As filed with the Securities and Exchange Commission on October 16, 2002
An Exhibit List can be found on page II-4.
Registration No. 333-88964
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
------------------------
AMENDMENT NO. 2 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MOONEY AEROSPACE GROUP, LTD.
(formerly Advanced Aerodynamics & Structures, Inc.)
(Name of small business issuer in its charter)
DELAWARE 95-4257380
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
3205 Lakewood Blvd.
Long Beach, CA 90808
(562) 938-8618
(Address and telephone number of principal executive offices and
principal place of business)
L. Peter Larson
3205 Lakewood Blvd.
Long Beach, CA 90808
(562) 938-8618
(Name, address and telephone number of agent for service)
Copies to:
Otto E. Sorensen, Esq.
Luce, Forward, Hamilton & Scripps LLP
600 West Broadway, Suite 2600
San Diego, California 92101
(619) 699-2534
(619) 645-5324 (fax)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED SECURITY(1) PRICE FEE
- ------------------------------------------------------- ----------------- -------------------- --------------------- --------------
Shares of Class A Common Stock, $0.0001 par value(2) 626,002 $0.34-1.203 $ 627,081
- ------------------------------------------------------- ----------------- -------------------- --------------------- --------------
Shares of Class A Common Stock, $0.0001 par value(3) 4,268,764 0.327-3.15 2,610,385
- ------------------------------------------------------- ----------------- -------------------- --------------------- --------------
Shares of Class A Common Stock, $0.0001 par value(4) 6,568,147 0.09 591,133
- ------------------------------------------------------- ----------------- -------------------- --------------------- --------------
Shares of Class A Common Stock, $0.0001 par value(5) 16,666,667 0.09 1,500,000
- ------------------------------------------------------- ----------------- -------------------- --------------------- --------------
Shares of Class A Common Stock, $0.0001 par value(6) 2,646,412 0.22275 589,488
- ------------------------------------------------------- ----------------- -------------------- --------------------- --------------
Shares of Class A Common Stock, $0.0001 par value(7) 183,598,531 0.09 16,523,868
- ------------------------------------------------------- ----------------- -------------------- --------------------- --------------
Shares of Class A Common Stock, $0.0001 par value(8) 36,306,284 0.25-0.30 9,984,228
- ------------------------------------------------------- ----------------- -------------------- --------------------- --------------
Shares of Class A Common Stock, $0.0001 par value(9) 16,376,989 0.09 1,473,929
- ------------------------------------------------------- ----------------- -------------------- --------------------- --------------
Shares of Class A Common Stock, $0.0001 par value(10) 26,840,269 0.09 2,415,624
- ------------------------------------------------------- ----------------- -------------------- --------------------- --------------
Shares of Class A Common Stock, $0.0001 par value(11) 90,179,008 0.09 8,116,111
- ------------------------------------------------------- ----------------- -------------------- --------------------- --------------
Shares of Class A Common Stock, $0.0001 par value(12) 14,742,962 0.09 1,326,867
- ------------------------------------------------------- ----------------- -------------------- --------------------- --------------
Shares of Class A Common Stock, $0.0001 par value(13) 1,668,571 0.25-0.30 458,857
- ------------------------------------------------------- ----------------- -------------------- --------------------- --------------
Shares of Class A Common Stock, $0.0001 par value(14) 2,000,000 0.25 500,000
- ------------------------------------------------------- ----------------- -------------------- --------------------- --------------
Shares of Class A Common Stock, $0.0001 par value(15) 100,000 0.30 30,000
- ------------------------------------------------------- ----------------- -------------------- --------------------- --------------
Shares of Class A Common Stock, $0.0001 par value(16) 980,000 0.09 88,200
- ------------------------------------------------------- ----------------- -------------------- --------------------- --------------
Total(17) 403,568,606 46,835,771 $4,309*
===================================================================================================================================
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, as amended
(the "Act"), based on the average of the closing bid and asked prices for
the registrant's Class A Common Stock as reported on the Over the Counter
Bulletin Board on October 7, 2002.
(2) Issuable upon the exercise of outstanding warrants issued under the March
26, 2002, Series A Preferred Stock Subscription Agreements: 480,000
warrants at an exercise price of $1.203 per share and 146,002 warrants at
an exercise price of $0.34 per share.
(3) Issuable upon the exercise of outstanding warrants issued under the Private
Equity Line of Credit Agreement: 250,000 warrants at an exercise price of
$3.15; 436,092 warrants at an exercise price of $1.11; 966,990 warrants at
an exercise price of $0.50 and 2,615,682 warrants at an exercise price of
$0.327.
(4) Issuable upon the conversion of notes issued in lieu of the payment of
finders fees payable under the March 27, 2001, Subscription Agreement and
the June 27, 2001, Subscription Agreement. We are registering 150% of the
shares issuable upon conversion of $410,089 in notes issued at an estimated
conversion price of $0.184 per share.
(5) Issuable upon the conversion of a convertible note issued on June 27, 2001.
We are registering 150% of the shares issuable upon the conversion of the
$1 million note at an estimated conversion price of $0.184 per share.
(6) Issuable upon the exercise of outstanding warrants issued on June 27, 2001,
at an exercise price of $0.22275 per share.
(7) Issuable upon the conversion of secured notes issued under the October 26,
2001, Subscription Agreement. We are registering 150% of the shares
issuable upon the conversion of the $10,000,000 in notes issued at an
estimated conversion price of $0.161 per share.
(8) Issuable upon the exercise of warrants issued under the October 26, 2001,
Subscription Agreement; the October 26, 2001, Put Agreement and the January
30, 2002, Subscription Agreement. One half of the warrants have an exercise
price of $0.25 per share and the remaining warrants have an exercise price
of $0.30 per share. 4,538,284 of these warrants were issued in payment of
finder's fees.
(9) Issuable upon the conversion of notes issued in lieu of the payment of
finder's fees payable under the October 26, 2001, Subscription Agreement.
We are registering 150% of the shares issuable upon conversion of $892,000
in notes issued at an estimated conversion price of $0.0817 per share.
(10) Issuable upon the conversion of $1,461,900 in notes issued under the
October 26, 2001, Put Agreement. We are registering 150% of the shares
issuable upon the conversion of the $1,329,000 in notes issued and $132,900
in finder's fee notes issued at an estimated conversion price of $0.0817
per share.
(11) Issuable upon the conversion of $4,911,750 in notes issued under the
January 30, 2002, Subscription Agreement. We are registering 150% of the
shares issuable upon the conversion of the $4,555,000 in notes issued and
$356,750 in finder's fee notes issued at an estimated conversion price of
$0.0817 per share.
(12) Issuable upon the conversion of $803,000 in notes issued under the May 16,
2002, Subscription Agreement. We are registering 150% of the shares
issuable upon the conversion of the $730,000 in notes issued and $73,000 in
finder's fee notes issued at an estimated conversion price of $0.0817 per
share.
(13) Issuable upon the exercise of warrants issued under the May 16, 2002,
Subscription Agreement. One half of the warrants have an exercise price of
$0.25 per share and the remaining warrants have an exercise price of $0.30
per share. 208,517 of these warrants were issued in payment of finder's
fees.
(14) Issuable upon the exercise of warrants issued under a severance agreement
at an exercise price of $0.25.
(15) Issuable upon the exercise of warrants issued under a consulting agreement
at an exercise price of $0.30.
(16) For the resale of shares issued to consultants for
services provided to us. We have an obligation to register these shares
under our agreements with the consultants.
(17) Pursuant to Rules 416 and 457 under the Act, additional shares as may be
issuable pursuant to the anti-dilution provisions of the warrants are also
being registered.
* A filing fee in the amount of $9,843 was previously paid with our original
filing on May 23, 2002.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
CROSS REFERENCE SHEET
Item Number in Form SB-2 Location in Prospectus and Registration Statement
- ---------------------- -------------------------------------------------
PART 1 -- INFORMATION REQUIRED IN PROSPECTUS
1. Front of Registration Statement and
Outside Front Cover Page of
Prospectus................................ Outside Front Cover of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus............................. Outside Back Cover Page of Prospectus
3. Summary Information and Risk Factors...... Outside Front Cover of Prospectus; Prospectus Summary;
Risk Factors
4. Use of Proceeds........................... Use of Proceeds
5. Determination of Offering Price........... *
6. Dilution.................................. *
7. Selling Security Holders.................. Selling Stockholders
8. Plan of Distribution...................... Plan of Distribution
9. Legal Proceedings......................... *
10. Directors, Executive Officers, Promoters
and Control Persons....................... Management
11. Security Ownership of Certain Beneficial
Owners and Management................... Principal Stockholders
12. Description of Securities............... Description of Securities
13. Interest of Named Experts and Counsel... Recent Sales Of Unregistered Securities
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. Undertakings
15. Organization Within Last Five Years..... Management, Principal Stockholders
16. Description of Business................. Business
17. Management's Discussion and Analysis or
Plan of Operation....................... Management's Discussion and Analysis and
Plan of Operation
18. Description of Property................. Properties
19. Certain Relationships and Related
Transactions............................ Certain Relationships and Related Transactions
20. Market for Common Equity and Related
Stockholder Matters..................... Price Range of Common Stock
21. Executive Compensation.................. Executive Compensation
22. Financial Statements.................... Financial Statements
23. Changes In and Disagreements With
Accountants on Accounting and Financial
Disclosure.............................. *
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
24. Indemnification of Directors and Officers Indemnification of Directors and Officers
25. Other Expenses of Issuance and Distribution Other Expenses of Issuance and Distribution
26. Recent Sales of Unregistered Securities Recent Sales of Unregistered Securities
27. Exhibits................................ Exhibits
28. Undertakings............................ Undertakings
- ------------
* Omitted because the item is inapplicable or the answer thereto is negative.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED _______, 2002
The information in this prospectus is not complete and may be changed.
MOONEY AEROSPACE GROUP, LTD.
3205 Lakewood Blvd.
Long Beach, CA 90808
(562) 938-8618
403,568,606 SHARES
CLASS A COMMON STOCK
THE OFFERING
Mooney Aerospace Group, Ltd. ("Mooney") is hereby registering the
resale of up to 403,568,606 shares of Mooney Class A Common Stock owned or
issuable upon the conversion or exercise of outstanding convertible securities.
Each selling stockholder is deemed to be an underwriter of the shares
of common stock which they are offering.
Mooney Class A Common Stock is traded on the Over the Counter Bulletin
Board under the trading symbol MASG. The closing price of MASG was $0.085 on
October 7, 2002.
TRADING SYMBOL
MASG (Over the Counter Bulletin Board)
----------
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 3.
----------
The Securities and Exchange Commission ("SEC") and state securities
regulators have not approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense. This prospectus is not an offer to sell these securities, and
it is not soliciting an offer to buy these securities, in any state where the
offer or sale is not permitted.
The information in this prospectus is not complete and may be changed.
This prospectus is included in the registration statement that was filed by
Mooney Aerospace Group, Ltd., with the Securities and Exchange Commission. The
selling stockholders may not sell these securities until the registration
statement becomes effective.
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED IN THIS
PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL THE INFORMATION YOU SHOULD
CONSIDER BEFORE INVESTING IN THE SECURITIES. BEFORE MAKING AN INVESTMENT
DECISION, YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE "RISK
FACTORS" SECTION, THE FINANCIAL STATEMENTS AND THE NOTES TO THE FINANCIAL
STATEMENTS. SOME OF THE STATEMENTS MADE IN THIS PROSPECTUS DISCUSS FUTURE EVENTS
AND DEVELOPMENTS, INCLUDING OUR FUTURE BUSINESS STRATEGY AND OUR ABILITY TO
GENERATE REVENUE, INCOME AND CASH FLOW. THESE FORWARD-LOOKING STATEMENTS INVOLVE
RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE CONTEMPLATED IN THESE FORWARD-LOOKING STATEMENTS.
OUR COMPANY
We are a development stage enterprise organized in 1990 to design,
develop, manufacture and market general aviation aircraft. For the first eleven
years of our existence, we sought to develop, and obtain an FAA Type Certificate
for, the Jetcruzer 500, a six seat, single engine turboprop aircraft based on a
canard design. At the end of 2001, we came to believe that an opportunity exists
in the general aviation industry today for the formation of a company, the
products of which would offer an alternative to business travel by airline for
executives of small to medium-sized businesses and high net worth individuals.
We believe this opportunity has resulted in part from the concurrence of the
following: (1) the reduction of product-liability exposure for general aviation
companies as a consequence of the passage of General Aviation Revitalization Act
of 1994, (2) the possible 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)
the deteriorating comfort and convenience of airline travel.
To take advantage of the current opportunity, we have hired a
management team with significant experience in turning around general aviation
manufacturing companies. The new management team has taken the first step in our
strategy by acquiring the assets of Mooney Aircraft Corporation ("MACorp").
MACorp has produced high-performance, single-engine piston aircraft for more
than 50 years. Our aircraft are believed by many to be the highest performance
piston engine aircraft in commercial production, and over 10,000 of our these
aircraft are in operation around the world. Significant spending on the
Jetcruzer program has been suspended, and we will review how best to capitalize
on the completed development work.
We have not generated any significant operating revenues to date and
have incurred losses from our operating activities of $21,200,000 and
$10,800,000 in 2001 and 2000, respectively, and $12,477,000 during the six-month
period ended June 30, 2002. We believe we will continue to experience losses
until such time as we attain sales of our aircraft on a commercial scale.
1
THE OFFERING
Class A Common Stock offered by Up to 403,568,606 shares, which may
selling stockholders (including be sold based on current market
shares underlying convertible prices or in negotiated
debentures and warrants) transactions. This number
represents 86.52% of the Company's
outstanding shares of Class A
Common Stock as of September 30,
2002, which was 72,628,941 shares
plus 393,795,211 shares
representing unissued common stock
shares issuable upon the full
conversion of the convertible
debentures and the complete
exercise of the warrants the resale
of which is hereby being
registered. We are registering the
resale of 150% of the shares
currently issuable upon the
conversion of the convertible
debentures at the current market
price.
Based upon current market prices
and assuming the full conversion of
the convertible debentures, and the
complete exercise of the warrants
being registered, 280,960,450
shares may be sold by selling
stockholders.
Use of proceeds General corporate purposes*
Over the Counter Bulletin Board symbol MASG
* We will not receive proceeds from the resale by selling stockholders
of the Class A Common Stock described in this prospectus. We may receive
proceeds from the sale of shares issuable upon the exercise of warrants by the
selling stockholders. However, if the cashless exercise provision of any of the
warrants is used, we will not receive proceeds from the exercise of those
warrants.
NOTICE ABOUT FORWARD-LOOKING STATEMENTS
To the extent that the information presented in this prospectus
discusses financial projections, information or expectations about our business
plans, results of operations, products or markets, or otherwise makes statements
about future events, such statements are forward-looking. Such forward-looking
statements can be identified by the use of words such as "intends,"
"anticipates," "believes," "estimates," "projects," "forecasts," "expects,"
"plans," and "proposes." Although we believe that the expectations reflected in
these forward-looking statements are based on reasonable assumptions, there are
a number of risks and uncertainties that could cause actual results to differ
materially from such forward-looking statements. These include, among others,
the cautionary statements in the "Risk Factors" section of this prospectus.
These cautionary statements identify important factors that could cause actual
results to differ materially from those described in the forward-looking
statements. When considering forward-looking statements in this prospectus, you
should keep in mind the cautionary statements in the "Risk Factors" section and
other sections of this prospectus.
2
RISK FACTORS
THIS INVESTMENT HAS A HIGH DEGREE OF RISK. BEFORE YOU INVEST YOU SHOULD
CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER
INFORMATION IN THIS PROSPECTUS. IF ANY OF THE POSSIBLE EVENTS DESCRIBED BELOW AS
RISKS ACTUALLY OCCUR, OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION
COULD BE HARMED AND THE VALUE OF OUR STOCK COULD GO DOWN. THIS MEANS YOU COULD
LOSE ALL OR A PART OF YOUR INVESTMENT.
PAYMENT OF CONVERTIBLE NOTES ISSUED UNDER VARIOUS SUBSCRIPTION AGREEMENTS COULD
BE DEMANDED AT ANY TIME UNDER THE TERMS OF THE NOTES; DEMAND COULD RESULT IN
INSOLVENCY.
We did not register the shares issuable upon conversion within the
various timelines as stated in the various Subscription Agreements. The timeline
ranges from 30 to 60 days from each transaction's closing date. For the June 27,
2001, October 26, 2001, January 30, 2002, May 16, 2002 and July 10, 2002
Subscription Agreements, the failure to register such shares constitutes a
non-registration event. For the June 27, 2001, October 26, 2001, January 30,
2002 and May 16, 2002 Subscription Agreements, the non-registration events have
become events of default pursuant to the Subscription Agreements. In accordance
with the terms of the Subscription Agreements, the holders may accelerate the
notes and demand immediate repayment of all principal and interest owed to the
notes. We do not have sufficient cash to comply with a demand for repayment of
all the June 2001, October 2001, January 2002 and May 2002 notes. If the holders
of the notes were to demand repayment of the principal and interest under such
notes, and we were unable to make such repayment, such holders could take
various actions to accomplish repayment, including, but not limited to,
foreclosure on our assets, virtually all of which were pledged as security for
the October 2001 Secured Convertible Notes. Any demand for repayment of the
notes would have a material adverse effect upon us and could jeopardize our
ability to continue our development efforts or to continue operations. There are
also liquidation damages due to the note holders as a result of the
non-registration event. Such damages are calculated from the date of the
non-registration event at an amount equal to 1% of the principal amount issued
for the first 30 days or part thereof, and then 2%, during the pendency of the
non-registration event. However, on May 20, 2002 certain note holders signed a
waiver whereby each holder waived his/her right to call their notes due and
deferred payment of the liquidation damages until conversion or maturity.
The terms for the payment of interest are contained within each
transaction's note agreements; therefore various payment terms may exist under a
given Subscription Agreement. Periodic interest payments are due on all
outstanding notes under each of the following transactions: March 27, 2001, June
27. 2001, July 25, 2001, October 26, 2001, February 27, 2002, March 26, 2002,
and May 16, 2002. All notes issued in other convertible debt financings require
the payment of interest at maturity. The interest payments became due
approximately three months after the initial issuance of the March 2001, June
2001 and July 2001 notes, and for the other notes interest was due on September
30, 2002. None of this interest has been paid. Pursuant to the terms of the
notes, the holders have the right to call the notes due. However, on May 20,
2002 certain note holders signed a waiver whereby each holder waived his/her
right to call their notes due and deferred payment of interest, until conversion
or maturity.
Our failure to continue the listing of our Class A Common Stack on
NASDAQ was a violation of the terms of our Secured Convertible Notes issued on
Match 27, 2001 (the "March 2001 Secured Convertible Notes"). Pursuant to such
terms, the holders of the March 2001 Secured Convertible Notes may accelerate
the notes and demand immediate repayment of all principal and interest owed
pursuant to the notes.
We do not have sufficient cash to comply with a demand for repayment of
all the notes as described above. Any demand for immediate repayment of the
notes would have a material adverse effect upon us and could jeopardize our
ability to continue our development efforts or to continue operations. However,
as stated previously, due to the obtaining of waivers the note holders cannot
demand immediate payment for all notes outstanding. At June 30, 2002, the amount
of principal, accrued interest and accrued non-registration damages that could
be subject to note bolder demands for immediate payment totaled $5,594,000,
$254,000 and $201,000 respectively. The aggregate amount of the principal,
interest and non-registration damages due on all outstanding convertible notes
at June 30, 2002 was $23,243,000, $903,000 and $1,198,000, respectively.
A DEMAND FOR THE IMMEDIATE REPAYMENT OF THE NOTES PAYABLE TO CONGRESS DUE TO ANY
DEFAULT IN PAYMENT WOULD ADVERSELY AFFECT OUR BUSINESS AND POSSIBLY RESULT IN
FORECLOSURE ON SUBSTANTIALLY ALL OF OUR ASSETS.
Under the terms of our agreements with Congress, we paid $8,000,000 to
acquire their position as a senior secured creditor in the Mooney Aircraft
Corporation bankruptcy. $3,500,000 of the purchase price was paid in cash and
$4,500,000 was paid in secured notes as follows: (1) a Secured Promissory Note
for $500,000 which was repaid in full on July 29, 2002, (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.
3
As additional security for our compliance with the fulfillment of our
obligations to Congress, we issued 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. The repayment of this note
is also secured by substantially all the assets acquired from Congress.
If sources of additional debt and/or financing are unavailable, we will
be unable to pay our obligations to Congress and will be in default on the
notes. Congress may then accelerate the notes and demand immediate repayment of
all principal and interest owed. We do not have sufficient cash to comply with a
demand for repayment of all the Congress notes. If Congress were to demand
repayment of the principal and interest under such notes, and we were unable to
make such repayment, Congress could take various actions to accomplish
repayment, including, but not limited to, foreclosure on our assets, virtually
all of which were pledged as security for the notes. Any demand for repayment of
the notes would have a material adverse effect upon us and could jeopardize our
ability to continue our development efforts or to continue operations.
RISK OF LOW-PRICE STOCKS, INCLUDING LIMITATIONS ON MARKET LIQUIDITY.
Our Class A Common Stock is classified as a "penny stock" by the
Commission. This classification severely and adversely effects the market
liquidity for our Class A Common Stock. Commission regulations define a "penny
stock" to be any non-NASDAQ equity security that has a market price of less than
$5.00 per share or with an exercise price of less than $5.00 per share, subject
to certain exceptions. For any transaction involving a penny stock, unless
exempt, the rules require delivery, prior to any transaction in a penny stock,
of a disclosure schedule prepared by the Commission relating to the penny stock
market. Disclosure is also required to be made about commissions payable to both
the broker-dealer and the registered representative and current quotations for
the securities. Finally, monthly statements are required to be sent disclosing
recent price information for the penny stock held in the account and information
on the limited market in penny stocks.
As a "penny stock" shares of our Class A Common Stock are subject
to Rule 15g-9 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), which imposes additional sales practice requirements on
broker-dealers which sell such securities to persons other than established
customers and "accredited investors" (generally, individuals with net worths in
excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together
with their spouses). For transactions covered by this rule, a broker-dealer must
make a special suitability determination for the purchaser and have received the
purchaser's prior written consent to the transaction. Consequently, the rule may
adversely affect the ability of broker-dealers to sell our securities and
may adversely affect the ability of holders of our securities to sell such
securities in the secondary market.
WE ARE A DEVELOPMENT STAGE COMPANY; NO ASSURANCE OF SUCCESS; NO SIGNIFICANT
COMMERCIAL OPERATIONS.
We remain in a developmental stage as we continue activities to restore
the Mooney manufacturing line to its previous operating level at our production
facility in Kerrville, Texas. Potential investors should be aware of the
problems, delays, expenses and difficulties usually encountered by an enterprise
engaged in such activities, many of which may be beyond our control. These
include unanticipated problems relating to continuing regulatory compliance,
manufacturing costs, production and assembly, the competitive and regulatory
environment in which we operate, marketing problems and additional costs and
expenses that may exceed current estimates.
WE HAVE ACCUMULATED A SUBSTANTIAL DEFICIT; WE HAVE A HISTORY OF LOSSES; WE
EXPECT SUBSTANTIAL FUTURE LOSSES; CONTINUED LACK OF PROFITABILITY COULD LEAD TO
A CESSATION OF OPERATIONS.
To date, we have incurred significant losses. At June 30, 2002, we had
an accumulated deficit of approximately $99,216,000. We have incurred losses
from our operating activities of $21,200,000 and $10,800,000 in 2001 and 2000,
respectively, and $12,477,000 during the six-month period ended June 30, 2002.
These losses have resulted principally from significant costs associated with
the development of the Jetcruzer 500 and, with regard to the six months ended
June 30, 2002, the acquisition of Mooney. We expect to incur further losses due
to significant costs associated with manufacturing our aircraft, maintaining the
necessary regulatory approvals, and marketing and selling our aircraft. There
can be no assurance that sales of our aircraft will ever generate sufficient
revenues to fund our continuing operations, that we will generate positive cash
flow from our operations, or that we will attain or thereafter sustain
profitability in any future period. If we do not begin to generate profits, we
may be forced to cease or curtail our operations.
4
WE WILL NEED ADDITIONAL FINANCING; FAILURE TO OBTAIN FINANCING COULD LEAD TO A
CESSATION OR CURTAILMENT OF OUR OPERATIONS.
We will need to obtain additional financing in order to complete the
renovation of our facilities in Kerrville and continue the production of new
aircraft and spare parts. Failure to obtain such additional financing would have
a material adverse effect on our business and prospects and could require that
we severely limit or cease our operations. Additional financing may not be
available on acceptable terms or at all.
REGULATORY UNCERTAINTY COULD RESULT IN ADDITIONAL COSTS OR LIABILITIES.
Our aircraft and our operations will also be subject to the risk of
modification, suspension or revocation of any FAA certificate. A modification,
suspension, or revocation could occur if, in the FAA's judgment, compliance with
airworthiness or safety standards by us was in doubt. If the FAA were to suspend
or revoke our type or production certificate for an aircraft model, sales of
that model would be adversely affected or terminated. If, in the FAA's judgment,
an unsafe condition developed or was discovered after one or more of our
aircraft had entered service, the FAA could issue an Airworthiness Directive,
which could result in a requirement that we develop appropriate design changes
at our expense. Foreign authorities could impose similar obligations upon us as
to aircraft within their jurisdiction. Any or all of these occurrences could
expose us to substantial additional costs and/or liabilities.
LIMITED PRODUCT LINE; FLUCTUATIONS IN SALES OF AIRCRAFT MAY RESULT IN PERIODIC
MATERIAL REDUCTIONS IN REVENUE AND PROFITABILITY.
If there is a downturn in the market for general aviation aircraft due
to economic, political or other reasons, we would not be able to rely on sales
of other products to offset the downturn. It is possible that sales of business
aircraft could decline in the future for reasons beyond our control.
Furthermore, if a potential purchaser is experiencing an economic downturn or is
for any other reason seeking to limit its capital expenditures, the high unit
selling price of a new aircraft may result in such potential purchaser deferring
its purchase or electing to purchase a pre-owned aircraft or a lower priced
aircraft. Further, since we intend to rely on the sale of a relatively small
number of high unit selling price aircraft to provide substantially all of its
revenue, small decreases in the number of aircraft delivered in any year may
have a material negative effect on the results of operations for that year. In
addition, small changes in the number and timing of deliveries of, and receipt
of payments on, new aircraft may have a material effect on our liquidity.
WE FACE NUMEROUS COMPETITORS, SOME OF WHICH HAVE GREATER RESOURCES; COMPETITION
MAY IMPROVE OR DEVELOP COMPETITIVE PRODUCTS.
Our aircraft will compete with other aircraft that have comparable
characteristics and capabilities. Many of our competitors, including Textron
(Cessna Aircraft Co.), Raytheon Aircraft Co. (Beechcraft) and New Piper Aircraft
Corp, are substantially larger in size and have far greater financial,
technical, marketing, and other resources than we do. Certain of our actual and
potential competitors have greater financial and other resources that may allow
them to modify existing aircraft or develop alternative new aircraft which could
compete with our aircraft, and these competitors may introduce such aircraft and
aircraft changes prior to the delivery of our first aircraft. Our ability to
compete effectively may be adversely affected by the ability of these
competitors to devote greater resources to the sale and marketing of their
products than are available to us. Future technological advances may result in
competitive aircraft with improved characteristics and capabilities that could
adversely affect our business. Our aircraft may also compete with used aircraft
which become available in the resale market at prices sufficiently lower to
offset deficits in performance, if any, as compared to our aircraft.
5
RELIANCE ON SINGLE SOURCE SUPPLIERS; PROBLEMS WITH SUPPLIES COULD REDUCE REVENUE
OR INCREASE COSTS.
We will be dependent on certain suppliers of products in order to
manufacture our aircraft. Should our ability to obtain the requisite components
be limited for any lengthy period of time or the cost of the components
increase, our ability to produce and sell aircraft could be materially and
adversely affected. Securing acceptable pricing and terms from suppliers of the
bankrupt MACorp may be difficult because of financial difficulties caused by
that bankruptcy and damage to the reputation of MACorp as a customer. In
addition, the possible failure of suppliers or subcontractors to meet our
performance specifications, quality standards or delivery standards or schedules
could have a material adverse effect on our operations. Moreover, our ability to
significantly increase our production rate could be limited by the ability or
willingness of key suppliers to increase their delivery rates; and, over time,
the prices to obtain materials and components may change and a number of
supplies may need to be replaced. Our inability to obtain supplies to
manufacture our products would have a material adverse effect on our business
prospects, operations and financial condition.
INSURANCE AND PRODUCT LIABILITY EXPOSURE; INCREASED PREMIUMS AND DAMAGE AWARDS
COULD INCREASE COSTS.
Because the failure of an aircraft manufactured by us or any other
mishap involving such an aircraft may result in physical injury or death to the
occupants of the aircraft or others, we could be subject to lawsuits involving
product liability claims, which lawsuits may involve claims for substantial
sums. Although we have obtained product liability insurance, such insurance is
expensive and subject to various coverage exclusions and may not be obtainable
by us in the future on acceptable terms or at all. Further, should we become
involved in product liability litigation, the expenses and damages awarded could
be large, and the scope of any coverage may be inadequate. Increased insurance
costs and/or liability costs could require an increase in the price of our
aircraft and therefore could have a negative impact on sales.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS MAY BE CAUSED BY LARGE UNIT PRICES.
We expect to 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 due to, for example, unanticipated
shipment reschedulings or cancellations, supplier delays in the delivery of
component parts or unexpected manufacturing difficulties, could have a material
and adverse effect on our financial position and results of operations for that
quarter.
RISKS OF INTERNATIONAL OPERATIONS, INCLUDING CHANGES IN TARIFFS AND DUTIES AND
CURRENCY EXCHANGE LOSSES, MAY INCREASE COSTS.
We intend to market and sell our aircraft to foreign customers.
Accordingly, we will be subject to all of the risks inherent in international
operations, including work stoppages, transportation delays and interruptions,
political instability or conflict between countries in which we may do business,
foreign currency fluctuations, economic disruptions, differences in
airworthiness and certification standards imposed by foreign authorities, the
imposition of tariffs and import and export controls, changes in governmental
policies (including United States trade policy) and other factors, including
other foreign laws and regulations, which could have an adverse effect on our
business. With respect to international sales that are denominated in U.S.
dollars, an increase in the value of the U.S. dollar relative to foreign
currencies can increase the effective price of, and reduce demand for, our
products relative to competitive products priced in the local currency. These
international trade factors may, under certain circumstances, materially and
adversely impact demand for our products or our ability to sell aircraft in
particular countries or deliver products in a timely manner or at a competitive
price, which in turn may have an adverse impact on our relationships with its
customers. In addition, foreign certification or equivalent approval is required
prior to importing an aircraft into a foreign country, and we may not receive
such certification or equivalent approval in any country. Our success will
depend in part upon our ability to obtain and maintain foreign certifications or
equivalent approvals and manage international marketing, sales and service
operations.
6
DEPENDENCE ON KEY PERSONNEL; FAILURE TO HIRE OR RETAIN PERSONNEL COULD RESULT IN
A REDUCTION OF REVENUES AND EARNINGS.
The results of our operations will depend in large part on the skills
and efforts of L. Peter Larson, our President, Chief Executive Officer, and
Chief Financial Officer, and, to a lesser extent, on the skills and efforts of
Dale Ruhmel, Executive Vice President of Group Operations and Engineering,
Nelson Happy, Executive Vice President and General Counsel, and Nicolas
Chabbert, Executive Vice President of Sales and Marketing. Our future success
will depend to a significant extent on our ability to hire certain other key
employees on a timely basis. Competition for highly skilled business, product
development, technical and other personnel is intense, and there can be no
assurance that we will be successful in recruiting new personnel or in retaining
our existing personnel. We will experience increased costs in order to retain
and attract skilled employees. Our failure to attract additional qualified
employees on a timely basis or to retain the services of key personnel would
have a material adverse effect on our operating results and financial condition.
PLANNED GROWTH MAY BE LIMITED BY CONSTRAINTS OR HUMAN AND FINANCIAL RESOURCES.
We plan to significantly expand our operations during the remainder of
2002 and 2003, which could place a significant strain on our limited personnel,
financial and other resources. We intend to continue to reestablish the
manufacturing capabilities of our Mooney subsidiary and to manufacture Mooney
aircraft. Our efforts to conduct manufacturing activities may not be successful,
and we may not be able to satisfy commercial scale production requirements on a
timely and cost-effective basis. Our ability to manage this growth, should it
occur, would require significant expansion of our engineering, production,
marketing and sales capabilities and personnel. We may not be able to find
qualified personnel to fill additional engineering, production, and sales and
marketing positions or be able to manage a larger sales and marketing
organization successfully. We also intend to seek to acquire additional aircraft
product lines which will place additional demands on our limited resources.
CONTROL BY INSIDERS AND THE EXISTENCE OF SHARES HAVING DISPROPORTIONATE VOTING
RIGHTS MAY DISCOURAGE ACQUISITION BY MOONEY.
Sam Rothman and C.M. Cheng, both Directors of our Company, beneficially
own, or have voting control over, shares of our capital stock representing a
significant portion of the total voting power of our Company. Accordingly, they
will continue to be able to have a significant influence over the election of
our directors and thereby influence the direction of our policies for the
foreseeable future. Furthermore, the disproportionate vote afforded the shares
of Class B Common Stock and Class E Common Stock could also serve to impede or
prevent a change of control of our Company. As a result, potential acquirers may
be discouraged from seeking to acquire control of our Company through the
purchase of Class A Common Stock, which could have a depressive effect on the
market price of our securities.
LIMITATION ON OFFICERS' AND DIRECTORS' LIABILITIES UNDER DELAWARE LAW MAY REDUCE
DAMAGES AVAILABLE FOR BREACH OF DUTY BY DIRECTORS.
Pursuant to our Certificate of Incorporation, and as authorized under
applicable Delaware law, our directors and officers are not liable for monetary
damages for breach of fiduciary duty, except (i) in connection with a breach of
the duty of loyalty, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) for dividend
payments or stock repurchases illegal under Delaware law or (iv) for any
transaction in which a director has derived an improper personal benefit. These
provisions may limit the ability of our stockholders to obtain damages from our
directors, either directly or on a derivative basis, for breach of fiduciary
duty.
POSSIBLE ADVERSE EFFECTS OF AUTHORIZATION OF PREFERRED STOCK, ANTI-TAKEOVER
PROVISIONS, AND ENHANCED VOTING POWER OF CLASS B COMMON STOCK AND CLASS E COMMON
STOCK MAY DISCOURAGE ACQUISITION AND REDUCE VALUE OF MOONEY.
Our Certificate of Incorporation authorizes the issuance of a maximum
of 5,000,000 shares of preferred stock on terms which may be fixed by our Board
of Directors without stockholder action. The terms of any series of preferred
stock, which may include priority claims to assets and dividends and special
voting rights, could adversely affect the rights of holders of the Class A
Common Stock. The issuance of preferred stock could make a possible takeover or
the removal of our management more difficult, discourage hostile bids or control
of our Company in which stockholders may receive premiums for their shares of
Class A Common Stock or otherwise dilute the rights of holders of Class A Common
Stock. In addition, we are subject to Delaware General Corporation Law
provisions that may have the effect of delaying, deferring or preventing certain
changes of control. Furthermore, the disproportionate vote afforded the Class B
Common Stock and Class E Common Stock could also serve to impede or prevent a
change in control of our Company.
7
POSSIBILITY OF DILUTION ARISING FROM SHARES AVAILABLE FOR FUTURE SALE MAY RESULT
IN LOWER STOCK PRICES.
Future sales of common stock by existing stockholders pursuant to Rule
144 under the Securities Act of 1933, as amended (the "Securities Act"), or
otherwise, could have an adverse effect on the price of our securities. As of
September 30, 2002, Mooney had outstanding 72,628,941 shares of Class A Common
Stock, debentures issued under various agreements convertible into 406,774,405
shares of Class A Common Stock, warrants issued under various agreements for
75,702,567 shares of Class A Common Stock, 10,400,000 Class A Warrants and
6,900,000 Class B Warrants (excluding the 10,400,000 Class B Warrants issuable
upon the exercise of the Class A Warrants), 38,459 shares of Series A Preferred
Stock, 1,013,572 shares of Class B Common Stock, and 8,000,000 shares of Class E
Common Stock. The Class A and Class B Warrants have been extended until through
October 31, 2002. The shares of Class E Common Stock are not currently
transferable and are subject to redemption by us for a nominal consideration if
we do not meet certain income levels, and are convertible into Class B Common
Stock if we do meet such levels. Sales of Class A Common Stock, or the
possibility of such sales, in the public market may adversely affect the market
price of the securities offered hereby.
OUR CLASS A COMMON STOCK HAS BEEN DELISTED FROM THE NASDAQ STOCK MARKET, WHICH
MAY RESULT IN A REDUCED VOLUME OF TRADING AND LOWER STOCK PRICES.
Our Class A Common Stock was delisted from the NASDAQ Stock Market in
April 2001, and it is now traded through the NASD's "Electronic Bulletin Board."
Consequently, the liquidity of our securities has been impacted, not only by the
number of securities which can be bought and sold, but also through delays in
the timing of the transactions, reductions in the number and quality of security
analysts' and the news media's coverage of us, and lower prices for our
securities than might otherwise be attained.
NO DIVIDENDS.
We have paid no dividends to our stockholders since its inception and
does not plan to pay dividends in the foreseeable future. We intend to reinvest
earnings, if any, in the development and expansion of our business.
VOLATILITY OF STOCK PRICE MAY INCREASE THE NUMBER OF SHARES ISSUABLE UPON
CONVERSION OF PREFERRED STOCK AND CONVERTIBLE NOTES.
The stock market from time to time experiences significant price and
volume fluctuations, some of which are unrelated to the operating performance of
particular companies. We believe that a number of factors can cause the price of
our common stock to fluctuate, perhaps substantially. These factors include,
among others:
-- Announcements of financial results and other developments
relating to our business;
-- Changes in the general state of the economy; and
-- Changes in market analyst estimates and recommendations for
our common stock.
Significant downward fluctuations of the price of our stock may
substantially increase the number of shares of common stock issuable upon
conversion of outstanding Series A Preferred Stock and convertible notes as a
result of the conversion formula, which is tied to the market price of the
common stock. The consequences of decreases in the common stock price are more
fully discussed below under the risk factors set forth below.
THE ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK UPON CONVERSION OF PREFERRED
STOCK MAY CAUSE SIGNIFICANT DILUTION OF EXISTING STOCKHOLDERS' INTERESTS AND
EXERT DOWNWARD PRESSURE ON THE PRICE OF OUR COMMON STOCK.
Significant dilution of existing stockholders' interests may occur if
we issue additional shares of common stock underlying outstanding shares of
preferred stock. As of September 30, 2002, we had 38,459 shares of Series A
Preferred Stock outstanding. The number of shares of common stock issuable upon
conversion of the Series A Preferred Stock would increase if the market price of
our Common Stock decreases, as such conversion is based on a formula pegged to
the market price of the Class A Common Stock. The formula provides,
specifically, that the number of shares of Common Stock issuable upon the
conversion of one share of Series A Preferred Stock is calculated as $100 (plus
any accrued and unpaid dividends on such share) divided by the conversion price.
The conversion price is equal to the lesser of (1) 100% of the average of the
closing bid price of the common stock on the last three trading days before the
date of initial issuance of shares of Series A Preferred Stock, or (2) 90% of
the average of the eight lowest closing bid prices of the common stock during
the last 180 trading days before the date of conversion. Therefore, there is a
possibility that the Series A Preferred Stock may convert to Class A Common
Stock at a rate which may be below the prevailing market price of the Class A
Common Stock at the time of conversion.
8
The exact number of shares of common stock into which the Series A
Preferred Stock may ultimately be convertible will vary over time as the result
of ongoing changes in the trading price of our common stock. Decreases in the
trading price of our common stock would result in increases in the number of
shares of common stock issuable upon conversion of the Series A Preferred Stock.
The following consequences could result:
-- If the market price of our common stock declines, thereby
proportionately increasing the number of shares of common
stock issuable upon conversion of the Series A Preferred
Stock, an increasing downward pressure on the market price of
the common stock might result (sometimes referred to as a
downward "spiral" effect).
-- The dilution caused by conversion of Series A Preferred Stock
and sale of the underlying shares could also cause downward
pressure on the market price of the common stock.
-- Once downward pressure is placed on the market price of our
stock, the pressure could encourage short sales by holders of
Series A Preferred Stock and others, thus placing further
downward pressure in the price of the common stock.
-- The conversion of Series A Preferred Stock would dilute the
book value and earnings per share of common stock held by our
existing stockholders.
THE ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK UPON CONVERSION OF CONVERTIBLE
NOTES MAY CAUSE SIGNIFICANT DILUTION OF EXISTING STOCKHOLDERS' INTERESTS AND
EXERT DOWNWARD PRESSURE ON THE PRICE OF OUR COMMON STOCK.
Significant dilution of existing stockholders' interests may occur if
we issue additional shares of common stock underlying outstanding shares of
convertible notes. As of September 30, 2002, we had approximately $25,895,000 in
aggregate principal amount of convertible notes outstanding. The number of
shares of common stock issuable upon conversion of the convertible notes would
increase if the market price of our Common Stock decreases, as such conversion
is based on a formula pegged to the market price of the Class A Common Stock.
The formula provides, specifically, that the number of shares of Class A Common
Stock issuable upon the conversion of the notes is calculated by dividing the
aggregate principal amount outstanding by the conversion price. For certain
notes, the conversion price is, at the option of the holder (1) 80% of the
average of the three lowest closing bid prices of the common stock during the
last 60 trading days before the date of conversion or (2) $0.25. For other
notes, the conversion price is, at the option of the holder (1) 70% of the
average of the three lowest closing bid prices of the common stock during the
last 30 trading days before the date of conversion or (2) $0.35. Therefore, it
is likely that the notes may convert to common stock at a rate which is below
the prevailing market price of the common stock at the time of conversion.
The exact number of shares of common stock into which the notes may
ultimately be convertible will vary over time as the result of ongoing changes
in the trading price of our common stock. Decreases in the trading price of our
common stock would result in increases in the number of shares of common stock
issuable upon conversion of the notes. The following consequences could result:
-- If the market price of our common stock declines, thereby
proportionately increasing the number of shares of common
stock issuable upon conversion of the notes, an increasing
downward pressure on the market price of the common stock
might result (sometimes referred to as a downward "spiral"
effect).
-- The dilution caused by conversion of notes and sale of the
underlying shares could also cause downward pressure on the
market price of the common stock.
-- Once downward pressure is placed on the market price of our
stock, the pressure could encourage short sales by holders of
notes and others, thus placing further downward pressure in
the price of the common stock.
-- The conversion of notes would dilute the book value and
earnings per share of common stock held by our existing
stockholders.
9
USE OF PROCEEDS
We will not receive any of the proceeds of the sale of shares
underlying the Series A Preferred Stock, the secured convertible notes, the
convertible notes or the warrants or any of the outstanding shares, the resale
of which is registered pursuant to the registration statement of which this
prospectus is a part. Additional amounts may be received if the warrants to
purchase Class A Common Stock issued under various agreements are exercised
without the use of any applicable cashless exercise provision.
PRICE RANGE OF COMMON STOCK
Our Class A Common Stock is listed for trading on the Over the Counter
Bulletin Board under the symbol "MASG." The following table sets forth the
range of high and low last sale prices per share for the Class A Common Stock as
quoted on the Over the Counter Bulletin Board, for the periods indicated.
YEAR ENDED DECEMBER 31, 2000 HIGH LOW
------------------------------------- -------- --------
First Quarter $6.688 $2.500
Second Quarter 5.250 2.781
Third Quarter 3.375 2.000
Fourth Quarter 2.156 .344
YEAR ENDED DECEMBER 31, 2001 HIGH LOW
------------------------------------- -------- --------
First Quarter $0.687 $0.250
Second Quarter 0.380 0.190
Third Quarter 0.332 0.180
Fourth Quarter 0.290 0.170
PERIOD ENDED SEPTEMBER 30, 2002 HIGH LOW
------------------------------------- -------- --------
First Quarter $0.440 $0.220
Second Quarter 0.330 0.200
Third Quarter 0.240 0.090
At September 30, 2002, there were approximately 226 holders of record
of our Class A Common Stock; 1 holders of record of our Class B Common Stock; 5
holders of record of our Class E-1 Common Stock and 6 holders of record of our
Class E-2 Common Stock. We believe that there are significant numbers of
beneficial owners of our Class A Common Stock whose shares are held in "street
name."
We have not paid cash dividends on our common stock and do not
anticipate that we will do so in the near future. Our present policy is to
retain earnings to finance the development of our operations.
10
ITEM 17
MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR PLAN OF OPERATIONS SHOULD
BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND THE RELATED NOTES. THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH ARE BASED UPON CURRENT
EXPECTATIONS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS OUR PLANS,
OBJECTIVES, EXPECTATIONS AND INTENTIONS. OUR ACTUAL RESULTS AND THE TIMING OF
CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH UNDER "RISK FACTORS," "BUSINESS" AND ELSEWHERE IN THIS PROSPECTUS. SEE
"RISK FACTORS."
PLAN OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the financial statements and notes thereto appearing elsewhere in this
report.
GENERAL
Since 1990, we have been a development-stage enterprise organized to
design, develop, manufacture and market aircraft intended primarily for
business, corporate and government use and have been engaged principally in
research and development of our proposed aircraft. We began our operations in
Burbank, California.
We have hired a management team with significant experience in turning
around general aviation manufacturing companies to take advantage of current
opportunities. The new management team instituted a technical review of the
Jetcruzer 500 program. Based on this review, the new management team concluded
that the Jetcruzer 500 was not likely to achieve its design objectives at a
commercially-reasonable cost. Accordingly, significant spending on the Jetcruzer
program was suspended, and we will review how best to capitalize on the
completed development work.
On February 8, 2002, we announced we had purchased Congress Financial
Corporation's ("Congress") position as senior secured creditor for Mooney
Aircraft Corporation of Kerrville, Texas ("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 MACorp asset
acquisition.
MACorp has been the world's leading supplier of high performance single
engine general aviation aircraft primarily serving the business and owner-flown
markets. MACorp has produced over 10,000 aircraft since its founding in 1947 and
presently has over 8,000 aircraft in operation in the U.S. alone. We have
acquired substantially all of MACorp's assets and intend to return the Mooney
aircraft line to full production. The former MACorp assets are held by our
wholly-owned subsidiary named Mooney Airplane Company, Inc. ("Subsidiary"). We
formally changed our name to Mooney Aerospace Group, Ltd. following our Annual
Meeting of Shareholders held on July 22, 2002.
We 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.
11
During the remainder of 2002 and throughout 2003, we intend to focus
our efforts on the following events:
o The restoration to full production of Mooney's manufacturing
line in Kerrville, Texas.
o Enhancement and aggressive implementation of Mooney's
marketing program.
We have entered into three-year employment agreements with Peter
Larson, President, CEO, and Chief Financial Officer; Dale Ruhmel, Executive Vice
President of Group Operations and J. Nelson Happy, Executive Vice-President and
General Counsel, on similar terms. The majority of their compensation was
designed to reward performance. Over the three-year period they will vest in
ownership of three percent, two percent and three percent, respectively, of our
outstanding shares and all receive annual salaries of $200,000 plus
reimbursement of expenses. We had also entered into a similar agreement with Roy
Norris, the former President and CEO, who resigned on August 15, 2002. As part
of Mr. Norris' severance package we paid $165,000 in cash as salary expense and
as of September 30, 2002, still owe him stock in the amount of 1.5% of the
shares outstanding as of August 16, 2002, the effective date of issuance, which
we expect to be issued in the fourth quarter of 2002. We have also entered into
a three-year employment agreement with Nicolas Chabbert, Executive Vice
President of Sales and Marketing. Mr. Chabbert will receive an annual salary of
$150,000, 300,000 stock options with an exercise price of $0.20 and a bonus
based upon the number of airplanes sold and delivered.
We have not generated any significant operating revenues to date and
have incurred losses from our operating activities of $21,200,000 and
$10,800,000 in 2001 and 2000, respectively, and $12,477,000 during the six-month
period ended June 30, 2002. We believe we will continue to experience losses
until such time as we attain sales of our aircraft on a commercial scale.
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. Additional funding will be required, either through
additional stock issuances or debt financing. If sources of financing are
unavailable, we will have to curtail our plans and will be unable to pay our
obligations to Congress.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
operating amounts and results.
Six Months Period from
Ended January 26,
Years Ended December 31 June 30, 1990 (inception)
---------------------------- --------------- to June 30,
2000 2001 2002 2002
------------- ------------- --------------- ----------------
$$$$ Net spare parts sales $ -- $ -- $ 369,000 $ 369,000
Cost of sales $ -- $ -- $ (124,000) $ (124,000)
Research and development, and
general and administrative expenses (9,884,000) (12,445,000) (8,293,000) (80,027,000)
Gain (loss) on sale of assets -- -- 170,000 (585,000)
Realized loss on sale of investments (36,000) -- -- (66,000)
Non-recurring expenses -- (3,823,000) -- (3,823,000)
Interest expense (938,000) (4,969,000) (4,667,000) (13,919,000)
Interest and other income 143,000 73,000 68,000 4,349,000
Extraordinary loss -- -- -- (942,000)
------------- -------------- ---------------- ----------------
Net loss $ (10,715,000) $ (21,164,000) $(12,477,000) $(94,768,000)
============== ============== ================ =================
12
We have generated $369,000 in operating revenues through June 30, 2002,
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.
Research and development expenses have consisted primarily of the costs
of personnel, facilities, materials and equipment required to conduct our
development activities. Such expenses aggregated $48,152,000 from inception
through June 30, 2002. These expenses were incurred mainly to develop the
Jetcruzer 450, to obtain a type certificate for the Jetcruzer 450, and to design
and develop the Jetcruzer 500. Research and development expenses amounted to
$7,630,000 in 2001 as we accelerated the development of the Jetcruzer 500. We
have decided to suspend the expenditure of substantial sums on the Jetcruzer 500
program. We are considering several options for the program, which include a
restart of the Jetcruzer program at a later date, use of Jetcruzer flight and
test data to launch a new development activity and the sale of the program to
another company. In the six-month period ended June 30, 2002, research and
development expenses decreased to $2,654,000 as a consequence of the suspension
and winding down of the Jetcruzer 500 program.
General and administrative expenses have consisted primarily of
administrative salaries and benefits, rent, marketing expenses, insurance and
other administrative costs. Such expenses aggregated $31,875,000 from inception
through June 30, 2002, $3,543,000 and $4,815,000 of which were incurred in 2000
and 2001, respectively. Through the six-month period ended June 30, 2002,
$5,639,000 of general and administrative expenses were incurred. The increases
in 2002 were primarily due to salary expenses, travel expenses, and legal
expenses related to financing and acquisition activities.
Non-recurring expenses, which were incurred in the year ended December
31, 2001, consist of the following: a write-off of capitalized tooling costs of
approximately $2,082,000; a write-off of capitalized engineering software of
approximately $723,000; and an accrual of approximately $1,018,000 related to
special orders out at certain vendors. We believe both the
capitalized tooling and software have no future use to us due to the change in
our business strategy and the suspension of activities related to our previous
major product, the Jetcruzer 500. The accrual to vendors represents costs
incurred by vendors in the production of items specifically related to the
Jetcruzer 500 with no alternative saleable value to the vendors.
Interest expense has consisted primarily of interest expended by us for
bank and private financing, including the amortization of debt issue costs and
discounts on convertible debentures. Interest expense aggregated $13,919,000
from inception through June 30, 2002, $938,000, $4,969,000 and $4,667,000 of
which were incurred in 2000, 2001, and for the six-month period ended June
30, 2002, respectively.
Interest income consisted primarily of earnings derived from the unused
proceeds of the 1999 sale and leaseback of our 200,000 square foot building.
Interest income aggregated $2,858,000 from inception through June 30, 2002,
$75,000, $37,000, and $3,000 was earned in the years ended 2000 and 2001, and
for the six-month period ended June 30, 2002, respectively.
We account for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." We have incurred
net losses in each year since our inception and consequently have paid no
federal or state income taxes.
At June 30, 2002, we had federal and California state tax net
operating loss carryforwards of approximately $76,774,000 and $29,240,000,
respectively, which, if unused, will expire in varying amounts in the years 2002
through 2021. Our ability to use our net operating loss carryforwards to offset
future taxable income may be limited annually if there is a substantial change
of control of Mooney. We can give no assurance as to the amount of the net
operating loss carryforwards that will be available in future years.
At June 30, 2002, we had federal and California state research and
development ("R&D") credit carryforwards of approximately $1,356,000 and
$542,000, respectively. The federal R&D credit carryforwards will expire in the
years 2004 through 2009. The state R&D credit carryforwards can be carried
forward indefinitely.
13
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, we had a working capital deficiency of $627,000 and a
stockholders' deficiency of $2,427,000. Since our inception in January 1990, we
have experienced continuing negative cash flows from operations, which have
resulted in our inability to pay certain existing liabilities in a timely
manner. We have financed our operations, which have mainly focused on research
and development, through private funding of equity and debt and through the
proceeds generated from our December 1996 initial public offering. Since our
inception, our investing activities have been limited to construction of our
manufacturing facility and tooling required to commence production of the
Jetcruzer 500. Currently, our investing activities have been limited to minimal
capital expenditures and the investment of funds until such funds are needed for
operating activities. Our investing activities will substantially increase as a
consequence of the acquisition of MACorp and commencement of production at
MACorp's facilities.
We expect to continue to incur losses until such time as we regain
market acceptance of our aircraft at selling prices and volumes which provide
adequate gross profit to cover operating costs and generate positive cash flow.
Our working capital requirements will depend upon numerous factors, including
the level of resources devoted to the scale-up of manufacturing and the
establishment of sales and marketing.
Our management team has developed a financial plan to address our
working capital deficiency and to increase the cash provided by financing
activities. Since early 2000, this has included the issuance of convertible
preferred stock and convertible debentures. While we believe this financial plan
has sufficiently funded operations to date, and will continue to do so if
executed successfully. However, our cash balance as of June 30, 2002, and the
cash received subsequently, is insufficient to fund operations for the next 12
months. We are currently pursuing additional financing from private parties, and
believe based upon past experience, sufficient funding will be obtained, however
no firm commitment for such funding currently exists.
On March 6, 2000, we entered into a series of subscription agreements
for the sale of up to $10,000,000 of 5% Cumulative Convertible Series A
Preferred Stock, from which we have received net proceeds of $8,265,000 to date.
On March 27, 2001, we consummated an agreement with certain investors
to provide $4,126,000 through the issuance of secured convertible debentures.
Under that same agreement, an additional $1,000,000 was provided on July 25,
2001. Warrants to purchase 10,254,000 shares of common stock at exercise prices
ranging from $0.24 to $0.45 were issued under this agreement. On June 27, 2001,
we obtained new financing of $1,000,000 by issuing an unsecured convertible
debenture with warrants to purchase 2,646,000 shares of common stock at an
exercise price of $0.22. All of these debentures bear interest at a rate of 5%
and are convertible into common stock at the lesser of $0.25 or 80% of the three
lowest closing prices for sixty trading days prior to the conversion. The term
of the debentures and warrants is five years. All issuances were to accredited
investors, as defined by Regulation D rules issued by the Securities and
Exchange Commission under the Securities Act of 1933. Substantially all of our
assets have been pledged as collateral to secure the repayment of the secured
debentures.
On October 26, 2001, we received an initial $7,405,000 in net proceeds
from a private placement offering of 8% Secured Convertible Notes along with
warrants to purchase 17,714,000 shares of common stock. The notes were issued in
the principal amount of $7,750,000, less approximately $1,100,000 already
advanced by the note holders prior to the closing date. Both the maturity date
of the notes and the expiration date of the warrants is October 26, 2006. The
first 50% of the warrants may be exercised at a price of $0.25 and the remaining
50% may be exercised at $0.30. In conjunction with this private placement, we
entered into a Put Agreement with a group of its investors who hold convertible
notes and preferred stock, some of whom participated in the private placement.
The Put Agreement provided us with an option to sell up to an additional
$5,000,000 of convertible notes and warrants. In February 2002, we issued
$1,329,000 in notes under the Put Agreement; the remaining balance of $3,171,000
is no longer available under the Put Agreement.
On February 27, 2002, we completed three financing transactions for
total proceeds of $5,734,000 and incurred financing costs of $184,000 paid from
the proceeds and $474,650 issued in convertible notes. The net proceeds for
these transactions were used to make the cash payment to Congress described
below and to fund current operations. In the first of the three financing
transactions, we issued $2,250,000 in 8% Secured Convertible Notes. The notes
are convertible after 120 days into shares of common stock at a conversion price
of $0.35 or 70% of the average of the three lowest closing bid prices for our
common stock for the thirty days prior to conversion. The maturity date of the
notes is October 26, 2006. Attached to the notes were warrants to purchase
5,143,000 shares of our common stock. Forty-five days following the closing, 50%
of the warrants became exercisable at a price of $0.25 per share and the
remaining warrants became exercisable at a price of $0.30 per share. The
expiration date of the warrants is January 30, 2007.
14
In the second of the three financing transactions, we issued $1,329,000
in 8% Unsecured Convertible Notes pursuant to the October 26, 2001 Put
Agreement. 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. Issued with the notes were warrants to purchase 3,037,000 shares of our
common stock. The warrants became exercisable forty-five days after the date of
issuance on the same terms as the warrants issued in conjunction with the
October 26, 2001 private placement.
In the third of the three financing transactions, we issued $2,155,000
in 8% Unsecured Convertible Notes. The notes are convertible after 120 days into
shares of common stock on the same terms as the October 26, 2001 private
placement. The maturity date of the notes is October 26, 2006. Issued with the
notes were warrants to purchase 4,926,000 shares of our Class A Common Stock.
The warrants became exercisable forty-five days after the date of issuance on
the same terms as the warrants issued in conjunction with the October 26, 2001
private placement.
On March 26, 2002, we issued $1,450,000 in 8% Unsecured Convertible
Notes. The notes are convertible after 120 days into shares of common stock on
the same terms as the October 26, 2001 private placement. The maturity date of
the notes is October 26, 2006. Issued with the notes were warrants to purchase
3,314,000 shares of our Class A Common Stock. The warrants became exercisable
forty-five days after the date of issuance under the same terms as the
warrants issued in conjunction with the October 26, 2001 private placement.
On April 11, 2002, we issued $950,000 in 8% Unsecured Convertible
Notes. The notes are convertible after 120 days into shares of common stock on
the same terms as the October 26, 2001 private placement. The maturity date of
the notes is October 26, 2006. Issued with the notes were warrants to purchase
1,900,000 shares of common stock. The warrants became exercisable forty-five
days after the date of issuance on the same terms as the warrants issued in
conjunction with the October 26, 2001, private placement.
On May 16, 2002, we issued $730,000 in 8% Unsecured Convertible Notes
.. The notes are convertible after 120 into
shares of common stock under terms similar to the October 26, 2001 private
settlement. The maturity date of the notes is May 16, 2007. Issued with the
notes were warrants to purchase 1,460,000 shares of common stock. The warrants
became exercisable forty-five days after the date of issuance under terms
similar to the warrants issued in conjunction with the October 26, 2001 private
placement.
On June 6, 2002, we issued $325,000 in 8% Unsecured Convertible Notes.
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 6, 2007. Issued with the notes were warrants to purchase 650,000 shares
of common stock. The warrants became exercisable forty-five days after the date
of issuance on the same terms as the warrants issued in conjunction with the May
16, 2002 private placement.
On June 10, 2002, we issued $500,000 in 8% Unsecured Convertible Notes.
The notes are convertible after 120 days into shares of common stock on the same
terms as the May 16, 2002 private placement. The maturity date of the notes is
June 10, 2007. Issued with the notes were warrants to purchase 1,000,000 shares
of common stock. The warrants became exercisable forty-five days after the date
of issuance on the same terms as the warrants issued in conjunction with the May
16, 2002 private placement.
On June 18, 2002 we issued $350,000 in 8% Unsecured Convertible Notes.
The notes are convertible after 120 days into shares of common stock on the same
terms as the May 16, 2002 private placement. The maturity date of the notes is
June 18, 2007. Issued with the notes were warrants to purchase 700,000 shares of
common stock. The warrants became exercisable forty-five days after the date of
issuance on the same terms as the warrants issued in conjunction with the May
16, 2002 private placement.
On June 28, 2002 we issued $2,000,000 in 8% Unsecured Convertible
Notes. The notes are convertible after 120 days into shares of common stock on
the same terms as the May 16, 2002 private placement. The maturity date of the
notes is June 28, 2007. Issued with the notes were warrants to purchase
4,000,000 shares of common stock. The warrants became exercisable forty-five
days after the date of issuance on the same terms as the warrants issued in
conjunction with the May 16, 2002 private placement.
15
On July 10, 2002 we issued $250,000 in 8% Unsecured Convertible Notes.
The notes are convertible after 120 days into shares of common stock on the same
terms as the May 16, 2002 private placement. The maturity date of the notes is
July 10, 2007. Issued with the notes were warrants to purchase 500,000 shares of
common stock. The warrants became exercisable forty-five days after the date of
issuance on the same terms as the warrants issued in conjunction with the May
16, 2002 private placement.
On July 31, 2002, we issued $300,000 in 8% Unsecured Convertible Notes.
The notes are convertible after 120 days into shares of common stock under terms
similar to the July 10, 2002 private placement. The maturity date of the notes
is July 31, 2007. Issued with the notes were warrants to purchase 150,000 shares
of common stock. The warrants became exercisable forty-five days after the date
of issuance at an exercise price of $.30.
On September 10, 2002, we issued $2,000,000 in 8% Unsecured Convertible
Notes. The notes are convertible after 120 days into shares of common stock
under terms similar to the July 31, 2002 private placement. The maturity date of
the notes is September 10, 2007. Issued with the notes were warrants to purchase
4,000,000 shares of common stock. The warrants became exercisable forty-five
days after the date of issuance, under terms similar to the warrants issued in
conjunction with the July 10, 2002 private placement.
As of June 30, 2002, we failed to comply with the registration
obligations arising out of the June 27, 2001, October 26, 2001, February 27,
2002, March 26, 2002 and April 11, 2002 financings. In accordance with the terms
of the applicable Subscription Agreements, we have accrued $1,198,000 at June
30, 2002, representing liquidated damages due to the note holders as a result of
these non-registration events. Such damages are calculated at an amount equal to
1% of the principal amount issued for the first 30 days or part thereof, and 2%
thereafter, during the pendency of the non-registration event.
Under the terms of our agreements with Congress, we paid $8,000,000 To
acquire its position as the senior secured creditor of Mooney Aircraft
Corporation. $3,500,000 of the purchase price was paid in cash and $4,500,000
was paid 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.
From May 24, 2002 through September 5, 2002, we executed various
promissory notes in the aggregate amount of $2,977,000. The payment terms of
each note varied, however no payment due date extends beyond December 23, 2002.
Interest accrues at 8% per annum. At September 30, 2002, $2,377,000 remained
outstanding.
As additional security for the fulfillment of our obligations to
Congress, we issued 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. Payment of this note is also secured by
substantially all the assets acquired from Congress.
At December 31, 2001 we recorded an accrual for approximately
$1,018,000 related to commitments to purchase special orders from certain
vendors. The amount accrued represents costs incurred by vendors in the
production of items specifically related to the Jetcruzer 500 with no
alternative saleable value to the vendors. We have worked out payment plans with
most of these vendors. At June 30, 2002, the total amount due to vendors under
these payment plans was $693,078.
In November 1998 we moved into our manufacturing and headquarters
facility. The primary financing for this project was our obligation under a loan
agreement related to proceeds of $8,500,000 in the issuance of Industrial
Development Bonds ("IDB") by the California Economic Development Financing
Authority (the "Authority"). We were required to provide cash collateral to the
Sumitomo Bank, Limited (the "Bank") in the amount of $8,500,000 for a stand-by
letter of credit in favor of the holders of the IDBs which was to expire on
August 5, 2002, if not terminated earlier by us or the Bank. The IDBs were
retired in 1999 and the stand-by letter of credit in favor of the holders of the
IDBs was terminated by us.
16
In June 1999, we sold our 200,000 square-foot building to The Abbey
Company and leased it back. The sale price of the building was $9,800,000, and
the term of the lease is eighteen years plus an option to extend the lease for
an additional ten years. Monthly payments under the terms of our current lease
are approximately $119,620 and escalate annually through June 1, 2007, and will
be adjusted annually beginning June 1, 2009, for changes in the Consumer Price
Index. The rent for the option period after the eighteenth year would be at fair
market rental value.
We lease approximately 10 acres of land located on the Long Beach
Airport in Long Beach, California. The lease commenced on October 20, 1997, and
has a term of 30 years with an option to renew for an additional 10 years. The
current monthly rent is $15,600. We had no material capital commitments at
December 31, 2001, other than as discussed elsewhere in this prospectus. We
intend to hire a number of additional employees, and the wages and benefits paid
to these employees prior to such time, if ever, as we attain profitability, will
require substantial additional capital resources.
We anticipate that we will hire up to 200 employees over the next
twelve months, including engineers and manufacturing technicians necessary to
produce our aircraft.
The following table summarizes our long-term obligations at June 30,
2002 as discussed above, in addition to other capital and operating leases and
miscellaneous other items:
Payments due by Period
Less than 1
Contractual Obligations Total year 1 - 3 years 4 - 5 years After 5 years
----------------------- ----- ---- ----------- ----------- -------------
Convertible Debentures 23,243,000 205,000 2,027,000 21,011,000 -
Notes Payable (1) 5,989,000 2,530,000 2,888,000 539,000 32,000
Capital Lease Obligations 37,169,000 1,674,000 3,776,000 4,558,000 27,161,000
Operating Leases 5,010,000 204,000 410,000 412,000 3,984,000
Unconditional Purchase Obligations(3) 693,000 693,000 - - -
Other Long Term Obligations(2) 200,000 50,000 150,000 - -
---------- --------- --------- ---------- ----------
Total Contractual Cash Obligations 72,304,000 5,356,000 9,251,000 26,520,000 31,177,000
(1) Included in this amount are the Congress notes discussed
previously, a promissory note of $400,000 signed in consideration of cash
received to fund operations, and a note signed for the acquisition of computer
equipment with a principal balance of approximately $75,000 outstanding at June
30, 2002.
(2) This amount represents severance pay due the former CEO and
President who resigned in January 2002.
(3) This amount represents amount due to vendors for items purchased
that were to be used in the production of the JETCRUZER 500, with no alternative
saleable value to the vendors. Of the total amount due, final due dates have not
yet been negotiated with certain vendors, however, it is assumed amounts will be
due within one year. The total amount of such payments is $239,000.
With respect to the various debenture transactions discussed above, at
June 30, 2002 we had $23,243,000 in convertible debenture principal outstanding,
of which $6,294,000 has been recorded as a current liability, either due to the
maturity date of the note, or the failure of us to obtain waivers from the note
holders waiving their rights to call the notes due to the occurrence of events
of default related to the failure of us to pay interest when due on June 30,
2001, September 30, 2001, and subsequent quarters, or to register the underlying
shares of stock in a timely manner as specified by the Subscription Agreement.
Although not expected, if these note holders were to call their notes due, we
would have to pay each holder 130% of the outstanding note principal in addition
to any interest and non-registration damages accrued to date, within five days
of receiving written notice from the note holder requesting payment.
Assuming a redemption date of July 1, 2002 by the note holders, of the
$6,294,000 recorded as a current liability as of June 30, 2002, only $5,594,000
would be subject to redemption notices, as $700,000 of the balance was recorded
current due to the expectation the Company would be unable to pay interest due
on September 30, 2002. Therefore, the total amount the Company would have had to
pay would have been $7,727,000, comprised of $7,272,000 in principal at 130%,
$254,000 in accrued interest and $201,000 in accrued non-registration damages.
None of the amounts recorded in long-term could have been subject to possible
redemption notices.
17
The following is a discussion of our cash flow for the years ended
December 31, 2001 and 2000, and for the six months ended June 30, 2002 and 2001
and should be read concurrently with the applicable cash flow statements that
appear on pages F-6 and F-29 respectively.
2001 VS. 2000
Cash used in operating activities in 2001 increased by $3,600,000, due
to the net loss for 2001 increasing by $10,449,000. Amortization and
depreciation also increased as compared to the prior year by $2,702,000. The
increase in the amortization of discount on convertible debentures relates to
the issuance of $14,953,000 of convertible debt in 2001 which did not occur in
2000, which were issued at a discount and contained beneficial conversion
features.
Cash used in investing activities in 2001 increased by $1,680,000.
During 2001, the Company significantly reduced its production of tooling, in
anticipation of commencing production on the Jetcruzer 500 in 2001.
Additionally, the Company determined that the program would be suspended
indefinitely, and therefore, wrote-off capitalized tooling of $2,805,000 related
to the Jetcruzer 500 program. Additionally, the Company accrued additional
significant interest and non-registration damages on the convertible debt issued
during 2001, and for certain non-cancelable commitments to vendors for items
related to the Jetcruzer 500.
Investments of $957,000 were depleted during 2001, which were used for
pre-production activities.
Cash provided by financing activities in 2001 increased by $6,433,000,
due to the significant increase in funding of pre-production operations. The
Company obtained $14,529,000 and $1,100,000 in proceeds from debentures and
preferred stock and related warrants, and bridge notes, respectively.
Additionally, the Company issued Common stock from its equity line of
$898,000. During 2001, the Company issued convertible debt, in lieu of preferred
stock, in order to provide a more attractive offer to investors. The majority of
the notes pay interest at 8% as opposed to the preferred stock which accrues
dividends at 5%. This was the first time the Company has used convertible
debentures.
The 2001 proceeds received from bridge loans was due to the lack of
cash to meet operating needs just prior to the issuance of convertible notes in
October 2001. The bridge financing was paid out of the proceeds raised from
the issuance. No such significant transactions occurred in 2000.
SIX MONTHS ENDED JUNE 30, 2002 VS. JUNE 30, 2001
Note: For purposes of the following discussion, "2002" refers to the
six-month period ended June 30, 2002, and "2001" refers to the six-month period
ended June 30, 2001.
Cash used in operating activities for the six months ended June 30,
2002 increased by $3,104,000 as compared to the same period in 2001, due to the
combination of an increased net loss of $3,139,000, offset by non-cash
compensation expense of $897,000 due to amounts owed to executives for the
stock-based portion of their compensation, including $320,000 in warrants issued
to the former President as part of his severance package. No such compensation
plans existed in the previous year.
Due to the acquisition of Mooney Airplane Company on April 19, 2002,
the changes in operating assets and liabilities are mainly related to the
operations of that business, including changes in inventory and accounts
payable.
The Company continues to accrue convertible note interest of
non-registration damages of and executive compensation. In 2001 the accruals for
the non-registration damages and the executive compensation did not exist.
18
Cash used in investing activities for the six months ended June 30,
2002 increased by $1,735,000 as compared to the same period in 2001. The Company
purchased the net assets of Mooney Airplane Company during 2002 for cash of
$4,082,000. This was offset by the sale of investments held to fund the
acquisition and operating activities of the Company.
Cash provided by financing activities for the six months ended June 30,
2002 increased by $4,772,000 as compared to the same period in 2001. During 2002
period, the Company continued to issue convertible debt, in lieu of preferred
stock, in order to provide a more attractive offer to investors. The majority of
the notes pay interest at 8% as opposed to the preferred stock which accrues
dividends at 5%.
The increase in proceeds received from the issuance of convertible
notes and related warrants of $6,633,000 is mainly due to issuance of additional
notes in 2002 to fund the Mooney Aircraft Company acquisition and operating
activities. During 2002, the Company was unable to utilize the Equity Line due
to the continual decline in the stock price. Previously, the Equity Line had
allowed the Company to demand cash in exchange for common stock, based upon
changes in the market price of the stock.
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 throughout the next year. We are currently pursuing other financing
to ensure that we have sufficient funds through the next twelve months. Although
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, it and expected cash flow from operations
will not be sufficient to fund operations for the next 12 months. Additional
funding will be required and is expected, either through additional stock
issuances or debt financing obtained from certain private parties. Based upon
past experience with such parties we believe such funding will be forthcoming,
however no firm commitment from such parties currently exists. If sources of
financing are unavailable, we will have to curtail our plans and will be unable
to pay our obligations to Congress.
19
SEASONALITY
We believe our business is not seasonal.
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis and Plan of Operations discusses
our financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. When we prepare these
financial statements, we are required to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. On an
on-going basis, we evaluate our estimates and judgments, including those related
to investments, long-lived assets, deferred tax assets, other liabilities and
revenue recognition. We base our estimates and judgments on historical
experience and on various other factors that we believe to be reasonable under
the circumstances, the results of which form the basis for our judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Our actual results may differ from these estimates under
different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in preparing our consolidated financial
statements. (See Note 3 of the Notes to audited Financial Statements as of
December 31, 2001 for our Summary of Significant Accounting Policies.)
DEFERRED TAXES
We record a valuation allowance to reduce the deferred-tax assets to
the amount that is more likely than not to be realized. We consider future
taxable income in assessing the need for a valuation allowance. Should we
determine that we are able to realize the deferred tax assets in the future, an
adjustment to the deferred tax assets would increase income in the period such
determination was made.
REVENUE RECOGNITION
We defer the recognition of revenue from deposits collected on airplane
orders until such time as production commences. As the production process
commences, deposits collected on sales orders will be recorded as income.
OTHER LIABILITIES
During fiscal year 2001, we recorded an estimate of the liability for
cancelled special orders for manufacturing equipment and inventory for the
Jetcruzer resulting from our actions. Although we do not expect significant
changes, the actual costs may differ from these estimates.
VALUATION OF CERTAIN MARKETABLE SECURITIES
We currently classify our investment securities as available-for-sale
securities. Pursuant to SFAS No. 115, such securities are measured at fair
market value in the financial statements with unrealized gains or losses
recorded in other comprehensive income until the securities are sold. However, a
decline in the fair market value below cost that is other than temporary is
accounted for as a realized loss.
20
LONG-LIVED ASSETS
We review the recoverability of our long-lived assets pursuant to SFAS
No. 144 whenever significant events or changes occur which might impair the
recovery of recorded costs. Because of the significant delays of the
commencement and production of the Jetcruzer 500, we have written off tooling
and software assets based upon the estimated market value of those assets.
CONVERSION OF PERFORMANCE SHARES
If we attain certain earnings thresholds, our 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, if we
attain such earnings thresholds, we may recognize a substantial charge to
earnings during the period in which such conversion occurs, which would have the
effect of increasing our loss or reducing or eliminating our earnings, if any,
at that time. In the event we do not attain these earnings thresholds, and no
conversion occurs, no compensation expense will be recorded for financial
reporting purpose.
BUSINESS
OVERVIEW
We are a development stage enterprise organized in 1990 to design,
develop, manufacture and market general aviation aircraft. We began development
of the Jetcruzer 450 in 1990. The Jetcruzer 450 is a non-pressurized,
single-engine aircraft powered by a Pratt & Whitney propjet engine which
obtained FAA Type Certificate approval in 1994. We later decided to amend the
Type Certificate to develop a stretched and pressurized version of the 450
called the Jetcruzer 500 for commercial sale. Research and development expenses
increased in 2001 as we accelerated the development of the Jetcruzer 500.
At the end of 2001, we came to believe that an opportunity exists in
the general aviation industry today for the formation of a company, the
products of which would offer an alternative to business travel by airline for
executives of small to medium-sized businesses and high net worth individuals.
We believe this opportunity has resulted in part from the concurrence of the
following: (1) the reduction of product-liability exposure as a consequence of
the passage of General Aviation Revitalization Act of 1994, (2) the possible
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) the deteriorating comfort and
convenience of airline travel.
To take advantage of the current opportunity, we have hired a
management team with significant experience in turning around general aviation
manufacturing companies. The new management team has taken the first step in our
strategy by acquiring the assets of MACorp. MACorp has produced
high-performance, single-engine piston aircraft for more than 50 years. Our
aircraft are currently recognized as the highest performance piston engine
aircraft in commercial production, and over 10,000 of our aircraft are in
operation around the world.
The new management team also instituted a technical review of the
Jetcruzer 500 program. Based on this review, the new management team concluded
that the Jetcruzer 500 was not likely to achieve its design objectives at a
commercially-reasonable cost. Accordingly, significant spending on the Jetcruzer
program was suspended, and we will review how best to capitalize on the
completed development work.
21
INDUSTRY BACKGROUND
The general aviation industry comprises essentially all nonmilitary
aviation activity other than scheduled and commercial airlines licensed by the
FAA and the Department of Transportation. General aviation aircraft are
frequently classified by their type and number of engines and include aircraft
with fewer than 20 seats. There are three different types of engines: piston,
propjet and turbofan (jet). Piston aircraft use an internal combustion engine to
drive a propeller, and there may be one or two engines and propellers. Propjet
aircraft combine a jet turbine powerplant with a propeller geared to the main
shaft of the turbine, and there may be one or two engines and propellers.
Turbofan aircraft use jet propulsion to power the aircraft.
Purchasers of general aviation aircraft include corporations,
governments, the military, the general public and fractional interest entities.
A corporation may purchase a general aviation aircraft for transporting its
employees and property. Many companies use an aircraft in their line of
business, including on-demand air taxi services, air ambulance services and
freight and delivery services. Governments and military organizations may
purchase an aircraft for the transportation of personnel, freight and equipment.
Members of the general public may purchase an aircraft for personal and/or
business transportation, freight, equipment and pleasure use. An aircraft must
qualify under FAA regulations in order to be used for certain purposes, and the
ability of an aircraft to so qualify will have a material affect on the
potential market for such aircraft.
Currently, there are fewer than ten major manufacturers of general
aviation aircraft based in the United States. Piston aircraft make up the
numerical majority of aircraft delivered by these manufacturers, whereas
propjets and jet aircraft account for the majority of billings. Aircraft
deliveries by United States manufacturers have increased consistently with sales
generating approximately $3.1 billion in 1996, $4.7 billion in 1997, $5.9
billion in 1998, $7.8 billion in 1999, $8.6 billion in 2000 and $8.7 billion in
2001.
STRATEGY
GENERAL
We believe that an opportunity exists in the general aviation industry
to create a company, the products of which would consist of the best of existing
aircraft models produced today. Also, the passage of the General Aviation
Revitalization Act of 1994 ("GARA") has resulted in reduced product liability
exposure on the part of general aviation aircraft manufacturers. Finally,
airline travel has steadily become a less desirable means of travel for the
business traveler due to the airlines' adoption of a hub-and-spoke system
significantly extending the time, and reducing the convenience, of airline
travel to destinations without major terminal facilities. The events of
September 11, 2001, have caused increased security measures to be implemented
that cause further travel delays and inconvenience to business travelers.
We have already taken the first step in this strategy by acquiring
substantially all of the assets of the MACorp at a federal bankruptcy auction in
San Antonio, Texas on March 18, 2002, and through the provisions of an Asset
Purchase Agreement with the general unsecured creditors committee. The MACorp
has produced high-performance, single-engine piston aircraft for more than 50
years. Mooney aircraft are recognized by many as the highest performance piston
engine aircraft in commercial production and have a wide following. Over 10,000
Mooney aircraft are in operation around the world. MACorp was producing three
models when it filed for bankruptcy in July 2001.
MACorp was operated after its bankruptcy filing by a skeleton staff
that primarily focused on supplying spare parts and technical service to its
customer base. We have formed a new company to own and operate the assets being
acquired from MACorp. This wholly-owned subsidiary is named Mooney Airplane
Company, Inc. ("MAC").
22
We intend to establish full production of the Mooney line of aircraft,
which will consist of three models, the Eagle 2, Ovation 2, and the Bravo, at
our manufacturing facility in Kerrville, Texas.
We believe we can operate MAC at a profit by eliminating significant
amounts of overhead, reducing manufacturing costs, and by instituting a new
approach for the sale and distribution of Mooney aircraft. An increase in these
costs led to MACorp's Chapter 11 bankruptcy in July of 2001.
We have hired a management team with significant experience in turning
around general aviation manufacturing companies in order to achieve these goals.
Pete Larson, President, CEO, and CFO, is the former CFO of Cessna Aircraft
Company and had significant experience in turning around Cessna's financial
performance. Dale Ruhmel, Executive Vice President of Group Operations and
Engineering, is the former head of Advanced Design and Technical Services for
Cessna Aircraft Company and an industry-recognized expert in small aircraft
design and certification. We believe the combined experience of this management
team will provide the necessary knowledge to make the required changes to bring
the Mooney aircraft back to profitability.
We continue to investigate the acquisition of other top of the line
general aviation product lines that will be complementary to the Mooney line. We
plan to pursue the acquisition of other complementary general aviation product
lines and development programs as they become available.
In order to better achieve our operating goals as describe above, on
October 1, 2002 the Board of Directors approved a resolution to close the
Company's facility in Long Beach, California. Since we are obligated under a
lease for the facility through 2017, we will make efforts to sublease the
facility. These actions may result in the possible write-off of all or a portion
of the building cost. The planned closure will also include the termination of
all employees at the facility, with the exception of officers and a small
marketing, accounting, administrative, and engineering staff. We have not yet
determined the impact of this decision on the consolidated financial statements.
MANUFACTURING
We will manufacture all aircraft products for Mooney airplanes in
Kerrville, Texas, at the location of Mooney's existing manufacturing facilities.
We have a favorable long-term lease on both land and buildings at the Kerrville
Airport, which makes Kerrville a financially attractive location to build
aircraft. As many as 700 aircraft per year have been produced in this facility,
and it should provide the space required for our future production plans.
Additionally, the Kerrville area has an experienced aerospace labor
work force developed over the many years the Mooney aircraft has been produced
in this location. There are no other aircraft manufacturers in the immediate
area, so competition for experienced workers is minimal. Labor to supply the
needs created by long-term growth is available in nearby San Antonio.
We plan to greatly simplify the manufacturing process used at the
Kerrville plant by eliminating inappropriate levels of computer control. The
Mooney aircraft is a simple and straightforward aircraft to build and the
overuse of MRP/ERP type manufacturing control systems led to an increase in
hours to build as opposed to the desired decrease. We plan to make appropriate
use of these computer tools.
The layout of the production line offers another opportunity for
reducing man-hours. Additionally, MACorp previously had an adverse
indirect-labor to direct-labor ratio, which is being corrected as we restart
operations. Lack of sufficient funding under the prior ownership was a cause of
cost growth. Irregular and excessive vendor payments caused disruptions in
material deliveries which impacted the production line, requiring installations
to be done out of station and out of sequence. Vendors were not inclined to give
best pricing terms under these conditions. We plan to enter into long-term
supply agreements to reduce raw material and purchased component costs.
We have hired Jack Jansen as President and COO for Mooney Airplane
Company, Inc. He ran manufacturing at MACorp from 1992-1994 and also was head of
manufacturing for another major general aviation manufacturer, Piper Aircraft
Company, building aircraft similar to Mooney aircraft.
23
SALES AND MARKETING
SALES STRATEGY
--------------
We plan to adopt a multifaceted method of sales that will capitalize on
agents for international sales and direct sales domestically. We will have two
showrooms and will station company salespersons in five select areas. We plan to
reset the price value equation for single-engine piston-powered aircraft and
gain market share through aggressive marketing and advertising emphasizing the
high performance capabilities of Mooney aircraft, new lower pricing, and high
safety. We intend to use new marketing channels, such as in-house sales from an
attractive showroom and salespersons located in major market areas. We believe
that new lower prices coupled with the high performance capabilities of Mooney
aircraft will allow us to compete successfully in our market area.
DOMESTIC SALES
--------------
We will adopt a new direct sales program from our California and Texas
locations combined with company salespersons located in five selected cities in
the United States.
We will advertise nationwide and provide one telephone number to call,
one website to view, and two showrooms from which to sell. Far fewer
salespeople, at significantly less salary and much lower commissions, are
required for this approach. The salespeople will concentrate on one product line
of aircraft only, and we believe this focus will allow them to refine the sales
process to a high level in a short time. Sales managers and other key
individuals will be located in the showrooms, allowing immediate answers to
sales questions or problems. If a sale cannot be completed, the salesperson will
have access to years of experience by calling on the sales managers, who will be
in the building to assist at any time.
We believe that this method is ideal for high-volume sales in today's
fast-paced market environment. The vast majority of sales will be from two major
outlets, the current facility showroom at the Long Beach airport and the factory
in Texas. Many customers will have a very short trip to see a new Mooney
aircraft, since a significant percentage of domestic aircraft sales are made in
California and Texas.
INTERNATIONAL SALES
-------------------
We plan to appoint a series of international agents who will represent
us in key international markets. These agents will be selected from experienced
international dealers and salespersons residing in the country of
responsibility. We will use the services of a consultant, Al Stauffer,
previously head of international sales for both Piper and Old Mooney, to
identify key candidates and make appropriate introductions. Agents will conduct
sales by signing international customers to a Mooney contract and will be paid a
commission for their success on a per aircraft basis.
NEW PRODUCT DEVELOPMENT PROGRAMS
We previously had only one new aircraft product under development, the
Jetcruzer 500. Based upon a technical review of the Jetcruzer 500 program
instituted by the new management team, it was determined that the plane was not
likely to achieve its design objectives at a commercially-reasonable cost.
Accordingly, our board of directors resolved on March 26, 2002, that significant
spending on the Jetcruzer program should be suspended and that we should review
new technologies which might increase the viability of the program and determine
how best to capitalize on the existing development work associated with the
Jetcruzer program. Options to be considered by management include a restart of
the Jetcruzer program at a later date, the use of Jetcruzer flight and test data
to launch a new development activity and the sale of the program to another
company.
24
SUPPLIERS
We rely on various suppliers of materials and components which are
necessary to manufacture our aircraft. Our aircraft will utilize engines,
propellers and avionics provided by outside manufacturers. These suppliers also
produce equipment for other aircraft manufacturers. The Mooney models use
engines manufactured by Teledyne Continental and engines, propellers and
governers manufactured by Textron. We have contractual agreements for these
products with both Teledyne and Textron.
The failure of suppliers or subcontractors to meet our performance
specifications, quality standards, delivery standards or schedules could have a
material adverse effect on our operations. Moreover, our ability to increase our
production rate on the reopened Kerrville plant production line could be limited
by the ability or willingness of our key suppliers to increase their delivery
rates.
COMPETITION
We anticipate a very competitive market for each of our products. We
are completing our pricing and marketing strategies, as well as our production
costs projections. Each of these factors influences the nature of our
competitive market. When we have such information in hand, we will be able to
identify the most direct competition for the various Mooney models with greater
clarity. Currently, it is anticipated that our competition will be from the
Cirrus Models SR20 and SR22, the Lancair Columbia 300, the Socata Models TB-20GT
and TB-21GT and the Commander Models 115 and 115TC.
PRODUCT LIABILITY AND INSURANCE
The failure of an aircraft, or any component part thereof, manufactured
by us or any other mishap involving such an aircraft may result in physical
injury or death to the occupants of the aircraft or others, and damage or
destruction of the aircraft itself, and therefore, we could be subject to
lawsuits involving product liability claims. We have obtained product-liability
insurance for the Jetcruzer 500 aircraft but do not intend to renew it at this
time for coverage of that product. We have also obtained product-liability
insurance for Mooney aircraft. Such insurance is expensive and subject to
various exclusions. Since the events of September 11, 2001, product-liability
insurance for manufacturers of general aviation aircraft has become less
available and more costly.
There can be no assurance that coverage will continue to be available
to us on acceptable terms or at all. Although we believe we will continue to be
able to obtain the necessary product liability insurance, we do not know what
limits of coverage will apply. Further, should we become involved in
product-liability litigation, the expenses and damages awarded could be large
and the scope of any coverage may be inadequate. We have obtained other
insurance as needed, including flight-test insurance for our pilots and aircraft
used during the FAA certification process.
GOVERNMENT REGULATION
The manufacture of aircraft is subject to extensive regulation by the
FAA. Both the finished product and the process of manufacturing itself must be
certified by the FAA, as must the type design. Failure to obtain or maintain all
required FAA certifications would have a material adverse effect on our
operations.
FAA CERTIFICATION
-----------------
For an aircraft model to be manufactured for sale, the FAA must issue a
type certificate and production certificate for that model; for an individual
aircraft to be operated, the FAA must issue an airworthiness certificate for
that aircraft.
Production certificates are issued by the FAA after it determines that
the type certificate holder (or its licensee) has the facilities and
quality-control capability to manufacture aircraft that will meet the design
provisions of the applicable type certificate. We have received the renewal of
production certificates for the Mooney line of aircraft.
25
An airworthiness certificate is issued by the FAA for a particular
aircraft when it is certified to have been built in accordance with
specifications approved under the type certificate for that model. The
airworthiness certificate remains in effect so long as required maintenance,
repairs and upkeep are performed. We will be subject to the risk of
modification, suspension or revocation of any FAA certificate we hold. Such
modification, suspension, or revocation could occur if, in the FAA's judgment,
our compliance with airworthiness or safety standards is in doubt. If the FAA
were to suspend or revoke our type or production certificates for an aircraft
model, sales of that model would be adversely affected or terminated. If, in the
FAA's judgment, an unsafe condition developed or was discovered after one or
more of our aircraft had entered service, the FAA could issue an "Airworthiness
Directive," which could result in a regulatory obligation upon us to develop
appropriate design changes. Foreign authorities could impose similar obligations
upon us as to aircraft within their jurisdiction. Any or all of the above
occurrences could expose us to substantial additional costs and/or liability.
PRODUCT-LIABILITY RISK LIMITATIONS
----------------------------------
In 1994, the United States Congress passed and the President signed the
General Aviation Revitalization Act of 1994 ("GARA"). GARA provides protection
for manufacturers of general aviation aircraft against certain lawsuits for
wrongful death or injuries resulting from an aircraft accident. Except as set
forth in GARA, and provided a period of 18 years has passed from the date of
delivery of the aircraft to the original purchaser or retailer, no claim for
damages resulting from personal injury or wrongful death may be brought against
the manufacturer of a general aviation aircraft. Although GARA will not directly
affect us until eighteen years from the date we deliver our first aircraft,
management believes that GARA will indirectly benefit us immediately, in that it
may encourage increased manufacturing and sales of general aviation aircraft and
this increased activity may in turn result in an increased number of licensed
pilots. Management believes that a greater number of licensed pilots may provide
an increased market for our aircraft. However, there can be no assurance that
our view of GARA's effects will prove to be correct.
With respect to the MACorp assets, the Bankruptcy Court's order and
the Asset Purchase Agreement grant us ownership of the MACorp assets free
and clear of any product-liability claims for products manufactured prior to our
acquisition of the assets. Therefore we believe that we would not be found
liable for product-liability claims related to Old Mooney aircraft or parts
manufactured prior to our acquisition of the Old Mooney assets. However, we may
be named as a defendant in future lawsuits and may incur costs associated with
the defense of such claims.
FOREIGN CERTIFICATION
---------------------
In order for us to sell our aircraft in foreign countries, we must
comply with each country's aircraft certification process. Certain countries
will accept as adequate certification issued by the FAA, while others impose
additional requirements. In countries which do require additional certification,
the FAA certification often provides a starting point from which such country
begins its certification process. We intend to begin the certification process
in a foreign country once we have received FAA certification for our aircraft
and have finalized a sale or distributorship of that aircraft in that country.
We have not yet determined which foreign market or markets we will first
address. Priorities in this area will be established by the levels of interest
in our products by dealers and distributors in the various foreign markets. At
this time we are unable to determine Mooney's certification status in foreign
countries. We will attempt to obtain any certifications required for us to sell
Mooney aircraft abroad.
EMPLOYEES
As of June 30, 2002, we had approximately 150 full-time employees. We
believe that our relations with our employees are good. We are not a party to
any collective bargaining agreement.
PROPERTIES
We have leased approximately ten acres of land located on the Long
Beach Airport in Long Beach, California (the "Ground Lease"). The Ground Lease
term commenced on October 20, 1997, and continues for 30 years with an option to
renew for an additional 10 years. The lease also contains options to lease other
airport properties. The current monthly rent for the Ground Lease is $15,600.
The Ground Lease was assigned to AP-Long Beach Airport LLC in June 1999.
26
We retained Commercial Developments International West to design and
build our approximately 200,000 square-foot manufacturing and headquarters
facility (the "New Facility") on the property subject to the Ground Lease. We
moved into the New Facility on November 18, 1998. The total cost for the New
Facility, including its design, construction, licenses, fees and change orders,
was approximately $9,800,000. In June 1999, we sold the New Facility to The
Abbey Company and leased it back. The sale price of the building was $9,800,000,
and the term of the lease is eighteen years plus an option to extend the lease
for an additional ten years. Monthly payments under the terms of our current
lease are approximately $119,620 and escalate annually through June 1, 2007, and
will be adjusted annually beginning June 1, 2009, for changes in the Consumer
Price Index. The rent in the option period following the eighteenth year would
be at fair market rental value.
The capacity of hanger and office space of the facility in Long Beach
is now in excess of our requirements as a result of the acquisition of the
MACorp facility in Kerrville, Texas and our decision to focus all production
activities in Texas. As previously discussed, on October 1, 2002, the Board of
Directors approved a resolution to close the Company's facility in Long Beach,
California. Since we are obligated under a lease for the facility through 2017,
we will make efforts to sublease the facility. These actions may result in the
possible write-off of all or a portion of the building cost.
MANAGEMENT
The following table sets forth certain information with respect to each
director and executive officer of Mooney as of September 30, 2002.
Name Age Position
Samuel Rothman 48 Chairman of the Board
L. Peter Larson 52 President, Chief Executive Officer, Director,
Chief Financial Officer and Treasurer
Shalom Babad 27 Consultant to Mooney and Director
C.M. Cheng 54 Consultant to Mooney and Director
Hon. Robert P. Kaplan 65 Director
Neil Lewis 54 Director
Arie Rabinowitz 30 Consultant to Mooney and Director
OTHER OFFICERS:
Jack A. Jansen 75 President and Chief Operating Officer of
Mooney Airplane Company, Inc. (a wholly-owned
subsidiary of Mooney)
J. Nelson Happy 58 Executive Vice President, General Counsel and
Secretary
Dale Ruhmel 67 Executive Vice President of Group Operations
and Engineering
Nicolas Chabbert 35 Executive Vice President of Sales and
Marketing
27
Directors serve until the next annual meeting or until their successors
are elected or appointed. All officers are appointed by and serve at the
discretion of the Board of Directors, although, Mr. Larson, Mr. Nelson, Mr.
Ruhmel and Mr. Chabbert have entered into employment agreements with us. See
"Management - Employment Agreements." There are no family relationships between
any of our directors or officers.
SAM ROTHMAN has served as a director of Mooney since December 2001. He
was elected Chairman of the Board on August 19, 2002. Mr. Rothman has been
self-employed in real estate and security investments during the past five
years.
L. PETER LARSON was elected President, Chief Executive Officer and a
Director on August 19, 2002 and has been Chief Financial Officer of Mooney since
January 8, 2002. He was the CEO of Telkonet Communications, which he co-founded
in 1999, prior to joining Mooney and was involved as a consultant in several
start-up and turnaround assignments beginning in 1993. Mr. Larson received a
B.S. in Electrical Engineering from Union College in 1971 and a M.S. in
Operations Research from Rensselaer Polytechnic Institute in 1973. He then
joined General Dynamics where he served in a number of management positions
including Vice President Finance and Controller of the General Dynamics Services
Company. Mr. Larson was Senior Vice President and Chief Financial Officer of
Cessna Aircraft for 5 years beginning in January 1989.
SHALOM BABAD is a consultant to Mooney and was appointed as a director
in April 2002. He has been self-employed as a consultant in fundraising and
security investments during the past five years.
C.M. CHENG has served as a director of Mooney since June 1996. Since
April 1996, Mr. Cheng has been a Vice President of Eurotai International, Ltd.,
a private company located in Taipei, Taiwan, which distributes health food
products. From 1984 to April 1996, Mr. Cheng served as a Vice President,
Director of the Office of the President, and Manager of Corporate Planning with
Taiwan Yeu Tyan Machinery, Mfg. Co. Ltd., a public company located in Taipei,
Taiwan, which manufactures automobiles and heavy equipment. From 1980 to 1983,
Mr. Cheng was an Associate Professor of Economics and Management at Taiwan
National Sun-Yet-Sen University. Mr. Cheng is the director of Harpa Limited, a
corporation organized under the laws of the Cayman Islands (Harpa), a principal
stockholder of Mooney. See "Certain Relationships and Related Transactions and
Principal Stockholders."
HON. ROBERT P. KAPLAN was elected as a director of Mooney in June 2001.
He was previously the Canadian Solicitor General and also was a member of the
Parliament of Canada from 1968 until 1993, when he retired from elective
politics. Since leaving public life in 1993, Mr. Kaplan has, among other things,
engaged in trade and investment in the Former Soviet Union. He serves as a
director of Hurricane Hydrocarbons Limited, a Calgary-based company which owns
oil fields and a major refinery in Kazakhstan, producing 10% of that country's
oil. It is listed on the Toronto, Frankfurt and Alberta Stock Exchanges.
Hurricane Hydrocarbans Limited was under bankruptcy protection from May 1999 to
March 2000, and emerged successfully. Mr. Kaplan served as a director, chairman
and acting CEO during this period. He also serves as a director of Rex Diamond
Corp., Ltd. Mr. Kaplan graduated with an Honours B.A. in Sociology (Criminology)
and an LL.B from the University of Toronto in 1961. He was called to the Bar in
Ontario in 1963, and practiced law with Toronto law firms doing tax and
corporate work until 1968.
NEIL LEWIS was appointed as a director of Mooney in July 2002. Mr.
Lewis has provided business and financial structuring advice to Australian
business in the private sector for the last four years as a consultant. He was
the Founding Principal and Joint Managing Director of Meridian International
Capital Limited, an Australia-based specialist merchant banking firm providing
domestic and international financing from 1991 to 1999. Mr. Lewis has been
involved in the international financial sector for the past 30 years in
countries that include Australia, the United States, Japan, the United Kingdom
(including Ireland), Malaysia and New Zealand. Mr. Lewis is a non-executive
director of Christian Broadcasting Association Limited which operates 2 CBA FM
radio stations in Australia.
ARIE RABINOWITZ has served as a director of Mooney since December 2001.
He is also a consultant to Mooney and has been a vice president at LH Financial
Services Inc. during the past five years. LH Financial clients have invested in
Mooney. Mr. Rabinowitz has a B.S. in Actuarial Sciences from Touro College in
New York.
JACK A. JANSEN has been the President and Chief Operating Officer of
Mooney Airplane Company, Inc. (a wholly-owned subsidiary of Mooney) since
February 2002. He was the Manufacturing Manager at Micco Aircraft from July 1996
to May 2001. His previous experience includes 20 years with Cessna Aircraft in
all phases of manufacturing; four years as Manufacturing Manager with Aero
Commander in Albany, Georgia, and 16 years with Piper Aircraft Company in Vero
Beach, Florida, as Director of Manufacturing Operations. He also worked at
Mooney Aircraft Corporation as Vice-President of Manufacturing from 1994 to
1996.
28
J. NELSON HAPPY has been the General Counsel and an Executive Vice
President of Mooney since January 8, 2002. He was previously the CEO of Conco
Refining Company from September 1999 to December 2001. From September 1993 to
August 1999, he served as the Dean of Regent University School of
Law. Mr. Happy received his B.S. degree from Syracuse University in 1964 and his
JD degree from Columbia University School of Law in 1967.
DALE RUHMEL has been the Executive Vice President of Group Operations
and Engineering at Mooney since January 8, 2002. He served as a consultant in
the aviation industry during the last five years.
NICOLAS CHABBERT has been our Executive Vice President of Sales and
Marketing since July 2002. From 2001 to 2002, he was the CEO of EXA SA in
Geneva, Switzerland, a start-up company that is marketing a new type of
stripping machine. Mr. Chabbert received a master's degree in 1992 from l'Ecole
Superieure Libre des Sciences Commerciales Appliqueees, a French school of
commerce, which is equivalent to an M.B.A. with a degree in "International
Business." He then Joined EADS Socata where he served in a number of management
positions and was in charge of direct sales and then the management of the
European distributor network. Mr. Chabbert was Senior Vice President Sales and
Marketing of the U.S. subsidiary Socata Aircraft for five years beginning in
June 1996, and reintroduced the TBM 700 and TB line in the U.S. market.
The Board of Directors held two meetings in 2001, and all Directors
were present at each meeting. No director attended fewer than seventy-five
percent (75%) of the aggregate number of meetings held by the Board of Directors
and the committees on which he served during 2001. The Board of Directors has an
Audit Committee which reviews the results and scope of the audit and other
accounting related matters. The members of the Audit Committee are currently
Messrs. Babad, Kaplan and Rothman. The Audit Committee held one meeting during
2001.
EXECUTIVE COMPENSATION
The following tables set forth certain information as to our Chief
Executive Officer and each of our four most highly-compensated executive
officers whose total annual salary and bonus for the fiscal year ending December
31, 2001, exceeded $100,000:
SUMMARY COMPENSATION TABLE
Annual Compensation (1)
-------------------------
Other
Name and Principal Position Year Salary Bonus Compensation
- -------------------------------------------------------------------------------
Carl L. Chen, Ph.D. 2001 $200,000 $0 $39,248(2)
Former President, Chairman and 2000 $200,000 $0 $39,248(2)
Chief Executive Officer 1990 $191,000 $0 $39,248(2)
Gene Comfort 2001 $153,000 $0 $0
Former Executive Vice President 2000 $153,000 $0 $0
1999 $143,000 $0 $0
- --------------------
(1) The compensation described in this table does not include medical
insurance, retirement benefits and other benefits which are available
generally to all employees of Mooney and certain perquisites and other
personal benefits, the value of which did not exceed the lesser of $50,000
or 10% of the executive officer's compensation in the table.
(2) Represents premium for life insurance paid by us on behalf of Dr. Chen.
29
EMPLOYMENT AGREEMENTS
We have entered into three-year employment agreements with Peter
Larson, President, CEO and Chief Financial Officer; Dale Ruhmel, Executive Vice
President of Group Operations and Engineering; and J. Nelson Happy, Executive
Vice-President and General Counsel. The majority of their compensation was
designed to reward performance. Over the three-year period they will vest in
ownership of five percent, three percent, two percent and three percent,
respectively, of the outstanding shares of Mooney and all receive annual
salaries of $200,000 plus reimbursement of expenses. We had also entered into a
similar agreement with Roy Norris, the former President and CEO, who resigned on
August 15, 2002. As part of Mr. Norris' severance package we paid $165,000 in
cash as salary expense and as of September 30, 2002 still owe him stock in the
amount of 1.5% of the shares outstanding as of August 16, 2002, the effective
date of issuance, which we expect to be issued in the fourth quarter of 2002. We
have entered into a three-year employment agreement with Nicolas Chabbert,
Executive Vice President of Sales and Marketing. Mr. Chabbert will receive an
annual salary of $150,000, 300,000 stock options with an exercise price of $0.20
and a bonus based upon the number of airplanes sold and delivered. We entered
into an eight-year employment agreement (the "Chen Employment Agreement") with
Dr. Carl Chen as President, Chairman and CEO commencing in May 1996. The Chen
Employment Agreement provided that, in consideration for Dr. Chen's services, he
was to be paid an annual salary of $200,000. Dr. Chen resigned effective January
8, 2002, under a severance agreement with the following terms: (i) a $300,000
payment with the first half paid during the first six months of 2002 and the
second half paid on January 8, 2004; (ii) eighteen months of health insurance;
(iii) 2,000,000 warrants with an exercise price of $0.25 and a three-year term;
and (iv) Dr. Chen's granting of an irrevocable proxy for his Class E-1 and Class
E-2 Common Shares to Samuel Rothman, a director.
COMPENSATION OF DIRECTORS
Non-employee directors receive $2,500 for each Board of Directors
meeting attended. We pay all out-of-pocket expenses of attendance.
30
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of our Common Stock as of September 30, 2002, by (i) each
person who is known by us to own beneficially more than 5% of any class of our
outstanding voting securities, (ii) each of our directors and executive
officers, and (iii) all of our officers and directors as a group.
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholder has sole or shared voting power or investment power and
also any shares which the selling stockholder has the right to acquire within 60
days. Percentages are based on a total of 72,628,941 shares of common stock
outstanding on September 30, 2002, plus the number of shares into which
convertible securities held may be converted.
Common Stock
Name and Address of Beneficially Percent of
Title of Class Beneficial Owner(1) Owned(2) Ownership
- ------------------------------------------ --------------------------- ------------------ ---------------------
Class A Common Stock Shalom Babad(3)(18) 2,178,868 3%
Class A Common Stock C.M. Cheng(4)(5) 15,000 <1%
Class B Common Stock 1,013,572 53%
Class E-1 Common Stock 2,027,144 51%
Class E-2 Common Stock 2,027,144 51%
Class A Common Stock Hon. Robert P. Kaplan(6) 3,544,876 4.75%
Class A Common Stock Neil Lewis(7) 7,255,631 9.99%
Class A Common Stock Arie Rabinowitz(8)(18) 2,178,868 3%
Class A Common Stock Samuel Rothman(11)(18) 2,579,000 3.43%
Class E-1 Common Stock 1,653,503 41%
Class E-2 Common Stock 1,453,503 36%
Class A Common Stock J. Nelson Happy(10) 2,178,868 3%
Class A Common Stock L. Peter Larson(11) 2,178,868 3%
Class A Common Stock Dale Ruhmel(12) 1,452,579 2%
Class A Common Stock Nicolas Chabbert(13) 300,000 <1%
Class A Common Stock All executive officers 3,861,756 32%
Class B Common Stock and directors as a group 1,013,572 53%
Class E-1 Common Stock (10 persons) 3,680,647 92%
Class E-2 Common Stock 3,480,647 87%
Class B Common Stock Harpa Limited(5) 1,013,572 53%
Class E-1 Common Stock 2,027,144 51%
Class E-2 Common Stock 2,027,144 51%
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Common Stock
Name and Address of Beneficially Percent of
Title of Class Beneficial Owner(1) Owned(2) Ownership
- ------------------------------------------ --------------------------- ------------------ ---------------------
Class B Common Stock Shih Jen Yeh(5) 1,013,572 53%
Class E-1 Common Stock 2,027,144 51%
Class E-2 Common Stock 2,027,144 51%
Class B Common Stock Chyao Chi Yeh(5) 1,013,572 53%
Class E-1 Common Stock 2,027,144 51%
Class E-2 Common Stock 2,027,144 51%
Class A Common Stock Alpha Capital 7,255,631 9.99%
Akteingesellschaft (14)
Class A Common Stock Austinvest Anstalt 7,255,631 9.99%
Balzers(15)
Class A Common Stock The Endeavour Capital 7,255,631 9.99%
Investment Fund, S.A. (16)
Class A Common Stock Esquire Trade & Finance 4,190,018 9.68%
Inc. (17)
- ---------------------
(1) Except as otherwise indicated, the address of each principal stockholder is
c/o Mooney at 3205 Lakewood Blvd., Long Beach, California 90808. We believe
that all persons named have sole voting power and sole investment power,
subject to community property laws where applicable.
(2) The Common Stock of Mooney is divided into four classes. Each share of
Class B Common Stock, Class E-1 Common Stock and Class E-2 Common Stock is
entitled to five votes per share, and Class A Common Stock is entitled to
one vote per share. The shares of Class E Common Stock are subject to
redemption by us if we do not achieve certain income or market price
levels.
(3) We entered into a consulting agreement pursuant to which Mr. Babad will be
granted a 3% interest in Mooney which is nondilutable.
(4) Includes 5,067,860 shares of Common Stock held by Harpa Limited, a Cayman
Island corporation (Harpa). C.M. Cheng is a director of Harpa and has sole
voting and investment control over the shares of Common Stock held by Harpa
and thus may be deemed to beneficially own such shares. Mr. Cheng disclaims
beneficial ownership of such shares. The address of Harpa is c/o Coutts Co.
(Cayman) Ltd., Coutts House, P.O. Box 707, West Bay Road, Grand Cayman,
Cayman Islands.
(5) The voting stock of Harpa is currently held equally by Shih Jen Yeh and
Chyao Chi Yeh, who are children of Song Gen Yeh, the former Chairman and
principal stockholder of Mooney. See "Certain Transactions." The address of
Mr. Shih Jen Yeh and Mr. Chyao Chi Yeh is 14th Floor, No. 55, Section 2,
Chung-Cheng Road, Shih-Lin District, Taipei, Taiwan.
(6) This amount includes 1,475,775 shares issued upon the conversion of
$250,000 of debentures and an estimated 1,335,101 shares of common stock
issuable upon the conversion of $110,000 in convertible debentures and
700,000 warrants outstanding as of September 30, 2002.
(7) Includes an estimated 6,905,631 shares issuable upon the conversion or
exercise of debentures and warrants. Excludes an estimated 6,575,425 shares
issuable upon the conversion or exercise of debentures and warrants which
may not be converted or exercised pursuant to a contractually stipulated
9.99% ownership restriction. The full conversion and exercise of all
debentures and warrants would exceed this restriction. Shares are held in
the name of Lewis Family Investments Pty., Ltd.
32
(8) We entered into a consulting agreement pursuant to which Mr. Rabinowitz
will be granted a 3% interest in Mooney which is nondilutable.
(9) We entered into a consulting agreement pursuant to which E&S Investment
Group will be granted a 3% interest in Mooney which is nondilutable. Mr.
Rothman disclaims beneficial ownership of the shares underlying the 3%
interest which will all be issued in his wife's name. Mr. Rothman's wife,
Tova Rothman, controls E&S Investment Group. Mr. Rothman holds an
irrevocable proxy from Dr. Chen to vote the Class E-1 and Class E-2 shares
Dr. Chen previously controlled. This amount includes an estimated 2,578,198
shares of common stock issuable upon the conversion of $170,775 in
convertible debentures and warrants outstanding as of September 30, 2002.
(10) There is an employment agreement pursuant to which Mr. Happy will be
granted a 3% interest in Mooney which is nondilutable for three years.
(11) There is an employment agreement pursuant to which Mr. Larson will be
granted a 3% interest in Mooney which is nondilutable for three years.
(12) There is an employment agreement pursuant to which Mr. Ruhmel will be
granted a 2% interest in Mooney which is nondilutable for three years.
(13) Includes 300,000 shares of Class A Common Stock issuable upon
the exercise of options which are currently exercisable.
(14) The address for Alpha Capital Aktiengesellschaft is Pradafant 7,
Furstentums 9490, Vaduz, Lichtenstein. Includes an estimated 7,255,631
shares of Class A Common Stock issuable upon the conversion or exercise of
debentures and warrants. Excludes an estimated 30,140,076 shares of Class A
Common Stock issuable upon the conversion or exercise of debentures and
warrants, which may not be converted or exercised pursuant to a
contractually stipulated 9.99% ownership restriction. The full conversion
and exercise of all debentures and warrants would exceed this restriction.
(15) The address for Austinvest Anstalt Balzers is Landstrasse 938, 9494
Furstentums, Balzers, Liechtenstein. Includes an estimated 7,255,631 shares
of Class A Common Stock issuable upon the conversion of Series A Preferred
Stock or exercise of warrants. Excludes an estimated 4,235,448 shares of
Class A Common Stock issuable upon conversion of Series A Preferred Stock
or exercise of warrants, which may not be converted or exercised pursuant
to a contractually stipulated 9.99% ownership restriction. The full
conversion of all Series A Preferred Stock and exercise of all warrants
would exceed this restriction.
(16) The address for The Endeavour Capital Investment Fund, S.A. is Cumberland
House, 27 Cumberland Street, Nassau, New Providence, The Bahamas. Includes
an estimated 7,255,631 shares of Class A Common Stock issuable upon the
exercise or conversion of Series A Preferred Stock, debentures, and
warrants. Excludes an estimated 7,748,624 shares of Class A Common Stock
issuable upon conversion or exercise of Series A Preferred Stock,
debentures, and warrants, which may not be converted or exercised pursuant
to a contractually stipulated 9.99% ownership restriction. The full
conversion and exercise of all Series A Preferred Stock, debentures, and
warrants would exceed this restriction.
(17) The address for Esquire Trade & Finance Inc. is Trident Chambers, Road
Town, Tortola, B.V.I. Includes an estimated 4,190,018 shares Class A Common
Stock issuable upon conversion of Series A Preferred Stock and exercise of
warrants.
(18) The consulting agreement between Mooney and E&S Investment Group
(controlled by Mr. Rothman's wife), Mr. Babad, Mr. Rabinowitz and Libra
Finance, S.A., grants these consultants a nondilutable 12% ownership
interest in Mooney which will be divided equally among the four
consultants. This 12% interest will be calculated based upon Mooney's
issued and outstanding common stock as of October 26, 2003.
33
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have entered into three-year employment agreements with Peter
Larson, President, CEO and Chief Financial Officer; Dale Ruhmel, Executive Vice
President of Group Operations and Engineering and J. Nelson Happy, Executive
Vice-President and General Counsel, on similar terms. The majority of their
compensation was designed to reward performance. Over the three-year period they
will vest in ownership of three percent, two percent and three percent,
respectively, of the outstanding shares of Mooney and all receive annual
salaries of $200,000 plus reimbursement of expenses. We had also entered into a
similar agreement with Roy Norris, the former President and CEO, who resigned on
August 15, 2002. As part of Mr. Norris' severance package we paid $165,000 in
cash as salary expense and as of September 30, 2002 still owe him stock in the
amount of 1.5% of the shares outstanding as of August 16, 2002, the effective
date of issuance, which we expect to be issued in the fourth quarter of 2002. We
have also entered into a three-year employment agreement with Nicolas Chabbert,
Executive Vice President of Sales and Marketing. Mr. Chabbert will receive an
annual salary of $150,000, 300,000 stock options with an exercise price of $0.20
and a bonus based upon the number of airplanes sold and delivered.
In March 2001, we entered into a consulting agreement to issue a 6%
nondilutable interest in Mooney to a group of consultants, two of whom (Messrs.
Babad and Rabinowitz) later became members of our Board of Directors and one of
whom is an entity controlled by the spouse of Mr. Rothman, the Chairman of the
Company. In October 2001, this agreement was amended to increase the
nondilutable interest in Mooney to be issued to the consultants to 12%. The
consulting agreement between Mooney and E&S Investment Group (controlled by Mr.
Rothman's wife), Mr. Babad, Mr. Rabinowitz and Libra Finance, S.A., grants these
consultants a nondilutable 12% ownership interest in Mooney which will be
divided equally among the four consultants. This 12% interest will be calculated
based upon Mooney's issued and outstanding common stock as of October 26, 2003.
Certain of our directors hold or have held convertible debentures
issued by us to them for their investment.
Mr. Babad, a director, received $29,032 in finder's fees in 2001 and
has a consulting agreement with us that provides for payments to him of $10,000
a month from December 2001 through March 2002, and $7,000 a month from April
2002 through November 30, 2002.
Mr. Rothman, a director, received $170,775 in finder's fees in 2001
prior to his appointment as a director.
DESCRIPTION OF SECURITIES
The following description of our capital stock and certain
provisions of our Certificate of Incorporation and Bylaws is a summary and is
qualified in its entirety by the provisions of the Certificate of Incorporation
and Bylaws, which have been filed as exhibits to our Registration Statement of
which this Prospectus is a part.
Our authorized capital stock consists of 625,000,000 shares
of Class A Common Stock, $0.0001 par value, 10,000,000 shares of Class B Common
Stock, $0.0001 par value, 4,000,000 shares of Class E-1 Common Stock, $0.0001
par value, 4,000,000 shares of Class E-2 Common Stock, $0.0001 par value, and
5,000,000 shares of Preferred Stock, $0.0001 par value, of which 100,000 have
been designated as Class A Preferred Stock. As of September 30, 2002, there were
outstanding 72,628,941 shares of Class A Common Stock, 1,013,572 shares of Class
B Common Stock (held of record by one stockholder), 4,000,000 shares of Class
E-1 Common Stock (held of record by five stockholders), 4,000,000 shares of
Class E-2 Common Stock (held of record by six stockholders) and 38,459 shares of
Series A Preferred Stock.
UNITS
Each Unit previously offered consisted of one share of Class A Common
Stock, one Class A Warrant and one Class B Warrant. At any time commencing on
the date of issuance until the fifth anniversary date of the Prospectus for that
offering, each Class A Warrant will be exercisable to purchase one share of
Class A Common Stock and one Class B Warrant and each Class B Warrant will be
exercisable to purchase one share of Class A Common Stock. The Common Stock and
Warrants included in the Units are immediately transferable separately upon
issuance. The exercise price of the Class A Warrant and the Class B Warrant at
the time of issuance was $6.50 and $8.75, respectively.
COMMON STOCK
The Class A Common Stock, Class B Common Stock, Class E-1 Common Stock
and Class E-2 Common Stock are substantially identical, except that the holders
of Class A Common Stock have the right to cast one vote, and the holders of
Class B Common Stock, Class E-1 Common Stock, and Class E-2 Common Stock have
the right to cast five votes, for each share held of record on all matters
submitted to a vote of the holders of Common Stock, including the election of
directors. The Class A Common Stock, Class B Common Stock, Class E-1 Common
Stock and Class E-2 Common Stock vote together as a single class on all matters
34
on which stockholders may vote, including the election of directors, except when
voting by class is required by applicable law. Holders of the Class A Common
Stock, Class B Common Stock, Class E-1 Common Stock and Class E-2 Common Stock
have equal ratable rights to dividends from funds legally available therefor,
when, as and if declared by the Board of Directors and are entitled to share
ratably, as a single class, in all of our assets available for
distribution to the holders of shares of common stock upon the liquidation,
dissolution or winding up of the affairs of Mooney. Except as described herein,
no pre-emptive, subscription, or conversion rights pertain to the common stock
and no redemption or sinking fund provisions exist for the benefit thereof. All
outstanding shares of common stock are, and those shares of Class A Common Stock
offered hereby will be, duly authorized, validly issued, fully paid and
nonassessable.
As a consequence of their ownership of common stock and the enhanced
voting power of the Class B Common Stock, Class E-1 Common Stock, and Class E-2
Common Stock, the current Class B, E-1 and E-2 stockholders of Mooney have
controlled a majority of the voting power of Mooney, and accordingly, were able
to elect all of our directors. This difference in voting rights and consequent
increase in the voting power of the Class B Common Stock, Class E-1 Common Stock
and Class E-2 Common Stock has an anti-takeover effect, in that the existence of
the Class B Common Stock, Class E-1 Common Stock and Class E-2 Common Stock may
make us a less attractive target for a hostile takeover bid or render more
difficult or discourage a merger proposal, an unfriendly tender offer, a proxy
contest, or the removal of incumbent management, even if such transactions were
favored by Mooney stockholders, other than the holders of Class B Common Stock,
Class E-1 Common Stock and Class E-2 Common Stock. Thus, our stockholders may be
deprived of an opportunity to sell their shares at a premium over prevailing
market prices in the event of a hostile takeover bid. Those seeking to acquire
us through a business combination may be compelled to consult first with the
holders of the Class B Common Stock, Class E-1 Common Stock and Class E-2 Common
Stock in order to negotiate the terms of such a business combination.
Additionally, any such proposed business combination would have to be approved
by the Board of Directors, which may be under the control of the holders of the
Class B Common Stock, Class E-1 Common Stock and Class E-2 Common Stock; and, if
stockholder approval were required, the approval of the holders of the Class B
Common Stock, Class E-1 Common Stock and Class E-2 Common Stock would be
necessary before any such business combination could be consummated.
PERFORMANCE SHARES
Our Certificate of Incorporation provides that the Class E-1 and E-2
Common Stock is redeemable by us at a price of $0.01 per share unless we meet
certain income thresholds as described below, none of which has been met as of
the date of this Prospectus. If the thresholds are met, the Performance Shares
will be automatically converted into shares of Class B Common Stock. The
Performance Shares are not assignable or transferable other than upon death, by
operation of law, or to related parties who agree to be bound by the
restrictions on the Performance Shares set forth in our Certificate of
Incorporation.
(a) The 4,000,000 shares of outstanding Class E-1 Common Stock will be
automatically converted into Class B Common Stock if, and only if, one or more
of the following conditions are met:
(i) our net income before provision for income taxes and
exclusive of any extraordinary earnings as audited and determined by Mooney's
independent public accountants (the "Minimum Pretax Income") amounts to at least
$17.5 million for the fiscal year ending December 31, 1998;
(ii) the Minimum Pretax Income amounts to at least $22.5
million for the fiscal year ending December 31, 1999;
(iii) the Minimum Pretax Income amounts to at least $28.5
million for the fiscal year ending December 31, 2000;
(iv) the Minimum Pretax Income amounts to at least $36.0
million for the fiscal year ending on December 31, 2001;
(v) the Minimum Pretax Income amounts to at least $45.0
million for the fiscal year ending on December 31, 2002; or
35
(vi) the Minimum Pretax Income amounts to at least $56.0
million for the fiscal year ending on December 31, 2003.
(b) The 4,000,000 shares of outstanding Class E-2 Common Stock will be
converted into Class B Common Stock if, and only if, at least one of the
following conditions is met.
(i) the Minimum Pretax Income amounts to at least $21.875
million for the fiscal year ending on December 31, 1998;
(ii) the Minimum Pretax Income amounts to at least $28.125
million for the fiscal year ending on December 31, 1999;
(iii) the Minimum Pretax Income amounts to at least $35.625
million for the fiscal year ending on December 31, 2000;
(iv) the Minimum Pretax Income amounts to at least $45.0
million for the fiscal year ending on December 31, 2001
(v) the Minimum Pretax Income amounts to at least $56.25
million for the fiscal year ending on December 31, 2002; or
(vi) the Minimum Pretax Income amounts to at least $69.5
million for the fiscal year ending on December 31, 2003.
The Minimum Pretax Income amounts set forth above and required to be
calculated exclusive of any extraordinary earnings or charge including, but not
limited to, any charge to income resulting from conversion of the Performance
Shares.
None of the applicable Minimum Pretax Income levels set forth above
have been met. If none are met by March 31, 2004, the Performance Shares will be
redeemable by us at a price of $0.01 per share. We expect that the conversion of
Performance Shares owned by officers, directors, employees and consultants of
Mooney will be deemed compensatory and, accordingly, will result in a
substantial charge to reportable earnings equal to the fair market value of such
shares on the date of conversion. Such charge could substantially increase the
loss or reduce or eliminate our net income for financial reporting purposes for
the period or periods during which such shares are, or become probable of being,
converted. Therefore, although the amount of compensation expense we recognize
will not affect our cash flow, it may have a negative effect on the market price
of our securities.
The restrictions on the Class E-1 Common Stock and Class E-2 Common
Stock were required by the Underwriter as a condition to our initial public
offering. The Minimum Pretax Income levels set forth above were determined by
negotiation between Mooney and the Underwriter and should not be construed to
imply or predict any future earnings by us.
CLASS B COMMON STOCK
Each share of Class B Common Stock is convertible at any time at the
option of the holder into one share of Class A Common Stock. Shares of Class B
Common Stock will also automatically convert into an equivalent number of fully
paid and non-assessable shares of Class A Common Stock upon the sale or transfer
of such shares of Class B Common Stock (other than a transfer to another holder
of Class B Common Stock) by the original record holder thereof or upon the death
of the holder thereof unless and to the extent that such shares are acquired by
another holder of Class B Common Stock.
36
PREFERRED STOCK
The preferred stock may be issued in series, and shares of each series
will have such rights, preferences, and privileges as are fixed by the Board of
Directors in the resolutions authorizing the issuance of that particular series.
In designating any series of preferred stock, the Board of Directors may,
without further action by the holders of common stock, fix the number of shares
constituting the series and fix the dividend rights, dividend rate, conversion
rights, voting rights (which may be greater or lesser than the voting rights of
the common stock), rights and terms of redemption (including any sinking fund
provisions), and the liquidation preferences of the series of preferred stock.
The holders of any series of preferred stock, when and if issued, are expected
to have priority claims to dividends and to any distributions upon liquidation
of our Company, and they may have other preferences over the holders of the
common stock.
The Board of Directors may issue series of preferred stock without
action by the holders of the common stock. Accordingly, the issuance of
preferred stock may adversely affect the rights of the holders of the common
stock. In addition, the issuance of preferred stock may be used as an
"anti-takeover" device without further action on the part of the holders of the
common stock. The issuance of preferred stock may also dilute the voting power
of the holders of common stock, in that a series of preferred stock may be
granted enhanced per share voting rights and the right to vote on certain
matters separately as a class, and may render more difficult the removal of
current management, even if such removal may be in the stockholders' best
interest. We have no current plans to issue any additional preferred stock,
other than under the March 2000 Series A Preferred Stock equity line.
As of September 30, 2002, we had 38,459 shares of Series A Preferred
Stock outstanding with a $100 stated value per share. Holders of the Series A
Preferred Stock are entitled to receive cash dividends, payable quarterly, and
have preferential liquidation rights above all other issuances of common stock
for an amount equal to the stated value. The Series A Preferred Stock and unpaid
dividends are convertible into shares of Class A Common Stock equal to an amount
determined by the market value at the date of close of the Class A Common Stock,
adjusted for changes in the market price prior to the conversion. The preferred
stockholders do not have voting rights.
TRANSFER AGENT AND WARRANT AGENT
American Stock Transfer & Trust Company, New York, New York, will serve
as Transfer Agent for the shares of Common Stock.
CERTAIN STATUTORY AND CHARTER PROVISIONS UNDER THE DELAWARE
GENERAL CORPORATION LAW
Section 203 of the Delaware General Corporation Law provides, in
general, that a stockholder acquiring more than 15% of the outstanding voting
shares of a publicly-held Delaware corporation subject to the statute (an
"Interested Stockholder") may not engage in certain "Business Combinations" with
the corporation for a period of three years subsequent to the date on which the
stockholder became an Interested Stockholder unless (i) prior to such date the
corporation's board of directors approved either the Business Combination or the
transaction in which the stockholder became an Interested Stockholder or (ii)
upon consummation of the Business Combination, the Interested Stockholder owns
85% or more of the outstanding voting stock of the corporation (excluding shares
owned by directors who are also officers of the corporation or shares held by
employee stock option plans that do not provide employees with the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer), or (iii) the Business Combination is
approved by the corporation's board of directors and authorized at an annual or
special meeting of stockholders, and not by written consent, by the affirmative
vote of at least two-thirds of the outstanding voting stock of the corporation
not owned by the Interested Stockholder.
Section 203 defines the term "Business Combination" to encompass a wide
variety of transactions with or caused by an Interested Stockholder in which the
Interested Stockholder receives or could receive a benefit on other than a pro
rata basis with other stockholders, including mergers, certain asset sales,
certain issuances of additional shares to the Interested Stockholder or
transactions in which the Interested Stockholder receives certain other
benefits.
These provisions could have the effect of delaying, deferring or
preventing a change of control of Mooney. Our stockholders, by adopting an
amendment to our Certificate of Incorporation or Bylaws, may elect not to be
governed by Section 203, effective twelve months after adoption. Neither our
Certificate of Incorporation nor our Bylaws currently excludes us from the
restrictions imposed by Section 203.
37
The Delaware General Corporation Law permits a corporation through its
Certificate of Incorporation to eliminate the personal liability of its
directors to the corporation or its stockholders for monetary damages for breach
of fiduciary duty of loyalty and care as a director with certain exceptions. The
exceptions include a breach of the director's duty of loyalty, acts or omissions
not in good faith or which involve intentional misconduct or knowing violation
of law, and improper personal benefit. Our Certificate of Incorporation
exonerates our directors from monetary liability to the fullest extent permitted
by this statutory provision.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of common stock in the public
market could adversely affect market prices prevailing from time to time. Under
the terms of this offering, the shares of common stock to be issued upon the
conversion of the various outstanding notes and Series A Preferred Stock and
underlying warrants which have been issued under the various agreements, as
described in this Prospectus, may be resold without restrictions or further
registration under the Securities Act of 1933, except that any shares purchased
by our "affiliates," as that term is defined under the Securities Act, may
generally only be sold in compliance with the limitations of Rule 144 under the
Securities Act.
OUTSTANDING RESTRICTED STOCK
As of September 30, 2002, 7,601,612 outstanding shares of Class A
Common Stock are restricted securities within the meaning of Rule 144 and may
not be sold in the absence of registration under the Securities Act unless an
exemption from registration is available, including the exemption from
registration offered by Rule 144. In general, under Rule 144, as currently in
effect, a person who has beneficially owned restricted shares for at least one
year, including a person who may be deemed to be our affiliate, may sell within
any three-month period a number of shares of common stock that does not exceed a
specified maximum number of shares. This maximum is equal to the greater of 1%
of the then outstanding shares of our common stock or the average weekly trading
volume in the common stock during the four calendar weeks immediately preceding
the sale. Sales under Rule 144 are also subject to restrictions relating to
manner of sale, notice and availability of current public information about us.
In addition, under Rule 144(k) of the Securities Act, a person who is not our
affiliate, has not been an affiliate of ours within three months prior to the
sale and has beneficially owned shares for at least two years would be entitled
to sell such shares immediately without regard to volume limitations, manner of
sale provisions, notice or other requirements of Rule 144.
PREFERRED STOCK
As of September 30, 2002, there were 38,459 shares of Series A
Preferred Stock currently outstanding held by 14 stockholders of record. The
shares of common stock to be issued upon the conversion of the preferred stock
may not be sold in the absence of registration under the Securities Act unless
an exemption from registration is available, including the exemption from
registration offered by Rule 144. A registration statement with regard to the
resale of the underlying common stock is currently effective and the resale of
additional shares underlying the conversion of the preferred stock are being
registered by this offering statement.
CONVERTIBLE NOTES
As of September 30, 2002, $25,895,000 of convertible notes with 81
holders was outstanding. The shares of common stock to be issued upon the
conversion of the notes may not be sold in the absence of registration under the
Securities Act unless an exemption from registration is available, including the
exemption from registration offered by Rule 144. A registration statement with
regard to the resale of certain of the underlying shares of common stock is
currently effective, and the resale of additional shares underlying the
conversion of the notes are being registered by this registration statement.
WARRANTS
The resale of shares of common stock to be issued upon the exercise of
warrants which have been issued under the various agreements described in this
registration statement are being registered by this registration statement.
38
PLAN OF DISTRIBUTION
The selling stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholders may use any one or more of the
following methods when selling shares:
-- ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
-- block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
-- purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
-- privately-negotiated transactions;
-- short sales;
-- broker-dealers may agree with the selling stockholders to sell
a specified number of such shares at a stipulated price per
share; and
-- a combination of any such methods of sale.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
The selling stockholders may pledge their shares to their brokers under
the margin provisions of customer agreements. If a selling stockholders defaults
on a margin loan, the broker may, from time to time, offer and sell the pledged
shares.
The selling stockholders may also engage in short sales against the
box, puts and calls and other transactions in our securities or derivatives of
our securities and may sell or deliver shares in connection with these trades.
The selling stockholders may pledge their shares of common stock to their
brokers under the margin provisions of customer agreements. If a selling
stockholder defaults on a margin loan, the broker may, from time to time, offer
and sell the pledged shares.
Broker-dealers engaged by the selling stockholders may arrange for
other broker-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling stockholders (or, if any broker-dealer
acts as agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
Each selling stockholder shall be deemed to be an "underwriter" within
the meaning of the Securities Act in connection with such sales. In such event,
any commissions received by such persons and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.
We are required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
selling stockholders, but excluding brokerage commissions or underwriter
discounts. We and the selling stockholders have agreed to indemnify each other
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
39
The rules and regulations set forth in Regulation M promulgated under
the Exchange Act provide that, during the period that any person is engaged in a
distribution of shares within the meaning of Regulation M, that person usually
may not purchase shares. The selling stockholders are subject to the rules and
regulations of the Securities Act and the Exchange Act, including Regulation M,
which may limit the timing of purchases and sales of shares by the selling
stockholders. Regulation M's prohibition on purchases may include purchases to
cover short positions by the selling stockholders and a selling shareholder's
failure to cover a short position at a lender's request, and subsequent
purchases of shares by the lender in the open market to cover such short
positions, may constitute an inducement to buy shares which is prohibited by
Regulation M. Consequently, this may affect the marketability of the shares. We
have informed the selling stockholders that the anti-manipulative provisions of
Regulation M may apply to them. All of the foregoing may affect the
marketability of the shares offered hereby.
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the
shares of common stock by the selling stockholders. We will not receive any
proceeds from the resale of the common stock by the selling stockholders. We
will receive proceeds from the exercise of the warrants, unless a cashless
exercise provision is available and is used. Assuming all the shares registered
below are sold by the selling stockholders, none of the selling stockholders
will continue to own any shares of our common stock.
The following table also sets forth the name of each person who is
offering the resale of shares of common stock by this prospectus, the number of
shares of common stock beneficially owned by each person, the number of shares
of common stock that may be sold in this offering and the number of shares of
common stock each person will own after the offering, assuming they sell all of
the shares offered.
40
Total Number of Common Stock
Common Shares Underlying Warrants
Underlying All Beneficial Issued under
Exerciseable Ownership the Series A
Convertible of Shares of % of Beneficial Preferred Stock
Securities as Common Stock Ownership of Subscription
of 9/30/02 at 9/30/02 Common Stock Agreement Being
Stock (including shares Assuming at 9/30/02 Registered
Ownership at being registered Full Conversion* Assuming Full in this
9/30/02 in this table)* (Columns A+B) Conversion* Prospectus
------- ---------- ---------- -------- ----------
A B C D E
Abraham Grossman (1) 0 711,995 711,995 0.97% 0
Alexander Wescott and Co., Inc. (2) 0 28,571 28,571 0.04% 0
Allan Rothstein (3) 0 711,995 711,995 0.97% 0
Alpha Capital Aktiengesellschaft (4) 0 37,395,707 37,395,707 33.99% 0
Amro International (5) 0 25,952,354 25,952,354 26.33% 175,845
Andrew Reckles (6) 768,513 628,250 1,396,763 1.91% 0
Aquarella Invest Corp (7) 0 3,559,976 3,559,976 4.67% 0
Austinvest Anstalt Balzers (8) 88,433 11,491,079 11,579,512 13.77% 104,941
Australian Overseas Investment (9) 0 0 0 0.00% 0
Barbara R. Mittman (10) 0 866,228 866,228 1.18% 0
Bear Stearns Securities Corp., Inc.
C/F Jeffrey Mosseri (11) 0 355,998 355,998 0.49% 0
Bi-Coastal Consulting Corp (12) 20,834 933,554 954,388 1.30% 0
Boat Basin Investors, LLC (13) 0 711,995 711,995 0.97% 0
Briarbrook Trust Co. (14) 0 1,167,993 1,167,993 1.58% 0
Bristol Capital LLC (15) 0 490,655 490,655 0.67% 0
Bristol Investment Fund, Ltd. (17) 0 14,239,902 14,239,902 16.39% 0
Capital Research Group, Inc. (18) 500,000 0 500,000 0.69% 0
Cecil Dean Tallman (19) 0 711,995 711,995 0.97% 0
Chaim Breuer (20) 0 589,397 589,397 0.80% 0
Cong. Bias Yitzchak, Inc. (21) 0 4,271,971 4,271,971 5.56% 0
Dr. Carl Chen (22) 427,312 2,000,000 2,427,312 3.25%
Dr. Ross Kaplan (23) 0 711,995 711,995 0.97% 0
E&S Investment Group, LLC (24) 422,839 0 422,839 0.58% 0
E. Gerald Hebert (25) 0 1,423,990 1,423,990 1.92% 0
Edward Turin (26) 0 5,695,961 5,695,961 7.27% 0
Ellis Enterprises (27) 0 563,146 563,146 0.77% 10,547
Esquire Trade & Finance, Inc. (28) 0 4,190,018 4,190,018 5.45% 103,895
Franseca Weingarten (29) 0 1,423,990 1,423,990 1.92% 0
Gary Kaplowitz (30) 0 711,995 711,995 0.97% 0
Guaranty & Finance Corp. (33) 0 28,479,804 28,479,804 28.17% 0
Hirsch J. Ziegler (35) 0 1,423,990 1,423,990 1.92% 0
Howard Schraub (36) 0 1,423,990 1,423,990 1.92% 0
Howard Weiss (37) 0 14,286 14,286 0.02% 0
Hyperion Holding LLC (38) 25,000 25,000 50,000 0.07% 0
International Trade & Investments Corp. (39) 0 3,559,976 3,559,976 4.67% 0
Justino Hirschhorn Rotschild (40) 0 7,119,951 7,119,951 8.93% 0
Kelp Investors (41) 0 1,423,990 1,423,990 1.92% 0
Kentucky National Insurance Co. (42) 0 711,995 711,995 0.97% 0
Keshet Fund LP (43) 0 14,380,589 14,380,589 16.53% 63,717
Keshet LP (44) 0 5,351,166 5,351,166 6.86% 138,075
Laurus Capital Management LLC (45) 0 303,622 303,622 0.42% 0
Leval Trading, Inc. (47) 0 91,868 91,868 0.13% 2,920
Libra Finance, SA (48) 0 12,252,675 14,431,543 16.58% 0
Luce, Forward, Hamilton & Scripps, LLP (49) 380,000 0 380,000 0.52% 0
Lucrative Investments LTD (50) 0 11,106,418 11,106,418 13.26% 0
Luis Nanes (51) 0 1,423,990 1,423,990 1.92% 0
Markham Holding, Ltd. (52) 0 2,847,980 2,847,980 3.77% 0
Martin Klein (54) 0 1,423,990 1,423,990 1.92% 0
Martin Thaler (55) 0 3,047,980 3,047,980 4.03% 0
Mervin Klein (56) 0 2,135,985 2,135,985 2.86% 0
MM & CTW Foundation, Inc. (57) 0 1,423,990 1,423,990 1.92% 0
Nachum Stein (59) 0 2,169,796 2,169,796 2.90% 0
Otto Weingarten (61) 0 3,559,976 3,559,976 4.67% 0
Palisades Equity Fund (62) 1,663,447 4,059,976 5,723,423 7.46% 0
Paul T. Mannion, Jr. (63) 28,250 28,250 56,500 0.08% 0
PEF Advisors (64) 0 35,715 35,715 0.05% 0
Perkman Investments (65) 0 1,423,990 1,423,990 1.92% 0
Phillip Heller (66) 0 1,211,995 1,211,995 1.64% 0
Rhossili Investments Limited (67) 0 1,303,247 1,303,247 1.76% 0
RNJA Company, LLC (69) 0 3,871,971 3,871,971 5.06% 0
Robert Kaplan (70) 0 2,035,101 2,035,101 2.73% 0
Rutgers Casualty Insurance (72) 0 711,995 711,995 0.97% 0
Sam Rothman (73) 0 2,578,198 2,578,198 3.43% 0
Samuel Schlesinger (74) 0 1,879,988 1,879,988 2.52% 0
Sarah Katz (75) 0 2,947,980 2,947,980 3.90% 0
Seth Kaplan (77) 0 171,376 171,376 0.24% 0
Shafer Family Trust (78) 0 711,995 711,995 0.97% 0
Silver Development Corp. (79) 0 7,119,951 7,119,951 8.93% 0
Stateland LTD. (80) 0 14,239,902 14,239,902 16.39% 0
Steven Jonathan Gedy (81) 0 1,029,861 1,029,861 1.40% 0
Stonestreet Corporation (82) 0 646,703 646,703 0.88% 0
Stonestreet Limited Partnership (83) 0 27,560,820 27,560,820 27.51% 0
Talbiya B. Investments Ltd. (84) 0 1,801,841 1,801,841 2.42% 0
Taria, Inc. (85) 0 7,119,951 7,119,951 8.93% 0
Tayside Trading Ltd (86) 0 4,983,966 4,983,966 6.42% 0
TCF Inc. (87) 0 1,423,990 1,423,990 1.92% 0
The Endeavour Capital Investment Fund, S.A. (88) 4,700 15,004,255 15,008,955 17.13% 14,600
The Shaar Fund (89) 2,086 6,477,894 6,479,980 8.19% 11,462
Vincent S. Sbarra (90) 18,500 18,500 37,000 0.05% 0
William B. Myers (91) 0 2,847,980 2,847,980 3.77% 0
Zochron Fraida Rivkah (92) 0 1,423,990 1,423,990 1.92% 0
41
Common Shares
Common Shares Common Stock Underlying
Common Stock Common Shares Underlying Underlying Convertible
Underlying Underlying Convertible Warrants Debentures Issued
Warrants Issued Convertible Debentures Issued on 6/27/01 on 10/26/01 and
under the Debentures Issued 6/27/01 (including 1/30/02 under
Private Equity Issued 3/27/01 (including Warrants issued the 10/26/01
Line of Credit and 7/25/01 for Finders for Finders Subscription
Agreement Being Finders Fees Fees) Being Fees) Being Agreement
Registered Being Registered Registered Registered Being Registered
in this in this in this in this in this
Prospectus Prospectus** Prospectus** Prospectus Prospectus***
---------- ----------- --------- ---------- ---------
F G H I J
Abraham Grossman (1) 0 0 0 0
Alexander Wescott and Co., Inc. (2) 0 0 0 0
Allan Rothstein (3) 0 0 0 917,993
Alpha Capital Aktiengesellschaft (4) 0 0 0 25,244,798
Amro International (5) 0 379,267 0 0 13,365,973
Andrew Reckles (6) 0 133,333 0 0 1,835,985
Aquarella Invest Corp (7) 0 0 0 0
Austinvest Anstalt Balzers (8) 1,303,247 0 0
Australian Overseas Investment (9) 0 166,667 0 0 0
Barbara R. Mittman (10) 0 0 0 1,110,771
Bear Stearns Securities Corp., Inc.
C/F Jeffrey Mosseri (11) 0 0 0 458,996
Bi-Coastal Consulting Corp (12) 0 66,667 0 0 0
Boat Basin Investors, LLC (13) 0 0 0 0
Briarbrook Trust Co. (14) 0 0 0 1,376,989
Bristol Capital LLC (15) 0 0 0 0
Bristol Investment Fund, Ltd. (17) 0 0 0 0
Capital Research Group, Inc. (18) 0 0 0
Cecil Dean Tallman (19) 0 0 0 0
Chaim Breuer (20) 0 0 0 550,796
Cong. Bias Yitzchak, Inc. (21) 0 0 0 5,507,956
Dr. Carl Chen (22) 0 0
Dr. Ross Kaplan (23) 0 0 0 917,993
E&S Investment Group, LLC (24) 0 363,333 0 0 0
E. Gerald Hebert (25) 0 0 0 1,835,985
Edward Turin (26) 0 0 0 0
Ellis Enterprises (27) 0 109,200 0 0 0
Esquire Trade & Finance, Inc. (28) 1,303,247 0 0
Franseca Weingarten (29) 0 0 0 1,835,985
Gary Kaplowitz (30) 0 917,993
Guaranty & Finance Corp. (33) 0 0 0 18,359,853
Hirsch J. Ziegler (35) 0 0 0 1,835,985
Howard Schraub (36) 0 0 0 0
Howard Weiss (37) 0 0 0 0
Hyperion Holding LLC (38) 0 0 0
International Trade & Investments Corp. (39) 0 0 0 0
Justino Hirschhorn Rotschild (40) 0 0 0 0
Kelp Investors (41) 0 0 0 1,835,985
Kentucky National Insurance Co. (42) 0 0 0 917,993
Keshet Fund LP (43) 0 16,666,667 2,646,412 0
Keshet LP (44) 0 0 0 0
Laurus Capital Management LLC (45) 0 372,813 0 0 82,619
Leval Trading, Inc. (47) 0 0 0
Libra Finance, SA (48) 125,000 938,200 0 0 6,458,078
Luce, Forward, Hamilton & Scripps, LLP (49) 0 0 0
Lucrative Investments LTD (50) 0 3,147,667 0 0 8,797,583
Luis Nanes (51) 0 0 0 0
Markham Holding, Ltd. (52) 0 0 0 0
Martin Klein (54) 0 0 0 1,835,985
Martin Thaler (55) 0 0 0 3,671,971
Mervin Klein (56) 0 0 0 2,753,978
MM & CTW Foundation, Inc. (57) 0 0 0 1,835,985
Nachum Stein (59) 0 0 1,835,985
Otto Weingarten (61) 0 0 0 4,589,963
Palisades Equity Fund (62) 0 0 0 0
Paul T. Mannion, Jr. (63) 0 0 0
PEF Advisors (64) 0 0 0 0
Perkman Investments (65) 0 0 0 1,835,985
Phillip Heller (66) 0 0 0 917,993
Rhossili Investments Limited (67) 1,303,247 0 0
RNJA Company, LLC (69) 0 0 0 5,507,956
Robert Kaplan (70) 0 166,667 0 0 1,835,985
Rutgers Casualty Insurance (72) 0 0 0 917,993
Sam Rothman (73) 0 0 0 3,135,404
Samuel Schlesinger (74) 0 0 0 2,294,982
Sarah Katz (75) 0 0 0 1,835,985
Seth Kaplan (77) 0 0 0 192,778
Shafer Family Trust (78) 0 0 0 0
Silver Development Corp. (79) 0 0 0 9,179,927
Stateland LTD. (80) 0 0 0 18,359,853
Steven Jonathan Gedy (81) 0 0 0 917,993
Stonestreet Corporation (82) 0 0 0 403,917
Stonestreet Limited Partnership (83) 0 0 0 10,097,919
Talbiya B. Investments Ltd. (84) 125,000 333,333 0 0 0
Taria, Inc. (85) 0 0 0 9,179,927
Tayside Trading Ltd (86) 0 0 0 6,425,949
TCF Inc. (87) 0 0 0 1,835,985
The Endeavour Capital Investment Fund, S.A. (88) 109,023 188,667 0 0 7,064,871
The Shaar Fund (89) 0 202,333 0 0 5,507,956
Vincent S. Sbarra (90) 0 0 0
William B. Myers (91) 0 0 0 0
Zochron Fraida Rivkah (92) 0 0 0 1,835,985
42
Common Stock
Underlying
Warrants
Common Stock Common Shares Issued on
Underlying Underlying Common Shares 5/16/02 under
Warrants Issued Common Shares Convertible Underlying the 5/16/02
on 10/26/01, Underlying Debentures Issued Convertible Subscription
1/30/02, 3/26/02 Convertible on 1/30/02, Debentures Agreement
and 4/11/02 Debentures 3/26/02 and Issued on (including
(including Issued on 4/11/02 under 5/16/02 under Warrants
Warrants issued 1/30/02 under the 1/30/02 the 5/16/02 issued
for Finders the 10/26/01 Put Subscription Subscription for Finders
Fees) Being Agreement Being Agreement Being Agreement Being Fees) Being
Registered Registered Registered Registered Registered
in this in this in this in this in this
Prospectus Prospectus*** Prospectus*** Prospectus*** Prospectus
---------- --------- --------- --------- ----------
L M N O P
Abraham Grossman (1) 100,000 0 917,993 0 0
Alexander Wescott and Co., Inc. (2) 28,571 0 0 0 0
Allan Rothstein (3) 100,000 0 0 0 0
Alpha Capital Aktiengesellschaft (4) 3,400,000 5,966,952 0 6,976,744 760,000
Amro International (5) 1,902,858 3,818,849 0 0 0
Andrew Reckles (6) 200,000 0 0 0 0
Aquarella Invest Corp (7) 500,000 0 4,589,963 0 0
Austinvest Anstalt Balzers (8) 0 0 0 0 0
Australian Overseas Investment (9) 0 0 0 0 0
Barbara R. Mittman (10) 125,714 0 0 0 0
Bear Stearns Securities Corp., Inc.
C/F Jeffrey Mosseri (11) 50,000 0 0 0 0
Bi-Coastal Consulting Corp (12) 160,713 0 0 642,595 100,000
Boat Basin Investors, LLC (13) 100,000 0 917,993 0 0
Briarbrook Trust Co. (14) 150,000 0 0 0 0
Bristol Capital LLC (15) 92,858 0 596,695 0 0
Bristol Investment Fund, Ltd. (17) 1,300,000 0 11,933,905 6,425,949 700,000
Capital Research Group, Inc. (18) 0 0 0 0
Cecil Dean Tallman (19) 100,000 0 917,993 0 0
Chaim Breuer (20) 60,000 0 0 0 0
Cong. Bias Yitzchak, Inc. (21) 600,000 0 0 0 0
Dr. Carl Chen (22) 0 0 0 0
Dr. Ross Kaplan (23) 100,000 0 0 0 0
E&S Investment Group, LLC (24) 0 0 0 0 0
E. Gerald Hebert (25) 200,000 0 0 0 0
Edward Turin (26) 800,000 0 7,343,941 0 0
Ellis Enterprises (27) 400,000 0 0 0 0
Esquire Trade & Finance, Inc. (28) 0 0 0 0 0
Franseca Weingarten (29) 200,000 0 0 0 0
Gary Kaplowitz (30) 100,000 0 0
Guaranty & Finance Corp. (33) 4,000,000 0 18,359,853 0 0
Hirsch J. Ziegler (35) 200,000 0 0 0 0
Howard Schraub (36) 200,000 0 1,835,985 0 0
Howard Weiss (37) 14,286 0 0 0 0
Hyperion Holding LLC (38) 0 0 0 0
International Trade & Investments Corp. (39) 500,000 0 4,589,963 0 0
Justino Hirschhorn Rotschild (40) 1,000,000 0 9,179,927 0 0
Kelp Investors (41) 200,000 0 0 0 0
Kentucky National Insurance Co. (42) 100,000 0 0 0 0
Keshet Fund LP (43) 0 0 0 0 0
Keshet LP (44) 0 0 0 0 0
Laurus Capital Management LLC (45) 0 0 0 0 0
Leval Trading, Inc. (47) 0 0 0 0 0
Libra Finance, SA (48) 1,954,570 697,674 4,339,351 558,140 86,857
Luce, Forward, Hamilton & Scripps, LLP (49) 0 0 0 0
Lucrative Investments LTD (50) 1,850,899 995,838 2,256,426 139,535 21,714
Luis Nanes (51) 200,000 0 1,835,985 0 0
Markham Holding, Ltd. (52) 400,000 0 3,671,971 0 0
Martin Klein (54) 200,000 0 0 0 0
Martin Thaler (55) 400,000 0 0 0 0
Mervin Klein (56) 300,000 0 0 0 0
MM & CTW Foundation, Inc. (57) 200,000 0 0 0 0
Nachum Stein (59) 200,000 0 0 0 0
Otto Weingarten (61) 500,000 0 0 0 0
Palisades Equity Fund (62) 500,000 0 4,589,963 0 0
Paul T. Mannion, Jr. (63) 0 0 0 0
PEF Advisors (64) 35,715 0 0 0 0
Perkman Investments (65) 200,000 0 0 0 0
Phillip Heller (66) 100,000 0 0 0 0
Rhossili Investments Limited (67) 0 0 0 0 0
RNJA Company, LLC (69) 200,000 0 0 0 0
Robert Kaplan (70) 200,000 0 0 0 0
Rutgers Casualty Insurance (72) 100,000 0 0 0 0
Sam Rothman (73) 487,929 0 0 0 0
Samuel Schlesinger (74) 250,000 0 0 0 0
Sarah Katz (75) 400,000 0 1,835,985 0 0
Seth Kaplan (77) 42,857 0 0 0 0
Shafer Family Trust (78) 100,000 0 917,993 0 0
Silver Development Corp. (79) 1,000,000 0 0 0 0
Stateland LTD. (80) 2,000,000 0 0 0 0
Steven Jonathan Gedy (81) 110,000 0 91,799 0 0
Stonestreet Corporation (82) 0 0 0 0 0
Stonestreet Limited Partnership (83) 2,770,000 8,675,031 5,783,354 0 0
Talbiya B. Investments Ltd. (84) 0 0 0 0 0
Taria, Inc. (85) 1,000,000 0 0 0 0
Tayside Trading Ltd (86) 700,000 0 0 0 0
TCF Inc. (87) 200,000 0 0 0 0
The Endeavour Capital Investment Fund, S.A. (88) 1,319,314 4,849,939 0 0 0
The Shaar Fund (89) 800,000 1,835,985 0 0 0
Vincent S. Sbarra (90) 0 0 0 0
William B. Myers (91) 400,000 0 3,671,971 0 0
Zochron Fraida Rivkah (92) 200,000 0 0 0 0
43
Shares
Underlying
Shares Warrants
Issued to Issued to Total
Consultants Consultants Shares of % of
Being Being Common Stock Beneficial Beneficial
Registered Registered Included Ownership Ownership
in this in this in this After the After the
Prospectus Prospectus Prospectus Offering**** Offering ****
-------- -------- -------- ------- ------
S (Total of
Q R columns E-R) T U
Abraham Grossman (1) 0 1,017,993 0 0.00%
Alexander Wescott and Co., Inc. (2) 0 28,571 0 0.00%
Allan Rothstein (3) 0 1,017,993 0 0.00%
Alpha Capital Aktiengesellschaft (4) 0 42,348,494 7,776,711 9.67%
Amro International (5) 0 19,642,792 12,417,103 14.60%
Andrew Reckles (6) 28,250 28,250 2,225,818 0 0.00%
Aquarella Invest Corp (7) 0 5,089,963 0 0.00%
Austinvest Anstalt Balzers (8) 0 1,408,188 10,171,324 12.30%
Australian Overseas Investment (9) 0 166,667 0 0.00%
Barbara R. Mittman (10) 0 1,236,485 0 0.00%
Bear Stearns Securities Corp., Inc.
C/F Jeffrey Mosseri (11) 0 508,996 0 0.00%
Bi-Coastal Consulting Corp (12) 0 969,975 265,278 0.36%
Boat Basin Investors, LLC (13) 0 1,017,993 0 0.00%
Briarbrook Trust Co. (14) 0 1,526,989 100,000 0.14%
Bristol Capital LLC (15) 0 689,553 0 0.00%
Bristol Investment Fund, Ltd. (17) 0 20,359,853 0 0.00%
Capital Research Group, Inc. (18) 500,000 0 500,000 0 0.00%
Cecil Dean Tallman (19) 0 1,017,993 0 0.00%
Chaim Breuer (20) 0 610,796 162,200 0.22%
Cong. Bias Yitzchak, Inc. (21) 6,107,956 0 0.00%
Dr. Carl Chen (22) 2,000,000 2,000,000 427,312 0.59%
Dr. Ross Kaplan (23) 0 1,017,993 0 0.00%
E&S Investment Group, LLC (24) 0 363,333 422,839 0.58%
E. Gerald Hebert (25) 0 2,035,985 0 0.00%
Edward Turin (26) 0 8,143,941 0 0.00%
Ellis Enterprises (27) 0 519,747 152,599 0.21%
Esquire Trade & Finance, Inc. (28) 0 1,407,142 2,782,876 3.69%
Franseca Weingarten (29) 0 2,035,985 0 0.00%
Gary Kaplowitz (30) 1,017,993 0 0.00%
Guaranty & Finance Corp. (33) 0 40,719,706 0 0.00%
Hirsch J. Ziegler (35) 0 2,035,985 0 0.00%
Howard Schraub (36) 0 2,035,985 0 0.00%
Howard Weiss (37) 0 14,286 0 0.00%
Hyperion Holding LLC (38) 25,000 25,000 50,000 0 0.00%
International Trade & Investments Corp. (39) 0 5,089,963 0 0.00%
Justino Hirschhorn Rotschild (40) 0 10,179,927 0 0.00%
Kelp Investors (41) 0 2,035,985 0 0.00%
Kentucky National Insurance Co. (42) 0 1,017,993 0 0.00%
Keshet Fund LP (43) 0 19,376,796 559,349 0.76%
Keshet LP (44) 0 138,075 5,213,091 6.70%
Laurus Capital Management LLC (45) 0 455,433 248,542 0.34%
Leval Trading, Inc. (47) 0 2,920 88,948 0.12%
Libra Finance, SA (48) 0 15,157,871 4,229,620 5.50%
Luce, Forward, Hamilton & Scripps, LLP (49) 380,000 0 380,000 0 0.00%
Lucrative Investments LTD (50) 0 17,209,662 1,107,551 1.50%
Luis Nanes (51) 0 2,035,985 0 0.00%
Markham Holding, Ltd. (52) 0 4,071,971 0 0.00%
Martin Klein (54) 0 2,035,985 0 0.00%
Martin Thaler (55) 0 4,071,971 200,000 0.27%
Mervin Klein (56) 0 3,053,978 0 0.00%
MM & CTW Foundation, Inc. (57) 0 2,035,985 0 0.00%
Nachum Stein (59) 0 2,035,985 745,806 1.02%
Otto Weingarten (61) 0 5,089,963 0 0.00%
Palisades Equity Fund (62) 0 5,089,963 0 0.00%
Paul T. Mannion, Jr. (63) 28,250 28,250 56,500 0 0.00%
PEF Advisors (64) 0 35,715 0 0.00%
Perkman Investments (65) 0 2,035,985 0 0.00%
Phillip Heller (66) 0 1,017,993 500,000 0.68%
Rhossili Investments Limited (67) 0 1,303,247 0 0.00%
RNJA Company, LLC (69) 0 5,707,956 0 0.00%
Robert Kaplan (70) 0 2,202,652 611,111 0.83%
Rutgers Casualty Insurance (72) 0 1,017,993 0 0.00%
Sam Rothman (73) 0 3,623,333 0 0.00%
Samuel Schlesinger (74) 0 2,544,982 100,000 0.14%
Sarah Katz (75) 0 4,071,971 100,000 0.14%
Seth Kaplan (77) 0 235,635 0 0.00%
Shafer Family Trust (78) 0 1,017,993 0 0.00%
Silver Development Corp. (79) 0 10,179,927 0 0.00%
Stateland LTD. (80) 0 20,359,853 0 0.00%
Steven Jonathan Gedy (81) 0 1,119,792 246,667 0.34%
Stonestreet Corporation (82) 0 403,917 377,426 0.52%
Stonestreet Limited Partnership (83) 0 27,326,304 8,419,951 10.39%
Talbiya B. Investments Ltd. (84) 0 458,333 1,676,841 2.26%
Taria, Inc. (85) 0 10,179,927 0 0.00%
Tayside Trading Ltd (86) 0 7,125,949 0 0.00%
TCF Inc. (87) 0 2,035,985 0 0.00%
The Endeavour Capital Investment Fund, S.A. (88) 0 13,546,414 5,622,811 7.19%
The Shaar Fund (89) 0 8,357,737 772,557 1.05%
Vincent S. Sbarra (90) 18,500 18,500 37,000 0 0.00%
William B. Myers (91) 0 4,071,971 0 0.00%
Zochron Fraida Rivkah (92) 0 2,035,985 0 0.00%
44
* Shareholders with beneficial ownership pursuant to subscription
agreements have contractually stipulated to a 9.99% ownership
restriction. The full conversion and exercise of convertible securities
would exceed this restriction for certain shareholders. The conversion
amount has been calculated without accrued interest. The percentage of
beneficial ownership is based upon the total number of common stock
shares actually outstanding as of September 30, 2002 (72,628,941
shares), plus the number of shares into which securities held by each
investor may be converted.
** 150% of the outstanding convertible equities at a conversion price
based upon the current market price of the stock ($0.09 conversion
price) is being registered pursuant to contractual obligations.
*** 150% of the convertible securities (including finder's fees) at a
conversion price based upon the current market price of the stock
($0.0817 conversion price) is being registered pursuant to contractual
obligations.
**** Shareholders with beneficial ownership pursuant to subscription
agreements have contractually stipulated to a 9.99% ownership
restriction. The full conversion and exercise of convertible securities
would exceed this restriction for certain shareholders. The conversion
amount has been calculated without accrued interest. Assumes all shares
being registered are sold and the full conversion of remaining
exercisable convertible securities whose underlying stock is not being
registered. The percentage of beneficial ownership is based upon the
total number of common stock shares actually outstanding as of
September 30, 2002 (72,628,941 shares), plus the number of shares into
which securities held by each investor may be converted, but not
including the common stock underlying the convertible securities being
registered.
45
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholder has sole or shared voting power or investment power and
also any shares which the selling stockholder has the right to acquire within 60
days. The actual number of shares of common stock issuable upon the conversion
of the convertible debentures is subject to adjustment depending on, among other
factors, the future market price of the common stock, and could be materially
less or more than the number estimated in the table. We are registering more
shares than can be currently converted due to our contractual obligations.
Using Amro International ("Amro") as an example, column A shows that
Amro does not hold common shares as of 9/30/02. Column B shows Amro's beneficial
ownership of common shares assuming the conversion of all convertible securities
exercisable by Amro at 9/30/02, including the common shares being registered in
this prospectus. Column C reflects the number of shares in Column B shown as a
percentage of the total number of common shares actually outstanding on 9/30/02
plus the number of common shares into which Amro's convertible securities may be
converted. Columns E through R reflect the common shares being registered in
this prospectus for resale by Amro upon the conversion of the convertible
securities as listed in the column headings. Column S shows the total number of
common shares being registered in this prospectus for resale by Amro. Column T
assumes that all shares registered in this prospectus for resale are sold and
reflects Amro's ownership of common shares assuming the full conversion of all
convertible securities exercisable at 9/30/02, other than the common shares
underlying convertible securities being registered in this prospectus. Column U
reflects the number of shares in Column T shown as a percentage of the total
number of common shares actually outstanding on 9/30/02 plus the number of
common shares into which Amro's convertible securities (whose underlying common
stock is not being registered) may be converted.
(1) The address for Abraham Grossman is 70 Concord Drive, Monsey,
NY 10952.
(2) The address for Alexander Wescott and Co., Inc. is 421 Broad
Street, Utica, NY 13501. The control person is Rick Bach.
(3) The address for Allan Rothstein is 34 Sousa Drive, Sands Pt.,
New York 11050.
(4) The address for Alpha Capital Aktiengesellschaft is Pradafant
7, 9490 Furstentums, Vaduz, Lichtenstein. Konrad Ackerman is
the director.
(5) The address for Amro International is c/o Ultra Finanz Ltd.
Grossmuensterplatz 6, P.O. Box 4401, Zurich, CH-8022,
Switzerland. H.U. Bachofen is the director.
(6) The address for Andrew Reckles is 4030 Palisades Main,
Kennesaw, Georgia 30144.
(7) The address for Aquarella Invest Corp. is c/o Primeway S.A., 7
Rue DuRhone CH-1204, Geneva, Switzerland. Beat Kunz is the
control person.
(8) The address for Austinvest Anstalt Balzers is Landstrasse 938,
9494 Furstentums, Balzers, Liechtenstein. Walter Grillis the
representative.
(9) The address for Australian Overseas Investment is 14 Par La
Ville Place, Par La Ville Road, P. O. Box HM 2257, Hamilton.
(10) The address for Barbara R. Mittman is 551 Fifth Avenue, Suite
1601, New York, NY 10176.
(11) The address for Bear Stearns Securities Corp., Inc. C/F
Jeffrey Mosseri is 80 Pine Street, New York, NY 10005-1702.
Jeffrey Mosseri is the control person.
(12) The address for Bi-Coastal Consulting Corp is 543 Virginia
Avenue, San Mateo, CA 94402. Peter Benz is the president.
(13) The address for Boat Basin Investors, LLC is c/o Novak
Burnbaum Crystal, 300 East 42nd Street, New York, NY 10017.
(14) The address for Briarbrook Trust Co. is c/o Fairbairn Trust
Company Limited, Attn: Angela Bartie, Fairbairn House, Rohais
Frank Peter Port, Guernsey GY1 3HE, Channel Islands. Angela
Bartie is the director. The directors of the Fairbairn Trust
Company Limited are the trustees.
(15) The address for Bristol Capital LLC is 6363 Sunset Boulevard,
Fifth Floor, Hollywood, CA 90028. Bristol Capital LLC is
owned and managed by its members, Mr. Paul Kessler and
Ms. Diana Derycz Kessler, who have voting and investment
control over the shares owned by Bristol Capital LLC.
(16) N/A
(17) The address for Bristol Investment Fund, Ltd. is Caledonian
House, Jennett Street, Georgetown, Grand Cayman, Cayman
Islands. Bristol Investment Fund, Ltd. is a private investment
fund that is owned by its investors and managed by Bristol
DLP, LLC. Bristol DLP, LLC, of which Mr. Paul Kessler and Ms.
Diana Derycz Kessler are the managing members, has voting and
investment control over the shares owned by Bristol Investment
Fund, Ltd.
46
(18) The address for Capital Research Group, Inc. is 1833 Kalakaua
Ave #409, Honolulu, HI 96815. Charles T. Tamburello is the
President/CEO.
(19) The address for Cecil Dean Tallman is 3354 Fuchsia Street,
Costa Mesa, CA.
(20) The address for Chaim Breuer is 10 Concord Drive, Monsey, NY
10952.
(21) The address for Cong. Bias Yitzchak, Inc. is P.O. Box 976,
Monsey, NY 10952. Epreim Schwartz is the director.
(22) The address for Dr. Carl Chen is 1730 Coach Place, Hacienda
Heights, CA 91745. Shares registered are shares underlying
warrants issued pursuant to a severance agreement.
(23) The address for Dr. Ross Kaplan is 2412 Ponderosa Drive North,
Suite B100, Camarillo, CA 93010.
(24) The address for E&S Investment Group, LLC is 134 Rubert
Avenue, Staten Island, NY 10314. Tova Rothman is the control
person. Tova Rothman is Samuel Rothman's wife. Samuel Rothman
is a director of Mooney and disclaims beneficial ownership of
these shares. E&S Consultants is entitled to an additional 3%
nondilutable interest in Mooney to be issued pursuant to a
consulting agreement.
(25) The address for E. Gerald Hebert is PO BOX 64048-48, Kenner,
LA 70064.
(26) The address for Edward Turin is c/o Control Services, 333
Meadowlands Parkway, Secaucus, New Jersey 07094.
(27) The address for Ellis Enterprises is 42A Waterloo Road,
London, England NW2, 7UF. Julian Ungar is the control person.
(28) The address for Esquire Trade & Finance, Inc is Trident
Chambers, P.O. Box 146, Road Town, Tortola, B.V.I.
Gisela Kindle is the director.
(29) The address for Franseca Weingarten is 1661 53rd Street,
Brooklyn, New York 11204.
(30) The address for Gary Kaplowitz is 1233 Beech Street, House #3,
Atlantic Beach, NY 11509.
(31) N/A
(32) N/A
(33) The address for Guaranty & Finance Corp. is Edificio
Vallarino, Calle 52 Y Elvira, Mendez Penthouse, Panama,
Panama. Dr. Ricardo Durling, president, is the control person.
(34) N/A
(35) The address for Hirsch J. Ziegler is 50 East Concord Drive,
Monsey, NY 10952.
(36) The address for Howard Schraub is 8538 Ruette Monte Carlo, La
Jolla, CA 92037.
(37) The address for Howard Weiss is c/o Mooney Aerospace Group,
Ltd., 3205 Lakewood Blvd., Long Beach, CA 90808.
(38) The address for Hyperion Holding LLC is 1225 Hightower Trial,
Suite B-220, Atlanta, GA 30350. Paul Mannion is the general
Partner.
(39) The address for International Trade & Investments Corp. is
P.O. Box 3321, Road Town, Tortola, British Virgin Island.
The control person is Eli Gugenheim.
(40) The address for Justino Hirschhorn Rotschild is 35 Avenue de
las Fuentes, 3rd Fl., Lomas de Tecamachalco, Naucalpan, Mexico
53950.
(41) The address for Kelp Investors is 96-98 Rue du Rhone, CH-1211,
Geneva, Switzerland. Alfonso Nuni is the director.
47
(42) The address for Kentucky National Insurance Co. is 444 Madison
Avenue, Suite 501, New York, NY 10022. Nachum Stein is the
chairman.
(43) The address for Keshet Fund LP is 135 West 50th Street, Suite
1700, New York, New York 10020. John Clarke is the authorized
signatory.
(44) The address for Keshet LP is Ragnall House, 18 Peel Road,
Douglas, Isle of Man1M1 4L2, United Kingdom. John Clarke is
the authorized signatory.
(45) The address for Laurus Capital Management LL is 135 West 50th
Street, Suite 1700, New York, NY 10020. David Grin and Eugene
Grin are the directors.
(46) N/A
(47) The address for Leval Trading, Inc. is c/o Thierry Ulmann, 14
Rue du Conseil-General, Ch-1205, Geneva, Switzerland.
Thierry Ulman is the control person.
(48) The address for Libra Finance, SA is P.O. Box 4603, Zurich,
Switzerland. Seymour Braun is the control person.
(49) The address for Luce, Forward, Hamilton & Scripps, LLP is 600
W. Broadway, Suite 2600, San Diego, CA 92101. Robert Buehl is
the managing partner.
(50) The address for Lucrative Investments LTD is P.O. Box 1405,
Majuro Marshall Island, M.H. 96960. Andre Zolty is the
director.
(51) The address for Luis Nanes is Ave. de Las Fuentes, No. 35, 3rd
Floor, Lomas de Tecamachalo, Naucalpan, Edo. De Mexico 53950.
(52) The address for Markham Holding, Ltd. is 50 Town Range,
Gibraltar. The control person is David Hassan.
(53) N/A
(54) The address for Martin Klein is 2 Boxwood Lane, Lawrence, NY
11559.
(55) The address for Martin Thaler is 14 Bartlett Road, Monsey, NY
10952.
(56) The address for Mervin Klein is 38 Winesap Lane, Monsey, NY
10952.
(57) The address for MM & CTW Foundation, Inc. is 1657 49th Street,
Brooklyn, New York 11219. The control person is Alfred West.
(58) N/A
(59) The address for Nachum Stein is 444 Madison Avenue, Suite 501,
New York, NY 10022.
(60) N/A
(61) The address for Otto Weingarten is 1661 53rd Street, Brooklyn,
NY 11204.
(62) The address for Palisades Equity Fund is 1215 Hightower Road,
Suite 220, Atlanta, GA 30350. Paul Mannion is the general
partner.
(63) The address for Paul T. Mannion, Jr. is c/o Hyperion Holding
LLC, 1225 Hightower Trial, Suite B-220, Atlanta, GA 30350.
(64) The address for PEF Advisors is 1215 Hightower Trail, Suite
B220, Atlanta, GA 30350.
48
(65) The address for Perkman Investments is Citco Building,
Roadtown, Tortola, B.V.I.
(66) The address for Phillip Heller is 1370 56th Street, Brooklyn,
New York 11219.
(67) The address for Rhossili Investments Limited is c/o Ultra
Finanz Ltd, Grossmuensterplatz 6, P. O. Box 4401, Zurich,
CH-8022, Switzerland.
(68) N/A
(69) The address for RNJA Company, LLC is 160 Central Park South,
Suite 2701, New York, New York 10019. Ronald Safdieh is
the control person.
(70) The address for Robert Kaplan is 55 Avenue Road, Suite 301,
Toronto ON, Canada, M5R, 2G3. Robert Kaplan is a director of
Mooney.
(71) N/A
(72) The address for Rutgers Casualty Insurance, 444 Madison
Avenue, New York, NY 10022. Nachum Stein is the chairman.
(73) The address for Sam Rothman is 14 Valencia Drive, Monsey, New
York 10952. Sam Rothman is a director of Mooney. He disclaims
beneficial ownership of a nondilutable 3% interest in Mooney
issuable pursuant to a consulting agreement in the name of E&S
Consultants, of which Tova Rothman, Sam Rothman's wife, is the
control person.
(74) The address for Samuel Schlesinger is 4 Valencia Drive,
Monsey, NY 10952.
(75) The address for Sarah Katz is Ave. de Las Fuentes, No. 35, 3rd
Floor, Lomas de Tecamachalo, Naucalpan, Edo. De Mexico 53950.
(76) N/A
(77) The address for Seth Kaplan is 9521 Teton Vista Avenue, Las
Vegas, NV 89117.
(78) The address for Shafer Family Trust is 20 Denia, Laguna
Niguel, CA 92677. J. Richard Shafer is the control person.
(79) The address for Silver Development Corp. is c/o Mooney
Aerospace Group, Ltd., 3205 Lakewood Blvd., Long Beach, CA
90808.
(80) The address for Stateland LTD. is Attn: William Tabbachi, 160
Central Park South, Suite 2602, New York, New York 10019.
(81) The address for Steven Jonathan Gedy is 10c Hapisga St., Bayit
Vegan, Jerusalem 96465, Israel.
(82) The address for Stonestreet Corporation is c/o Canaccord
Capital Corporation, 320 Bay Street, Suite 1300, Toronto, ON
M5H 4A6, Canada. Michael Finkelstein is the vice-president and
Elizabeth Leonard is the portfolio manager.
(83) The address for Stonestreet Limited Partnership is c/o
Canaccord Capital Corporation, 320 Bay Street, Suite 1300,
Toronto, ON M5H 4A6, Canada.
(84) The address for Talbiya B. Investments Ltd. is Ragnall House,
18 Peel Road, Douglas, Isle of Man1M1 4L2, United Kingdom.
John Clarke is the authorized signatory.
(85) The address for Taria, Inc. is St. Annagasse 16, 8027, Zurich,
Switzerland. Bernhard Korolnik is the control person.
(86) The address for Tayside Trading Ltd is 50 Town Range,
Gilbralta. Ezra Pines is the director.
49
(87) The address for TCF Inc. is 11 Jay Street, Monsey, NY 10952.
Chaim Citronenbaum is the director.
(88) The address for The Endeavour Capital Investment Fund, S.A. is
S.A., Cumberland House, 27 Cumberland Street, Nassau, New
Providence, the Bahamas. Kenneth E. Gardner and Nathan I.
Lihou are the directors.
(89) The address for The Shaar Fund is c/o Herrick Feinstein, LLP,
2 Park Avenue, New York, New York 10022. Kenneth E. Gardner
and Nathan I. Lihou are the directors.
(90) The address for Vincent S. Sbarra is c/o Hyperion Holding LLC,
1225 Hightower Trial, Suite B-220, Atlanta, GA 30350.
(91) The address for William B. Myers is 4171 Shorebreak Drive,
Huntington Beach, CA 92649.
(92) The address for Zochron Fraida Rivkah is c/o Abe Roth, 5612
18th Avenue, Brooklyn, New York 11204. Abraham Roth is the
director.
50
MARCH 2000 PREFERRED STOCK EQUITY LINE AGREEMENT
OVERVIEW. On March 3, 2000, we entered into a Subscription Agreement
with certain of the selling stockholders identified in this Prospectus. Under
this agreement we have issued $9,108,500 in Series A Preferred Stock with a put
option to issue and sell an additional $891,500 of Series A Preferred Stock upon
the agreement of the applicable selling stockholders.
PUT RIGHTS. In order to invoke a put right, we must have an effective
registration statement on file with the SEC registering the resale of the common
shares which underlie the conversion of the preferred stock to be issued as a
consequence of the invocation of that put right. Additionally, we must provide
the selling stockholders with a Put Notice, which must set forth the Investment
Amount which we intend to sell to the selling stockholders, and which must be
accompanied by certain required documents.
LIMITATIONS AND CONDITIONS PRECEDENT TO OUR PUT RIGHTS. The selling
stockholders' obligation to acquire and pay for any Series A Preferred Stock
with respect to any particular put is subject to certain conditions precedent,
including:
-- The resale of the shares to be issued must be registered on an
effective Registration Statement;
-- Trading of our Class A Common Stock must not have been
suspended, and our Class A Common Stock must continue to be
listed on its principal market (including the Over the Counter
Bulletin Board); and
-- We must be in compliance with the Certificate of Designation
which governs the Series A Preferred Stock.
A previous requirement that we must be listed on NASDAQ was deleted by
an amendment to the agreement and the Certificate of Designation.
SHORT SALES. The selling stockholders and their affiliates are
prohibited from engaging in short sales of our common stock at a time when the
last reported bid of the common stock is less than $7.00 per share.
MARCH 27, 2001, SUBSCRIPTION AGREEMENT FOR SECURED CONVERTIBLE NOTES
OVERVIEW. On March 27, 2001, we entered into a subscription agreement
with certain of the selling stockholders identified in this Prospectus for the
sale of (i) between $4,000,000 to $5,000,000 in secured convertible notes and
(ii) warrants to purchase two shares of our Class A Common Stock for each dollar
loaned to us pursuant to such convertible notes. The maturity date on these
secured convertible notes and the expiration date on these warrants is 3 years
from the date of issuance.
The secured convertible notes bear interest at the annual rate of 5%
and are convertible following issuance into shares of our Class A Common Stock
at, upon the election of the holder, one of the following prices per share: (i)
$0.25; (ii) 80% of the average of the three lowest closing prices of our Class A
Common Stock for the sixty trading days immediately prior to the conversion
date; or iii) the closing price of our Class A Common Stock on the last trading
day immediately preceding the date of the initial issuance of the notes. These
convertible notes are secured by all of our assets.
The warrants may be exercised following issuance and will have an
exercise price per share of 110% of the closing price of the Class A Common
Stock on the trading day prior to the issuance of the warrant.
We are required to register the resale of the shares of Class A Common
Stock underlying the secured convertible notes and warrants.
INITIAL CLOSING. Pursuant to the subscription agreements discussed
above, on March 27, 2001, we sold in an initial closing $4,100,000 in secured
convertible notes for face value and issued warrants to purchase 8,254,060
shares of our Class A Common Stock at an exercise price of $0.45 per share.
51
As part of this initial closing, we incurred fee obligations to finders
of $330,089 which was paid by the issuance of unsecured convertible notes
substantially similar to the secured convertible notes described above, but for
the security interest.
PUT RIGHTS AND PUT CLOSING. The subscription agreement also provided us
with put rights for up to an additional $3,000,000 in secured convertible notes
and warrants under the same terms as the March 27, 2001, subscription agreement.
We completed a put on July 25, 2001, and issued $1,000,000 in secured
convertible notes for face value and issued warrants to purchase 2,000,000
shares of our Class A Common Stock at an exercise price of $0.242 per share. As
part of this put, we incurred fee obligations to finders of $80,000. Of this
$80,000, $68,480 was paid by the issuance of unsecured convertible notes
substantially similar to the secured convertible notes described above, but for
the security interest. The additional $2,000,000 previously available under the
put agreement is no longer available.
CONVERSION. The closing price of our Class A Common Stock as of
September 30, 2002, was $0.10. Assuming an average price of $0.072 and further
assuming that holders would elect the lesser of this average price and $0.25,
the conversion price under the secured convertible notes would be $0.072 and the
$1,149,300 face value of the currently outstanding secured convertible notes
(including finders notes) would be convertible into approximately 15,962,500
shares of our Class A Common Stock. This calculation does not include interest
and is therefore potentially convertible into a higher number of shares.
JUNE 27, 2001, SUBSCRIPTION AGREEMENT FOR UNSECURED CONVERTIBLE NOTES
OVERVIEW. On June 27, 2001, we entered into a subscription agreement
with a certain Selling Stockholder identified in this Prospectus for the sale of
$1,000,000 in unsecured convertible notes and warrants to purchase shares of
our Class A Common Stock. The maturity date on these unsecured convertible notes
is 5 years from the date of issuance and the expiration date on these warrants
is 3 years from the date of issuance.
The convertible notes bear interest at the annual rate of 5% and are
convertible following issuance into shares of our Class A Common Stock at, upon
the election of the holder, one of the following prices per share: (i) $0.25;
(ii) 80% of the average of the three lowest closing prices of our Class A Common
Stock for the sixty trading days immediately prior to the conversion date; or
(iii) the closing price of our Class A Common Stock on the last trading day
immediately preceding the date of the initial issuance of the notes.
The warrants may be exercised following issuance and will have an
exercise price per share of 110% of the closing price of the Class A Common
Stock on the trading day prior to the issuance of the warrant.
We are required to register the resale of the shares of Class A Common
Stock underlying the unsecured convertible notes and warrants.
CLOSING. Pursuant to the subscription agreement discussed above, on
June 27, 2001, we issued $1,000,000 in unsecured convertible notes for face
value and issued warrants to purchase 2,646,212 shares of our Class A Common
Stock at an exercise price of $0.22275 per share. As part of the closing, we
incurred fee obligations to finders of $100,000.
CONVERSION. The closing price of our Class A Common Stock as of
September 30, 2002, was $0.10. Assuming an average price of $0.072 and further
assuming that holders would elect the lesser of this average price and $0.25,
the conversion price under the secured convertible notes would be $0.072 and the
$1,000,000 face value of the currently outstanding secured convertible notes
would be convertible into approximately 13,888,889 shares of our Class A Common
Stock. This calculation does not include interest and is therefore potentially
convertible into a higher number of shares.
OCTOBER 26, 2001, SUBSCRIPTION AGREEMENT FOR SECURED CONVERTIBLE NOTES
OVERVIEW. On October 26, 2001, we entered into a subscription agreement
with certain of the selling stockholders identified in this Prospectus for the
sale of (i) between $7,000,000 to $10,000,000 in secured convertible notes and
(ii) warrants to purchase two shares of our Class A Common Stock for each dollar
loaned to us pursuant to such convertible notes. The maturity date on these
secured convertible notes and the expiration date on these warrants is 5 years
from the date of issuance.
52
The secured convertible notes bear interest at the annual rate of 8%
and are convertible following 120 days from issuance into shares of our Class A
Common Stock at, upon the election of the holder, one of the following prices
per share: (i) $0.35; or (ii) 70% of the average of the three lowest closing
prices of our Class A Common Stock for the thirty trading days immediately prior
to the conversion date. These convertible notes are secured by all of our
assets.
The warrants may be exercised following 45 days from issuance and
provide an exercise price per share of: (i) $0.25 for the first 50% of the
shares purchasable thereunder; and (ii) $0.30 for the remaining 50% of such
shares.
We are required to register the resale of the shares of Class A Common
Stock underlying the secured convertible notes and warrants.
INITIAL CLOSING. Pursuant to the subscription agreements discussed
above, on October 26, 2001, we sold in an initial closing $7,000,000 in secured
convertible notes for face value and issued warrants to purchase 14,000,000
shares of our Class A Common Stock.
As part of this initial closing, we incurred fee obligations to finders
of $697,000 plus warrants to purchase up to 2,000,000 shares of our Class A
Common Stock. Of this $697,000, $622,000 was paid by the issuance of unsecured
convertible notes substantially similar to the secured convertible notes
described above, but for the security interest. The warrants issued to finders
were identical to those issued on October 26, 2001.
SUBSEQUENT CLOSINGS. On November 12, 2001, additional investors were
added to the subscription agreement discussed above, and we sold an additional
$750,000 in secured convertible notes for face value and issued warrants to
purchase 1,500,000 shares of our Class A Common Stock.
As part of this subsequent closing, we incurred fee obligations to
finders of $75,000 plus warrants to purchase up to 214,285 shares of our Class A
Common Stock. Of this $75,000, $45,000 was paid by the issuance of unsecured
convertible notes substantially similar to the secured convertible notes
described above, but for the security interest. The warrants issued to finders
were identical to those issued on October 26, 2001.
On February 27, 2002, additional investors were added to the
subscription agreement discussed above, and we sold an additional $2,250,000 in
secured convertible notes for face value and issued warrants to purchase
4,500,000 shares of our Class A Common Stock.
As part of this subsequent closing, we incurred fee obligations to
finders of $225,000 plus warrants to purchase up to 642,857 shares of our Class
A Common Stock. The finders fees of $225,000 were paid by the issuance of
unsecured convertible notes substantially similar to the secured convertible
notes described above, but for the security interest. The warrants issued to
finders were identical to those issued on October 26, 2001.
53
OCTOBER 26, 2001, PUT AGREEMENT FOR UNSECURED CONVERTIBLE NOTES
PUT AGREEMENT AND PUT CLOSING. In connection with the initial closing
on October 26, 2001, we also entered into an agreement with certain investors
who hold our securities, some of whom purchased secured convertible notes and
obtained warrants in the initial closing, providing us with the right to sell to
such investors up to an additional $5,000,000 in secured convertible notes and
warrants under the same terms as the October 26, 2001, subscription agreement.
This right expires on October 26, 2002. The put amount was reduced by $500,000
pursuant to the subsequent closing of November 12, 2001. On February 27, 2002,
we closed on a put in the amount of $1,329,000 and issued unsecured convertible
notes in that amount and issued warrants to purchase 2,658,000 shares of our
Class A Common Stock. We incurred fee obligations to finders of $132,900 plus
warrants to purchase up to 379,714 shares of our Class A Common Stock. The
finder's fees of $132,900 were paid by the issuance of unsecured convertible
notes substantially similar to the unsecured convertible notes issued to the
investors. The warrants issued to finders were identical to those issued on
October 26, 2001.
JANUARY 30, 2002, SUBSCRIPTION AGREEMENT FOR UNSECURED CONVERTIBLE NOTES
INITIAL CLOSING. We entered into a January 30, 2002, subscription
agreement for up to $5,000,000 in unsecured convertible notes on the same terms
as the October 26, 2001, subscription agreement discussed above, except that the
notes were unsecured. On February 27, 2002, we completed an issuance of
$2,155,000 in unsecured convertible notes for face value and issued warrants to
purchase 4,310,000 shares of our Class A Common Stock.
As part of this initial closing, we incurred fee obligations to finders
of $215,500 plus warrants to purchase up to 615,714 shares of our Class A Common
Stock. Of this $215,500, $116,750 was paid by the issuance of unsecured
convertible notes identical to the unsecured convertible notes issued to the
investors. The warrants issued to finders were identical to those issued on
October 26, 2001.
SUBSEQUENT CLOSINGS. On March 26, 2002, additional investors were added
to the subscription agreement discussed above, and we sold an additional
$1,450,000 in unsecured convertible notes for face value and issued warrants to
purchase 2,900,000 shares of our Class A Common Stock.
As part of this subsequent closing, we incurred fee obligations to
finders of $145,000 plus warrants to purchase up to 414,286 shares of our Class
A Common Stock. The finder's fee of $145,000 was paid by the issuance of
unsecured convertible notes substantially similar to the unsecured convertible
notes issued to investors. The warrants issued to finders were identical to
those issued on October 26, 2001.
On April 11, 2002, additional investors were added to the subscription
agreement discussed above, and we sold an additional $950,000 in unsecured
convertible notes for face value and issued warrants to purchase 1,900,000
shares of our Class A Common Stock.
As part of this subsequent closing, we incurred fee obligations to
finders of $95,000 plus warrants to purchase up to 271,428 shares of our Class A
Common Stock. The finder's fee of $95,000 was paid by the issuance of unsecured
convertible notes substantially similar to the unsecured convertible notes
issued to investors. The warrants issued to finders were identical to those
issued on October 26, 2001.
MAY 16, 2002, SUBSCRIPTION AGREEMENT FOR UNSECURED CONVERTIBLE NOTES
INITIAL CLOSING. We entered into a May 16, 2002, subscription agreement
for up to $4,000,000 in unsecured convertible notes on the same terms as the
October 26, 2001, subscription agreement discussed above, except that the notes
were unsecured. On May 16, 2002, we completed an issuance of $730,000 in
unsecured convertible notes for face value and issued warrants to purchase
1,460,000 shares of our Class A Common Stock.
As part of this initial closing, we incurred fee obligations to finders
of $73,000 plus warrants to purchase up to 208,571 shares of our Class A Common
Stock. The finder's fee of $73,000 was paid by the issuance of unsecured
convertible notes identical to the unsecured convertible notes issued to the
investors. The warrants issued to finders were identical to those issued on
October 26, 2001.
SUBSEQUENT CLOSINGS. On June 6, 2002, additional investors were added
to the subscription agreement discussed above, and we sold an additional
$325,000 in unsecured convertible notes for face value and issued warrants to
purchase 650,000 shares of our Class A Common Stock.
As part of this subsequent closing, we incurred fee obligations to
finders of $32,500 plus warrants to purchase up to 92,857 shares of our Class A
Common Stock. The finder's fee of $32,500 was paid by the issuance of unsecured
convertible notes substantially similar to the unsecured convertible notes
issued to investors. The warrants issued to finders were identical to those
issued on October 26, 2001.
54
On June 10, 2002, an additional investor was added to the subscription
agreement discussed above, and we sold an additional $500,000 in unsecured
convertible notes for face value and issued warrants to purchase 1,000,000
shares of our Class A Common Stock.
As part of this subsequent closing, we incurred fee obligations to
finders of $50,000 plus warrants to purchase up to 142,857 shares of our Class A
Common Stock. The finders fee of $50,000 was paid by the issuance of unsecured
convertible notes substantially similar to the unsecured convertible notes
issued to investors. The warrants issued to finders were identical to those
issued on October 26, 2001.
On June 18, 2002, additional investors were added to the subscription
agreement discussed above, and we sold an additional $350,000 in unsecured
convertible notes for face value and issued warrants to purchase 700,000 shares
of our Class A Common Stock.
As part of this subsequent closing, we incurred fee obligations to
finders of $35,000 plus warrants to purchase up to 100,000 shares of our Class A
Common Stock. The finders fee of $35,000 was paid by the issuance of unsecured
convertible notes substantially similar to the unsecured convertible notes
issued to investors. The warrants issued to finders were identical to those
issued on October 26, 2001.
On June 28, 2002, additional investors were added to the subscription
agreement discussed above, and we sold an additional $2,000,000 in unsecured
convertible notes for face value and issued warrants to purchase 4,000,000
shares of our Class A Common Stock.
JULY 10, 2002, SUBSCRIPTION AGREEMENT FOR UNSECURED CONVERTIBLE NOTES
INITIAL CLOSING. We entered into a July 10, 2002, subscription
agreement for up to $10,000,000 in unsecured convertible notes on the same terms
as the October 26, 2001, subscription agreement discussed above, except that the
notes were unsecured. On July 10, 2002, we completed an issuance of $250,000 in
unsecured convertible notes for face value and issued warrants to purchase
500,000 shares of our Class A Common Stock.
As part of this initial closing, we incurred fee obligations to finders
of $25,000 plus warrants to purchase up to 71,428 shares of our Class A Common
Stock. The finder's fee of $25,000 was paid by the issuance of unsecured
convertible notes identical to the unsecured convertible notes issued to the
investors. The warrants issued to finders were identical to those issued on
October 26, 2001.
SUBSEQUENT CLOSING. On July 31, 2002, additional investors were added
to the subscription agreement discussed above, and we sold an additional
$300,000 in unsecured convertible notes for face value and issued warrants to
purchase 150,000 shares of our Class A Common Stock at an exercise price of
$.30.
As part of this subsequent closing, we incurred fee obligations to
finders of $30,000 plus warrants to purchase up to 85,714 shares of our Class A
Common Stock at an exercise price of $.30. The finder's fee of $30,000 was paid
in cash. The warrants issued to finders were similar to those issued on July 10,
2002.
SEPTEMBER 10, 2002, SUBSCRIPTION AGREEMENT FOR UNSECURED CONVERTIBLE NOTES
CLOSING. We entered into a September 10, 2002, subscription agreement
for up to $10,000,000 in unsecured convertible notes on the same terms as the
October 26, 2001, subscription agreement discussed above, except that the notes
were unsecured. On September 10, 2002, we completed an issuance of $2,000,000 in
unsecured convertible notes for face value and issued warrants to purchase
4,000,000 shares of our Class A Common Stock under terms similar to those issued
on July 10, 2002.
As part of this closing, we incurred fee obligations to finders of
$40,000 plus warrants to purchase up to 571,429 shares of our Class A Common
Stock at an exercise price of $.30. The finder's fee of $40,000 was paid in
cash. The warrants issued to finders were similar to those issued on July 31,
2002.
CONVERSION PROVISIONS FOR NOTES ISSUED ON OR AFTER OCTOBER 26, 2001
The conversion provisions are the same for the October 26, 2001,
Subscription Agreement and Put Agreement, the January 30, 2002 Subscription
Agreement, the May 16, 2002 Subscription Agreement, the July 10, 2002
Subscription Agreement and the September 10, 2002 Subscription Agreement. The
closing price of our Class A Common Stock as of September 30, 2002, was $0.10.
Assuming an average price of $0.063 and further assuming that holders would
elect the lesser of this average price and $0.35, the conversion price under the
convertible notes issued on or after October 26, 2001 would be $0.063 and the
$23,746,000 face value of the convertible notes outstanding as of September 30,
2002 (including finder's notes) would be convertible into approximately
376,923,016 shares of our Class A Common Stock. This calculation assumes all
issuances are eligible for conversion on September 30, 2002; however, the
debentures issued in July and September 2002 were not so eligible, as 120 days
from the issuance date had not passed. This calculation also does not include
interest and is therefore potentially convertible into a higher number of
shares.
LEGAL MATTERS
The validity of the shares of common stock being offered hereby will be
passed upon for us by Luce, Forward, Hamilton and Scripps LLP, San Diego,
California. Luce Forward may resell approximately 380,000 shares of Common Stock
pursuant to this Prospectus.
55
EXPERTS
The financial statements of Mooney Aerospace Group, Ltd. (a development
stage enterprise) at December 31, 2001, and for each of the two years in the
period ended December 31, 2001, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon (which contains an explanatory paragraph
describing conditions that raise substantial doubt about our ability to continue
as a going concern as described in Note 2 to the financial statements) appearing
elsewhere herein, and are included in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the
Securities Act of 1933, as amended, relating to the shares of Class A Common
Stock being offered by this prospectus, and reference is made to such
registration statement. This prospectus constitutes the prospectus of Mooney
filed as part of the registration statement, and it does not contain all
information in the registration statement, as certain portions have been omitted
in accordance with the rules and regulations of the SEC.
We are subject to the informational requirements of the Securities and
Exchange Act of 1934 and pursuant to those requirements, we file reports, proxy
statements and other information with the Securities and Exchange Commission
relating to our business, financial statements and other matters. Reports, proxy
and information statements filed under Sections 14(a) and 14(c) of the
Securities Exchange Act of 1934 and other information filed with the SEC,
including copies of the registration statement, can be inspected and copied at
the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. The public may obtain information on the operation of the Public
Reference Room by calling 1-800-SEC-0330. The SEC also maintains an Internet
site that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the SEC at
http://www.sec.gov.
We intend to furnish our stockholders with annual reports containing
audited financial statements.
56
INDEX TO FINANCIAL STATEMENTS
(Issued in the name of Advanced Aerodynamics & Structures, Inc., now known as
Mooney Aerospace Group, Ltd.)
FINANCIAL STATEMENTS
DECEMBER 31, 2001
Page
Number
------
Report of Independent Auditors F-1
Balance Sheet F-2
Statement of Operations F-3
Statement of Stockholders' Deficiency F-4
Statement of Cash Flows F-6
Notes to Financial Statements F-8
INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
Page
Number
------
Unaudited Balance Sheets F-24
Unaudited Statement of Operations F-25
Unaudited Statement of Stockholders' Deficiency F-26
Unaudited Statement of Cash Flows F-29
Notes to Unaudited Financial Statements F-31
MOONEY AIRCRAFT CORPORATION (DEBTOR-IN POSSESSION)
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
Page
Number
------
Report of Independent Auditors F-41
Balance Sheets F-42
Statements of Operations F-44
Statements of Stockholders' Deficit F-45
Statements of Cash Flows F-46
Notes to Financial Statements F-48
MOONEY AEROSPACE GROUP LTD.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
Page
Number
------
Unaudited Pro Forma Combined Statement of Operations F-64
Notes to Unaudited Pro Forma Combined Financial
Statements F-67
57
Report of Independent Auditors
To the Board of Directors
Mooney Aerospace Group, Ltd.
We have audited the accompanying balance sheet of Mooney Aerospace
Group, Ltd. (a development stage enterprise) as of December 31, 2001, and the
related statements of operations, stockholders' deficiency, and cash flows for
the two years then ended, and for the period from January 26, 1990 (inception)
through December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion the financial statements referred to above present
fairly, in all material respects, the financial position of Mooney Aerospace
Group Ltd., at December 31, 2001, and the results of its operations and its cash
flows for each of the two years in the period then ended and the period from
January 26, 1990 (inception) through December 31, 2001, in conformity with
accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming
Mooney Aerospace Group, Ltd. will continue as a going concern. As more fully
described in Note 2, the Company has incurred recurring losses, has an
accumulated deficit and a working capital deficiency at December 31, 2001. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
/s/ Ernst & Young LLP
Long Beach, California
March 26, 2002, except for the first
paragraph of Note 1, as to which the
date is July 31, 2002.
F-1
MOONEY AEROSPACE GROUP, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
December 31, 2001
-------------
ASSETS
Current assets:
Cash and cash equivalents $ 681,000
Debt issuance costs, current portion 58,000
Prepaid expenses and other current assets 67,000
-------------
Total current assets 806,000
Property, plant and equipment, net 12,159,000
Investments available-for-sale 1,924,000
Restricted cash 436,000
Debt issuance costs 341,000
Other assets 314,000
-------------
Total assets $ 15,980,000
=============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 2,087,000
Other accrued liabilities 1,646,000
Capital leases, current portion 158,000
Notes payable 389,000
Convertible debentures, current (net discount of $11,518,000) 1,240,000
-------------
Total current liabilities 5,520,000
Long-term liabilities:
Capital leases, long-term 12,850,000
Deferred land lease 369,000
Deferred revenue 1,815,000
-------------
Total liabilities 20,554,000
Stockholders' deficiency:
Preferred Stock, par value $.0001 per share; 5,000,000 shares
authorized; none issued and outstanding, 100,000 shares
designated as Series A --
Series A, 5% Cumulative Convertible Preferred Stock, $100 stated
value per share, 100,000 shares authorized, 46,648 shares
issued and outstanding 3,615,000
Class A Common Stock, par value $.0001 per share; 625,000,000
shares authorized; 45,338,850 shares issued and outstanding 37,000
Class B Common Stock, par value $.0001 per share; 10,000,000 shares
authorized; 1,900,324 shares issued and outstanding --
Class E-1 Common Stock; par value $.0001 per share; 4,000,000
shares authorized; 4,000,000 shares issued and outstanding --
Class E-2 Common Stock; par value $.0001 per share; 4,000,000
shares authorized; 4,000,000 shares issued and outstanding --
Warrants to purchase common stock
Warrants 6,352,000
Public Warrants 473,000
Class A Warrants 11,290,000
Class B Warrants 4,632,000
Additional paid-in capital 55,631,000
Accumulated other comprehensive loss (29,000)
Deficit accumulated during the development stage (86,575,000)
-------------
Total stockholders' deficiency (4,574,000)
-------------
Total liabilities and stockholders' deficiency $ 15,980,000
=============
See accompanying notes to financial statements.
F-2
MOONEY AEROSPACE GROUP, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
Period from
January 26,
Year Ended 1990
December 31, (inception) to
----------------------------- December 31,
2000 2001 2001
------------- ------------- -------------
Interest income $ 75,000 $ 37,000 $ 2,855,000
Other income 68,000 36,000 1,426,000
----------- ------------ -----------
143,000 73,000 4,281,000
Cost and expenses:
Research and development costs 6,341,000 7,630,000 44,737,000
General and administrative expenses 3,543,000 4,815,000 26,236,000
Loss on disposal of assets -- -- 755,000
Realized loss on sale of investments 36,000 -- 66,000
Interest expense 938,000 4,969,000 9,252,000
In-process research and development acquired -- -- 761,000
Non-recurring expenses -- 3,823,000 3,823,000
------------- ------------- -------------
10,858,000 21,237,000 85,630,000
------------- ------------- -------------
Loss before extraordinary item (10,715,000) (21,164,000) (81,349,000)
Extraordinary loss on retirement of Bridge Notes -- -- (942,000)
------------- ------------- -------------
Net loss $(10,715,000) $(21,164,000) $(82,291,000)
============= ============= =============
Net loss per share $ (1.26) $ (.73)
============= =============
Weighted average number of shares outstanding 9,168,000 30,010,000
============= =============
See accompanying notes to financial statements.
F-3
MOONEY AEROSPACE GROUP, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
Statement of Stockholders' Deficiency
- --------------------------------------------------- --------------------------------------------------------------------------------
Common Stock
- --------------------------------------------------- --------------------------------------------------------------------------------
Preferred Stock Class A Class B Class E-1 Class E-2
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Warrants
------------------- --------------------------------------------------------------------------------
Common stock issued at $3.59 $ $ 418,904 $ 836,189 $ 836,189 $ $
per share
Common stock issued in
exchange for in-process
research and development at
$.36 per share 201,494 402,988 402,988
Imputed interest on advances
from stockholder
Conversion of stockholder
advances 598,011 1,196,021 1,196,021
Conversion of officer loans 187,118 374,236 374,236
Stock issued in consideration
for services in 1994, 1995,
and 1996 at $.51 per share 595,283 1,190,566 1,190,566
Imputed interest on advances
from stockholder
Net proceeds from initial public
offering of Units at $4.39
per share 6,000,000 1,000
Net proceeds from exercise of
over-allotment option at
$4.55 per share 900,000
Warrants issued in connection
with issuance of Bridge
Notes at $.79 per share
Net loss from inception to
December 31, 1996
----------------------------------------------------------------------------------------------------
Balance at December 31, 1996 6,900,000 1,000 2,000,000 4,000,000 4,000,000
Adjustment to proceeds from
initial public offering and
exercise of overallotment
option
Net loss
----------------------------------------------------------------------------------------------------
Balance at December 31, 1997 6,900,000 1,000 2,000,000 4,000,000 4,000,000
Conversion of Class B to A
Common Stock 99,676 (99,676)
Net loss
----------------------------------------------------------------------------------------------------
Balance at December 31, 1998 6,999,676 1,000 1,900,324 4,000,000 4,000,000
Net loss
----------------------------------------------------------------------------------------------------
Unrealized loss on investments
Comprehensive loss
----------------------------------------------------------------------------------------------------
Balance at December 31, 1999 6,999,676 1,000 1,900,324 4,000,000 4,000,000
F-4a
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Deficit
accumulated
Public Class A Class B Additional Accumulated other during the
warrants warrants warrants paid-in capital comprehensive loss development stage Total
----------------------------------------------------------------------------------------------------
Common stock issued at $3.59 $ $ $ $ 7,500,000 $ $ $ 7,500,000
per share
Common stock issued in
exchange for in-process
research and development at
$.36 per share 361,000 361,000
Imputed interest on advance
from stockholders 799,000 799,000
Conversion of stockholder 10,728,000 10,728,000
advances
Conversion of officer loans 336,000 336,000
Stock issued in consideration
for services in 1994, 1995,
and 1996 at $.51 per share 1,507,000 1,507,000
Imputed interest on advances
from stockholder 11,000 11,000
Net proceeds from initial public
offering of Units at $4.39
per share 9,583,000 4,166,000 12,566,000 26,316,000
Net proceeds from exercise of
over-allotment option at
$4.55 per share 1,707,000 466,000 1,922,000 4,095,000
Warrants issued in connection
with issuance of Bridge
Notes at $.79 per share 473,000 473,000
Net loss from inception to
December 31, 1996 24,328,000 24,328,000
------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 473,000 11,290,000 4,632,000 35,730,000 (24,328,000) 27,798,000
Adjustment to proceeds from
initial public offering and
exercise of overallotment
option (78,000) (78,000)
Net loss (6,625,000) (6,625,000)
------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 473,000 11,290,000 4,632,000 35,652,000 (30,953,000) 21,095,000
Conversion of Class B to A
Common Stock
Net loss (10,118,000) (10,118,000)
------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 473,000 11,290,000 4,632,000 35,652,000 (41,071,000) 10,977,000
Net loss (9,341,000) (9,341,000)
Unrealized loss on investments (32,000) (32,000)
Comprehensive loss (9,373,000)
------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 473,000 11,290,000 4,632,000 35,652,000 (32,000) (50,412,000) 1,604,000
F-4b
MOONEY AEROSPACE GROUP, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
Statement of Stockholders' Deficiency (continued)
- --------------------------------------------------- --------------------------------------------------------------------------------
Common Stock
- --------------------------------------------------- --------------------------------------------------------------------------------
Preferred Stock Class A Class B Class E-1 Class E-2
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Warrants
------------------- --------------------------------------------------------------------------------
Net proceeds from issuance of
preferred stock at $63.08 per
share 79,800 $5,034,000 $ $ $ $ $
Net proceeds from issuance of
warrants at $1.29 per share 2,217,000
Conversion of Preferred Stock to
Class A Common Stock (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 Common Stock (33,546) (2,167,000) 16,112,563 16,000
Net proceeds from issuance of
common stock at $0.17 per
share 5,300,701 5,000
Net proceeds from issuance of
warrants at $.07 per share 274,000
Amortization of discount on
Preferred Stock 179,000
Amortization of warrants
attached to common stock
Issuance of warrants attached to
debentures at $.11 per share 3,433,000
Beneficial conversion feature
related to debentures
Conversion of Convertible
Debentures to Class A
Common Stock 14,961,087 15,000
Unrealized loss on investments
Net loss
----------------------------------------------------------------------------------------------------
Comprehensive loss
----------------------------------------------------------------------------------------------------
Balance at December 31, 2001 46,648 $3,615,000 45,338,850 $37,000 1,900,324 $ 4,000,000 $ 4,000,000 $ $6,352,000
====================================================================================================
See accompanying motes to financial statements.
F-5a
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
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 Common Stock 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 Common Stock 2,318,000 (183,000) (16,000)
Net proceeds from issuance of
common stock at $0.17 per
share 1,237,000 1,242,000
Net proceeds from issuance of
warrants at $.07 per share 274,000
Amortization of discount on
Preferred Stock (163,000) 16,000
Amortization of warrants
attached to common stock 119,000 (119,000)
Issuance of warrants attached to
debentures at $.11 per share 3,443,000
Beneficial conversion feature
related to debentures 9,674,000 9,674,000
Conversion of Convertible
Debentures to Class A
Common Stock 1,564,000 1,579,000
Unrealized loss on investments (29,000) (29,000)
Net loss (21,164,000) (21,164,000)
----------------------------------------------------------------------------------------------------
Comprehensive loss (21,193,000)
----------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $473,000 $11,290,000 $4,632,000 $55,631,000 $(29,000) $(86,575,000) $ (4,574,000)
====================================================================================================
See accompanying notes to financial statements.
F-5b
MOONEY AEROSPACE GROUP, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
PERIOD FROM
JANUARY 26
1990
YEAR-ENDED DECEMBER 31, (INCEPTION)
------------------------------ TO DECEMBER 31,
2000 2001 2001
------------------------------------------------
OPERATING ACTIVITIES:
Net loss $(10,715,000) $(21,164,000) $(82,291,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Noncash stock compensation expense -- -- 1,207,000
Noncash professional service expense -- 344,000 344,000
Noncash interest expense -- 211,000 547,000
Amortization of discount on convertible debentures -- 2,158,000 2,158,000
Amortization of debt issue costs -- 73,000 73,000
Cost of in-process research and development acquired -- -- 761,000
Imputed interest on advances from stockholder -- -- 810,000
Interest income from restricted cash invested -- -- (474,000)
Extraordinary loss on retirement of bridge notes -- -- 942,000
Depreciation and amortization 1,148,000 1,692,000 6,465,000
Loss on disposal of assets -- 2,805,000 3,560,000
Realized loss on sale of investments 36,000 -- 66,000
Changes in operating assets and liabilities:
Decrease in prepaid expenses and other current assets 7,000 2,000 106,000
Increase in other assets (12,000) (109,000) (315,000)
Increase in accounts payable 1,002,000 694,000 699,000
Increase in accrued liabilities 145,000 1,330,000 3,121,000
Increase in deferred revenue 70,000 45,000 1,605,000
------------------------------------------------
Net cash used in operating activities (8,319,000) (11,919,000) (60,616,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in construction in progress -- -- (446,000)
Proceeds from insurance claims upon loss of aircraft -- -- 30,000
Proceeds from sales of assets -- -- 9,803,000
Capital expenditures (2,276,000) (82,000) (8,201,000)
Purchase of certificate of deposit -- -- (1,061,000)
Proceeds from redemption of certificate of deposit -- -- 1,061,000
Purchase of investments (2,626,000) (2,881,000) (39,227,000)
Proceeds from maturities of investments in bonds -- 653,000 1,481,000
Proceeds from sale of investments 4,950,000 304,000 35,756,000
Restricted cash from long-term debt -- -- (8,095,000)
Increase in restricted cash (405,000) (31,000) (436,000)
------------------------------------------------
Net cash used in investing activities (357,000) (2,037,000) (9,335,000)
------------------------------------------------
FINANCING ACTIVITIES:
Adjustment to net proceeds from initial public offering and exercise of
over allotment option -- -- (78,000)
Proceeds from long-term debt -- -- 8,500,000
Restricted cash collateral for long-term debt -- -- (8,500,000)
Proceeds from issuance of convertible preferred stock 5,034,000 954,000 5,988,000
Proceeds from issuance of convertible debentures -- 9,798,000 9,798,000
Proceeds from issuance of warrants 2,217,000 3,777,000 5,994,000
Advances from stockholder -- -- 10,728,000
Proceeds from issuance of common stock 1,221,000 898,000 9,619,000
Net proceeds from initial public offering and exercise of over-allotment option -- -- 30,411,000
Net proceeds from bridge financing -- 1,100,000 7,295,000
Net proceeds from loans from officers -- -- 336,000
Payments on capital lease obligations (281,000) (378,000) (934,000)
Payments on promissory notes -- (425,000) (425,000)
Repayment of bridge financing -- (1,100,000) (8,100,000)
------------------------------------------------
Net cash provided by financing activities 8,191,000 14,624,000 70,632,000
------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (485,000) 668,000 681,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 498,000 13,000 --
------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,000 $ 681,000 $ 681,000
================================================
See accompanying notes to financial statements.
F-6
MOONEY AEROSPACE GROUP, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS (continued)
PERIOD FROM
JANUARY 26
1990
(INCEPTION)
YEAR-ENDED DECEMBER 31, TO DECEMBER 31,
------------------------------------------------
2000 2001 2001
------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $1,190,000 $1,256,000 $ 4,422,000
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Stockholder advances converted to common stock $10,728,000
Loans from officer converted to common stock $ 36,000
Common stock issued for noncash consideration and compensation $ 1,507,000
Liabilities assumed from ASI $ 400,000
Common stock issued for in-process research and development acquired $ 361,000
Assets acquired with a note $ 814,000 $ 814,000
Assets acquired under capital leases $ 433,000 $3,200,000 $13,527,000
Deposit surrendered as payment for rents due $ 80,000
Construction in progress acquired with restricted cash $ 8,578,000
See accompanying notes to financial statements.
F-7
MOONEY AEROSPACE GROUP, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS STRATEGY
Advanced Aerodynamics & Structures, Inc. ("AASI") was incorporated in
California on January 26, 1990. In July 1996, AASI reincorporated by
merging into a newly formed corporation in Delaware. Upon approval of
the Board of Directors and shareholders, AASI filed with the State of
Delaware to change its name. On July 23, 2002, the Company obtained
approval from the State of Delaware to change the name from Advanced
Aerodynamics & Structures, Inc. to Mooney Aerospace Group, Ltd. (the
"Company" or "Mooney"). The financial statements as of December 31,
2001 have been adjusted to reflect this name change
The Company is in the development stage of designing a multi-purpose
light aircraft. Since its inception, the Company has been engaged
primarily in research and development of its proposed aircraft, the
JETCRUZER 500. In June 1994, the FAA awarded the Company a Type
Certificate for the JETCRUZER 450, which is a non pressurized propjet
aircraft powered by a smaller Pratt & Whitney engine.
On January 8, 2002 the Board of Directors elected a new management team
of experienced aviation executives to refocus the Company. The Chief
Executive Officer, Dr. Carl Chen, was replaced by Roy Norris, former
President of Raytheon Aircraft Company. Following the reorganization of
management, the Company adopted a new business strategy of becoming a
leading supplier of piston, turboprop, and light jet aircraft for the
business and owner-flown general aviation markets. The Company plans to
accomplish this through the acquisition of existing high quality
aviation lines and the development of new aircraft models. The Company,
under its new management team, conducted a technical review of the
JETCRUZER 500 program to ascertain the reasons for the continued delays
in the JETCRUZER 500 program and the actual status of the aircraft.
This review revealed that the JETCRUZER 500 was seriously overweight,
was not achieving its speed goals, and had a serious gravity problem
with fuel burn. Additionally, subsequent noise tests determined that
the aircraft could not meet current federal guidelines for external
noise levels. Accordingly, the Board of Directors suspended significant
spending on the JETCRUZER 500 program. The Company is currently
considering several options, which includes a restart of the JETCRUZER
500 at a later date, sale of the program to another company or use the
JETCRUZER flight and test data to launch a new development activity.
As discussed in Note 16, the Company's first step is the acquisition of
Mooney Aircraft Corporation's ("Mooney") assets out of bankruptcy,
which was approved by the bankruptcy courts on March 18, 2002. It is
expected that the deal will close some time in April 2002. Mooney is
located in Kerrville, Texas. This is an important first step in the
Company's new strategy to assemble a new and vibrant general aviation
manufacturer with revolutionary newly developed aircraft products using
the latest in technology and cost effective manufacturing techniques.
In connection with the acquisition of the Mooney assets, the Company
set up a wholly-owned subsidiary, Mooney Airplane Company, to acquire
those assets.
2. FINANCIAL RESULTS AND LIQUIDITY
To date, the Company has generated no sales revenue and none is
projected until the Company can begin commercial production of their
product and regain market acceptance of the aircraft at profitable
selling prices and volumes. The Company incurred program development
costs to date of approximately $45,498,000 and has recorded a
cumulative net loss of $(82,291,000). The Company's management team has
been developing a financial plan to address its working capital
requirements and believes that if executed successfully, the Plan will
F-8
substantially improve the Company's ability to meet its working capital
requirements throughout the current year. Although the Company has
received verbal commitments to carry out the acquisition of the Mooney
assets and to complete its business strategy, the current working
capital is insufficient to meet the Company's needs beyond the second
quarter of fiscal 2002. These conditions raise substantial doubt as to
the Company's ability to continue as a going concern. These financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RESEARCH AND DEVELOPMENT COSTS
All costs incurred in the design, testing, and certification of
aircraft being developed by the Company (including costs of in-process
research and development acquired) are expensed as incurred.
PRE-OPERATING COSTS
Pre-operating costs are expensed as incurred.
ADVERTISING EXPENSE
Advertising costs are expensed as incurred. Advertising expense was
$476,000 and $43,000 for the years ended December 31, 2000 and 2001,
respectively.
CASH AND CASH EQUIVALENTS
The Company considers all short-term, highly liquid instruments that
have original maturities of three months or less and are readily
convertible to cash to be considered cash equivalents. Cash and cash
equivalents are held by major financial institutions.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash, cash
equivalents, investments available-for-sale, and restricted cash. The
Company maintains its financial instruments with major financial
institutions. At times, cash balances held by financial institutions
were in excess of federal limits. The Company, by policy, limits the
amount of credit exposure to any one financial institution, and does
not consider itself to have any significant concentrations of credit
risk.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of substantially all financial instruments of the
Company approximates their carrying value in the aggregate due to their
short-term maturity and/or prevailing market interest rates.
LONG-TERM INVESTMENTS
The Company's investment strategies consider safety of principal,
availability of funds and maximum return on investment. Management
determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designation as of each balance
sheet date. Currently all debt securities are classified as
available-for-sale, as the Company intends to sell such securities as
necessary to fund operations. Such securities are recorded at market
value, with unrealized gains/losses being recorded in other
comprehensive income.
During the year ended December 31, 2001, unrealized losses amounted to
$29,000 which have been reported in the balance sheet and statement of
stockholders' deficiency. Long-term investments are recorded at market
value as determined by the most recently traded price of each security
at the balance sheet date. When securities are sold, the investment
account is relieved by use of the specific identification method.
F-9
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and are depreciated
using the straight-line method over their estimated useful lives of
5-10 years for machinery and equipment, 3-5 years for office furniture
and equipment and 18 years for the building acquired under a capital
lease. Leasehold improvements are amortized over the shorter of their
estimated useful lives or the term of the lease. Included in
depreciation expense is the amortization of assets acquired under
capital leases.
The Company reviews the recoverability of its long-lived assets, as
required by Statement of Financial Accounting Standards ("SFAS") No.
121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of whenever significant events or
changes occur which might impair the recovery of recorded costs. The
measurement of possible impairment is either based upon significant
losses or on the inability to recover the balance of the long-lived
asset from expected future operating cash flows on an undiscounted
basis. If an impairment exists, the amount of such impairment is
calculated based upon the discounted cash flows or the market values as
compared to the recorded costs.
INCOME TAXES
Income taxes are accounted for under an asset and liability approach
that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. A
valuation allowance is established to reduce deferred tax assets if it
is more likely than not that all or some portion of such deferred tax
assets will not be realized.
DEFERRED REVENUE
Deferred revenue represents advance deposits from customers which were
paid when the sales order was signed. The Company will record these
deposits as revenue once the Company has obtained its production
certificate and commences production of the JETCRUZER 500.
STOCK-BASED COMPENSATION
The Company grants stock options with an exercise price equal to at
least the fair value of the stock at the date of grant. The Company has
elected to continue to account for its employee stock- based
compensation plans using an intrinsic value based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25) and related Interpretations.
Under APB 25, because the exercise price of the Company's employee
stock options equal or exceeds the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
F-10
ACCOUNTING PRONOUNCEMENTS
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, BUSINESS COMBINATIONS and SFAS No. 142, GOODWILL AND
OTHER INTANGIBLE ASSETS. SFAS No. 141 is effective for any business
combinations completed after June 30, 2001 and SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001. Under the
new rules, goodwill deemed to have indefinite lives will no longer be
amortized but will be subject to annual impairment tests in accordance
with the Statements. Other intangible assets will continue to be
amortized over their useful lives.
The Company expects to adopt the provisions of SFAS No. 141 and SFAS
No. 142 on January 1, 2002 and has not yet determined what the effect
of the adoption of these pronouncements will be on the earnings and
financial position of the Company.
In October 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which supersedes SFAS No.
121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF. SFAS No. 144 addresses financial
accounting and reporting for the impairment of long-lived assets and
for long-lived assets to be disposed of. However, SFAS No. 144 retains
certain fundamental provisions of SFAS No. 121 including recognition
and measurement of the impairment of long-lived assets to be held and
used; and measurement of long-lived assets to be disposed of by sale.
SFAS No. 144 is effective for fiscal years beginning after December 15,
2001. The Company expects to adopt SFAS No. 144 on January 1, 2002 and
is in the process of assessing the effect of adopting this
pronouncement.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2000 balances to
conform to the 2001 presentation.
4. CONVERTIBLE DEBENTURES
On March 27, 2001, the Company obtained new financing of up to
$5,000,000, with an availability of up to an additional $3,000,000. The
additional amount becomes available after certain criteria have been
met, as defined in the agreement. The Company issued $4,100,000 in
Secured Convertible Notes ("Notes" or "Debentures") with an interest
rate of 5% to accredited investors, as defined by Regulation D rules
issued by the Securities and Exchange Commission under the Securities
Act of 1933. On July 25, 2001, the Company issued an additional
$1,000,000 in Notes under this agreement. In conjunction with the
financing, the Company issued an additional $410,000 in Secured
Convertible Notes as finders fees. As part of the agreement the Company
also issued warrants to purchase 10,254,000 shares of Common stock at
an exercise price ranging from approximately $.24 to $.45 per share.
The Company filed a proxy statement and Form S-3 Registration Statement
as required by the terms of the agreement. There is a mandatory
redemption requirement at 125% of the unpaid principal balance and
unpaid interest upon the occurrence of default or if the Company is
prohibited from issuing shares of common stock. Additionally, the
Company may put the additional notes to the note holders upon meeting
certain covenants related to the availability of trading of the stock,
trading volume and market price and other milestones.
At December 31, 2001, the Company was in default on one of the
covenants of the agreement for failure to pay accrued interest on the
notes within 10 days of December 31, 2001. Due to the default, the
Company is required to accrue the interest due at 10%. In accordance
with the agreement, the Company has accrued approximately $242,000 in
interest due these note holders at December 31, 2001. The Company has
not obtained waivers from the note holders waiving their right to call
the notes due or the payment of outstanding interest, nor has any note
holder elected to redeem their notes outstanding according to the terms
of the Subscription Agreement. Due to the event of default, the Company
has recorded all notes outstanding as a current liability in the
Balance Sheet.
F-11
The debentures were issued with various stated conversion prices, which
resulted in a beneficial conversion feature since the effective
conversion price was below market at the time of the issuances. The
discount of $3,345,000, which resulted from these transactions, will be
amortized over the life of the debentures. During the current year,
$1,356,000 was amortized to interest expense, due to the passage of
time and conversions into shares of Common Stock.
On June 27, 2001, the Company obtained new financing of $1,000,000,
which is separate from that of March 27, 2001, described above. The
Company issued $1,000,000 in a Convertible Note (or "Debenture") with
an interest rate of 5% to an accredited investor, as defined by
Regulation D rules issued by the Securities and Exchange Commission
under the Securities Act of 1933. As part of the agreement, the Company
issued warrants to purchase 2,646,000 shares of common stock at a
purchase price of $.22 per share. There is a mandatory redemption
requirement at 125% of the unpaid principal balance and unpaid interest
upon the occurrence of default or if the Company is prohibited from
issuing shares of common stock. The Company did not register the shares
issuable upon conversion within 30 days of the closing date which is a
non-registration event pursuant to Section 10.4 of the Subscription
Agreement. In accordance with the Section, the Company has accrued
$115,000 representing liquidation damages due to the note holder as a
result of the non-registration event. Such damages are calculated at an
amount equal to 1% of the principal amount issued per 30 days or part
thereof, and 2% for each 30 days or part thereof, during the pendency
of the non-registration event.
The debenture was issued with various stated conversion prices, which
resulted in a beneficial conversion feature since the effective
conversion price was below market at the time of the issuance. The
discount of $351,000, which resulted from this transaction, will be
amortized over the life of the debenture. During the current year
approximately $36,000 was amortized to interest expense. No notes
issued under this agreement were converted in 2001.
At December 31, 2001, the Company was in default on one of the
covenants of the June 27, 2001 agreement for failure to pay accrued
interest on the notes within 10 days of December 31, 2001. Due to the
default, the Company is required to accrue the interest due at 10%. In
accordance with the agreement, the Company has accrued approximately
$52,000 in interest due the note holders at December 31, 2001. The
Company has not obtained a waiver from the note holder waiving his
right to call the notes due or the payment of the outstanding interest,
nor has the note holder elected to redeem his notes outstanding
according to the terms of the Subscription Agreement. Due to the event
of default, the Company has recorded this note outstanding as a current
liability in the Balance Sheet.
On October 26, 2001, the Company obtained new financing of up to
$10,000,000 with an availability of up to an additional $3,000,000, as
part of a private placement offering, which is separate from that of
March 27, 2001 and June 27, 2001. The Company issued $7,750,000 in
Secured Convertible Notes (or "debentures") with an interest rate of 8%
to accredited investors, as defined by Regulation D rules issued by the
Securities and Exchange Commission under the Securities Act of 1933. In
conjunction with the financing, the Company issued an additional
$667,000 in Secured Convertible Notes as finders fees. As part of the
agreement, the Company issued warrants to purchase 17,714,000 shares of
Common stock. Half of the warrants may be exercised at a purchase price
of $.25 per share. The other 50% may be exercised at $.30 per share.
There is a mandatory redemption requirement at 125% of the unpaid
principal balance and unpaid interest upon the occurrence of default or
if the Company is prohibited from issuing shares of Common stock. The
Company did not register the shares issuable upon conversion within 60
days of the closing date, which is a non-registration event pursuant to
Section 10.4 of the Subscription Agreement. In accordance with the
Section, the Company has accrued $292,000 representing liquidation
damages due to the note holders as a result of the non-registration
event. Such damages are calculated at an amount equal to 1% of the
principal amount issued per 30 days, for the first 30 days or part
thereof, and 2% for each 30 days or part thereof, during the pendency
of the non-registration event. The Company has recorded the debentures
as a current liability.
F-12
In conjunction with the October 26, 2001 private placement, the Company
entered into a Put Agreement with a group of its investors who hold
Convertible Notes and Preferred Stock. Under the Put Agreement, the
Company may sell up to an additional $5,000,000 in Convertible Notes
and warrants. The Company's right to exercise this option expires
October 25, 2002.
The debentures were issued with various stated conversion prices, which
resulted in a beneficial conversion feature since the conversion price
was below market at the time of issuance. The discount of $5,936,000,
which resulted from this transaction, will be amortized over the life
of the debentures. During the current year approximately $210,000 was
amortized to interest expense due to the passage of time. No notes
issued under this agreement were converted in 2001. The Company has
accrued approximately $122,000 in interest at 8% due to the note
holders at December 31, 2001.
As of December 31, 2001, various note holders converted a total of
$2,195,000 of convertible debentures into 14,961,000 shares of Class A
Common Stock.
Contractual future repayments of convertible debentures as of December
31, 2001 are as follows:
2002 $ 462,000
2003 --
2004 2,879,000
2005 --
2006 9,417,000
--------------
12,758,000
Less discount on convertible debentures (11,518,000)
---------------
Convertible debentures, net $ 1,240,000
===============
However, due to the events of default and non-registration events
previously noted, all notes outstanding have been recorded as a current
liability.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consist of the following:
Building $ 13,000,000
Office furniture and equipment 1,228,000
Machinery and equipment 1,616,000
---------------
15,844,000
Accumulated depreciation and amortization (3,685,000)
---------------
Property, plant, and equipment, net $ 12,159,000
===============
The Company purchased computer equipment amounting to $814,000 with a
note payable and stated interest at 15.45% which is payable monthly.
Principal payments amount to $68,000 a month through June 2002.
As described in Note 9, the building is held under a capital lease. In
addition, included in office furniture and equipment and machinery and
equipment are assets acquired under capital leases in the amount of
$306,000 and $39,000, respectively, net of $286,000 and $12,000 of
accumulated depreciation, respectively. The Company did not capitalize
any interest during the year ended December 31, 2001.
F-13
6. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial statement purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax
liabilities and assets as of December 31, 2001 are as follows:
Deferred tax assets:
Federal net operating loss $ 26,407,000
State net operating loss 2,797,000
Research & development credits 1,978,000
Other 189,000
-------------
Total deferred tax assets 31,371,000
Valuation allowance (31,371,000)
-------------
$ --
=============
At December 31, 2001, the Company had Federal and California state net
operating loss ("NOL") carryforwards of approximately $76,774,000 and
$29,240,000, respectively. Federal NOLs could, if unused, expire in
varying amounts in the years 2012 through 2021. California NOLs, if
unused, could expire in varying amounts from 2002 through 2011.
At December 31, 2001, the Company had Federal and California research
and development ("R&D") credit carryforwards of approximately
$1,356,000 and $542,000, respectively. The Federal R&D credit
carryforwards will expire beginning in 2004. The California R&D credit
carryforwards can be carried forward indefinitely.
The provision for income taxes are as follows:
December 31, December 31,
2000 2001
------------ ------------
Deferred:
Federal $(3,834,000) $(6,950,000)
State (416,000) (987,000)
------------ ------------
Total deferred (4,250,000) (7,937,000)
Increase in valuation allowance 4,250,000 7,937,000
------------ ------------
$ -- $ --
============ ============
Utilization of the net operating loss and tax credit carryforwards will
be subject to an annual limitation if a change in the Company's
ownership should occur as defined by Section 382 and Section 383 of the
Internal Revenue Code.
As a result of the Company's operating losses, no income tax provision
has been recorded in 2000 and 2001.
7. LONG-TERM INVESTMENTS
At December 31, 2001, all long-term investments were classified as
available-for-sale and were U.S. government debt securities. These
investments were recorded at fair value. Unrealized losses relating to
the securities totaled $29,000 during the year ended December 31, 2001,
and have been included in Accumulated Other Comprehensive Loss on the
face of the Statement of Stockholders' Deficiency.
F-14
The contractual maturities of debt securities at December 31, 2001 are
as follows:
Fair Value
------------
Due in one year or less $ 1,363,000
Due after one through five years --
Due five through 10 years 136,000
Due after 10 years 425,000
------------
$ 1,924,000
============
8. RELATED PARTY TRANSACTIONS
In 1995 and through August 1996, an officer of the Company made loans
to the Company in the aggregate principal amount of $562,000 bearing
interest at 12% per annum. In May 1996, $336,000 of such loans were
converted into 187,118 shares of Class B Common Stock and 374,236
shares each of Class E-1 and Class E-2 Common Stock. The remaining
$226,000 principal amount of these loans, together with accrued
interest of $36,000, was repaid with the proceeds of bridge notes.
On December 23, 1993, the Company entered into an agreement with a
stockholder to convert advances from such stockholder aggregating
$10,478,000 at that date into 584,074 shares of Class B Common Stock,
and 1,168,148 shares each of Class E-1 and Class E-2 Common Stock. The
Company issued these shares in June 1996. Interest expense was not
recorded on these advances subsequent to December 23, 1993 due to the
intent to convert the advances into stockholders' equity. In 1994, the
stockholder provided additional advances aggregating $250,000, which
were converted into 13,937 shares of Class B Common Stock and 27,873
shares each of Class E-1 and Class E-2 Common Stock in June 1996. Based
on prevailing market rates, imputed interest of $11,000 in 1996, and
$810,000 for the period from January 26, 1990 (inception) to December
31, 1996 on the advances was charged to expense and credited to
additional paid-in capital.
In May 1996, the Company entered into an employment agreement with the
Company's President, which extends to April 30, 2004 and provides for
an annual salary of $200,000. If the employment agreement is terminated
by the Company without cause, the President may be entitled to receive
up to eighteen months' salary as severance payment. In consideration of
the termination of a previous employment agreement the Company issued
577,823, 1,155,647 and 1,155,647 shares of Class B, Class E-1 and Class
E-2 common stock, respectively, to the Company's President. In February
2002, the Company entered into a severance agreement with the Company's
President who resigned effective January 8, 2002. Based upon the terms
of the severance package, the President will receive a total of
$300,000 paid out through 2004.
Also in May 1996, an officer of the Company was awarded 17,460 shares
of Class B Common Stock and 34,919 shares each of Class E-1 and Class
E-2 Common Stock for services rendered. Compensation cost of $31,000
was charged to expense in 1996 based on the fair value of the stock
awarded by reference to an independent appraisal.
In March 2001, we entered into a consulting agreement to issue a 6%
nondilutable interest in the Company to a group of consultants, three
of whom later became members of our Board of Directors. We issued
845,678 shares of Class A Common Stock at that time with a fair value
of $344,000 in exchange for consulting services provided. In October
2001, this agreement was amended to increase the nondilutable interest
in the Company to be issued to the consultants to 12%.
In addition, one member of the Board of Directors is also an investor
in one of the convertible debenture agreements discussed in Note 4, and
at December 31, 2001 held notes in the principal amount of $360,000.
F-15
9. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company is generally subject to
claims, complaints, and legal actions. At December 31, 2001, management
believes that the Company is not a party to any action which would have
a material impact on its financial condition, operations, or cash
flows.
The Company leases approximately 10 acres of land located on the Long
Beach Airport in Long Beach, California. The lease commenced on January
14, 1998 and has a term of 30 years with an option to renew for an
additional 10 year term. The lease also contains options to lease other
airport properties. The lease contains incremental increases which
escalate the monthly rent to approximately $15,600 after 5 years. The
aggregate minimum payments under the lease have been included in the
table below.
Pursuant to an Agreement dated May 19, 1999, the Company sold its
leasehold interest in real property located at 3205 Lakewood Boulevard,
Long Beach, California, together with the manufacturing hangar facility
(approximately 205,000 square feet) and finished office space
(approximately 22,000 square feet) owned by the Company. The cash
purchase price was $9,800,000. As part of this transaction, the Company
entered into an agreement to sublease the land and lease the
manufacturing hanger facility and finished office space to the Company
for a term of 18 years, plus an option to extend the lease for an
additional 10 years. The $246,000 deferred gain on the sale of the
facility is being amortized over the 18 year lease term.
Effective January 1, 2001, the lessor of the building amended the
payment terms of the lease to include escalating payments through June
1, 2008, after which the payments escalate according to Consumer Price
Index (CPI) increases. As a result of the change in payment terms, the
cost of the building and the capital lease obligation were increased by
$3,200,000, increasing the cost value of the building to $13,000,000,
which approximated fair value at the time of the amendment. As the fair
value was less than the present value of the amended future minimum
lease payments, the total amount recorded including this adjustment was
limited to the fair value of the building, as required by SFAS No. 13,
ACCOUNTING FOR LEASES.
During 2000, the Company entered into a capital lease agreement for a
new computer system. As required under the agreement, the Company
purchased certificates of deposit amounting to $405,000. These
certificates are being used as collateral under the lease, and as such,
have been recorded as restricted cash in the accompanying financial
statements.
Future minimum lease payments applicable to non-cancelable operating
leases and capital leases as of December 31, 2001, are as follows:
CAPITAL OPERATING
LEASES LEASES
------------ ------------
2002 $ 1,636,000 $ 189,000
2003 1,744,000 187,000
2004 1,882,000 187,000
2005 2,051,000 187,000
2006 2,298,000 187,000
Thereafter 28,407,000 3,948,000
------------ ------------
Net future minimum lease payments 38,018,000 $ 4,885,000
============
Amount representing interest (25,010,000)
------------
Present value of minimum lease payments 13,008,000
Less amount representing the current portion (158,000)
------------
$12,850,000
============
F-16
The Company incurred rent expense of $180,000 and $173,000, for the
years ended December 31, 2000 and 2001, respectively.
10. STOCKHOLDERS' EQUITY
Upon formation of the Company, an aircraft prototype and related
proprietary technology were contributed by Aerodynamics and Structures,
Inc. ("ASI") in exchange for 2,500,764 of the Company's common shares
with a fair value of $250,000. In connection with this exchange, the
Company also assumed ASI's liabilities of approximately $400,000. Three
other individuals contributed technical information in exchange for
1,113,740 of the Company's common shares with a fair value of $111,000.
Such technology and prototype acquired were immediately expensed as
in-process research and development. Finally, certain investors
contributed $7,500,000 in cash in exchange for 7,500,000 shares of
convertible preferred stock of the Company. ASI was subsequently
liquidated and its sole asset, investment in the Company's common
shares, was distributed to ASI's stockholders. Upon reincorporation of
the Company, the Company's aforementioned common and preferred shares
were converted into approximately 619,588, 1,239,177 and 1,239,177
shares, respectively, of Class B, Class E-1 and Class E-2 Common Stock.
During 1996 the Company successfully completed its initial public
offering of 6,900,000 units including exercise of the over allotment
option. Each unit sold is composed of one share of Class A common
stock, one Class A warrant and one Class B warrant. The net proceeds of
the offering of $30,411,000 were used to finance the continued
development, manufacture and marketing of its product to achieve
commercial viability. Additionally, in February of 1998 a shareholder
of the Company converted 99,676 shares of Class B Common Stock to
99,676 shares of Class A Common Stock. The conversion resulted in an
increase in Class A Common Stock to 6,999,676 and a decrease in the
number of outstanding shares of Class B Common Stock to 1,900,324.
The rights and privileges of holders of Class A, Class B, Class E-1 and
Class E-2 Common Stock are substantially the same on a share-for-share
basis, except that: (i) the holder of each outstanding share of Class A
Common Stock is entitled to one vote and the holder of each outstanding
share of Class B, Class E-1 and Class E-2 Common Stock is entitled to
five votes; and (ii) Class B Common Stock cannot be transferred or sold
for thirteen months following the effective date of the initial public
offering, after which time the Class B Common Stock may be converted at
any time at the option of the holder into one share of Class A Common
Stock.
All shares of Class E-1 and Class E-2 Common Stock ("Performance
Shares") are not transferable or assignable and may be converted into
shares of Class B Common Stock in the event income before provision for
income taxes, exclusive of any extraordinary earnings or losses,
reaches certain targets over the next seven years, or if the market
price of the Class A Common Stock reaches specified levels over the
next three years. With respect to targeted earnings, Class E-1 Common
Stock shares may be converted if pretax income exceeds $45.0 million in
2002 and $56.0 million in 2003. Class E-2 Common Stock shares may be
converted if pretax income exceeds, $56.3 million in 2002 or $69.5
million in 2003. With respect to market price levels, the Class E-1
Common Stock shares may be converted if, commencing 18 months after
December 3, 1996 and ending 36 months thereafter, the bid price of the
Company's Class A Common Stock averages $18.50 per share for 30
consecutive business days. Class E-2 Common Stock shares may be
converted if commencing 18 months after December 3, 1996 and ending 36
months thereafter, the bid price of the Company's Class A Common Stock
averages in excess of $23.00 for 30 consecutive business days. All
Performance Shares that have not been converted by March 31, 2004 may
be redeemed by the Company for $.01 per share. For accounting purposes,
the Performance Shares are treated in a manner similar to a variable
stock option award. As a consequence, a compensation charge will be
recorded in an amount equal to the then fair value of any Performance
Shares that are ultimately converted into Class B Common Stock.
F-17
Upon the closing of the Initial Public Offering, the Company granted to
the Underwriter A Unit Purchase Option to purchase up to 600,000 Units
and previously issued bridge warrants were converted into one Class A
Warrant ("Public Warrant") which is identical in all respects to the
Class A Warrant. The fair value of the Bridge Warrants ($473,000),
together with the cost of issuance (approximately $805,000), has been
treated as additional interest expense over the term of the Bridge
Notes. The Units issuable upon exercise of the Unit Purchase Option
will, when so issued, be identical to the Units. The Unit Purchase
Option cannot be transferred, sold, assigned or hypothecated for three
years, except to any officer of the Underwriter or member of the
selling group or their officers. The Unit Purchase Option is
exercisable during the two-year period commencing three years from
December 6, 1996 at an exercise price of $6.50 per Unit (130% of the
initial public offering price) subject to adjustment under certain
circumstances. The holders of the Unit Purchase Option have certain
demand and piggyback registration rights.
The Class A Warrants issued in connection with the Company's initial
public offering in 1996, entitle the holder to purchase one share of
Class A Common Stock and one Class B Warrant. Each Class B Warrant
entitles the holder to purchase one share of Class A Common Stock.
Class A Warrants and Class B Warrants may be exercised at an exercise
price of $6.50 and $8.75, respectively, at anytime. The warrants
originally expired on December 3, 2001, but have been extended through
May 31, 2002. Currently Class A Warrants are subject to redemption by
the Company, upon 30 days written notice, at a price of $.05 per
Warrant, if the average closing bid price of the Class A Common Stock
for any 30 consecutive trading days ending within 15 days of the date
on which the notice of redemption is given shall have exceeded $12.00
per share. Currently Class B Warrants are subject to redemption by the
Company upon 30 days' written notice, at a price of $.05 per warrant,
if the average closing bid price of the Class A Common Stock for any 30
consecutive trading days ending within 15 days of the date on which the
notice of redemption is given shall exceed $15.00 per share.
PREFERRED STOCK
As of December 31, 2001, the Company received $8,265,000 in net cash
proceeds related to a preferred stock agreement to issue up to 100,000
shares of 5% Cumulative Convertible Series A Preferred Stock
("Preferred Stock") with a stated value of $100 per share and Common
Stock Purchase Warrants to purchase Class A Common Stock, for the
aggregated purchase price of $10 million. The Company issued 91,085
shares of Preferred Stock with a stated value of $9,108,500 and
detachable warrants to purchase 1,082,000 shares of common stock and
paid $843,000 in commissions and legal fees. Of the total amount issued
to date, 11,285 shares of Preferred Stock with a stated value of
$1,128,500, and detachable warrants to purchase 128,310 shares of
common stock were issued during the year ended December 31, 2001. The
remaining $891,500 in Preferred Stock funding will not occur until
certain criteria have been met.
Additionally, as consideration for the transaction, placement warrants
to purchase up to 1,688,000 shares of Class A Common Stock were issued.
Of the amount issued to date, 926,000 were issued in the year ended
December 31, 2001. Fair values of $1,231,000 and $987,000 for the
detachable warrants and the placement warrants, respectively, were
included in stockholders' deficiency and were netted as a discount to
the Preferred Stock. The warrants are exercisable in installments and
the terms for the placement warrants are similar to the terms of the
detachable warrants issued with the Preferred Stock. The fair value for
these warrants was estimated at the dates of grant using a
Black-Scholes pricing model with the following weighted-average
assumptions: risk-free interest rates of 4.68% to 6.43%; dividend
yields of 0%; a volatility factor of .566 to .915 and an expected life
of the warrants of 3 years.
The Preferred Stock was issued with various conversion prices. This
resulted in a beneficial conversion feature since the effective
conversion price was below market at the time of the issuance. The
discount on the Preferred Stock of $536,000 was immediately amortized
to Accumulated Deficit, as the preferred stockholders were able to
convert to common stock immediately upon issuance of the Preferred
Stock. Of the total amount amortized, $194,000 was amortized in the
year ended December 31, 2001.
F-18
Holders of the Preferred Stock are entitled to receive cash dividends,
payable quarterly and have preferential liquidation rights above all
other issuances of Common Stock for an amount equal to the stated
value. The Preferred Stock and unpaid dividends are convertible into
shares of Common Stock equal to an amount determined by the market
value at the date of close of the common stock, adjusted for changes in
the market price prior to the conversion. The preferred stockholder
does not have voting rights. As of December 31, 2001, the Company has
dividends in arrears for the Preferred Stock totaling $336,000 or $7.20
per share.
As of December 31, 2001, various preferred stockholders converted a
total of 44,000 shares plus dividends in arrears into 16,825,000 shares
of Class A Common Stock. No warrants have been exercised as of December
31, 2001.
EQUITY LINE OF CREDIT
On August 15, 2000, the Company signed a Private Equity Line of Credit
Agreement ("Equity Line") to sell up to $20,000,000 of Common Stock
over the course of two years. This Equity Line enables the Company to
request, at the Company's sole discretion, that the investors purchase
certain amounts of shares every 15 days at a price equal to 92% or 93%
of the market price. Each request will be for a minimum of $200,000 and
subject to a maximum of $1,500,000. Additional drawings on this Equity
Line are dependent upon stock market conditions. The Company sold a
total of 5,707,000 shares under the Equity Agreements with a total net
proceeds of $2,393,000, of which 4,455,000 shares under the Equity
Agreement were sold for net cash proceeds of $1,172,000 as of December
31, 2001.
In connection with the Equity Line transactions, warrants to purchase
4,269,000 shares of Common Stock over the next three years, at a stock
price as defined in each agreement, were issued. The fair value related
to these warrants of $632,000 has been included in stockholders' equity
and no warrants have been exercised as of December 31, 2001. The fair
value of these warrants was estimated on the date of issuance using a
Black-Scholes pricing model with the following weighted average
assumptions:
Transaction Risk-Free Dividend Volatility Expected
Date Exercise Price Interest Yield Factor Life
----------- -------------- -------- -------- ---------- --------
August 15, 2000 $3.15 6.12% 0% .855 3
May 1, 2001 $.32-$1.20 4.68% 0% .915 3
The Company has reserved approximately 182,000,000 shares of Class A
Common Stock for future issuance for the following conversions:
1,900,000 shares issuable upon the conversion of Class B Common Stock
currently outstanding; 8,000,000 shares issuable upon the conversion of
Class E Common Stock; 27,700,000 shares issuable upon the exercise of
purchase warrants; 4,000,000 shares issuable under the Stock Option
Plan, 20,282,000 shares issuable upon conversion of the outstanding
Preferred Stock, 33,386,000 shares issuable upon the exercise of the
detachable warrants and placements warrants, 4,269,000 shares issuable
upon the exercise or warrants issued in connection with the Equity Line
and 82,538,000 shares issuable upon conversion of the outstanding
Convertible Debentures.
F-19
11. STOCK OPTIONS
In July 1996, the Company's Board of Directors approved the Stock
Option Plan (the "Plan"). The Plan provides for the grant of incentive
and non-qualified stock options to certain employees, officers,
directors, consultants, and agents of the Company. Under the 1996 Stock
Option Plan, the Company may grant options with respect to a total of
500,000 shares of Class A Common Stock. Subsequent Stock Option Plans
were approved in 1998 and 2000, authorizing the Company to grant
additional options for up to 2,000,000 shares of Class A Common Stock.
Options under the 1996, 1998 and 2000 Plans are to be granted at not
less than fair market value, vest in equal annual installments over
five years and may be exercised for a period of one to 10 years as
determined by the Board of Directors.
In April 2001, the Board of Directors approved the 2001 Stock Option
Plan (the "2001 Plan"). Under the 2001 Plan, the Company may grant
options with respect to a total of 1,500,000 shares of Class A Common
Stock. Options under the 2001 Plan are to be granted at not less than
fair market value, vest in equal annual installments over four years
and may be exercised for a period of one to 10 years as determined by
the Board of Directors.
Transactions under the Stock Option Plans during the year ended
December 31, 2000 and 2001 are summarized as follows:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------------ ------------
Outstanding at December 31, 1999 588,000 $ 5.00
Granted -- --
Exercised -- --
Canceled (74,000) 5.00
------------
Outstanding at December 31, 2000 514,000 5.00
Granted 878,000 .50
Exercised -- --
Canceled (70,000) 2.43
------------ ------------
Outstanding at December 31, 2001 1,322,000 $ 2.15
============ ============
The weighted average fair value of options granted during 2001 was
$0.23, per option. The weighted average exercise price for 2000 and
2001 was $5.00 and $0.50, respectively. The weighted average remaining
contractual life of options outstanding is 7.06 years and 8.06 years
for 2000 and 2001, respectively. As of December 31, 2000 and 2001,
268,000 and 570,500 options were exercisable at a weighted average
exercise price of $5.00 per option. At December 31, 2001, options to
purchase 2,297,000 shares of Class A Common Stock were available for
future grants under the 1996, 1998, 2000 and 2001 Plans.
If the Company had elected to recognize compensation cost based on the
fair value of the options granted at the grant date as prescribed by
SFAS No. 123, net loss and net loss per share would have been increased
to the pro forma amounts shown below:
Years Ended December 31,
2000 2001
------------- -------------
Pro forma net loss $(10,936,000) $(21,365,000)
Pro forma net loss per share $(1.24) $(0.71)
F-20
The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following
weighted-average assumptions: risk-free interest rates of 6.81% and
4.89% for 2000 and 2001, respectively, dividend yields of 0% for 2000
and 2001; volatility factors of the expected market price of the
Company's common stock of .863 and .915 for 2000 and 2001,
respectively, and a weighted average expected life of the option of 10
years and 4 years for 2000 and 2001, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of employee stock options.
12. NON-RECURRING EXPENSES
During the fourth quarter of fiscal 2001, the Company recorded
approximately $3,823,000 of non-recurring expenses. These expenses were
primarily the result of: a write-off of capitalized tooling costs of
approximately $2,082,000; a write-off of capitalized engineering
software of approximately $723,000; and an accrual of approximately
$1,018,000 related to commitments to purchase special orders from
certain vendors. The Company believes the capitalized tooling and
engineering software have no future use to the Company due to the
change in the Company's business strategy and the re-design of its
major product, the JETCRUZER 500. The accrual to vendors represents
costs incurred by vendors in the production of items specifically
related to the JETCRUZER 500 with no alternative saleable value to the
vendors.
13. INDUSTRIAL DEVELOPMENT BONDS
On August 5, 1997, the Company entered into a loan agreement in
connection with industrial development bonds (IDB) issued by the
California Economic Development Financing Authority. The Company has
established in the trustee's favor a bank letter of credit for the
principle amount of $8,500,000 plus 45 days accrued interest on the
bonds, which is secured by $8,500,000 of Company restricted cash. The
bonds mature August 1, 2027 at which time all outstanding amounts
become due and payable. The Company has used the proceeds for the IDBs
to finance the construction and installation of the 200,000 square foot
manufacturing facility and related manufacturing equipment which the
Company moved into on November 16, 1998. On June 1, 1999, the Company
retired all the industrial development bonds using the restricted cash
previously held as security for the IDB.
14. BENEFIT PLAN
The Company has a 401(k) savings plan with a profit sharing provision,
covering substantially all full time employees. The Company may make
discretionary contributions to the Plan as authorized by the Board of
Directors. The Company has not made any profit sharing contributions to
the Plan.
15. PER SHARE INFORMATION
The Company calculates basic net loss per share as required by SFAS No.
128, "EARNINGS PER SHARE." Basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities, and
is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period.
The following table sets forth the computation of basic loss per share:
F-21
2000 2001
------------- -------------
Numerator
Loss before extraordinary item $(10,715,000) $(21,164,000)
Amortization of Discount on Preferred Stock (620,000) (361,000)
Dividend in Arrears (246,000) (336,000)
------------- -------------
Numerator for basic loss per share $(11,581,000) $(21,861,000)
============= =============
Denominator
Weighted average shares of Class B Shares 1,900,000 1,900,000
Weighted average shares of Class A Shares 7,268,000 28,110,000
------------- -------------
Denominator for basic loss per share 9,168,000 30,010,000
------------- -------------
Basic loss per share $(1.26) $(0.73)
============= =============
There is no difference between the loss per common share amounts
computed for basic and dilutive purposes because the impact of
convertible debt and preferred stock, options and warrants would be
anti-dilutive.
16. SUBSEQUENT EVENTS
On February 6, 2002 the U.S. Bankruptcy Court in San Antonio, Texas,
approved an operating agreement, which allows the Company to manage
Mooney while a plan of reorganization was prepared for approval. Mooney
has operated under the protection of Chapter 11 bankruptcy since July
2001.
On February 8, 2002, the Company purchased Congress Financial
Corporation's position (the "Congress Position") as senior secured
creditor for Mooney. Under the terms of the Assignment and Assumption
Agreement, the purchase price paid by the Company in connection with
the acquisition of the Congress Position was $8,000,000 with $3,500,000
paid in cash and $4,500,000 payable in secured notes. Each note is
secured by substantially all the assets acquired from Congress
Corporation. As additional security for the Company's compliance with
the fulfillment of its obligations pursuant to the Assignment and
Assumption Agreement and the acquisition notes, the Company delivered
to Congress Corporation a Limited Recourse Secured Promissory Note for
$5,700,000. This note is a contingent note, payable only in the event
that the Company defaults under the terms of the original acquisition
notes.
On March 18, 2002, the bankruptcy courts approved the sale of Mooney's
assets to the Company, which is expected to close in April 2002. Mooney
produces top of the line, single engine piston airplanes including the
Eagle, the Ovation2, and the Bravo, which are the performance leaders
in the four-passenger single engine aircraft market. For over 50 years,
the Company has produced high performance piston aircraft, which are
considered by many to be the "best of breed" in the owner-flown
aircraft market. There are more than 10,000 Mooney aircraft in
operation around the world.
Additionally, the Company has entered into discussions with Century
Aerospace Corporation concerning acquisition of the rights to
manufacture the Century Jet, one of the exciting new entrants in the
"micro-jet" market. The Century Jet is a revolutionary new business jet
that could be priced more than $1,000,000 below the current least
expensive business jet, setting a new benchmark for low cost business
travel by private aircraft and providing a cost effective alternative
to airline travel for small and medium-sized businesses.
On February 27, 2002, the Company completed three financing
transactions for total proceeds of $5,734,000 and incurred financing
costs of $184,000. The net proceeds of these transactions were used to
acquire the Congress Position as secured creditor for Mooney Aircraft
and to fund current operations.
F-22
The Company issued $2,250,000 in 8% Secured Convertible Notes under the
October 26, 2001 placement offering in which $3,000,000 was available
to the Company for additional financing. The Notes are convertible
after 120 days into shares of Class A Common Stock at a conversion
price of $.35 or 70% of the average of the three lowest closing bid
prices for the Company's Common Stock for the thirty days prior to
conversion. The maturity date of the Notes is October 26, 2006.
Attached to the Notes were warrants to purchase up to 4,500,000 shares
of the Company's Class A Common Stock. The first 50% of the warrants
may be exercised after 45 days at a price of $.25 whereas the remaining
50% of the warrants may be exercised at $.30. The expiration date of
the warrants is January 30, 2007.
The Company issued $1,329,000 in 8% Unsecured Convertible Notes as part
of the October 26, 2001 Put Agreement in which the Company had the
option to sell up to an additional $5,000,000 in Convertible Notes. The
Notes are convertible after 120 days into shares of Class A Common
Stock under the same terms as the October 26, 2001 placement offering
described above. The maturity date of the notes is October 26, 2006.
Attached to the Notes were warrants to purchase 2,658,000 shares of the
Company's Class A Common Stock. The warrants may be exercised under the
same terms as the warrants issued in conjunction with the October 26,
2001 placement offering described above.
The Company issued $2,155,000 in 8% Unsecured Convertible Notes as part
of a new placement offering dated January 30, 2002. The Notes are
convertible after 120 days into shares of Class A Common Stock under
the same terms of the October 26, 2001 placement offering described
above. The maturity date of the notes is October 26, 2006. Attached to
the Notes were warrants to purchase 4,310,000 shares of the Company's
Class A Common Stock. The warrants may be exercised under the same
terms as the warrants issued in conjunction with the October 26, 2001
placement.
On March 26, 2002, the Company issued $1,450,000 in 8% Unsecured
Convertible Notes in a subsequent closing that was part of the new
private placement dated January 30, 2002. The notes are convertible
after 120 days into shares of Class A Common Stock under the same terms
as the October 26, 2001 private placement. The maturity date of the
notes is October 26, 2006. Attached to the notes were warrants to
purchase 2,900,000 shares of our Class A Common Stock. The warrants may
be exercised under the same terms as the warrants issued in conjunction
with the October 26, 2001 private placement.
F-23
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
F-24
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.
F-25
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
F-26a
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
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
F-26b
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
====================================================================================================
F-27a
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
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
F-27b
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
====================================================================================================
F-28a
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
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
F-28b
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
F-29
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
F-30
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
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 accounting principles generally accepted
in the United States have been 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 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
concurrence of the following: (1) reduction of product-liability exposure as a
consequence of the passage of General Aviation Revitalization Act of 1994, (2)
the availability of several top of the line general aviation product lines as a
result of the recent recession and changes in strategic direction by several
general aviation aircraft manufacturers, and (3) deteriorating comfort and
convenience of airline travel.
To date, the Company has generated minimal sales revenue and no
substantial revenue is projected until the Company begins commercial production
of its product and regains market acceptance of the aircraft at profitable
selling prices and volumes. The Company incurred program development costs to
date of approximately $48,152,000 and has recorded a cumulative net loss of
$(94,768,000). The Company's management team has been developing a financial
plan to address its working capital requirements and believes that if executed
successfully, the Plan will substantially improve the Company's ability to meet
its working capital requirements throughout the current year. However, the
current working capital and financing obtained subsequent to June 30, 2002, is
insufficient to meet the Company's needs beyond the fourth quarter of fiscal
2002. These conditions raise substantial doubt as to the Company's ability to
continue as a going concern. These financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
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 Position") 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 acquisition 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.
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 Ovation2, 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.
F-31
MACorp's assets will be held by a newly formed wholly owned subsidiary,
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 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 supersedes SFAS No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF. SFAS No. 144 addresses financial accounting and reporting for
the impairment of long-lived assets and for long-lived assets to be disposed of.
However, SFAS No. 144 retains certain fundamental provisions of SFAS No. 121
including recognition and measurement of the impairment of long-lived assets to
be held and used; and measurement of long-lived assets to be disposed of by
sale. SFAS No. 144 is effective for fiscal years beginning after December 15,
2001. The Company 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.
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% percent 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%
percent per annum in excess of the Prime Rate with principal payments of
$208,000, and interest 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% percent 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.
F-32
5. CONVERTIBLE DEBENTURES
On March 27, 2001, the Company obtained new financing of up to
$5,000,000, with an availability of up to an additional $3,000,000. The
additional amount becomes available after certain criteria have been met, as
defined in the agreement. The Company issued $4,100,000 in Secured Convertible
Notes ("Notes" or "Debentures") with an interest rate of 5% to accredited
investors, as defined by Regulation D issued by the Securities and Exchange
Commission under the Securities Act of 1933. On July 25, 2001, the Company
issued an additional $1,000,000 in Notes under this agreement. In conjunction
with the financing, the Company issued an additional $410,000 in Secured
Convertible Notes as finders fees. As part of the agreement the Company also
issued warrants to purchase 10,254,000 shares of common stock at an exercise
price ranging from approximately $.24 to $.45 per share. The Company filed a
proxy statement and Form S-3 Registration Statement as required by the terms of
the agreement. There is a mandatory redemption requirement at 125% of the unpaid
principal balance and unpaid interest upon the occurrence of default or if we
are prohibited from issuing shares of common stock. Additionally, the Company
may put the additional notes to the note holders upon meeting certain covenants
related to the availability of trading of the stock, trading volume and market
price and other milestones.
The March 27, 2001 Debentures were issued with various stated
conversion prices, all of which were below market at the time of issuance. The
discount of $3,345,000 which resulted from these transactions, will be amortized
over the life of the Debentures. For the 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 5% 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 recorded as a
long-term liability.
The June 27, 2001 debenture was issued with a 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.
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.
F-33
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 that 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.
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 in Note 1 and to fund current operations. In the first of
the three financing transactions, the Company issued $2,250,000 in 8% Secured
Convertible Notes under the October 26, 2001, private placement in which
$3,000,000 was available to us for additional financing. In conjunction with the
financing, the Company issued an additional $225,000 in Unsecured Convertible
Notes as finder's fees. The notes are convertible after 120 days into shares of
common stock at a conversion price of $.35 or 70% of the average of the three
lowest closing bid prices for our common stock for the thirty days prior to
conversion. The maturity date of the notes is October 26, 2006 and interest is
due on September 30, 2002 and semi-annually thereafter. Attached to the notes
were warrants to purchase 5,143,000 shares of common stock. The first 50% of the
warrants may be exercised after 45 days at a price of $.25 per share and the
remaining 50% may be exercised at $.30 per share. The warrants may be exercised
under the same terms as the warrants issued in conjunction with the October 26,
2001, private placement.
In the second of the three financing transactions, the Company issued
$1,329,000 in 8% Unsecured Convertible Notes as part of the October 26, 2001 Put
Agreement in which 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.
F-34
The February 27, 2002 debentures were issued with various stated
conversion prices, which resulted in a beneficial conversion feature since the
conversion price was below market at the time of issuance. The resulting
discount of $3,385,000 is being amortized over the life of the debentures. As of
June 30, 2002, approximately $124,000 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.
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 thereafter. Attached to the notes were warrants to purchase
3,314,000 shares of Class A Common Stock. The warrants may be exercised under
the same terms as the warrants issued in conjunction with the October 26, 2001
private placement.
The March 26, 2002 debentures were issued with stated conversion
prices, which resulted in a beneficial conversion feature since the conversion
price was below market at the time of issuance. The resulting discount of
$988,000 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.
F-35
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.
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 thereafter. 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 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 of 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.
F-36
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.
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.
F-37
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.
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 stockholders 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.
F-38
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, the Company had 5,707,000 shares outstanding under the Equity
Agreements with a total net proceeds of $2,393,000. No shares under the equity
line were sold during the six-month period ended June 30, 2002.
In connection with the Equity Line transactions, warrants to purchase
4,269,000 shares of common stock over the next three years, at a stock price as
defined in each agreement, were issued. The fair value related to these warrants
of $632,000 has been included in stockholders' deficiency and no warrants have
been exercised as of 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 a mutually agreed upon basis. The Company has
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.
F-39
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 proforma
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 warrants maybe exercised after 45 days at a price of
$.25 per share and the remaining may be exercised at $0.30 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.
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 warrants may be
exercised after 45 days 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 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 or 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.
On October 1, 2002, the Board of Directors approved a resolution to
close the Company's facility in Long Beach, California. Since the Company is
obligated under a lease for the facility through 2017, it will make efforts to
sublease the facility. These actions may result in the possible write-off of all
or a portion of the building cost. The planned closure will also include the
termination of all employees at the facility, with the exception of officers,
and a small marketing, accounting, administrative and engineering staff. The
Company has not yet determined the impact of this decision on the consolidated
financial statements.
F-40
Report of Independent Auditors
Board of Directors and Responsible Person
Mooney Aircraft Corporation
We have audited the accompanying balance sheets of Mooney Aircraft Corporation
(the "Corporation") as of December 31, 2001 and 2000, and the related statements
of operations, stockholders' deficit, and cash flows for the years then ended.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mooney Aircraft Corporation at
December 31, 2001 and 2000, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States.
The accompanying financial statements have been prepared assuming that Mooney
Aircraft Corporation will continue as a going concern. As more fully described
in Note 2, the Corporation has incurred operating losses and has a working
capital deficiency. In addition, the Corporation has historically not complied
with certain covenants of bank loan agreements. The Corporation has also filed a
voluntary petition for relief under Chapter 11 of Title 11 of the United States
Code in United States Bankruptcy Court for the Western District of Texas. These
conditions raise substantial doubt about the Corporation's ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 2. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
/s/ Ernst & Young LLP
June 20, 2002
F-41
Mooney Aircraft Corporation (Debtor-in-Possession)
Balance Sheets
December 31
2001 2000
----------------------------------------------
Assets
Current assets:
Cash $ 74,306 $ 762,408
Accounts receivable, net of allowance for
doubtful accounts of $173,446 and $25,000 at
December 31, 2001 and 2000, respectively 42,590 153,670
Inventories, net of obsolescence reserve of
$1,475,000 and $875,000 at December 31, 2001 and
2000, respectively 5,845,382 9,072,358
Other current assets 334,996 358,902
----------------------------------------------
Total current assets 6,297,274 10,347,338
Property, plant, and equipment:
Land and land improvements 186,043 186,043
Building and building improvements 1,821,789 1,821,789
Machinery and equipment 4,356,879 4,444,059
Furniture and fixtures 450,005 566,638
Tooling 4,327,784 4,289,401
Computer equipment 1,897,152 1,916,608
Experimental aircraft 229,899 229,899
----------------------------------------------
13,269,551 13,454,437
Less accumulated depreciation and amortization 10,519,398 9,495,031
----------------------------------------------
Net property, plant, and equipment 2,750,153 3,959,406
----------------------------------------------
Total assets $ 9,047,427 $ 14,306,744
==============================================
F-42
December 31
2001 2000
-----------------------------------------------
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 479,208 $ 5,192,853
Payroll and related liabilities - 1,057,683
Accrued airworthiness directive - 340,000
Current maturities of capital leases 110,266 199,133
Revolving prepetition credit facility - 6,047,714
Current maturities of pre-petition notes payable - 5,383,058
Revolving debtor-in-possession credit facility 2,705,454 -
Other accrued liabilities 839,334 5,371,580
-----------------------------------------------
Total current liabilities 4,134,262 23,592,021
Other liabilities:
Liabilities subject to settlement under
reorganization proceedings 20,975,266 -
Accrued environmental remediation 525,579 525,579
Other liabilities - 501,487
-----------------------------------------------
21,500,845 1,027,066
Long-term debt, net of current portion:
Capital leases - 176,036
Notes payable to stockholders - 1,000,000
-----------------------------------------------
- 1,176,036
Stockholders' deficit:
Common stock, no par value, 3,000,000 shares
authorized; 1,100,000 shares in 2001 and
1,000,000 shares in 2000 issued and outstanding 5,880,100 4,880,100
Additional paid-in capital 23,621,272 23,621,272
Accumulated deficit (46,089,052) (39,989,751)
-----------------------------------------------
Total stockholders' deficit (16,587,680) (11,488,379)
-----------------------------------------------
Total liabilities and stockholders' deficit $ 9,047,427 $ 14,306,744
===============================================
See accompanying notes.
F-43
Mooney Aircraft Corporation (Debtor-in-Possession)
Statements of Operations
Year Ended December 31
2001 2000
----------------------------------------------
Net sales $ 15,247,992 $ 38,196,663
Cost of sales 12,764,440 29,128,089
----------------------------------------------
Gross margin 2,483,552 9,068,574
Research and development expenses 456,053 663,612
Selling and support expenses 1,137,119 2,754,528
General and administrative expenses 3,850,391 4,531,956
Reorganization expenses 2,488,925 -
----------------------------------------------
7,932,488 7,950,096
----------------------------------------------
(Loss) income from operations (5,448,936) 1,118,478
Other (expense) income:
Interest expense (1,415,636) (1,720,347)
Other income 765,271 338,188
----------------------------------------------
(650,365) (1,382,159)
----------------------------------------------
Net loss $ (6,099,301) $ (263,681)
==============================================
See accompanying notes.
F-44
Mooney Aircraft Corporation (Debtor-in-Possession)
Statements of Stockholders' Deficit
Additional
Common Paid-In Accumulated
Stock Capital Deficit Total
-------------------------------------------------------------------------------
Balances at
December 31, 1999 $ 4,880,100 $ 23,621,272 $ (39,726,070) $ (11,224,698)
Net loss - - (263,681) (263,681)
-------------------------------------------------------------------------------
Balances at
December 31, 2000 4,880,100 23,621,272 (39,989,751) (11,488,379)
Exercise of common
stock warrants 1,000,000 - - 1,000,000
Net loss - - (6,099,301) (6,099,301)
-------------------------------------------------------------------------------
Balances at
December 31, 2001 $ 5,880,100 $ 23,621,272 $ (46,089,052) $ (16,587,680)
===============================================================================
See accompanying notes.
F-45
Mooney Aircraft Corporation (Debtor-in-Possession)
Statements of Cash Flows
Year Ended December 31
2001 2000
-------------------------------------------
Operating Activities
Net loss $ (6,099,301) $ (263,681)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation 1,073,117 1,161,567
Gain on forgiveness of interest (698,355)
Gain on sale of property and equipment (150,406)
Gain on rejections of capital leases (7,208)
Changes in operating assets and liabilities:
Accounts receivable, net 111,080 307,356
Inventories, net 2,800,784 707,755
Other current assets 23,906 3,792
Accounts payable 245,449 624,697
Payroll and related liabilities (354,048) 438,639
Accrued environmental remediation - (2,921)
Accrued airworthiness directive (340,000) (660,000)
Other accrued liabilities (1,630,561) 2,880,489
-------------------------------------------
Net cash (used in) provided by operating activities (4,875,137) 5,047,287
Investing Activities
Proceeds from sale of property and equipment - 325,000
Purchases of property and equipment (46,967) (924,317)
-------------------------------------------
Net cash used in investing activities (46,967) (599,317)
Financing Activities
Principal payments on capital lease obligations (74,592) (259,840)
Net change in revolving credit facility 2,199,826 (1,819,652)
Net change in revolving debtor-in-possession credit facility 2,705,454 -
Principal payments on notes payable and long-term debt (871,686) (1,632,871)
Proceeds from loan from stockholder 275,000 -
-------------------------------------------
Net cash provided by (used in) financing activities 4,234,002 (3,712,363)
-------------------------------------------
(Decrease) increase in cash (688,102) 735,607
F-46
Mooney Aircraft Corporation (Debtor-in-Possession)
Statements of Cash Flows (continued)
Year Ended December 31
2001 2000
-------------------------------------------
Cash at beginning of year $ 762,408 $ 26,801
-------------------------------------------
Cash at end of year $ 74,306 $ 762,408
===========================================
Supplemental disclosures of cash flow information:
Interest paid $ 1,299,914 $ 1,480,812
Significant noncash transactions:
Purchases of fixed assets through capital leases 31,381 204,446
Conversion of accounts payable to note payable - 432,596
Disposal of fixed assets through lease rejections 144,840 -
Book value of fixed assets traded on purchases 69,644 -
Cancellation of notes payable to offset sale of aircraft 38,032 -
Cancellation of accounts payable to offset sale of aircraft 388,160 -
Conversion of notes payable to aircraft deposits 50,000 -
Conversion of debt to common stock 1,000,000 -
See accompanying notes.
F-47
*** Mooney Aircraft Corporation (Debtor-in-Possession)
Notes to Financial Statements
December 31, 2001 and 2000
1. Significant Accounting Policies
Organization
On January 31, 1998, Mooney Aircraft Corporation (the "Corporation") issued
$2,500,000 of additional cumulative, redeemable preferred stock which was
converted to common stock with the previously issued preferred stock outstanding
at December 31, 1997. This conversion resulted in AVAQ Group, Inc. ("AVAQ")
having control of 80% of the Corporation's outstanding common stock. The
remaining 20% of the Corporation's outstanding common stock was owned by Mooney
Holding Corporation ("MHC"), the Corporation's parent as of December 31, 1997,
until March 12, 2001 when AVAQ acquired the remaining 20% from MHC.
On July 27, 2001 (the "Petition Date"), the Corporation filed a petition for
reorganization under Chapter 11 ("Chapter 11") of Title 11 of the United States
Code ("Bankruptcy Code") in the United States Bankruptcy Court for the Western
District of Texas ("Court" or "Bankruptcy Court"). The Chapter 11 case is being
administered by the Court, with the Corporation managing its business as a
debtor-in-possession subject to Court approval for certain actions the
Corporation takes.
Under the Chapter 11 proceedings, actions by creditors to collect claims in
existence at the Petition Date ("prepetition") are stayed ("deferred"), absent
specific Court authorization to pay such claims, while the Corporation continues
to manage its business as a debtor-in-possession. These financial statements
include adjustments and reclassifications that have been made to reflect the
liabilities that have been deferred under the Chapter 11 proceedings. Those
noncurrent liabilities that have been deferred are expected to be settled as
part of a plan or plans of reorganization and are classified as liabilities
subject to settlement under reorganization proceedings. As of June 20, 2002, no
plan of reorganization has been submitted to the Court. Other prepetition
liabilities have been approved by the Court for payment in the ordinary course
of business and are included in the appropriate liability caption on the balance
sheet. Various accounting and business practices have also been adopted that are
applicable to companies operating under Chapter 11. For instance, interest
expense is accrued only for debt that is currently believed to be fully secured.
Some significant executory contracts have been rejected and additional executory
contracts may be rejected or renegotiated during the Chapter 11 proceedings.
F-48
Mooney Aircraft Corporation (Debtor-in-Possession)
Notes to Financial Statements (continued)
December 31, 2001 and 2000
1. Significant Accounting Policies (continued)
The Corporation believes appropriate provisions have been made in the
accompanying financial statements for prepetition claims which are recorded as
liabilities subject to settlement under reorganization proceedings, which
include claims associated with the rejection of certain leases, trade accounts
payable as of the Petition Date, and prepetition general liability claims (see
Note 13). The amounts of the claims filed by some claimants may be significantly
in excess of the related liabilities recorded by the Corporation.
The previous discussion provides general background information regarding the
Chapter 11 case but is not intended to be an exhaustive summary. For additional
information regarding the effect on the Corporation reference should be made to
the Bankruptcy Code.
Nature of Business
The Corporation's business operations include (i) the design and manufacture of
four-place, single-engine, retractable gear aircraft, (ii) sale of spare parts
for Mooney aircraft, (iii) manufacture of aircraft components for other
aerospace companies, and (iv) service and repair of aircraft. Aircraft sales,
both domestic and international, are largely through a Mooney Marketing Center
distribution system. Spare parts are sold worldwide through a Mooney Service
Center distribution system. The manufacture of aircraft components and the
Corporation's service and repair of aircraft are primarily domestic operations.
Revenue Recognition Policy
The Corporation recognized revenue on substantially all aircraft sales and parts
and service sales when each of the following four criteria is met: 1) a contract
or sales arrangement exists; 2) products have been shipped or services have been
rendered; 3) the price of the products or services is fixed or determinable; and
4) collectibility is reasonable assured.
The Corporation also recognizes revenue on aircraft sales under bill-and-hold
transactions when each of the following seven criteria are met: 1) the risk of
ownership has passed to the buyer; 2) the buyer has made a fixed commitment to
purchase the goods; 3) the buyer has requested that the transaction be on a
bill-and-hold basis and has a substantial business purpose for ordering so; 4)
there is a fixed schedule for delivery of the goods and
F-49
Mooney Aircraft Corporation (Debtor-in-Possession)
Notes to Financial Statements (continued)
December 31, 2001 and 2000
1. Significant Accounting Policies (continued)
the delivery date is reasonable and consistent with the buyer's business
practices; 5) the Corporation has not retained any specific performance
obligations such that the earnings process is not complete; 6) the aircraft has
been segregated from the Corporation's inventory and is not subject to being
used to fill other orders; and 7) the aircraft must be complete and ready for
shipment.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market. An
obsolescence reserve is estimated for parts whose values have been determined to
be impaired or whose future utility appears limited.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation for plant and
equipment, including equipment under capital leases, is computed primarily using
the straight-line method over the estimated economic service lives of the assets
as follows:
Years Years
------------- -------------
Land improvements 10 - 20 Furniture and fixtures 5 - 7
Building and building improvements Tooling 5 - 7
20 - 25 Computer equipment 3 - 5
Machinery and equipment 5 - 10 Experimental aircraft 7 - 10
Advertising Expense
The Corporation expenses its advertising costs as incurred. Advertising expenses
were approximately $170,000 in 2001 and $845,000 in 2000.
Research and Development Expense
The Corporation incurs costs related to new products, product improvements,
support, and reliability. These costs are expensed as incurred. Costs of tools,
dies, fixtures, etc., with an extended life are capitalized as tooling and
depreciated over their estimated economic service lives.
F-50
Mooney Aircraft Corporation (Debtor-in-Possession)
Notes to Financial Statements (continued)
December 31, 2001 and 2000
1. Significant Accounting Policies (continued)
Warranty
A warranty period of two years is provided for each aircraft sold. Periodically,
the recorded warranty liability is evaluated with consideration given to actual
warranty expense incurred on a historical basis, the volume of products still
under warranty, and the warranty period remaining for those products.
Product Liability
An accrual is provided for product liability expenses on manufactured products.
Periodically, the recorded product liability accrual is evaluated with
consideration given to actual product liability expenses, the number of product
liability claims still outstanding, the severity of the alleged and actual
damages specified in each claim, and the likelihood that actual expenses will be
incurred on each claim.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Environmental Remediation Costs
Expenses associated with environmental remediation obligations are accrued when
such losses are probable and reasonably estimable. Accruals for estimated
expenses from environmental remediation obligations generally are recognized no
later than completion of the remedial feasibility study. Such accruals are
adjusted as further information develops or circumstances change. Costs of
future expenditures for environmental remediation obligations are not discounted
to their present value.
Reclassification
Certain prior year amounts have been reclassified for comparison to current year
amounts.
F-51
Mooney Aircraft Corporation (Debtor-in-Possession)
Notes to Financial Statements (continued)
December 31, 2001 and 2000
2. Going Concern
The Corporation's financial statements have been presented on the basis that it
is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Corporation's
history of losses, the incurrence of costs related to environmental remediation
(Note 10), its historical noncompliance with certain financial covenants of loan
agreements with financial institutions (Note 3), and the filing of a voluntary
petition for relief under Chapter 11 of Title 11 of the United States Code in
United States Bankruptcy Court for the Western District of Texas raise concerns
as to its ability to produce continued profitable operations and positive future
cash flows.
The potential costs related to the remediation of and compliance with
environmental issues are being managed to the lowest possible amount pursuant to
regulatory requirements. Due to the timing of some of the environmental
remediation compliance procedures, the Corporation may be unable to meet all of
its operational cash needs (see Note 10).
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary as a consequence of the
bankruptcy proceedings or should the Corporation be unable to continue as a
going concern. The appropriateness of using the going-concern basis for a
company operating under Chapter 11 of the Bankruptcy Code is dependent upon
several factors, including the success of future operations, the ability to
generate sufficient cash from operations and financing to meet its obligations
and, eventually, the confirmation of a plan of reorganization.
Until a plan of reorganization is confirmed by the Bankruptcy Court and becomes
effective, it is not possible to predict with certainty the ultimate recoveries
for creditors and stockholders, the length of time the Company will be under the
protection of Chapter 11, the outcome of the Chapter 11 proceedings in general,
the effects of the proceedings on the business of the Corporation, or the extent
of the negative effects on the interests of the various creditors and
stockholders. While management currently believes the Company has made adequate
provision for the liabilities to be incurred in connection with Chapter 11
claims, there can be no assurance as to the final amount of such liabilities or
the final impact of such liabilities on a confirmed plan of reorganization.
F-52
Mooney Aircraft Corporation (Debtor-in-Possession)
Notes to Financial Statements (continued)
December 31, 2001 and 2000
3. Notes Payable and Debtor-in-Possession Credit Facility
December 31
2001 2000
------------------------------------
Note payable to bank - revolving credit facility not to exceed $13,500,000
with interest at prime plus 4% (8.75% at December 31, 2001), secured by
substantially all the assets and the guarantee of MHC, AVAQ, and Paul S.
Dopp ("Dopp"), majority stockholder of AVAQ, interest monthly, with final
principal payment scheduled to be due in 2001 $ 8,247,540 $ 6,047,714
Note payable to bank - equipment term loan with an original principal
balance of $1.2 million amortizing monthly on a four-year basis with
interest at prime plus 4% (8.75% at December 31, 2001), secured by
substantially all the assets and the guarantee of MHC, AVAQ, and Dopp,
monthly principal of $18,333 plus interest, with final principal payment
scheduled to be due in 2001 390,007 587,504
Note payable to bank - Type Certificate term loan of $4.0 million payable
monthly on a three-year basis with interest at prime plus 4% (8.75% at
December 31, 2001), secured by substantially all the assets and the
guarantee of MHC, and Dopp, monthly principal of $66,667 plus interest,
with final principal payment scheduled to be due in 2001 2,133,333 2,733,333
F-53
Mooney Aircraft Corporation (Debtor-in-Possession)
Notes to Financial Statements (continued)
December 31, 2001 and 2000
3. Notes Payable and Debtor-in-Possession Credit Facility (continued)
December 31
2001 2000
---------------------------------------------
Note payable to vendor - interest at 10%, principal and interest due in
equal monthly installments of $38,032, with final payment
scheduled to be due in 2001 $ - $ 112,221
Note payable - interest at LIBOR plus .75% (6.25%
at December 31, 2001), unsecured, interest and
principal due December 2002 950,000 1,950,000
Notes payable to related parties - two noninterest-bearing notes for
$500,000 each, subordinate to the above revolving credit facility,
equipment term loan, and Type Certificate term loan 1,000,000 1,000,000
Notes payable to stockholder - four notes with
interest at 8%, unsecured, principal and
interest due on demand 225,000 -
---------------------------------------------
Total long-term debt 12,945,880 12,430,772
Less current portion - (11,430,772)
Less long-term debt subject to
settlement under reorganization proceedings
(see Note 13) (12,945,880) -
---------------------------------------------
Long-term debt, net of current portion $ - $ 1,000,000
=============================================
F-54
Mooney Aircraft Corporation (Debtor-in-Possession)
Notes to Financial Statements (continued)
December 31, 2001 and 2000
3. Notes Payable and Debtor-in-Possession Credit Facility (continued)
The revolving prepetition credit facility provides up to $13,500,000 in
committed credit. The aggregate amount of the credit facility shall not exceed a
calculated Borrowing Base (as defined in the loan and security agreement) based
on inventories and accounts receivable. The Facility contains restrictive
covenants and certain financial ratio covenants including, but not limited to, a
minimum adjusted net worth and a minimum adjusted working capital. At December
31, 2001, the Corporation is in violation of certain financial covenants
covering the revolving credit facility and the term loans and is in default as
the revolving prepetition credit facility and term loans matured in May 2001.
The amount owed under the revolving prepetition credit facility and term loans
exceeds the value of the underlying collateral. Therefore, these balances have
been included with liabilities subject to settlement under reorganization
proceedings (see Note 13). All unsecured notes payable have also been included
with liabilities subject to settlement under reorganization proceedings.
On July 27, 2001, in conjunction with the Corporation's filing under Chapter 11
and under order from the bankruptcy trustee, the Company entered into a
Debtor-in-Possession Credit Agreement (the "DIP Credit Agreement") with the same
financial institution providing the revolving prepetition credit facility. Under
the terms of the DIP Credit Agreement, the Corporation is allowed to borrow
funds based on the approval of the Bankruptcy Court, U.S. trustee, and financial
institution. Borrowings under this arrangement are due on demand, bear interest
at 8.75%, and have priority over all other secured claims.
The fair value of the Corporation's borrowings is not determinable due to the
Chapter 11 proceedings and other factors (see Note 2).
During 2001, one of the lenders forgave accrued interest payable in the amount
of $698,355. This has been included in other income on the statement of
operations.
F-55
Mooney Aircraft Corporation (Debtor-in-Possession)
Notes to Financial Statements (continued)
December 31, 2001 and 2000
4. Inventories
A summary of inventories is as follows:
December 31
2001 2000
------------------------------------------------
Raw materials and purchased parts $ 1,430,591 $ 1,849,559
Manufactured parts 2,226,757 2,461,134
Work-in-process 3,636,084 4,675,106
Finished aircraft - 919,940
Other miscellaneous 26,950 41,619
------------------------------------------------
7,320,382 9,947,358
Less allowance for obsolete and
slow-moving parts 1,475,000 875,000
------------------------------------------------
$ 5,845,382 $ 9,072,358
================================================
F-56
Mooney Aircraft Corporation (Debtor-in-Possession)
Notes to Financial Statements (continued)
December 31, 2001 and 2000
5. Leases
The Corporation has acquired certain equipment through capital leases. The book
value of the equipment and accumulated amortization related to these assets held
under capital leases are $717,592 and $566,695, respectively, at December 31,
2001 and $862,265 and $412,933, respectively, at December 31, 2000. In 2002, the
Corporation subsequently settled substantially all of the capital leases for an
amount less than what was contractually due. Therefore, capital leases are
classified as current and no portion of future payments is considered to be
interest.
In addition, the Corporation has several operating leases. Rent expense incurred
during 2001 and 2000 was approximately $187,000 and $358,000, respectively. The
following is a schedule of the future minimum payments under noncancelable
operating leases as of December 31, 2001:
2002 $ 38,727
2003 19,848
2004 19,848
2005 16,013
2006 16,013
Thereafter 93,408
Under its Chapter 11 proceedings (see Note 1), the Corporation has the right,
subject to Court approval, to assume or reject executory contracts and unexpired
leases. In this context, "assumption" means that the Corporation agrees to
perform its obligation to perform further under the contract or lease but is
subject to a claim of damages for the breach thereof. Therefore, the commitments
shown above may not reflect the actual cash outlay in the future.
F-57
Mooney Aircraft Corporation (Debtor-in-Possession)
Notes to Financial Statements (continued)
December 31, 2001 and 2000
6. Federal Income Taxes
For 2001, the Corporation will file a consolidated income tax return with its
parent, AVAQ. For purposes of these financial statements, income taxes have been
calculated on a separate-company basis in accordance with Financial Accounting
Standards Board Statement No. 109 (FAS 109).
The Corporation records income taxes under FAS 109 using the liability method.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
The Corporation has net operating loss carryforwards for federal income tax
purposes of approximately $33,520,000 that will expire in years 2005 through
2021. The tax effect of these carryforwards is fully reserved as of December 31,
2001.
The valuation allowance increased (decreased) $1,402,745 and $(96,559) for the
years ended December 31, 2001 and 2000, respectively.
Deferred income taxes result from the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Corporation's
deferred tax assets and liabilities are as follows:
2001 2000
-----------------------------------------------
Deferred tax assets:
Depreciation $ 366,155 $ 343,246
Uniform capitalization adjustment 141,662 174,697
Inventory reserve 501,500 281,219
Bad debts 58,972 15,953
Vacation 21,155 71,030
Warranty 336,291 170,000
Product insurance 76,672 53,576
Environmental remediation 178,697 178,697
General business credit 83,444 83,444
F-58
Mooney Aircraft Corporation (Debtor-in-Possession)
Notes to Financial Statements (continued)
December 31, 2001 and 2000
6. Federal Income Taxes (continued)
2001 2000
--------------------------------------
Accrued airworthiness directive $ - $ 195,002
Other 18,155 18,155
NOL carryforwards 11,396,832 10,203,238
--------------------------------------
Total deferred tax assets 13,179,535 11,788,257
Deferred tax liabilities:
Tax over book amortization - 11,467
--------------------------------------
Net deferred tax assets 13,179,535 11,776,790
Less valuation allowance 13,179,535 11,776,790
--------------------------------------
Net deferred tax assets $ - $ -
======================================
As a result of the issuance of additional shares of common stock, an ownership
change under Section 382 occurred in January 1998. Accordingly, it is expected
that the use of net operating loss carryforwards generated through January 1998
will be limited to approximately $65,000 annually. Further changes in ownership
may further limit the use of the Corporation's loss carryforwards.
In addition to the Section 382 limitations, uncertainties exist as to the future
utilization of the operating loss carryforwards under the criteria set forth
under FAS 109. Therefore, the Corporation has established a valuation allowance
of $13,179,535 and $11,776,790 for net deferred tax assets at December 31, 2001
and 2000, respectively.
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is:
2001 2000
--------------------------------
Expected tax (benefit) expense $ (2,073,762) $ 85,981
Change in valuation allowance 1,402,745 (96,559)
Permanent and other differences 671,017 10,578
--------------------------------
Actual tax expense $ - $ -
================================
F-59
Mooney Aircraft Corporation (Debtor-in-Possession)
Notes to Financial Statements (continued)
December 31, 2001 and 2000
7. Contingencies
The Corporation was partially self-insured for product liability and aircraft
grounding claims and related legal and administrative costs prior to September
1, 1997, and there is remaining coverage from the prior policy. Subsequent to
September 1, 1997, the Corporation has coverage up to $50 million in claims per
policy year. An accrual has been provided for such claims based on management's
best estimate of losses and expenses using historical figures, known incidents,
incidents under investigation or in suit, and discussion with the Corporation's
counsel regarding such incidents. Management believes that amounts accrued are
adequate to cover its potential liability under such claims and that the
ultimate disposition of these claims will have no material adverse effect on the
financial position or results of operations of the Corporation; however, the
ultimate resolution of these matters cannot be determined.
8. 401(k) Plan
The Corporation has a defined contribution retirement plan ("401(k) Plan")
covering substantially all employees. The 401(k) Plan's inception date was July
1, 1996. An employee may elect to make voluntary contributions up to 15% of the
employee's eligible compensation. Employer contributions to the 401(k) Plan are
discretionary. There were no employer contributions for the years ended December
31, 2001 and 2000.
9. Related Party Transaction
In November 2000, Dopp purchased an aircraft from the Corporation and
subsequently entered into a lease agreement whereby the Corporation leased the
aircraft from him on a month-to-month basis for approximately $5,000. Profits on
the sale of the aircraft were deferred.
F-60
Mooney Aircraft Corporation (Debtor-in-Possession)
Notes to Financial Statements (continued)
December 31, 2001 and 2000
10. Commitments and Contingencies
There are various suits and claims against the Corporation that have arisen in
the ordinary course of business. The total liability on these matters cannot be
determined with certainty. However, in the opinion of management, the ultimate
liability, to the extent not otherwise provided for, will not materially impact
the financial statements of the Corporation. Due to the Corporation's filing
under Chapter 11, certain of such cases have been stayed pursuant to the
automatic stay issued by the Court. Under Chapter 11, these cases require court
approval or must be specifically exempt for litigation proceedings to continue.
Environmental Remediation Loss Contingencies
The Corporation has completed, under the supervision of environmental counsel,
an audit of certain operations pursuant to the Texas Environmental, Health and
Safety Audit Privilege Act. Environmental engineering consultants have conducted
sampling and tests of these operations and determined certain events of
noncompliance with applicable environmental laws, as well as future compliance
issues. The current estimate for remediation and compliance with these
environmental issues is estimated at $525,579, all of which will not be paid out
in the next 12 months. These estimates may change upon completion of the audit,
as additional information becomes available and environmental laws change. The
Corporation is pursuing certain governmental programs that could possibly
mitigate these costs.
11. Stock Warrants
On July 7, 1998, in connection with the AVAQ purchase, the Corporation issued to
AVAQ nontransferable warrants to purchase 1,000,000 shares of the Corporation's
common stock. The first 500,000 warrants, with an exercise price of $7.00 per
share, expired on July 7, 1999. The second 500,000 warrants, with an exercise
price of $10.00 per share, expire on July 7, 2003. On March 12, 2001, AVAQ
exercised 100,000 warrants at $10.00 per share. In consideration, AVAQ cancelled
$1,000,000 of indebtedness owed them from the Corporation.
F-61
Mooney Aircraft Corporation (Debtor-in-Possession)
Notes to Financial Statements (continued)
December 31, 2001 and 2000
12. Reorganization Expense
In fiscal 2001, the Company incurred $2,488,925 in reorganization expense
attributable to the filing under Chapter 11. This expense includes $598,129 for
potential lease rejection claims and $1,890,796 for professional fees.
13. Liabilities Subject to Settlement Under Reorganization Proceedings
The Court established the date ("Bar Date") of November 29, 2001 by which claims
must be filed. Claims subject to the order which are not filed by the Bar Date
are barred from voting upon or receiving distribution under any plan of
reorganization of the Corporation unless the Court orders otherwise.
Those liabilities, which are ultimately expected to be settled as part of a plan
of reorganization, are classified as liabilities subject to settlement under
reorganization proceedings and include the following estimates at December 31,
2001:
Trade accounts payable $ 4,570,940
Accrued payroll and other related liabilities 703,635
Accrued expenses 2,156,682
Notes payable to related parties 1,225,000
Notes payable 3,473,340
Revolving prepetition credit facility 8,247,540
Potential lease rejection claims 598,129
------------
Total $ 20,975,266
============
While management currently believes that it has made adequate provision for the
liabilities to be incurred in connection with Chapter 11 claims, including
executory contracts and estimated costs of lease rejections, there can be no
assurance as to the amount of the ultimate liabilities on a plan of
reorganization or how such liabilities will be treated in a confirmed plan of
reorganization.
F-62
Mooney Aircraft Corporation (Debtor-in-Possession)
Notes to Financial Statements (continued)
December 31, 2001 and 2000
14. Subsequent Events
On January 30, 2002, Advanced Aerodynamics & Structures, Inc. ("AASI") purchased
for cash and notes payable the revolving credit facility and term notes from
Congress Financial ("Congress") for $8,000,000, assuming all the rights and
obligations of Congress. At that time the outstanding balance due Congress was
approximately $13,700,000. AASI relieved Dopp of his guaranty on these notes
after their purchase.
On February 6, 2002, AASI agreed to provide continued debtor-in-possession
financing through May 3, 2002. Through April 19, 2002, AASI advanced an
additional $220,000 in debtor-in-possession financing.
On April 19, 2002, AASI purchased the inventory and capital assets and assumed
certain liabilities of the Corporation for approximately $11,360,000 including
cash and other consideration.
Under the terms of the purchase agreement, AASI paid $8,000,000 against the
secured claim they purchased from Congress. The remaining $5,700,000 of debt
owed them from the Corporation became subordinated, unsecured debt. AASI also
paid $1,000,000 to the bankruptcy estate ($350,000 in cash and $650,000 in
stock) to be disbursed to the unsecured creditors, and provided approximately
$560,000 for operating expenses incurred prior to the purchase. AASI also
assumed approximately $1,800,000 of liabilities and the property leases with the
City of Kerrville, Kerr County, and Kerr County Industrial and Development
Foundation.
The purchase agreement also provides for the issuance of approximately 3,600,000
stock warrants of AASI stock at an exercise price of $.276 per share to be
disbursed to the unsecured creditors. In addition, if no action letter is
received from the Securities and Exchange Commission within 60 days of the date
of purchase, AASI is required to transfer stock with a value of $250,000 to the
bankruptcy estate.
Subsequent to the purchase, AASI changed its name to Mooney Aerospace Group,
Ltd.
F-63
Unaudited Pro Forma Combined Statements of Operations
The following unaudited pro forma combined statements of operations
give effect to the Mooney Aerospace Group, Ltd. (formerly Advanced Aerodynamics
& Structures, Inc. (a Development Stage Enterprise)) ("Mooney" or the "Company")
purchase of the inventory and property, plant and equipment of Mooney Aircraft
Corporation (Debtor-in-Possession) ("MACorp") for cash and notes, which was
consummated April 19, 2002. Mooney also assumed certain liabilities totaling
$1,947,000. In addition, Mooney assumed the property lease with the City of
Kerrville for the land where MACorp's facilities are located. The acquisition
was accounted for using the purchase method of accounting.
The following unaudited pro forma combined financial information has
been derived from the historical financial statements of Mooney and MACorp. The
unaudited pro forma combined statement of operations as of December 31, 2001 has
been derived from the audited financial statements of Mooney and MACorp. The
unaudited pro forma combined statement of operations as of June 30, 2002 have
been derived from the unaudited financial statements of Mooney and MACorp. The
statements of operations for the six-month period ended June 30, 2002 and the
year ended December 31, 2001 assumes that the acquisition was consummated as of
the beginning of the fiscal year presented.
The unaudited pro forma combined statements of operations are presented
for illustrative purposes only and are not necessarily indicative of the
financial position or results of operations of Mooney that would have been
reported had the acquisition occurred on the date indicated, nor do they
represent a forecast of the financial position of Mooney at any future date or
the results of operations of Mooney for any future period. Furthermore, no
effect has been given in the Mooney unaudited pro forma combined statements of
operations for operating benefits that may be realized through the combination
of the entities. The unaudited pro forma combined financial statements,
including the notes thereto, should be read in conjunction with the historical
financial statements and related notes of MACorp and the Company's historical
financial statements and related notes.
F-64
Mooney Aerospace Group, Ltd.
(A Development Stage Enterprise)
Unaudited Pro Forma Combined Statements of Operations
(in thousands, except per share and share amounts)
Mooney MACorp
Year ended
--------------------------------
December 31, 2001 Pro forma Adjustments Pro Forma
-------------------------------- ------------------------------- -------------
Net sales $ - $ 15,248 $ - $ - $ 15,248
Cost of sales - 12,765 927/(4)/ - 13,692
------------------------------------------------------------------------------
Gross profit - 2,483 (927) - 1,556
Operating expenses:
Research and development costs 7,630 456 - - 8,086
General and administrative
expenses 4,815 3,850 - 19/(5)/ 8,684
Selling and support expenses - 1,137 - - 1,137
Non-recurring expenses/(6)/ 3,823 - - - 3,823
Reorganization expenses/(7)/ - 2,489 - - 2,489
------------------------------------------------------------------------------
16,268 7,932 - 19 24,219
------------------------------------------------------------------------------
Loss from operations (16,268) (5,449) (927) (19) (22,663)
Other income 73 765 - - 838
Interest expense (4,969) (1,415) (214)/(1)/ (1,389)/(3)/ (6,572)
1,415/(2)/
------------------------------------------------------------------------------
Net loss $ (21,164) $ (6,099) $ 274 $ (1,408) $ (28,397)
==============================================================================
Net loss per share - basic $ (0.73) $ - $ - $ - $ (0.87)
==============================================================================
Weighted average common shares
outstanding - basic 30,010,000 - - $3,260,871/(8)/ 33,270,871
==============================================================================
See accompanying notes to unaudited pro forma combined financial statements.
F-65
Mooney Aerospace Group, Ltd.
(A Development Stage Enterprise)
Unaudited Pro Forma Combined Statements of Operations (continued)
(in thousands, except per share and share amounts)
Mooney MACorp
Six months ended
June 30, 2002 Pro forma Adjustments Pro forma
-------------------------------------------------------------------------------
Net sales $ 369 $ 460 $ - $ - $ 829
Cost of sales 124 145 - - 269
-------------------------------------------------------------------------------
Gross profit 245 315 - - 560
Operating expenses:
Research and development costs 2,654 22 - - 2,676
General and administrative
expenses 5,639 981 - 278/(4)/ 6,898
Gain on sale of assets (170) - - - (170)
Reorganization expenses/(7)/ - 228 - - 228
-------------------------------------------------------------------------------
8,123 1,231 - 278 9,632
-------------------------------------------------------------------------------
Loss from operations (7,878) (916) - (278) (9,072)
Other income (expense) 68 94 - - 162
Interest expense (4,667) (312) (18)/(1)/ 312/(2)/ (4,801)
(116)/(3)/
-------------------------------------------------------------------------------
Net loss $ (12,477) $ (1,134) $ (18) $ (82) $ (13,771)
===============================================================================
Net loss per share - basic $ (.23) $ - $ - $ - $ (0.23)
===============================================================================
Weighted average common shares
outstanding - basic 59,602,301 - - / 59,602,301
===============================================================================
See accompanying notes to unaudited pro forma combined financial statements.
F-66
Mooney Aerospace Group, Ltd.
(A Development Stage Enterprise)
Notes to Unaudited Pro Forma Combined
Financial Statements
(1) Represents the additional interest related to the February 2002 issuance
of $4.5 million notes payable to Congress Financial that would have been
incurred for the year ended December 31, 2001 and the six-month period
ended June 30, 2002, as if the transaction occurred effective January 1,
2001. Interest expense related to the Congress Financial notes was
calculated based upon the terms of the notes with Congress, using the
interest rate effective as of June 30, 2002 of 4.75%. The interest expense
for the year ended December 31, 2001 was calculated as the principal
balance of $4,500,000 multiplied by the interest rate of 4.75%, for a
total of approximately $214,000. The interest expense for the six-month
period ended June 30, 2002 was calculated as the principal balance of
$4,500,000 multiplied by the interest rate of 4.75%, multiplied by 50% to
account for semi-annual interest, less $88,000 already recorded during the
period, for a total of approximately $18,000.
(2) Represents the elimination of historical interest expensed by MACorp for
the year ended December 31, 2001 and the six-month period ended June 30,
2002.
(3) Represents the additional interest incurred for the year ended December
31, 2001 and the six-month period ended June 30, 2002 related to the
portion of convertible debentures issued in January 2002 required to fund
the MACorp acquisition that would have been outstanding as of January 1,
2001. Calculated interest expense includes an accrual based upon the
debentures stated interest rate as well as amortization of discounts and
debt issue costs for each of the periods presented.
(4) Represents additional depreciation for the step-up in basis due to the
acquisition of MACorp for the year ended December 31, 2001 and the six
months ended June 30, 2002. Depreciation was calculated using a 5-year
life based upon the relative historical depreciation expense included in
each category. For the year ended December 31, 2001 the adjustment is
included in cost of sales. For the six months ended June 30, 2002 the
adjustment is included in general and administrative expenses due to
minimal sales activity during that period.
F-67
Mooney Aerospace Group, Ltd.
(A Development Stage Enterprise)
Notes to Unaudited Pro Forma Combined
Financial Statements (continued)
(5) Represents the elimination of salaries paid ($272,000) to the previous
owners, and the additional cost ($291,000) of the current Mooney executive
management team in excess of the cost of the previous AASI executive
management team, recorded during the year ended December 31, 2001. No
adjustment is necessary for the six month period ended June 30, 2002, as
no salary was paid to the previous owners during that period, and the
current Mooney executive management team started on January 8, 2002.
(6) For the year ended December 31, 2001 Mooney incurred $3,823,000 in
non-recurring expenses attributable to the change in the Company's
business strategy and re-design of its major product, the JetCruzer 500.
This expense includes a write-off of capitalized tooling and software
costs of $2,805,000 and $1,018,000 for purchase order commitments for
special orders from vendors for the year ended December 31, 2001.
(7) For the year ended December 31, 2001 and the six-month period ended June
30, 2002, MACorp incurred $2,488,925 and $228,349 in reorganization
expenses attributable to the filing under Chapter 11. This expense
includes $598,129 for potential lease rejection claims and $1,890,796 for
professional fees for the year ended December 31, 2001. For the six-month
period ended June 30, 2002, the expenses were solely related to
professional fees.
(8) Represents consideration of shares issued in conjunction with the
acquisition as follows:
Common stock issued (see footnote 2) $ 900,000(x)
Price per share $ .276(y)
Total shares to be issued 3,260,871(x/y)*
*Minor difference due to rounding
F-68
====================================== =======================================
You should rely only on the
information contained in this
prospectus. We have not authorized
anyone to provide you with information
different from the information
contained in this prospectus. This
document may only be used where it is
legal to sell the securities. The
information in this document may only
be accurate on the date of this
document. 403,568,606 SHARES
OF COMMON STOCK
TABLE OF CONTENTS
Page
----
Prospectus Summary.................... 1
Risk Factors.......................... 2
Use of Proceeds....................... 10
Price Range of Common Stock........... 10 MOONEY AEROSPACE GROUP, LTD.
Management's Discussion and
Analysis and Plan of Operations..... 11
Business.............................. 20
Management............................ 26
Description of Securities............. 32
Shares Eligible For Future Sale....... 36
Plan of Distribution.................. 37 PROSPECTUS
Selling Stockholders.................. 39
Legal Matters......................... 62
Experts............................... 63
Available Information................. 63
Index to Financial Statements......... 64
___________, 2002
====================================== =======================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Reference is made to Section 145 of the General Corporation Law of the
State of Delaware. As permitted by Delaware law, our Certificate of
Incorporation contains an article limiting the personal liability of directors.
The Certificate of Incorporation provides that a director of Mooney shall not be
personally liable for any damages from any breach of fiduciary duty as a
director, except for liability based on a judgment or other final adjudication
adverse to him establishing that his acts or omissions were committed in bad
faith or were the result of active or deliberate dishonesty and were material to
the cause of action so adjudicated, or that he personally gained a financial
profit or other advantage to which he was not legally entitled. Our Certificate
of Incorporation and Bylaws also provide for indemnification of all officers and
directors of Mooney to the fullest extent permitted by law.
We have entered into Indemnification Agreements ("Indemnification
Agreements") with each of our directors and officers (collectively, the
"Indemnitees"). The Indemnification Agreements permit us to indemnify the
Indemnitees for liabilities and expenses arising from certain actions taken by
the Indemnitees for or on behalf of Mooney and require indemnification in
certain circumstances.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The registrant estimates that expenses in connection with the
distribution described in this registration abatement will be as shown below.
All expenses incurred with respect to the distribution, except for fees of
counsel, if any, retained individually by the selling stockholders and any
discounts or commissions payable with respect to sales of the shares, will be
paid by Mooney. See "Plan of Distribution."
SEC registration fee $ 9,843
Printing expenses* 5,000
Accounting fees and expenses* 6,000
Legal fees and expenses* 2,000
---------
Total $ 22,843
=========
* Estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In March 2000 we issued 50,000 shares of Series A Convertible Preferred
Stock and warrants to purchase 1,085,000 shares of Class A Common Stock, with
exercise prices ranging from $3.87 to $5.16, in a private placement offering. We
relied on Section 4(2) of the Act as a basis of exemption from registration.
In June 2000 we issued 25,000 shares of Series A Convertible Preferred
Stock and warrants to purchase 530,000 shares of Class A Common Stock, with
exercise prices ranging from $3.87 to $5.16, in a private placement offering. We
relied on Section 4(2) of the Act as a basis of exemption from registration.
In August 2000 we issued warrants to purchase 250,000 shares of Class A
Common Stock with an exercise price of $3.15 in conjunction with the Private
Equity Line of Credit Agreement ("Equity Line"). We relied on Section 4(2) of
the Act as a basis of exemption from registration.
In October 2000 we issued 351,773 shares of Class A Common Stock in
connection with the exercise of puts drawn on the Equity Line. We relied on
Section 4(2) of the Act as a basis of exemption from registration.
In November 2000 we issued 199,944 shares of Class A Common Stock in
connection with the exercise of puts drawn on the Equity Line. We relied on
Section 4(2) of the Act as a basis of exemption from registration.
II-1
In November 2000 we issued 4,800 shares of Series A Convertible
Preferred Stock and warrants to purchase 102,000 shares of Class A Common Stock,
with exercise prices ranging from $3.87 to $5.16, in a private placement
offering. We relied on Section 4(2) of the Act as a basis of exemption from
registration.
In December 2000 we issued 700,443 shares of Class A Common Stock in
connection with the exercise of puts drawn on the Equity Line. We relied on
Section 4(2) of the Act as a basis of exemption from registration.
In January 2001 we issued 3,350 shares of Series A Convertible
Preferred Stock and warrants to purchase 71,000 shares of Class A Common Stock,
with exercise prices ranging from $3.87 to $5.16, in a private placement
offering. We relied on Section 4(2) of the Act as a basis of exemption from
registration.
In January 2001 we issued 3,118,377 shares of Class A Common Stock in
connection with the exercise of puts drawn on the Equity Line. We relied on
Section 4(2) of the Act as a basis of exemption from registration.
In February 2001 we issued 7,935 shares of Series A Convertible
Preferred Stock and warrants to purchase 983,000 shares of Class A Common Stock,
with exercise prices ranging from $3.87 to $5.16, in a private placement
offering. We relied on Section 4(2) of the Act as a basis of exemption from
registration.
In March 2001 we issued $4,456,000 in 5% Secured Convertible Notes,
with various conversion prices as stated in the Note Agreement, as part of a
private placement offering. In conjunction with the offering, we issued warrants
to purchase 8,254,000 shares of Class A Common Stock, with an exercise price of
$.45. We relied on Section 4(2) of the Act as a basis of exemption from
registration.
In March 2001 we issued 845,678 shares of Class A Common Stock pursuant
to a consulting agreement with a group of consultants, three of whom are members
of the Board of Directors.
In June 2001 we issued $1,000,000 in 5% Unsecured Convertible Notes,
with various conversion prices as stated in the Note Agreement, as part of a
private placement offering. In conjunction with the offering, we issued warrants
to purchase 2,646,000 shares of Class A Common Stock, with an exercise price of
$.22. We relied on Section 4(2) of the Act as a basis of exemption from
registration.
In July 2001 we issued $1,080,000 in 5% Secured Convertible Notes, with
various conversion prices as stated in the Note Agreement, as part of a private
placement offering. In conjunction with the offering, we issued warrants to
purchase 2,000,000 shares of Class A Common Stock, with an exercise price of
$.24. We relied on Section 4(2) of the Act as a basis of exemption from
registration.
In August 2001 we issued 1,336,646 shares of Class A Common Stock in
connection with the exercise of puts drawn on the Equity Line. We relied on
Section 4(2) of the Act as a basis of exemption from registration.
In October 2001 we issued $8,417,000 in 8% Secured Convertible Notes,
with various conversion prices as stated in the Note Agreement, as part of a
private placement offering. In conjunction with the offering, we issued warrants
to purchase 17,714,000 shares of Class A Common Stock, with 50% of the warrants
having an exercise price of $.25, and the other 50% having an exercise price of
$.30. We relied on Section 4(2) of the Act as a basis of exemption from
registration.
In January 2002, we issued 2,000,000 warrants for Class A Common Stock
shares with an exercise price of $0.25 and a three-year term under a severance
agreement with our former Chairman, Chief Executive Officer and President. We
relied on Section 4(2) of the Act as a basis of exemption from registration.
II-2
In February 2002 we issued $2,475,000 in 8% Secured Convertible Notes,
with various conversion prices as stated in the Note Agreement, as part of a
private placement offering. In conjunction with the offering, we issued warrants
to purchase 5,143,000 shares of Class A Common Stock, with 50% of the warrants
having an exercise price of $.25, and the other 50% having an exercise price of
$.30. We relied on Section 4(2) of the Act as a basis of exemption from
registration.
In February 2002 we issued $1,462,000 in 8% Unsecured Convertible
Notes, with various conversion prices as stated in the Note Agreement, as part
of a private placement offering. In conjunction with the offering, we issued
warrants to purchase 3,038,000 shares of Class A Common Stock, with 50% of the
warrants having an exercise price of $.25, and the other 50% having an exercise
price of $.30. We relied on Section 4(2) of the Act as a basis of exemption from
registration.
In February 2002 we issued $2,272,000 in 8% Unsecured Convertible
Notes, with various conversion prices as stated in the Note Agreement, as part
of a private placement offering. In conjunction with the offering, we issued
warrants to purchase 4,926,000 shares of Class A Common Stock, with 50% of the
warrants having an exercise price of $.25, and the other 50% having an exercise
price of $.30. We relied on Section 4(2) of the Act as a basis of exemption from
registration.
In February 2002, we issued 100,000 Class A Common Stock shares and
100,000 warrants for Class A Common Stock with an exercise price of $0.30 and a
three-year term for consulting services. We relied on Section 4(2) of the Act as
a basis of exemption from registration.
In March 2002 we issued $1,595,000 in 8% Unsecured Convertible Notes,
with various conversion prices as stated in the Note Agreement, as part of a
private placement offering. In conjunction with the offering, we issued warrants
to purchase 3,314,000 shares of Class A Common Stock, with 50% of the warrants
having an exercise price of $.25, and the other 50% having an exercise price of
$.30. We relied on Section 4(2) of the Act as a basis of exemption from
registration.
In March 2002, we issued 380,000 Class A Common Stock shares in payment
for services provided by Luce Forward Hamilton & Scripps LLP. We relied on
Section 4(2) of the Act as a basis of exemption from registration.
In April 2002 we issued $1,045,000 in 8% Unsecured Convertible Notes,
with various conversion prices as stated in the Note Agreement, as part of a
private placement offering. In conjunction with the offering, we issued warrants
to purchase 2,171,000 shares of Class A Common Stock, with 50% of the warrants
having an exercise price of $.25, and the other 50% having an exercise price of
$.30. We relied on Section 4(2) of the Act as a basis of exemption from
registration.
In April 2002, we issued 3,260,871 Class A Common Stock shares and
3,623,189 warrants for Class A Common Stock with an exercise price of $0.45 and
a two-year term to Mooney Aircraft Corporation for the acquisition of
substantially all of its assets. We relied on Section 4(2) of the Act as a basis
of exemption from registration.
In May 2002 we issued $803,000 in 8% Unsecured Convertible Notes, with
various conversion prices as stated in the Note Agreement, as part of a private
placement offering. In conjunction with the offering, we issued warrants to
purchase 1,669,000 shares of Class A Common Stock, with 50% of the warrants
having an exercise price of $.25, and the other 50% having an exercise price of
$.30. We relied on Section 4(2) of the Act as a basis of exemption from
registration.
In May 2002, we issued 500,000 Class A Common Stock shares for
consulting services. We relied on Section 4(2) of the Act as a basis of
exemption from registration.
II-3
In June 2002 we issued $358,000 in 8% Unsecured Convertible Notes, with
various conversion prices as stated in the Note Agreement, as part of a private
placement offering. In conjunction with the offering, we issued warrants to
purchase 743,000 shares of Class A Common Stock, with 50% of the warrants having
an exercise price of $.25, and the other 50% having an exercise price of $.30.
We relied on Section 4(2) of the Act as a basis of exemption from registration.
In June 2002 we issued $550,000 in 8% Unsecured Convertible Notes, with
various conversion prices as stated in the Note Agreement, as part of a private
placement offering. In conjunction with the offering, we issued warrants to
purchase 1,143,000 shares of Class A Common Stock, with 50% of the warrants
having an exercise price of $.25, and the other 50% having an exercise price of
$.30. We relied on Section 4(2) of the Act as a basis of exemption from
registration.
In June 2002 we issued $385,000 in 8% Unsecured Convertible Notes, with
various conversion prices as stated in the Note Agreement, as part of a private
placement offering. In conjunction with the offering, we issued warrants to
purchase 800,000 shares of Class A Common Stock, with 50% of the warrants having
an exercise price of $.25, and the other 50% having an exercise price of $.30.
We relied on Section 4(2) of the Act as a basis of exemption from registration.
In June 2002 we issued $2,000,000 in 8% Unsecured Convertible Notes,
with various conversion prices as stated in the Note Agreement, as part of a
private placement offering. In conjunction with the offering, we issued warrants
to purchase 4,000,000 shares of Class A Common Stock, with 50% of the warrants
having an exercise price of $.25, and the other 50% having an exercise price of
$.30. We relied on Section 4(2) of the Act as a basis of exemption from
registration.
In July 2002 we issued $275,000 in 8% Unsecured Convertible Notes, with
various conversion prices as stated in the Note Agreement, as part of a private
placement offering. In conjunction with the offering, we issued warrants to
purchase 571,000 shares of Class A Common Stock, with 50% of the warrants having
an exercise price of $.25, and the other 50% having an exercise price of $.30.
We relied on Section 4(2) of the Act as a basis of exemption from registration.
In July 2002 we issued $300,000 in 8% Unsecured Convertible Notes, with
various conversion prices as stated in the Note Agreement, as part of a private
placement offering. In conjunction with the offering, we issued warrants to
purchase 236,000 shares of Class A Common Stock, with an exercise price of $.30.
We relied on Section 4(2) of the Act as a basis of exemption from registration.
In September 2002 we issued $2,160,000 in 8% Unsecured Convertible
Notes, with various conversion prices as stated in the Note Agreement, as part
of a private placement offering. In conjunction with the offering, we issued
warrants to purchase 4,571,000 shares of Class A Common Stock. Of the warrants
issued, 2,571,000 shares may be purchased at an exercise price of $.30, and
2,000,000 shares may be purchased at an exercise price of $.25. We relied on
Section 4(2) of the Act as a basis of exemption from registration.
Except as expressly set forth above, the individuals and entities to
whom we issued securities as indicated in this section of the registration
statement are unaffiliated with us.
II-4
ITEM 27. EXHIBITS.
The following exhibits are filed or incorporated by reference as part
of this Registration Statement.
EXHIBIT NO. DESCRIPTION
----------- -----------
(1) 2.1 Agreement of Merger dated July 16, 1996 between
Advanced Aerodynamics and Structures, Inc., California
corporation, and Advanced Aerodynamics & Structures,
Inc., a Delaware corporation
(15) 2.2 Order of the U.S. Bankruptcy Court dated March 18, 2002
re Mooney Aircraft Corporation
(15) 2.3 Asset Purchase Agreement by and between the Company and
Mooney Aircraft Corporation dated March 18, 2002
(15) 2.4 First Amendment to Asset Purchase Agreement by and
between the Company and Mooney Aircraft Corporation
dated March 19, 2002
(1) 3.1 Certificate of Incorporation
3.2 Bylaws as amended on August 19, 2002
(1) 3.3 Amended and Restated Certificate of Incorporation
(10) 3.4 Amendment to the Certificate of Incorporation
(19) 3.5 Amendment to the Certificate of Incorporation
(7) 3.6 Certificate of Designation
(8) 3.7 Amendment to Certificate of Designation
(15) 3.8 Certificate of Incorporation for Mooney Airplane
Company, Inc. (a wholly-owned subsidiary)
(15) 3.9 Certificate of Amendment of Certificate of
Incorporation for Mooney Airplane Company, Inc. (a
wholly-owned subsidiary)
(19) 3.10 Bylaws as amended on July 22, 2002 for Mooney Airplane
Company, Inc. (a wholly-owned subsidiary)
(1) 4.1 Specimen Certificate of Class A Common Stock
(1) 4.2 Warrant Agreement (including form of Class A and Class
B Warrant Certificates)
II-5
EXHIBIT NO. DESCRIPTION
----------- -----------
(1) 4.3 Form of Underwriter's Unit Purchase Option
(6) 4.5 Form of March 2000 Common Stock Purchase Warrant to be
issued to the Series A Preferred Stock Subscribers and
Placement Agents
(6) 4.6 Form of Special Common Stock Purchase Warrant to be
issued to the Series A Preferred Placement Agent
(6) 4.7 Form of Funds Escrow Agreement related to the March
2000 Subscription Agreement
(7) 4.8 Private Equity Line of Credit Agreement, dated August
15, 2000, between the Company and certain Investors
(7) 4.9 Registration Rights Agreement between the Company and
the investors participating in the Private Equity Line
of Credit Agreement
(7) 4.10 Form of Warrant issued in connection with Private
Equity Line of Credit Agreement
(8) 4.11 Waiver Agreement between the Registrant and the Series
A Preferred Stock Subscribers
(8) 4.12 Form of March 27, 2001, Subscription Agreement between
the Registrant and the 5% Secured Convertible Note
Subscribers
(8) 4.13 Form of March 27, 2001, Secured Convertible Note
between the Registrant and the 5% Secured Convertible
Note Subscribers
(8) 4.14 Form of March 27, 2001, Common Stock Purchase Warrant
to be issued to the 5% Secured Convertible Note
Subscribers
(8) 4.15 Form of March 27, 2001, Collateral Agent Agreement
between the Collateral Agent and the 5% Secured
Convertible Note Subscribers
(8) 4.16 Form of March 27, 2001, Security Agreement between the
Registrant and the Collateral Agent
(11) 4.18 Form of June 27, 2001, Subscription Agreement ("SA")
and Form of Note (Exhibit A to the SA) and Form of
Warrant (Exhibit D to the SA)
(9) 4.19 Form of October 26, 2001 Subscription Agreement ("SA")
and Form of Secured Note (Exhibit A to the SA) and Form
of Warrant (Exhibit D to the SA)
(9) 4.20 Form of October 26, 2001 Security Agreement
(9) 4.21 Form of October 26, 2001 Lockup Agreement
(9) 4.22 Form of October 26, 2001 Put Agreement
(12) 4.23 Secured Traunche A Promissory Note for $500,000, dated
January 29, 2002, issued to Congress Financial
Corporation (Southwest), as executed
II-6
EXHIBIT NO. DESCRIPTION
----------- -----------
(12) 4.24 Secured Traunche B Promissory Note for $2,500,000,
dated January 29, 2002, issued to Congress Financial
Corporation (Southwest), as executed
(12) 4.26 Limited Recourse Secured Traunche D Promissory Note for
$5,714,408.71, dated January 29, 2002, issued to
Congress Financial Corporation (Southwest), as executed
(13) 4.27 January 30, 2002 Subscription Agreement and Form of
Secured Note (Exhibit A to the Subscription Agreement)
and Form of Warrant (Exhibit D to the Subscription
Agreement) for subsequent closing under October 26,
2002 Subscription Agreement
(13) 4.28 Notice of Put, Officer's Certificate and Modification
of Put Agreement Terms for the Put dated January 30,
2002
(13) 4.29 January 30, 2002 Subscription Agreement and Form of
Unsecured Note (Exhibit A to the Subscription
Agreement) and Form of Warrant (Exhibit D to the
Subscription Agreement)
(14) 4.30 March 26, 2002 Subscription Agreement and Form of
Unsecured Note (Exhibit A to the Subscription
Agreement) and Form of Warrant (Exhibit D to the
Subscription Agreement) for subsequent closing under
January 30, 2002 Subscription Agreement
(16) 4.31 April 11, 2002 Subscription Agreement and Form of
Unsecured Note (Exhibit A to the Subscription
Agreement) and Form of Warrant (Exhibit D to the
Subscription Agreement) for subsequent closing under
January 30, 2002 Subscription Agreement
(19) 4.32 May 16, 2002 Subscription Agreement and Form of
Unsecured Note (Exhibit A to the Subscription
Agreement) and Form of Warrant (Exhibit D to the
Subscription Agreement)
(19) 4.33 June 5, 2002 Subscription Agreement and Form of
Unsecured Note (Exhibit A to the Subscription
Agreement) and Form of Warrant (Exhibit D to the
Subscription Agreement) for subsequent closing under
May 16, 2002 Subscription Agreement)
(19) 4.34 June 10, 2002 Subscription Agreement and Form of
Unsecured Note (Exhibit A to the Subscription
Agreement) and Form of Warrant (Exhibit D to the
Subscription Agreement) for subsequent closing under
May 16, 2002 Subscription Agreement
(19) 4.35 June 18, 2002 Subscription Agreement and Form of
Unsecured Note (Exhibit A to the Subscription
Agreement) and Form of Warrant (Exhibit D to the
Subscription Agreement) for subsequent closing under
May 16, 2002 Subscription Agreement
(19) 4.36 June 28, 2002 Subscription Agreement and Form of
Unsecured Note (Exhibit A to the Subscription
Agreement) and Form of Warrant (Exhibit D to the
Subscription Agreement) for subsequent closing under
May 16, 2002 Subscription Agreement
(19) 4.37 July 10, 2002 Subscription Agreement and Form of
Unsecured Note (Exhibit A to the Subscription
Agreement) and Form of Warrant (Exhibit D to the
Subscription Agreement)
(19) 4.38 Waiver and Agreement of Amendment
(20) 4.39 July 31, 2002 Subscription Agreement and Form of
Unsecured Note (Exhibit A to the Subscription
Agreement) and Form of Warrant (Exhibit D to the
Subscription Agreement)
5.1 Form of Opinion of Luce, Forward, Hamilton & Scripps
LLP as to legality of securities being offered
II-7
EXHIBIT NO. DESCRIPTION
----------- -----------
(1) 10.1 Form of Indemnification Agreement
(2) 10.2 Amended 1996 Stock Option File
(1) 10.3 Employment Agreement dated as of May 1, 1996 between
the Company and Dr. Carl L. Chen
(15) 10.4 Severance Agreement and Warrant Agreement, each between
the Company and Dr. Carl L. Chen
(2) 10.5 Lease dated December 19, 1996 between Olen Properties
Corp., a Florida corporation, and the Company
(3) 10.6 Standard Sublease dated June 27, 1997 with Budget
Rent-a-Car of Southern California
(3) 10.8 Standard Industrial/Commercial Multi-Tenant Lease-Gross
dated March 12, 1997 with the Golgolab Family Trust
(5) 10.9 Loan Agreement dated as of August 1, 1997 between the
Company and the California Economic Development
Authority
(5) 10.10 Indenture of Trust dated as of August 1, 1997 between
the Company and the California Economic Development
Authority and First Trust of California, National
Association
(4) 10.11 Official Statement dated August 5, 1997
(5) 10.12 Letter of Credit issued by The Sumitomo Bank, Limited
(5) 10.13 Reimbursement Agreement dated as of August 1, 1997
between the Company and the Sumitomo Bank, Limited
(5) 10.14 Purchase Contract dated August 1, 1997 by and among
Rauscher Pierce Refnes, Inc., the California Economic
Development Authority and the Treasurer of the State of
California, and approved by the Company
(5) 10.15 Remarketing Agreement dated as of August 1, 1997
between the Company and Rauscher Pierce Refnes, Inc.
(5) 10.16 Blanket Letters of Representations of the California
Economic Development Authority and First Trust of
California, National Association
(5) 10.17 Tax Regulatory Agreement dated as of August 1, 1997 by
and among the California Economic Development
Authority, the Company and First Trust of California,
National Association
(5) 10.18 Custody, Pledge and Security Agreement dated as of
August 1, 1997 between the Company and The Sumitomo
Bank, Limited
(5) 10.19 Investment Agreement dated August 5, 1997 by and
between the Company and the Sumitomo Bank, Limited
II-8
EXHIBIT NO. DESCRIPTION
----------- -----------
(5) 10.20 Specimen Direct Obligation Note between the Company and
the Sumitomo Bank, Limited
(4) 10.21 Lease Agreement dated October 17, 1997 between the
Company and the City of Long Beach
(4) 10.22 Construction Agreement dated October 29, 1997 between
the Company and Commercial Developments
International/West
(12) 10.23 Assignment and Assumption Agreement between Advanced
Aerodynamics and Structures, Inc. and Congress
Financial Corporation (Southwest), dated January 29,
2002, as executed
(12) 10.24 Collateral Assignment of Debt and Security Agreements
between Advanced Aerodynamics and Structures, Inc. and
Congress Financial Corporation (Southwest), dated
January 29, 2002, as executed
(17) 10.25 Roy Norris Employment Agreement
(17) 10.26 Dale Ruhmel Employment Agreement
(17) 10.27 L. Peter Larson Employment Agreement
(17) 10.28 J. Nelson Happy Employment Agreement
(17) 10.29 Exhibit 1 to Employment Agreements
(19) 10.30 Nicolas Chabbert Employment Agreement
(19) 10.31 2002 Stock Option Plan
(20) 10.32 Audit Committee Charter adopted July 22, 2002
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Ernst & Young LLP, Independent Auditors
23.3 Consent of legal counsel (see Exhibit 5.1)
24.1 Power of Attorney (filed as part of the signature page
to the Registration Statement)
(1) Incorporated by reference to the Company's
Registration Statement on Form SB-2 (333-12273)
filed on September 19, 1996, declared effective
by the Securities and Exchange Commission on
December 3, 1996.
(2) Incorporated by reference to the Company's
Report on Form 10-KSB filed with the Securities
and Exchange Commission on March 31, 1997.
(3) Incorporated by reference by the Company's
Post-Effective Amendment No. 1 to Form SB-2
Registration Statement filed with the
Securities and Exchange Commission on August 5,
1997.
II-9
EXHIBIT NO. DESCRIPTION
----------- -----------
(4) Filed by paper pursuant to the Company's
request for a temporary hardship exemption
relating to this report.
(5) Incorporated by reference to the Company's
Report on Form 10-QSB filed with the Securities
and Exchange Commission on November 14, 1997.
(6) Incorporated by reference to the Company's
Report on Form 10-KSB for the year ended
December 31, 1999, filed with the Securities
and Exchange Commission on March 30, 2000.
(7) Incorporated by reference to the Company's
Report on Form SB-2 filed with the Securities
and Exchange Commission on September 5, 2000.
(8) Incorporated by reference to the Company's
Report on Form 10-KSB filed with the Securities
and Exchange Commission on April 2, 2001.
(9) Incorporated by reference to the Company's
Report on Form 10-QSB filed with the Securities
and Exchange Commission on November 14, 2001.
(10) Incorporated by reference to the Company's
Definitive Information Statement filed with the
Securities and Exchange Commission on November
21, 2001.
(11) Incorporated by reference to the Company's
Registration Statement on Form SB-2 (333-74924)
filed on December 12, 2001, and withdrawn by
the Company on January 24, 2002.
(12) Incorporated by reference to the Company's
Report on Form 8-K filed with the Securities
and Exchange Commission on February 14, 2002.
(13) Incorporated by reference to the Company's
Report on Form 8-K filed with the Securities
and Exchange Commission on March 14, 2002.
(14) Incorporated by reference to the Company's
Report on Form 8-K filed with the Securities
and Exchange Commission on April 10, 2002.
(15) Incorporated by reference to the Company's
Report on Form 10-KSB filed with the Securities
and Exchange Commission on April 16, 2002.
(16) Incorporated by reference to the Company's
Report on Form 8-K filed with the Securities
and Exchange Commission on April 26, 2002.
(17) Incorporated by reference to the Company's
Report on Form 10-QSB filed with the Securities
and Exchange Commission on May 20, 2002.
(18) Incorporated by reference to the Company's
Registration Statement on Form SB-2 (333-88964)
filed on May 23, 2002.
(19) Incorporated by reference to the Company's
Amendment No. 1 to the Registration Statement
on Form SB-2 (333-88964) filed with the
Securities and Exchange Commission on August 6,
2002.
(20) Incorporated by reference to the Company's
Report on Form 10-QSB filed with the Securities
and Exchange Commission on August 19, 2002.
II-10
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of the
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) under the Securities Act if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the effective
registration statement, and
(iii) Include any additional or changed material information
on the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act,
treat the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-11
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, Director, President, Chief
Executive Officer and Chief Financial Officer
Dated October 14, 2002
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature
appears below hereby constitutes and appoints L. Peter Larson as his true and
lawful attorney-in-fact and agent, with full power of substitution, for him and
in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this registration statement,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he might or could do them in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or any of them, or their or his substitute or substitutes, shall do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ L. Peter Larson Director, President, Chief Executive October 14, 2002
- --------------------------------- Officer, Chief Financial Officer and
Peter Larson Principal Accounting Officer
/s/ Shalom Babad Director October 14, 2002
- --------------------------------
Shalom Babad
/s/ C.M. Cheng Director October 14, 2002
- --------------------------------
C.M. Cheng
/s/ J. Nelson Happy Director October 14, 2002
- --------------------------------
J. Nelson Happy
/s/ Robert P. Kaplan Director October 14, 2002
- --------------------------------
Robert P. Kaplan
/s/ Neil Lewis Director October 14, 2002
- --------------------------------
Neil Lewis
/s/ Arie Rabinowitz Director October 14, 2002
- --------------------------------
Arie Rabinowitz
/s/ Samuel Rothman Chairman of the Board October 14, 2002
- --------------------------------
Samuel Rothman
II-12