================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-21749
_______________________
MOONEY AEROSPACE GROUP, LTD.
(FORMERLY ADVANCED AERODYNAMICS & STRUCTURES, INC.)
(Exact name of small business issuer as specified in its charter)
DELAWARE 95-4257380
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification)
3205 LAKEWOOD BOULEVARD
LONG BEACH, CALIFORNIA 90808
(Address of principal executive offices)
(562) 938-8618
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of November 15, 2002, the issuer had outstanding 38,089 shares of
Series A 5% Cumulative Convertible Preferred Stock, 73,328,580 shares of Class A
Common Stock, 1,013,572 shares of Class B Common Stock, 4,000,000 shares of
Class E-1 Common Stock and 4,000,000 shares of Class E-2 Common Stock.
================================================================================
MOONEY AEROSPACE GROUP, LTD.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Please note these financial statements have not been reviewed
by the Company's independent accountants, and will be amended
upon the completion of such review.
Item 2. Plan of Operations 27
Item 4. Controls and Procedures 32
PART II. OTHER INFORMATION 33
Item 1. Legal Proceedings 33
Item 5. Other Information 33
Item 6. Exhibits and Reports on Form 8-K 33
2
MOONEY AEROSPACE GROUP, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEET
September 30,
2002
(Unaudited)
--------------
ASSETS
Current assets:
Cash and cash equivalents $ 147,000
Accounts receivable, net 96,000
Inventories, net 8,202,000
Debt issuance costs, current portion 151,000
Prepaid expenses and other current assets 393,000
--------------
Total current assets 8,989,000
Property, plant and equipment, net 16,256,000
Restricted cash 436,000
Debt issuance costs 545,000
Goodwill 1,287,000
Other assets 331,000
--------------
Total assets $ 27,844,000
==============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 1,973,000
Accrued Interest 4,248,000
Other accrued liabilities 2,043,000
Capital leases, current portion 136,000
Notes payable, current portion 4,345,000
Convertible debentures, current (net discount of $ 5,810,000) 1,130,000
--------------
Total current liabilities 13,875,000
Long-term liabilities:
Capital leases, long-term 12,761,000
Note payable 2,098,000
Convertible debenture, long-term (net discount of $ 16,200,000) 2,754,000
Deferred land lease 359,000
Deferred revenue 1,855,000
Other liabilities, long-term 537,000
--------------
Total liabilities 34,239,000
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, 38,459 shares
issued and outstanding 3,120,000
Class A Common Stock, par value $.0001 per share; 625,000,000
shares authorized; 72,825,204 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 11,514,000
Public Warrants 473,000
Class A Warrants 11,290,000
Class B Warrants 4,632,000
Additional paid-in capital 68,310,000
Deficit accumulated during the development stage (105,741,000)
--------------
Total stockholders' deficiency (6,395,000)
--------------
Total liabilities and stockholders' deficiency $ 27,844,000
==============
See accompanying notes to the unaudited consolidated financial statements
3
MOONEY AEROSPACE GROUP, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
Period from
January 26, 1990
Three Months Ended Nine Months Ended (inception) to
September 30, September 30, September 30, 2002
(Unaudited) (Unaudited) (Unaudited)
----------- ----------- -----------
2001 2002 2001 2002
---- ---- ---- ----
Net spare parts sales $ -- $ 1,338,000 $ -- $ 1,707,000 $ 1,707,000
Cost of sales -- 749,000 -- 873,000 873,000
------------- ------------- ------------- ------------- --------------
Gross margin -- 589,000 -- 834,000 834,000
Cost and expenses:
Research and development costs 1,903,000 835,000 5,937,000 3,489,000 48,226,000
Selling, general and administrative
expenses 979,000 2,966,000 2,943,000 8,605,000 34,841,000
(Gain) loss on sale of assets -- (170,000) -- (170,000) 585,000
Realized loss on sale of investments -- 27,000 -- 27,000 93,000
In-process research and development
acquired -- -- -- -- 761,000
Non-recurring expenses -- -- -- -- 3,823,000
------------- ------------- ------------- ------------- --------------
2,882,000 3,828,000 8,880,000 11,951,000 88,329,000
------------- ------------- ------------- ------------- --------------
Loss from operations (2,882,000) (3,239,000) (8,880,000) (11,117,000) (87,495,000)
Other (expense) income:
Interest expense (1,546,000) (3,244,000) (4,901,000) (7,911,000) (17,163,000)
Interest and other income 18,000 9,000 33,000 77,000 4,358,000
------------- ------------- ------------- ------------- --------------
Loss before extraordinary item (4,410,000) (6,474,000) (13,748,000) (18,951,000) (100,300,000)
Extraordinary loss on retirement
of Bridge Notes -- -- -- -- (942,000)
------------- ------------- ------------- ------------- --------------
Net loss $ (4,410,000) $ (6,474,000) $(13,748,000) $(18,951,000) $(101,242,000)
============ ============= ============= ============= ==============
Net loss per common share $ (0.13) $ (0.09) $ (0.53) $ (0.30)
------------- ------------- ------------- -------------
Weighted average number of common
shares outstanding 33,348,000 72,874,000 25,075,000 64,072,000
============= ============= ============= =============
See accompanying notes to unaudited consolidated financial statements
4
MOONEY AEROSPACE GROUP, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
Consolidated Statement of Stockholders' Deficiency
(Unaudited)
- --------------------------------------------------- --------------------------------------------------------------------------------
Common Stock
- --------------------------------------------------- --------------------------------------------------------------------------------
Series A Class A Class B Class E-1 Class E-2
Preferred Stock
------------------- --------------------------------------------------------------------------------
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
(CONTINUED ON NEXT PAGE)
5a
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Deficit
accumulated
Public Class A Class B Additional Accumulated other during the
warrants warrants warrants paid-in capital comprehensive loss development stage Total
----------------------------------------------------------------------------------------------------
Common stock issued at $3.59 $ $ $ $ 7,500,000 $ $ $ 7,500,000
per share
Common stock issued in
exchange for in-process
research and development at
$.36 per share 361,000 361,000
Imputed interest on advance
from stockholders 799,000 799,000
Conversion of stockholder 10,728,000 10,728,000
advances
Conversion of officer loans 336,000 336,000
Stock issued in consideration
for services in 1994, 1995,
and 1996 at $.51 per share 1,507,000 1,507,000
Imputed interest on advances
from stockholder 11,000 11,000
Net proceeds from initial public
offering of Units at $4.39
per share 9,583,000 4,166,000 12,566,000 26,316,000
Net proceeds from exercise of
over-allotment option at
$4.55 per share 1,707,000 466,000 1,922,000 4,095,000
Warrants issued in connection
with issuance of Bridge
Notes at $.79 per share 473,000 473,000
Net loss from inception to
December 31, 1996 (24,328,000) (24,328,000)
------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 473,000 11,290,000 4,632,000 35,730,000 (24,328,000) 27,798,000
Adjustment to proceeds from
initial public offering and
exercise of overallotment
option (78,000) (78,000)
Net loss (6,625,000) (6,625,000)
------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 473,000 11,290,000 4,632,000 35,652,000 (30,953,000) 21,095,000
Conversion of Class B to A
Common Stock
Net loss (10,118,000) (10,118,000)
------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 473,000 11,290,000 4,632,000 35,652,000 (41,071,000) 10,977,000
Net loss (9,341,000) (9,341,000)
Unrealized loss on investments (32,000) (32,000)
------------------------------------------------------------------------------------------------------
Comprehensive loss (9,373,000)
------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 473,000 11,290,000 4,632,000 35,652,000 (32,000) (50,412,000) 1,604,000
See accompanying notes to unaudited consolidated financial statements
5b
MOONEY AEROSPACE GROUP, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
Consolidated Statement of Stockholders' Deficiency (continued)
(Unaudited)
- --------------------------------------------------- --------------------------------------------------------------------------------
Common Stock
- --------------------------------------------------- --------------------------------------------------------------------------------
Series A Class A Class B Class E-1 Class E-2
Preferred Stock
------------------- --------------------------------------------------------------------------------
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 3,443,000
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
====================================================================================================
(CONTINUED ON NEXT PAGE)
6a
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----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Deficit accumulated
Public Class A Class B Additional Accumulated other during the
warrants warrants warrants paid-in capital comprehensive loss development stage Total
----------------------------------------------------------------------------------------------------
Net proceeds from issuance of
preferred stock at $63.08 per
share $ $ $ $ 3,302,000 $ $ (3,302,000) $ 5,034,000
Net proceeds from issuance of
warrants at $1.29 per share 2,217,000
Conversion of Preferred Stock to
Class A 687,000 --
Net proceeds from issuance of
common stock at $0.69 per
share 863,000 863,000
Net proceeds from issuance of
warrants at $1.43 per share 358,000
Amortization of discount on
Preferred Stock (278,000) --
Amortization of warrants
attached to common stock 45,000 (45,000) --
Unrealized gain on investments 32,000 32,000
Net loss (10,715,000) (10,715,000)
----------------------------------------------------------------------------------------------------
Comprehensive loss (10,683,000)
----------------------------------------------------------------------------------------------------
Balance at December 31, 2000 473,000 11,290,000 4,632,000 40,549,000 (64,752,000) (607,000)
Net proceeds from issuance of
preferred stock at $84.54
per share 170,000 (194,000) 954,000
Net proceeds from issuance of
warrants at $.06 per share 60,000
Conversion of Preferred Stock
to Class A 2,332,000 (183,000) (16,000)
Net proceeds from issuance of
common stock at $0.17 per
share 1,241,000 1,242,000
Net proceeds from issuance of
warrants at $.07 per share 274,000
Amortization of discount on
Preferred Stock (163,000) 16,000
Amortization of warrants
attached to common stock 119,000 (119,000)
Issuance of warrants attached to
debentures at $.11 per share 3,443,000
Beneficial conversion feature
related to debentures 9,674,000 9,674,000
Conversion of Convertible
Debentures to Class A 1,578,000 1,579,000
Unrealized loss on investments (29,000) (29,000)
Net loss (21,164,000) (21,164,000)
----------------------------------------------------------------------------------------------------
Comprehensive loss (21,193,000)
----------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $473,000 $11,290,000 $4,632,000 $55,663,000 $ (29,000) $(86,575,000) $ (4,574,000)
====================================================================================================
See accompanying notes to unaudited consolidated financial statements
6b
MOONEY AEROSPACE GROUP, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
Consolidated Statement of Stockholders' Deficiency (continued)
(Unaudited)
- --------------------------------------------------- --------------------------------------------------------------------------------
Common Stock
- --------------------------------------------------- --------------------------------------------------------------------------------
Series A Class A Class B Class E-1 Class E-2
Preferred Stock
------------------- --------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Warrants
------------------- --------------------------------------------------------------------------------
Conversion of Preferred Stock
to Class A Common Stock (8,189) $ (563,000) 5,627,182 $ 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 68,000
Amortization of warrants
attached to common stock
Issuance of warrants attached to
debentures 4,433,000
Beneficial conversion feature
related to debentures
Conversion of Convertible
Debentures to Class A
Common Stock 16,731,549 1,000
Unrealized gain on investments
Issuance of common stock for
professional services 880,000
Conversion of Class B stock
to Class A Common Stock 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 and comprehensive loss
----------------------------------------------------------------------------------------------------
Balance at September 30, 2002
(unaudited) 38,459 $3,120,000 72,825,204 $ 7,000 1,013,572 $ -- 4,000,000 $ -- 4,000,000 $ -- $11,514,000
====================================================================================================
(CONTINUED ON NEXT PAGE)
7a
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Deficit accumulated
Public Class A Class B Additional Accumulated other during the
warrants warrants warrants paid-in capital comprehensive loss development stage Total
----------------------------------------------------------------------------------------------------
Conversion of Preferred Stock
to Class A Common Stock $ $ $ $ 716,000 $ $ (57,000) $ 97,000
Net proceeds from issuance of
common stock and warrants
at $.11 for professional
services 22,000 32,000
Amortization of discount on
Preferred Stock (68,000) --
Amortization of warrants
attached to common stock 90,000 (90,000) --
Issuance of warrants attached to
debentures 4,433,000
Beneficial conversion feature
related to debentures 9,783,000 9,783,000
Conversion of Convertible
Debentures to Class A
Common Stock 958,000 959,000
Unrealized gain on investments 29,000 29,000
Issuance of common stock for
professional services 178,000 178,000
Conversion of Class B stock
to Class A Common Stock --
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 and comprehensive loss (18,951,000) (18,951,000)
----------------------------------------------------------------------------------------------------
Balance at September 30, 2002
(unaudited) $473,000 $11,290,000 $4,632,000 $68,310,000 $ -- $(105,741,000) $ (6,395,000)
====================================================================================================
See accompanying notes to unaudited consolidated financial statements
7b
MOONEY AEROSPACE GROUP, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
PERIOD FROM
JANUARY 26
NINE MONTHS ENDING 1990
SEPTEMBER 30, (INCEPTION)
---------------------------- TO SEPTEMBER 30,
2001 2002 2002
----------------------------------------------
OPERATING ACTIVITIES:
Net loss $(13,748,000) $(18,951,000) $(101,242,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Noncash stock and warrant compensation expense -- 807,000 2,014,000
Noncash professional service expense -- 618,000 962,000
Noncash interest expense -- 120,000 667,000
Amortization of discount on convertible debentures 3,836,000 3,322,000 5,480,000
Amortization of debt issue costs -- 133,000 206,000
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 1,054,000 1,113,000 7,578,000
(Gain) loss on disposal of assets -- (170,000) 3,390,000
Realized loss on sale of investments -- 27,000 93,000
Changes in operating assets and liabilities:
Increase in accounts receivable -- (96,000) (96,000)
Increase in inventory -- (2,854,000) (2,854,000)
Decrease (increase) in prepaid expenses and other current assets 57,000 (326,000) (220,000)
Increase in other assets (109,000) (16,000) (331,000)
Increase (decrease) in accounts payable 594,000 (101,000) 598,000
Increase in accrued liabilities 487,000 3,295,000 6,416,000
(Decrease) increase in deferred revenue (25,000) 50,000 1,655,000
----------------------------------------------
Net cash used in operating activities (7,854,000) (13,029,000) (73,645,000)
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 (259,000) (27,000) (8,228,000)
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 (259,000) (2,015,000) (11,350,000)
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 5,836,000 9,593,000 19,391,000
Proceeds from issuance of warrants -- 4,433,000 10,427,000
Advances from stockholder -- -- 10,728,000
Proceeds from issuance of common stock 1,172,000 -- 9,619,000
Net proceeds from initial public offering and exercise of
over-allotment option -- -- 30,411,000
Net proceeds from bridge financing 604,000 1,900,000 9,195,000
Net proceeds from loans from officers -- -- 336,000
Payments on capital lease obligations (507,000) (111,000) (1,045,000)
Payments on promissory notes -- (313,000) (738,000)
Repayment of bridge financing -- (992,000) (9,092,000)
----------------------------------------------
Net cash provided by financing activities 8,119,000 14,510,000 85,142,000
----------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,000 (534,000) 147,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,000 681,000 --
----------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,000 $ 147,000 147,000
==============================================
See accompanying notes to unaudited consolidated financial statements
8
MOONEY AEROSPACE GROUP, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
(Unaudited)
PERIOD FROM
JANUARY 26
NINE MONTHS ENDING 1990
SEPTEMBER 30, (INCEPTION)
---------------------------- TO SEPTEMBER 30,
2001 2002 2002
----------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $861,000 $1,367,000 $ 5,789,000
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 -- -- $ 814,000
Issuance of note, stock and warrants for net assets acquired in
business combination -- $5,799,000 $ 5,799,000
Assets acquired under capital leases $153,000 -- $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 unaudited consolidated financial statements
9
MOONEY AEROSPACE GROUP, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
As this filing on Form 10-QSB has not been reviewed by the Company's
independent accountants, it is considered an incomplete filing. Upon completion
of the review by the Company's independent accountants, an amended Form 10-QSB
will be filed.
In the opinion of the Company's management, the accompanying unaudited
consolidated financial statements include all adjustments (which include only
normal recurring adjustments) necessary for a fair presentation of the financial
position of the Company at September 30, 2002 and the results of operations and
cash flows for the three and nine months ended September 30, 2002 and September
30, 2001, respectively, and for the period from January 26, 1990 (inception) to
September 30, 2002. Although the Company believes that the disclosures in these
financial statements are adequate to make the information presented not
misleading, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. Results of operations for interim
periods are not necessarily indicative of results of operations to be expected
for any other interim period or the full year.
The financial information in these consolidated financial statements
should be read in conjunction with the audited December 31, 2001 financial
statements and notes thereto included in the Company's annual report filed on
Form 10-KSB.
The Company is a development stage enterprise organized in 1990 to
design, develop, manufacture and market general aviation aircraft. At the end of
2001, the Company recognized that a unique opportunity exists in the general
aviation industry today. The Company believes that an opportunity has been
created for the formation of a new general aviation company whose products offer
an alternative to business travel by airline for executives of small to
medium-sized businesses and high net worth individuals as a result of the
occurrence of the following: (1) reduction of product-liability exposure as a
consequence of the passage of General Aviation Revitalization Act of 1994, (2)
the availability of several top of the line general aviation product lines as a
result of the recent recession and changes in strategic direction by several
general aviation aircraft manufacturers, and (3) deteriorating comfort and
convenience of airline travel.
To date, the Company has generated minimal sales revenue from the sale
of spare parts and the delivery of two aircraft, and no substantial revenue is
projected until the Company regains market acceptance at profitable selling
prices and volumes. The Company incurred program development costs to date of
approximately $48,987,000 and has recorded a cumulative net loss of
$101,242,000. 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 September 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.
10
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 Ovation 2, and the Bravo, which are widely considered to be the
performance leaders in the four-passenger single engine aircraft market. For
over 50 years, the MACorp has produced high performance piston aircraft, which
are considered by many to be the "best of breed" in the owner-flown aircraft
market. There are more than 10,000 Mooney aircraft in operation around the
world.
MACorp's assets are held by a newly formed wholly owned subsidiary of
Mooney Airplane Company, Inc. (MAC). On July 23, 2002, the Company changed its
name from Advanced Aerodynamics & Structures, Inc. to Mooney Aerospace Group,
Ltd. ("the Company"). The accompanying consolidated financial statements are
inclusive of the Company and MAC, however, the results of operations and cash
flows of MAC are only included for the period April 19, 2002 (the date of
acquisition) through September 30, 2002. Refer to Note 9 for additional
discussion and footnote disclosures regarding the acquisition.
The Company plans to pursue the acquisition of other complementary
general aviation product lines and development programs as they become
available. The new management team has suspended significant spending on the
Jetcruzer, and the Company will review how best to capitalize on the completed
development work.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2001 balances to
conform to the 2002 presentation.
2. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, business Combinations and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 is effective for any business combinations
completed after June 30, 2001 and SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives.
11
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 September 30,
2002, as it relates to the acquisition of MACorp, are disclosed in Note 9.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supercedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of. SFAS No. 144 addresses financial accounting and reporting for
the impairment of long-lived assets and for long-lived assets to be disposed of.
However, SFAS No. 144 retains certain fundamental provisions of SFAS No. 121
including recognition and measurement of the impairment of long-lived assets to
be held and used; and measurement of long-lived assets to be disposed of by
sale. SFAS No. 144 is effective for fiscal years beginning after December 15,
2001. The Company has adopted SFAS No. 144 on January 1, 2002. The adoption did
not have an effect on the earnings and financial position of the Company as of
and for the nine months ended September 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 nine month periods ended September 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 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 the Prime Rate with principal payments of
$208,000, and interest payments 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 the Prime Rate, with
principal payments of $93,750, and interest payments being due on the first
business day of each calendar quarter commencing on July 1, 2002. These notes
are secured by substantially all the assets acquired from MACorp. As of
September 30, 2002, a total of approximately $3,307,000 of these notes remained
outstanding. At September 30, 2002 accrued interest related to these notes
totaled approximately $42,000. 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 Congress. No events of default have
occurred with respect to these notes.
12
In addition to these notes, the terms of the Assignment and Assumption
Agreement between the Company and Congress also call for the Company to pay to
Congress, 7 1/2% of any additional funding raised subsequent to the agreement,
as a prepayment of principal on the third note described above with a principal
value of $1,500,000. The Company had also agreed to pay legal expenses incurred
by Congress with respect to the acquisition. The total amount to be paid was
approximately $816,000, including $268,000 for the legal expenses. In August
2002, the Company and Congress agreed that the total amount due would be paid in
three separate installments of approximately $272,000 on August 30, September
30, and October 31, 2002. On August 30, 2002 the first payment was made by
certain investors on the Company's behalf and recorded as a short-term loan
payable. Of the amount paid, $183,000 was applied to the principal of the note,
and the remaining portion was applied against the accrued legal expenses.
On May 24, 2002 the Company received $400,000 in cash in order to fund
operations, by signing an unsecured promissory note. However, on July 30, 2002 a
new secured note in the amount of $1,075,000 was signed which superseded the
terms of this note, and raised an additional $600,000 to fund operations. The
remaining $75,000 was received in-kind by the payment of a consulting invoice on
behalf of the Company. The note was secured with nearly all of the assets of
Mooney Airplane Company as specified within the Security Agreement dated July
29, 2002. The terms of this notes call for repayment on the earliest to occur
of: (1) August 30, 2002; or (2) the sale of the first three complete airplanes;
or (3) in the event the Company raises an aggregate of at least $3,000,000 in
financing; or (4) the occurrence of an event of default as defined in the
Security Agreement dated July 30, 2002 relating to the notes totaling $502,000
as described below. The notes accrue at an annual rate of 8% that increases to
12% should the Company default on repayment. As of September 30, 2002 the
Company was in default on the note as the note had not been repaid according to
the repayment terms listed above. At September 30, 2002, the balance outstanding
of $1,075,000 has been recorded as a current liability and interest in the
amount of $22,000 has been accrued at 12%.
On July 30, 2002 the Company also signed five secured 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 notes were secured with three aircraft owned by the Company as specified
within the Security Agreement dated July 30, 2002. The interest and payment
terms are identical to those of the note in the amount of $1,075,000 discussed
above. As of September 30, 2002 the Company was in default on the note as the
note had not been repaid according to the repayment terms listed above. At
September 30, 2002, the balance outstanding of $202,000 has been recorded as a
current liability and interest in the amount of $8,000 has been accrued at 12%.
On July 31, 2002 the Company signed two secured promissory notes in the
total amount of $200,000 in order to raise funds for operations. The notes were
secured with nearly all of the assets of Mooney Airplane Company as specified
within the Security Agreement dated July 29, 2002. The interest and payment
terms are identical to those of the note in the amount of $1,075,000 discussed
above, except for event number (4), which is defined as the occurrence of an
event of default as defined in the Security Agreement dated July 29, 2002. As of
September 30, 2002 the Company was in default on the note as the note had not
been repaid according to the repayment terms listed above. At September 30,
2002, the balance outstanding of $200,000 has been recorded as a current
liability and interest in the amount of $4,000 has been accrued at 12%.
13
On August 23, 2002 the Company signed a secured promissory note in the
amount of $500,000 in order to raise funds for operations. The note was secured
with nearly all of the assets of Mooney Airplane Company as specified within the
Security Agreement dated July 29, 2002. Payment is due on December 23, 2002.
Interest accrues at 8% per annum, and at 12% in the event of default. At
September 30, 2002, the balance outstanding of $500,000 has been recorded as a
current liability and interest in the amount of $4,000 has been accrued at 8%.
On August 29, 2002 the Company signed a secured promissory note in the
amount of $200,000 in order to raise funds for operations. The note was secured
with nearly all of the assets of Mooney Airplane Company as specified within the
Security Agreement dated July 29, 2002. The payment and interest terms are
identical to those of the note executed on August 23, 2002. At September 30,
2002, the balance outstanding of $200,000 has been recorded as a current
liability and interest in the amount of $1,000 has been accrued at 8%.
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 nine months ended September 30, 2002,
$552,000 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 September 30, 2002 under this Subscription Agreement was
approximately $90,000. The balance of $947,000 outstanding at September 30, 2002
from the March 27,2001 transaction has been recorded as a long-term liability.
The balance of $201,000 outstanding from the July 25, 2001 transaction has been
recorded as a short-term liability, as the notes were due on July 25, 2002.
14
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 September 30,
2002, the Company has accrued $187,000 in such damages. In addition, as the
non-registration event lasted more than 61 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 September 30, 2002 has been record as a
long term liability.
The June 27, 2001 debenture was issued with a various stated conversion
price, which resulted in a beneficial conversion feature since the effective
conversion price was below market at the time of the issuance. The discount of
$351,000 which resulted from this transaction, will be amortized over the life
of the debenture. During the nine months ended September 30, 2002 approximately
$72,000 was amortized to interest expense. No notes issued under this agreement
were converted as of September 30, 2002.
At September 30, 2002, the Company has accrued approximately $128,000
in interest due at the penalty rate, as the waiver obtained and discussed above
did not waive this note holder's right to collect interest at the penalty rate
as defined in the note agreement.
On October 26, 2001, the Company obtained a new financing of up to
$10,000,000 with an availability of up to an additional $3,000,000, as part of a
private placement offering, which is separate from that of March 27, 2001 and
June 27, 2001. The Company issued $7,750,000 in Secured Convertible Notes
("Notes" or "Debentures") with an interest rate of 8% to accredited investors,
as defined by Regulation D issued by the Securities and Exchange Commission
under the Securities Act of 1933. In conjunction with the financing, the Company
issued an additional $667,000 in Secured Convertible Notes as finders fees. As
part of the agreement, the Company issued warrants to purchase 17,714,000 shares
of Common Stock. Half of the warrants may be exercised at a purchase price of
$.25 per share. The remaining 50% may be exercised at $.30 per share. There is a
mandatory redemption requirement at 125% of the unpaid principal balance and
unpaid interest upon the occurrence of default or if the Company is prohibited
from issuing shares of common stock. The Company did not register the shares
issuable upon conversion within 60 days of the closing date, which is a
non-registration event pursuant to Section 10.4 of the Subscription Agreement.
In addition, as the non-registration event lasted more than 61 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 $1,091,000 representing liquidation
damages due to the note holders as a result of the non-registration event.
15
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 expired October 25, 2002. Funding in the amount of
$1,329,000 was obtained through the exercise of this option and is discussed
below within the transaction closed on February 27,2002.
The October 26, 2001 debentures were issued with various stated
conversion prices, which resulted in a beneficial conversion feature since the
conversion price was below market at the time of issuance. The discount of
$5,936,000, which resulted from this transaction, will be amortized over the
life of the debentures. For the nine-month period ended September 30, 2002,
approximately $810,000 was amortized to interest expense due to the passage of
time and conversions.
At September 30, 2002, the Company has accrued approximately $781,000
in interest due the note holders. The Company failed to pay the interest due on
September 30, 2002 and within the 10 day grace period which is an event of
default, therefore, interest has been accrued at the penalty rate of 10%.
However, as discussed earlier, on May 20, 2002, the Company obtained waivers
from certain note holders. As the debentures are secured, per the terms of the
associated Collateral Agreement, the terms of the notes could be changed on
behalf of all subscribers under terms similar to the debentures issued on March
27, 2001. As waivers representing 66% of all subscribers were obtained, the
notes were amended to require the payment of interest at maturity thus curing
that event of default, but the waiver did not prohibit the accrual of interest
at the penalty rate. Due to the non-registration event of default noted above,
the principal balance of $5,468,000 outstanding as of September 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 described in Note 1 and to fund current operations. In the
first of the three financing transactions, the Company issued $2,250,000 in 8%
Secured Convertible Notes under the October 26, 2001, private placement in which
$3,000,000 was available for additional financing. In conjunction with the
financing, the Company issued an additional $225,000 in Unsecured Convertible
Notes as finder's fees. The notes are convertible after 120 days into shares of
common stock at a conversion price of $.35 or 70% of the average of the three
lowest closing bid prices for our common stock for the thirty days prior to
conversion. The maturity date of the notes is October 26, 2006 and interest is
due on September 30, 2002 and semi-annually there after. Attached to the notes
were warrants to purchase 5,143,000 shares of common stock. The first 50% of the
warrants may be exercised after 45 days at a price of $.25 per share and the
remaining 50% may be exercised at $.30 per share. The warrants may be exercised
under the same terms as the warrants issued in conjunction with the October 26,
2001, private placement.
In the second of the three financing transactions, the Company issued
$1,329,000 in 8% Unsecured Convertible Notes as part of the October 26, 2001 Put
Agreement in which we had the option to sell up to an additional $5,000,000 in
convertible notes. In conjunction with the financing, the Company issued an
additional $133,000 in Unsecured Convertible Notes as finder's fees. The notes
are convertible after 120 days into shares of common stock under the same terms
as the October 26, 2001 private placement, except that there is no security
involved. The maturity date of the notes is October 26, 2006. Attached to the
notes were warrants to purchase 3,037,000 shares of common stock. The warrants
may be exercised under the same terms as the warrants issued in conjunction with
the October 26, 2001, private placement.
16
In the third of the three financing transactions, the Company issued
$2,155,000 in 8% Unsecured Convertible Notes as part of a new private placement
dated January 30, 2002. In conjunction with the financing, the Company issued an
additional $117,000 in Unsecured Convertible Notes as finders fees. The notes
are convertible after 120 days into shares of common stock under the same terms
as the October 26, 2001 private placement. The maturity date of the notes is
October 26, 2006. Attached to the notes were warrants to purchase 4,926,000
shares of Class A Common Stock. The warrants may be exercised under the same
terms as the warrants issued in conjunction with the October 26, 2001 private
placement.
The February 27, 2002 debentures were issued with various stated
conversion prices, which resulted in a beneficial conversion feature since the
conversion price was below market at the time of issuance. The resulting
discount of $3,385,000 will be amortized over the life of the debentures. As of
September 30, 2002, approximately $434,000 was amortized to interest expense due
to the passage of time and conversions.
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 61 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 $438,000 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, but did not waive their right to
have interest accrued at the penalty rate of 10%. As interest was due on
September 30, 2002, and the Company failed to pay the interest when due or
within the 10-day grace period, a second event of default has occurred. At
September 30, 2002, the Company has accrued approximately $402,000 in interest
due the note holders. Due to these events of default, the outstanding principal
balance of $3,419,000 at September 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 there after. Attached to the notes were warrants to purchase
3,314,000 shares of Class A Common Stock. The warrants may be exercised under
the same terms as the warrants issued in conjunction with the October 26, 2001
private placement.
The March 26, 2002 debentures were issued with stated conversion
prices, which resulted in a beneficial conversion feature since the conversion
price was below market at the time of issuance. The resulting discount of
$988,000 will be amortized over the life of the debentures. As of September 30,
2002, approximately $99,000 was amortized to interest expense due to the passage
of time. No notes issued under this agreement were converted during the nine
months ended September 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. In addition, as the non-registration
17
event lasted more than 61 days an event of default has also occurred. 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 call the notes due and 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 $51,000 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, but did not
waive their right to have interest accrued at the penalty rate of 10%. As
interest was due on September 30, 2002 and the Company failed to pay the
interest when due or within the 10 day grace period, a second event of default
has occurred. At September 30, 2002, the Company has accrued approximately
$83,000 in interest due the note holders. Due to the events of default noted
above, the outstanding principal balance of $1,245,000 at September 30, 2002
under this Agreement that is representative of those who signed the waivers has
been recorded as a long-term liability in the balance sheet, while the remaining
outstanding balance of $350,000 has been recorded as a current liability.
On April 11, 2002, the Company issued $950,000 in 8% Unsecured
Convertible Notes in a subsequent closing that was part of the new private
placement that closed on February 27, 2002. In conjunction with the closing, the
Company issued an additional $95,000 in Unsecured Convertible Notes as finder's
fees. The notes are convertible after 120 days into shares of common stock under
the same terms as the October 26, 2001 private placement. The maturity date of
the notes is October 26, 2006 with interest being due at maturity. Attached to
the notes were warrants to purchase 2,171,000 shares of Class A Common Stock.
The warrants may be exercised under the same terms as the warrants issued in
conjunction with the October 26, 2001 private placement. At September 30, 2002
the Company has accrued $40,000 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 September 30,
2002, approximately $64,000 was amortized to interest expense due to the passage
of time. As of September 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. As the non-registration event lasted
ore than 61 days an event of default has also occurred. 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 call their notes due and to have liquidation damages accrued
during the period May 20, 2002 through August 31, 2002. Therefore, at September
30, 2002, in accordance with the waiver and Section 10.4, the Company has
accrued $50,000 representing liquidation damages due to the note holders as a
result of the non-registration event and subsequent default. Therefore due to
the event of default, the outstanding debenture principal balance of $395,000 at
September 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 $650,000 has been recorded as
a current liability.
On May 16, 2002, the Company issued $730,000 in 8% Unsecured
Convertible Notes under a new Subscription Agreement. In conjunction with the
closing, the Company issued an additional $73,000 in Unsecured Convertible Notes
as finder's fees. The notes are convertible after 120 days into shares of common
stock at a conversion price of $.35 or 70% of the average of the three lowest
closing bid prices for our common stock for the thirty days prior to conversion.
The maturity date of the notes is May 16, 2007 and interest is due on September
30, 2002 and semi-annually there after. Attached to the notes were warrants to
18
purchase 1,669,000 shares of common stock. The first 50% of the warrants may be
exercised after 45 days at a price of $.25 per share and the remaining 50% may
be exercised at $.30 per share. There is a mandatory redemption requirement at
125% of the unpaid principal balance and unpaid interest upon the occurrence of
default or if we are is prohibited from issuing shares of common stock.
The May 16, 2002 debentures were issued with various stated conversion
prices, which resulted in a beneficial conversion feature since the conversion
price was below market at the time of issuance. The resulting discount of
$497,000 will be amortized over the life of the debentures. As of September 30,
2002, approximately $37,000 was amortized to interest expense due to the passage
of time. As of September 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. In addition, as the non-registration
event lasted more than 61 days, an event of default has also occurred. 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 call the notes due, and to have liquidation damages accrued
during the period May 20, 2002 through August 31, 2002. Therefore, at September
30, 2002, in accordance with the waiver and Section 10.4, the Company has
accrued $23,000 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, but did not waive their right to have interest accrued at
the penalty rate of 10%. As interest was due on September 30, 2002, and the
Company failed to pay interest when due or within the 10-day grace period, a
second event of default has occurred. At September 30, 2002, the Company has
accrued approximately $31,000 in interest due the note holders. Due to the
occurrence of the events of default, the outstanding principal balance of
$453,000 at September 30, 2002 under this Agreement that is representative of
those who signed the waivers has been recorded as a long-term liability in the
balance sheet, while the remaining outstanding balance of $350,000 has been
recorded as a current liability.
On June 6, 2002, the Company issued $325,000 in 8% Unsecured
Convertible Notes in a subsequent closing that was part of the new private
placement dated May 16, 2002. In conjunction with the closing, the Company
issued an additional $32,500 in Unsecured Convertible Notes as finder's fees.
The notes are convertible after 120 days into shares of common stock under the
same terms as the May 16, 2002 private placement. The maturity date of the notes
is June 5, 2007 with interest being due at maturity. Attached to the notes were
warrants to purchase 743,000 shares of Class A Common Stock. The warrants may be
exercised under the same terms as the warrants issued in conjunction with the
May 16, 2002 private placement.
The June 6, 2002 debentures were issued with stated conversion prices,
which resulted in a beneficial conversion feature since the conversion price was
below market at the time of issuance. The resulting discount of $230,000 will be
amortized over the life of the debentures. As of September 30, 2002,
approximately $14,000 was amortized to interest expense due to the passage of
time. No notes issued under this agreement were converted during the nine months
ended September 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, at September 30, 2002, in accordance with the waiver and
Section 10.4, the Company has accrued $10,000 representing liquidation damages
due to the note holders as a result of the non-registration event.
19
At September 30, 2002 the Company has accrued approximately $9,000 in
interest due the note holders. In addition, as no events of default have
occurred with respect to these notes, the principal value of the notes
outstanding of $358,000 has been recorded as a long-term liability.
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 September 30, 2002,
approximately $22,000 was amortized to interest expense due to the passage of
time. No notes issued under this agreement were converted during the nine months
ended September 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, at September 30, 2002, in accordance with the waiver and
Section 10.4, the Company has accrued $11,000 representing liquidation damages
due to the note holders as a result of the non-registration event.
At September 30, 2002 the Company has accrued approximately $14,000 in
interest due the note holders. In addition, as no events of default have
occurred with respect to these notes, the principal value of the notes
outstanding of $550,000 has been recorded as a long-term liability.
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 September 30,
2002, approximately $15,000 was amortized to interest expense due to the passage
of time. No notes issued under this agreement were converted during the nine
months ended September 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, at September 30, 2002, in accordance with the waiver and
Section 10.4, the Company has accrued $7,000 representing liquidation damages
due to the note holders as a result of the non-registration event.
20
At September 30, 2002 the Company has accrued approximately $9,000 in
interest due the note holders. In addition, as no events of default have
occurred with respect to these notes, the principal value of the notes
outstanding of $385,000 has been recorded as a long-term liability.
On June 28, 2002, the Company issued $2,000,000 in 8% Unsecured
Convertible Notes in a subsequent closing that was part of the new private
placement dated May 16, 2002. The notes are convertible after 120 days into
shares of common stock under the same terms as the May 16, 2002 private
placement. The maturity date of the notes is June 28, 2007 with interest being
due at maturity. Attached to the notes were warrants to purchase 4,000,000
shares of Class A Common Stock. The warrants may be exercised under the same
terms as the warrants issued in conjunction with the May 16, 2002 private
placement.
The June 28, 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 September
30, 2002, approximately $72,000 was amortized to interest expense due to the
passage of time. No notes issued under this agreement were converted during the
nine months ended September 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 $24,000 representing liquidation damages due to the note holders at
September 30, 2002 as a result of the non-registration event.
At September 30, 2002 the Company has accrued approximately $42,000 in
interest due the note holders. In addition, as no events of default have
occurred with respect to these notes, the principal value of the notes
outstanding of $2,000,000 has been recorded as a long-term liability.
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 571,000 shares of common
stock. The first 50% of the warrants may be exercised after 45 days at a price
of $.25 per share and the remaining 50% may be exercised at $.30 per share.
There is a mandatory redemption requirement at 125% of the unpaid principal
balance and unpaid interest upon the occurrence of default or if the Company is
prohibited from issuing shares of common stock.
The July 10, 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
$192,000 will be amortized over the life of the debentures. As of September 30,
2002, approximately $9,000 was amortized to interest expense due to the passage
of time. No notes issued under this agreement were converted during the nine
months ended September 30, 2002.
21
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, at September 30, 2002, in accordance with the waiver and
Section 10.4, the Company has accrued $2,000 representing liquidation damages
due to the note holders as a result of the non-registration event.
At September 30, 2002 the Company has accrued approximately $5,000 in
interest due the note holders. In addition, as no events of default have
occurred with respect to these notes, the principal value of the notes
outstanding of $275,000 has been recorded as a long-term liability.
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 150,000 shares of common stock. The warrants may be
exercised under terms similar to those issued as finder's fees.
The July 31, 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
$154,000 will be amortized over the life of the debentures. As of September 30,
2002, approximately $5,000 was amortized to interest expense due to the passage
of time. No notes issued under this agreement were converted during the nine
months ended September 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. Therefore, at September 30, 2002, in
accordance with Section 10.4, the Company has accrued less than $1,000
representing liquidation damages due to the note holders as a result of the
non-registration event.
At September 30, 2002 the Company has accrued approximately $4,000 in
interest due the note holders. In addition, as no events of default have
occurred with respect to these notes, the principal value of the notes
outstanding of $300,000 has been recorded as a long-term liability.
Additionally, on September 10, 2002, the Company issued $2,000,000 in
8% Unsecured Convertible Notes under a new Subscription Agreement. In
conjunction with the closing, the Company paid $40,000 in cash, issued an
additional $160,000 in convertible notes and issued warrants to purchase 571,000
shares of common stock, all 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 September
10, 2007 and interest is due on that date. Attached to the notes were warrants
to purchase 4,000,000 shares of common stock. The first 50% of the warrants may
be exercised after 45 days at a price of $.25 per share and the remaining 50%
may be exercised at $.30 per share. There is a mandatory redemption requirement
at 125% of the unpaid principal balance and unpaid interest upon the occurrence
of default or if the Company is prohibited from issuing shares of common stock.
22
The September 10, 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 $1,680,000 will be amortized over the life of the debentures. As of
September 30, 2002, approximately $18,000 was amortized to interest expense due
to the passage of time. No notes issued under this agreement were converted
during the nine months ended September 30, 2002.
At September 30, 2002 the Company has accrued approximately $8,000 in
interest due the note holders. In addition, as no events of default have
occurred with respect to these notes, the principal value of the notes
outstanding of $2,000,000 has been recorded as a long-term liability.
As of September 30, 2002, various note holders converted a total of $
4,831,000 of Convertible Debentures into 31,692,636 shares of Class A Common
Stock.
6. STOCKHOLDERS' DEFICIENCY
PREFERRED STOCK
Through September 30, 2002, the Company has issued 91,085 shares and
received $8,265,000 (net of $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 38,459 shares of Preferred Stock with a stated value of $3,845,900
and detachable warrants to purchase 1,082,000 shares of common stock. No
Preferred Stock was issued during the nine months ended September 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 nine month period ended September 30,
2002, $68,000 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
23
an amount determined by the market value of the common share at the date of
close, adjusted for changes in the market price prior to the conversion.
Preferred stockholder's do not have voting rights. As of September 30, 2002, the
Company had accumulated dividends in arrears for the Preferred Stock totaling
$420,000 or $ 10.91 per share.
For the nine-month period ended September 30, 2002, various preferred
stockholders had converted a total of 8,189 shares plus dividends in arrears
into 5,627,000 shares of Class A Common Stock. No warrants have been exercised
as of September 30, 2002.
EQUITY LINE OF CREDIT
On August 15, 2000, the Company signed a Private Equity Line of Credit
Agreement ("Equity Line") to sell up to $20,000,000 of Common stock over the
course of two years. This Equity Line enables us to request, at the Company's
sole discretion, that the investors purchase certain amounts of shares every 15
days at a price equal to 92% or 93% of the market price. Each request will be
for a minimum of $200,000 and subject to a maximum of $1,500,000. Additional
drawings on this Equity Line are dependent upon stock market conditions. As of
December 31, 2001, we had 5,707,000 shares outstanding under the Equity
Agreements with a total net proceeds of $2,393,000. No shares under the equity
line were sold during the nine-month period ended September 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 September 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:
SEPTEMBER 30, 2002
------------------
Raw materials and purchased parts $ 2,199,000
Manufactured parts 3,335,000
Work-in-process 3,346,000
Finished goods 797,000
------------------
9,677,000
Less allowance for obsolete and
slow-moving parts 1,475,000
------------------
$ 8,202,000
==================
24
8. EXECUTIVE COMPENSATION EXPENSES
The Company's former President and Chief Executive Officer, Dr. Carl
Chen, resigned effective January 8, 2002. He will remain available as needed for
consulting with the Company on mutually agreed upon basis. The Company agreed to
pay Dr. Chen severance of $300,000 over the next two years. In addition, he
received warrants to purchase 2,000,000 shares of Class A Common Stock at an
exercise price of $.25. At September 30, 2002, $150,000 of the cash severance
has been paid. At that date, the Company has accrued compensation expense of
$470,000, representing the liability for the remaining $150,000 cash payment
due, plus the estimated fair value of the warrants issued.
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
President and Chief Executive Officer. The terms of Mr. Norris' severance called
for the payment of $165,000 in cash as severance pay, in addition to $58,000 in
consulting fees and expenses, and has been paid. In addition, the Company is
to issue a number of shares of Class A common stock that is equivalent to 1.5%
of all outstanding Class A shares as of the date of issuance. As of September
30, 2002, these shares had not yet been issued, however a liability of $150,000
was recorded to accrue the fair value of the shares owed.
Additionally, the Company has executed three-year employment agreements
with two executives dated January 8, 2002. On a ratable basis over the
three-year period, the executives will vest a total of 5% ownership in the
Company. At September 30, 2002, the Company has accrued $93,000 in compensation
expense representing the estimated fair market value of the vested ownership at
the date.
As of September 30, 2002 the Company also had a similar employment
agreement with Mr. L. Peter Larson. However, on November 14, 2002, Mr. Larson
submitted his resignation to the Board of Directors. As a result, the amount
owed to him as stock compensation was decreased from 3% to 1%, as of the shares
outstanding at November 1, 2002 per the terms of his severance. Therefore, as of
September 30, 2002 the Company has accrued approximately $44,000 due Mr. Larson
which reflects this change. Refer to footnote 10 regarding Mr. Larson's
resignation.
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.
25
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 September
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 fourth quarter.
The operating results of the acquisition are included in the Company's
consolidated results of operations from April 19, 2002. The following unaudited
proforma summary presents the consolidated results of operations as if the
acquisition had occurred at the beginning of the year of acquisition and the
year immediately preceding, after the effect of certain adjustments. These
proforma results have been presented for comparative purposes only and are not
indicative of what would have occurred had the acquisitions been made as of
January 1, 2001, appropriately, or of any potential results which may occur in
the future. The results of operations of MACorp included in the pro forma
information below are not indicative of what the results of operations would be
had MACorp been operating under normal circumstances, as it was operating under
Chapter 11 proceedings during a portion of the time during the nine months
ended September 30, 2002, and the nine months ended September 30, 2001.
---------------------------------------- ------------------------ -------------------------
Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001
---------------------------------------- ------------------------ -------------------------
Pro forma (unaudited)
---------------------------------------- ------------------------ -------------------------
Revenue $ 2,167,000 $ 14,226,000
---------------------------------------- ------------------------ -------------------------
Loss from continuing operations $ (12,601,000) $ (13,621,000)
---------------------------------------- ------------------------ -------------------------
Net loss $ (20,474,000) $ (18,934,000)
---------------------------------------- ------------------------ -------------------------
Net loss per share $ (0.32) $ (0.78)
---------------------------------------- ------------------------ -------------------------
10. SUBSEQUENT EVENTS
On October 1, 2002 the Board of Directors approved a resolution to
close the Company's facility in Long Beach, California, in an effort to minimize
costs and focus efforts on the manufacturing facility in Kerrville, Texas. 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 a small accounting staff. The Company has not yet determined the
impact of this decision on the consolidated financial statements.
On October 4, 2002, the Company executed four promissory notes in the
aggregate amount of $1,100,000. The Company received $333,000 in cash proceeds
that were used to fund operations. The remaining amount of $767,000, was paid
directly to Congress by the creditor on behalf of the Company, to make the
principal, interest and additional financing payments due on October 4, 2002
(the due dates had been extended from September 30, 2002 and October 1, 2002).
The notes were secured by five aircraft owned by the Company as defined in the
Security Agreement dated October 4, 2002. The notes are due on November 19,
2002, and accrue interest at a rate of 10% per annum, and at 12% should an event
of default occur.
On October 10, 2002 the Company executed a promissory note for $250,000
to raise funds for operations. The terms are similar to the note signed on
October 4, 2002.
On November 1, 2002, the Board of Directors determined that in
conjunction with the Company's efforts to minimize costs, Mr. L. Peter Larson,
President, Chief Executive Officer and Chief Financial Officer, should resign
from his position, and Mr. Dale Ruhmel, Executive Vice President of Operations,
should be terminated. However, Mr. Larson's resignation was not formally
submitted to the Board until November 14, 2002, and Mr. J. Nelson Happy,
Executive Vice President-General Counsel was named President and Chief Executive
26
Officer. No Chief Financial Officer was named. The terms of Mr. Larson's
severance call for the payment of $36,000 in cash and $36,000 in stock over the
course of the next 12 months, in addition to the shares of stock due him as
discussed in footnote 8. The terms of Mr. Ruhmel's severance have not been
resolved.
ITEM 2. PLAN OF OPERATIONS
Certain statements contained in this report, including statements
concerning our future cash and financing requirements, our ability to raise
additional capital, our ability to obtain market acceptance of its aircraft, our
ability to obtain regulatory approval for its aircraft, and the competitive
market for sales of small business aircraft and other statements contained
herein regarding matters that are not historical facts, are forward looking
statements; actual results may differ materially from those set forth in this
report, our Annual Report on Form 10-KSB and other reports and document that we
file with the Securities and Exchange Commission, all of which may be retrieved
at www.sec.gov.
GENERAL
The new management team previously discussed, consisting of Roy Norris
- - Chairman and CEO, Peter Larson - Executive Vice President and CFO, Dale Ruhmel
- - Executive Vice President of Engineering and Operations, and Nelson Happy -
Executive Vice President and General Counsel, was appointed by the Board on
January 8, 2002 and began implementation of our new strategy.
On February 8, 2002, we announced we had purchased Congress Financial
Corporation's ("Congress") position as senior secured creditor for Mooney
Aircraft Corporation of Kerrville, Texas ("MACorp"). On February 6th, the U.S.
Bankruptcy Court in San Antonio, Texas, approved an operating agreement which
allowed us to manage MACorp until a plan of reorganization was approved. The
Bankruptcy Court approved the sale of substantially all of the MACorp assets to
us on March 18, 2002 and on April 19, 2002 we completed the Mooney asset
acquisition.
MACorp was the world's leading supplier of high performance single
engine general aviation aircraft primarily serving business and owner-flown
markets. MACorp produced over 10,000 aircraft since its founding in 1947, and
presently has over 8,000 aircraft in operation in the US alone. We have acquired
substantially all of MACorp's assets and intend to return to full production of
the Mooney aircraft line. MACorp's assets are held by our wholly-owned
subsidiary named Mooney Airplane Company, Inc. ("MAC"). On July 23, 2002, we
changed our name to Mooney Aerospace Group, Ltd.
We believe the acquisition of MACorp's assets is the first step in our
strategy to become a leading supplier of piston, turboprop and light jet
aircraft for the business and owner-flown general aviation markets. It is our
intention to accomplish this objective through both the acquisition of existing
high quality general aviation product lines and the development of revolutionary
new aircraft models. Our goals are to create a dynamic new general aviation
company, return MAC to full production and create substantial potential for
earnings growth for the Company and its shareholders. We then recruited Jack
Jansen, who has been in charge of production for a number of general aviation
manufacturers, to take the position of Mooney Airplane Company President and
COO. In July 2002, Nicolas Chabbert joined the company as Executive Vice
President of Sales & Marketing. Mr. Chabbert is considered one of the leading
authorities in the world in General Aviation sales and marketing, having among
his most noteworthy achievements the tremendously successful introduction of the
Socata TBM-700 single engine turboprop aircraft to the United States.
27
We have commenced the commercial sale of our aircraft, and 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.
During 2002 and 2003, we intend to focus our efforts on the following
events:
o The restoration to full production of MAC's manufacturing line
in Kerrville, Texas.
o Enhancement and aggressive implementation of our marketing
program.
o Reduction of costs to increase profit margins.
On June 27, 2002 MAC announced that we had received a Federal Aviation
Administration (FAA) production certificate that covers the current Mooney
models: Eagle2 (Mooney M20S), Ovation2 (Mooney M20R) and the Bravo2 (Mooney
M20M). We are making good progress in getting the factory up to full production.
The first airplane was completed, licensed and flown to Oshkosh, Wisconsin for
EAA's AirVenture in July. The aircraft has been sold and delivered to our first
customer.
On August 8, 2002 we announced that MAC had received FAA certification
as a repair station. The repair station is co-located with the MAC production
facility in Kerrville, Texas. This will enhance our support to Mooney owners and
provide us with additional business opportunities.
On August 15, 2002, 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. On August 19, 2002 Mr. L. Peter Larson was named President, Director,
Chief Executive Officer and also retained his previous position as Chief
Financial Officer. We have entered into three-year employment agreements with J.
Nelson Happy, Executive Vice-President and General Counsel, and Nicolas
Chabbert, Executive Vice President of Sales and Marketing on terms designed to
reward performance. Over the three- year period Happy will vest in ownership of
three percent of the outstanding shares of the Company and receive an annual
salary of $200,000 plus reimbursement of expenses. Chabbert will receive an
annual salary of $150,000, plus options to purchase 300,000 shares of our Class
A Common Stock.
As of September 30, 2002, we also had similar employment agreements
with Mr. Larson and Mr. Ruhmel. However, on November 1, 2002, the Board of
Directors determined that in conjunction with the Company's efforts to minimize
costs, Mr. Larson, should resign from his position, and Mr. Ruhmel should be
terminated. However, Mr. Larson's resignation was not formally submitted to the
Board until November 14, 2002, and Mr. J. Nelson Happy, Executive Vice
President-General Counsel was named President and Chief Executive Officer. No
Chief Financial Officer has yet been named, nor has Mr. Ruhmel's severance
been resolved.
28
We have generated $1,707,000 in operating revenues to date, from the
delivery of two aircraft and spare parts sales, and have incurred losses from
our operating activities of $11,117,000 during the nine-month period ended
September 30, 2002. Included in the loss was a gain of $170,000 from the
disposal of a fully depreciated piece of equipment. We believe we will continue
to experience losses until such time as we attain a sales level of our aircraft
on a commercial scale. No assurance can be made that we will be able to attain
sales levels of our aircraft in the foreseeable future that will allow us to
generate revenue sufficient to maintain its operations without other sources of
financing.
Our current cash balance, including the additional funding obtained
subsequent to September 30, 2002 described elsewhere (see "Liquidity and Capital
Resources"), has been sufficient to finance our plan of operations and
acquisitions to date. We are currently in negotiations with certain individuals
whose intention is to fund us approximately $5,000,000 over the next month in
the fourth quarter, however no firm commitment exists at the current time.
Should this funding be obtained, we believe it, and the cash generated from our
operating activities will be sufficient to meet our operating needs for the next
12 months. Should this funding not be obtained, additional funding will be
required, either through additional stock issuances or debt financing. If
sources of financing are unavailable, we will have to curtail our plans and will
be unable to pay our obligations to Congress. If we are unable to pay our
obligations to Congress, it will have the ability to take legal action against
us under the terms of our various notes payable to Congress. Legal action taken
by Congress could include foreclosure on all of our assets, which would likely
result in cessation of the majority or all of our operations.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, we had a negative working capital of $4,886,000
and stockholders' deficiency of $6,395,000. Since our inception in January 1990,
we have experienced continuing negative cash flow from operations, which have
resulted in our inability to pay certain existing liabilities in a timely
manner. We have financed our operations through private funding of equity and
debt and through the proceeds generated from our December 1996 initial public
offering.
We expect to continue to incur losses until such time, as we restore
our production processes to planned production levels and regain market
acceptance of our aircraft at selling prices and volumes which provide adequate
gross profit to cover operating costs and generate positive cash flow. Our
working capital requirements will depend upon numerous factors, including the
level of resources devoted to the scale-up of manufacturing and the
establishment of sales and marketing. No assurance can be made that the Company
will be able to restore Mooney's production processes to planned levels, regain
market acceptance for our aircraft or generate positive cash flow in the
foreseeable future, or ever. If the Company is unable to generate cash flow
through its operations as necessary, it will have to continue to obtain
financing through equity or debt financing. No assurance can be made that the
Company will be able to obtain sufficient equity or debt financing under terms
acceptable to the Company to allow it to maintain operations according to its
current operating plans, or at all.
Our management team has developed a financial plan to address our
working capital requirements. Since early 2001, this has included the issuance
of convertible debentures. The debentures are convertible into shares of Class A
Common Stock at various conversion prices as specified in each transaction's
note agreement. The notes earn interest at the rate stated in the note
agreements and the payment terms vary with each agreement. Based upon the
specific payment terms of the following agreements, events of default have
occurred due to our failure to pay the interest due on the appropriate due
dates: March 2001, June 2001, July 2001, October 2001, February 2002, March 2002
and May 2002. No events of default due to the failure to pay interest have
occurred with respect to debentures issued under any other transactions, as all
the payment terms of such other debentures call for the payment of interest at
maturity.
29
In addition to the events of default that have occurred as described
above, the Company's failure to register the appropriate amount of shares to
cover possible conversions as specified within each transaction's Subscription
Agreement, has led to the occurrence of non-registration events. Should such an
event extend beyond 60 days from the date of the transaction closing, each note
holder shall be entitled to damages that are to be paid either in cash or
additional shares of Class A Common Stock, according to the formula specified in
the Subscription Agreement. As of September 30, 2002, the Company has accrued a
total of $1,895,000 in such damages. In addition, a non-registration event does
not constitute an event of default unless such an event continues for 61 or 181
days beyond the transaction closing date, depending upon the terms specified in
the Subscription Agreement. When such an even of default occurs, the note
holders have the right to call the notes due. This is the case for the
transactions from June 2001, October 2001, February 2002, March 2002, April 2002
and May 2002.
Although such events of default and non-registration have occurred, the
Company has obtained waivers and amendments from a number of note holders who
have waived their rights to call their notes due to the events mentioned above,
have amended their note agreements to require the payment of interest at
maturity instead of the original due dates, and in certain cases such note
holders have also waived their rights to receive interest at penalty rates, the
payment of non-registration damages in cash, and the accrual of such damages for
the time period May 20, 2002 through August 31, 2002.
The specific circumstances regarding the events of default and
non-registration and the obtaining of waivers has been discussed in greater
detail within Note 5 of the footnotes to the financial statements, however the
following table summarizes the convertible debenture transactions the Company
has entered into to date, showing each transaction's original principal balance,
the number of warrants issued in conjunction with the debentures, the principal
balance outstanding at September 30, 2002, and whether each transaction has
fallen into an event of non-registration or default, or both, as of the date of
this filing, the cause thereof, and whether the obtaining of waivers and
amendments has completely or partially cured the default for all note holders.
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
Original Event of Default and
Principal Value Principal Balance Non-Registration Cause (I=interest;
(including Outstanding at Event as of R=Registration; FC=fully
Closing Date finders fees) Warrants September 30, 2002 November 15,2002 cured; PC=partially cured)
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
3/27/2001 $4,456,000 8,254,000 $947,000 No Yes-I, FC
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
6/27/2001 $1,000,000 2,646,000 $1,000,000 Yes Yes-I, R, FC
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
7/25/2001 $1,068,000 2,000,000 $201,000 No Yes-I, PC
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
10/26/2001 $8,417,000 17,714,000 $8,317,000 Yes Yes-I, R, PC
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
2/27/2002 (1) $2,475,000 5,143,000 $2,475,000 Yes Yes-I, R, PC
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
2/27/2002 (2) $1,462,000 3,037,000 $1,462,000 Yes Yes-I, R, FC
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
2/27/2002 (3) $2,272,000 4,926,000 $2,022,000 Yes Yes-I, R, PC
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
30
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
3/26/2002 $1,595,000 3,314,000 $1,595,000 Yes Yes-I, R, PC
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
4/11/2002 $1,045,000 2,171,000 $1,045,000 Yes Yes-R, PC
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
5/16/2002 $803,000 1,669,000 $803,000 Yes Yes-I, R, PC
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
6/6/2002 $358,000 743,000 $358,000 Yes No
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
6/10/2002 $550,000 1,143,000 $550,000 Yes No
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
6/18/2002 $385,000 800,000 $385,000 Yes No
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
6/28/2002 $2,000,000 4,000,000 $2,000,000 Yes No
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
7/10/2002 $275,000 571,000 $275,000 Yes No
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
7/31/2002 $300,000 236,000 $300,000 Yes No
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
9/10/2002 $2,160,000 4,571,000 $2,160,000 Yes No
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
Totals $30,621,000 62,938,000 $25,895,000
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
Of the total outstanding principal balance recorded at September 30,
2002 only $6,940,000 has been recorded as short-term, either due to the maturity
date of the note, or the failure of the Company to obtain waivers from the note
holders.
Of the transactions displayed in the above table, the proceeds raised
from the February 2002 transactions were used to make the cash payment to
Congress in our acquisition of the assets of MACorp as described earlier. Under
the terms of our agreements with Congress, we paid $8,000,000 to acquire their
position as a senior secured creditor. $3,500,000 of the purchase price was paid
in cash and $4,500,000 in secured notes as follows: (1) a Secured Promissory
Note for $500,000, (2) a Secured Promissory Note for $2,500,000, and (3) a
Secured Promissory Note for $1,500,000, each due at various times with varying
schedules for interest payments and the repayment of principal. These notes are
secured by substantially all the assets acquired from Congress.
As additional security for our compliance with the fulfillment of our
obligations to Congress, there is a Limited Recourse Secured Promissory Note for
$5,700,000. This note is a contingent note, payable in the event that we default
under the payment terms of the other notes. This note is also secured by
substantially all the assets acquired from Congress.
As of September 30, 2002, we also had additional secured notes and
short-term loans payable outstanding of approximately $2,449,000, as further
described in footnote 4. Of the balance outstanding, $1,477,000 has fallen into
default, however the creditors have made no attempt to collect the assets
pledged as collateral. All amounts have been recorded as a current liability.
On October 4, 2002 we also executed another secured promissory note in
the amount of $1,100,000, and used the proceeds to pay the principal and
interest payments due Congress, and fund operations. This note was secured by
certain assets of the Company.
On October 10, 2002 the Company executed a promissory note for $250,000
to raise funds for operations.
31
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
September 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. If sources of
financing are unavailable, we will have to curtail our plans and will be unable
to pay our obligations to Congress.
CRITICAL ACCOUNTING POLICIES
The Plan of Operations discusses our unaudited consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. When we prepare these financial
statements, we are required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. On an on-going
basis, we evaluate our estimates and judgments, including those related to
investments, long-lived assets, deferred tax assets, other liabilities and
revenue recognition. We base our estimates and judgments on historical
experience and on various other factors that we believe to be reasonable under
the circumstances, the results of which form the basis for our judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
For further information regarding the accounting policies that we
believe to be critical accounting policies and that affect our more significant
judgments and estimates used in preparing our financial statements see our
December 31, 2001 Form 10-KSB.
CONVERSION OF PERFORMANCE SHARES
In the event we attain certain earnings thresholds or our Class A
Common Stock meets certain minimum bid price levels, the Class E Common Stock
will be converted into Class B Common Stock. In the event any such converted
Class E Common Stock is held by officers, directors, employees or consultants,
the maximum compensation expense recorded for financial reporting purposes will
be an amount equal to the fair value of the shares converted at the time of such
conversion which value cannot be predicted at this time. Therefore, in the event
we attain such earnings thresholds or stock price levels, we will recognize a
substantial charge to earnings during the period in which such conversion
occurs, which would have the effect of increasing our loss or reducing or
eliminating our earnings, if any, at that time. For the year ending December 31,
2002, such earning thresholds would be pre-tax income of $45 million and $56.25
million for Class E-1 and Class E-2 Common Stock, respectively. In the event we
do not attain these earnings thresholds or minimum bid price levels, and no
conversion occurs, no compensation expense will be recorded for financial
reporting purpose.
Item 4. Controls and Procedures
As of September 30, 2002, an evaluation was performed, under the supervision and
with the participation of the Company's management, including the Company's
Chief Executive Officer of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rule 13a-14 under the
Securities Exchange Act of 1934, as amended. Based upon that evaluation, the
Company's management, including the Chief Executive Officer, concluded that the
Company's disclosure controls and procedures are effective as of September 30,
2002. There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to September 30, 2002.
32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On May 22, 2002, the Company received a demand letter regarding an
individual formerly employed by the Company who is asserting claims
regarding an alleged breach of an employment agreement and an aircraft
sale agreement, as well as sums allegedly due on a consulting
agreement. The letter claims the Company owes the claimant a total of
$210,625, plus interest, as well as the obligation to locate a
qualified buyer for the claimant's aircraft or purchase the aircraft
itself. It also makes claim for various statutory penalties in an
unstated amount under California Labor Code Sec. 203 in payment of
alleged wages owed. The letter gives the Company until May 27, 2002 to
respond.
Item 5. Other Information
On November 1, 2002, Mr. L. Peter Larson tendered his resignation as
President, Chief Executive Officer, Director and Chief Financial
Officer, however his resignation was not formally submitted to the
Board of Directors until November 14, 2002. J. Nelson Happy was named
President and Chief Executive Officer. No Chief Financial Officer has
been named as of the date of this filing. Also on November 1, 2002, Mr.
Dale Ruhmel, Executive Vice President of Operations and Director, was
terminated by the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification of Chief Executive Officer
(b) Reports on Form 8-K
NONE
33
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/ J. Nelson Happy
---------------------------------------------------
J. Nelson Happy, President and Chief Executive
Officer
Dated: November 19, 2002
- --------------------------------------------------------------------------------
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934
- --------------------------------------------------------------------------------
I, J. Nelson Happy, hereby certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Mooney
Aerospace Group, Ltd.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under with such statements were made, not misleading with
respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have;
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiary, is made known to us by
others within that entity, particularly during the period in
which this quarterly report is being prepared;
34
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing of this quarterly report (the "Evaluation Date");
and
(c) presented in this quarterly report the undersigned's
conclusions about the effectiveness of the disclosure controls
and procedures based on our required evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and to the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls.
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 19, 2002
By: /s/ J. Nelson Happy
---------------------------------------------------
J. Nelson Happy
Chief Executive Officer
35