UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________________ to _______________
000-21749
(Commission file number)
MOONEY AEROSPACE GROUP, LTD.
(Exact name of small business issuer as specified in its charter)
DELAWARE 95-4257380
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
LOUIS SCHREINER FIELD, KERRVILLE, TEXAS 78028
(Address of principal executive offices)
(803) 896-6000
(Issuer's telephone number)
N/A
(Former name, former address and former fiscal year, if changed since
last report)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of May 30, 2003 -142,078,027
shares of common stock
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
MOONEY AEROSPACE GROUP, LTD.
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Consolidated Balance Sheet as of March 31, 2003 (unaudited) 3-4
Consolidated Statements of Operations for
the three months ended March 31, 2003 and 2002 (unaudited) 5
Consolidated Statements of Cash Flows for
the three months ended March 31, 2003 and 2002 (unaudited) 6-7
Notes to Consolidated Financial Statements (unaudited) 8-16
Item 2. Management's Discussion and Analysis or Plan of Operation 17-22
Item 3. Controls and Procedures 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23-24
Item 2. Change in Securities 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 25
CERTIFICATIONS 26-27
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MOONEY AEROSPACE GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
MARCH 31, 2003
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 241,000
Accounts receivable, less allowance for
doubtful accounts of $0 150,000
Inventory, net of obsolescence reserve
of $220,000 8,923,000
Debt issuance costs 391,000
Prepaid expenses and other current assets 256,000
-------------
Total current assets 9,961,000
PROPERTY AND EQUIPMENT, net 4,576,000
TRADE NAME 1,802,000
DEBT ISSUANCE COSTS 438,000
-------------
TOTAL ASSETS $ 16,777,000
=============
See accompanying notes to the financial statements.
3
MOONEY AEROSPACE GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET, CONTINUED
MARCH 31, 2003
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 2,414,000
Accrued expenses 3,672,000
Accrued interest and penalties 9,147,000
Liabilities related to abandoned property 14,099,000
Accrued warrant liability 49,000
Advanced deposits 2,096,000
Convertible debentures, current portion (net of discounts of $13,592,000) 5,958,000
Notes payable, current portion (including related party notes of $713,000) 5,587,000
--------------
Total current liabilities 43,022,000
CONVERTIBLE DEBENTURES, less current portion (net of discounts
of $4,968,000) 1,060,000
NOTES PAYABLE, less current portion 3,194,000
--------------
TOTAL LIABILITIES 47,276,000
--------------
COMMITMENTS AND CONTINGENCIES (Note 9) --
STOCKHOLDERS' DEFICIT
Preferred Stock, $0.0001 par value, 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; 33,757 shares issued and outstanding 2,672,000
Class A Common Stock, $0.0001 par value, 625,000,000 shares authorized;
116,414,809 shares issued and outstanding 12,000
Class B Common Stock, $0.0001 par value, 10,000,000 shares authorized;
1,013,572 shares issued and outstanding --
Class E-1 Common Stock, $0.0001 par value, 4,000,000 shares authorized;
4,000,000 shares issued and outstanding --
Class E-2 Common Stock, $0.0001 par value, 4,000,000 shares authorized;
4,000,000 shares issued and outstanding --
Additional paid-in capital 98,392,000
Accumulated deficit (131,575,000)
--------------
Total stockholders' deficit (30,499,000)
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 16,777,000
==============
See accompanying notes to the financial statements.
4
MOONEY AEROSPACE GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
2003 2002
------------ ------------
(restated)
NET SALES $ 1,865,000 $ --
COST OF SALES 1,532,000 --
------------ ------------
GROSS PROFIT 333,000 --
------------ ------------
OPERATING EXPENSES
Research and development expenses -- 1,661,000
Selling and support expenses 479,000 --
General and administrative expenses 1,141,000 2,151,000
------------ ------------
1,620,000 3,812,000
------------ ------------
LOSS FROM OPERATIONS (1,287,000) (3,812,000)
------------ ------------
OTHER INCOME (EXPENSES):
Interest income 10,000 3,000
Other income (expense), net 341,000 38,000
Amortization of debt issue costs and discounts (1,543,000) (2,284,000)
Interest expense (2,338,000) (1,016,000)
------------ ------------
TOTAL OTHER INCOME (EXPENSES) (3,530,000) (3,259,000)
------------ ------------
LOSS BEFORE INCOME TAXES (4,817,000) (7,071,000)
INCOME TAXES -- --
------------ ------------
NET LOSS $(4,817,000) $(7,071,000)
============ ============
NET LOSS PER SHARE:
BASIC AND DILUTED $ (0.05) $ (0.14)
============ ============
See accompanying notes to the financial statements.
5
MOONEY AEROSPACE GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
2003 2002
------------ ------------
(restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,817,000) $(7,071,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of discount on convertible debentures 1,477,000 2,239,000
Amortization of debt issuance costs 66,000 45,000
Depreciation and amortization expense 142,000 294,000
(Increase) decrease in:
Accounts receivable (105,000) --
Inventory (1,371,000) --
Prepaid expenses and other current assets 86,000 (7,000)
Increase (decrease) in:
Accounts payable (191,000) 328,000
Accrued liabilities 823,000 (549,000)
Accrued interest and penalties 2,306,000 1,786,000
Accrued warrant liability (350,000) --
Advanced deposits 153,000 (7,000)
------------ ------------
Net cash used in operating activities (1,781,000) (2,942,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (16,000) (2,000)
Proceeds from sale of investments -- 1,926,000
Deposit on acquisition of Mooney Airplane Company, Inc. -- (3,658,000)
------------ ------------
Net cash used in investing activities (16,000) (1,734,000)
------------ ------------
See accompanying notes to the financial statements.
6
MOONEY AEROSPACE GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
2002 2001
------------ ------------
(restated)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible debentures -- 7,184,000
Proceeds from issuance of notes payable 2,200,000 --
Proceeds from the issuance of common stock -- 33,000
Payments for debt issue costs (229,000) (125,000)
Payments on capital lease obligation -- (35,000)
Payments on notes (1,346,000) (242,000)
------------ ------------
Net cash provided by financing activities 625,000 6,815,000
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,172,000) 2,139,000
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 1,413,000 681,000
------------ ------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 241,000 $ 2,820,000
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ -- $ 1,388,000
============ ============
Income taxes paid $ -- $ --
============ ============
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the three months ended March 31, 2003, the Company converted: 1) 2,132
shares of Series A preferred stock into 14,286,525 shares of Class A common
stock valued at $165,000, 2) $286,000 of convertible debentures into 19,151,509
share of Class A common stock, and 3) $32,000 of accrued interest into 2,466,014
share of Class A common stock.
During the three months ended March 31, 2002, the Company acquired certain
assets of MACorp for a note payable of $4,500,000.
See accompanying notes to the financial statements.
7
MOONEY AEROSPACE GROUP. LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The unaudited consolidated financial statements have been prepared by Mooney
Aerospace Group, Ltd. (the "Company"), pursuant to the rules and regulations of
the Securities and Exchange Commission. The information furnished herein
reflects all adjustments (consisting of normal recurring accruals and
adjustments) which are, in the opinion of management, necessary to fairly
present the operating results for the respective periods. Certain information
and footnote disclosures normally present in annual consolidated financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted pursuant to such rules and
regulations. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and footnotes for
the year ended December 31, 2002 included in the Company's Annual Report on Form
10-KSB. The results of the three months ended March 31, 2003 are not necessarily
indicative of the results to be expected for the full year ending December 31,
2003.
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern. The
Company incurred net losses for the three months ended March 31, 2003 of
$4,817,000 and at March 31, 2003, had an accumulated deficit of $131,575,000 and
a working capital deficit of $33,061,000. In addition, the Company is in default
on the payment of certain of its convertible debentures and notes payable. These
conditions raise substantial doubt as to the Company's ability to continue as a
going concern. These consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty. These
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts, or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
Management plans to take the following steps that it believes will be sufficient
to provide the Company with the ability to continue in existence.
1. 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 year ended
December 31, 2003. However, the current working capital and financing
obtained subsequent to March 31, 2003 is insufficient to meet the
Company's needs beyond the third quarter of fiscal 2003.
2. Management plans to restructure its current outstanding debt and raise
additional capital through private equity or debt financing to
sufficiently fund its current operations and increase the number of
airplanes produced to generate sufficient revenue to achieve profitable
operating results.
3. Management is currently in the process of trying to sell its JETCRUZER
500 program; and
4. Management plans to explore the unique opportunity that 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.
8
MOONEY AEROSPACE GROUP. LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
Stock Options
- -------------
The Company did not grant any new options and no options were cancelled or
exercised during the three months ended March 31, 2003. As of March 31, 2003, no
options were outstanding under the Company Stock Option Plan (the "Plan") and
300,000 options outstanding that were issued outside the Plan in July 2002 that
were fully vested on that date.
Pro forma information regarding the effect on operations is required by SFAS 123
and SFAS 148, has been determined as if the Company had accounted for its
employee stock options under the fair value method of that statement. Pro forma
information using the Black-Scholes method at the date of grant based on the
following assumptions:
Expected life 5 Years
Risk-free interest rate 4.0%
Dividend yield -
Volatility 84%
This option valuation model requires input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing model does not necessarily provide a reliable single
measure of fair value of its employee stock options.
For purposes of SFAS 123 pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. The Company's
proforma information is as follows:
2003 2002
------------ ------------
Net loss, as reported $ 4,817,000 $ 7,071,000
Compensation recognized under APB 25
-- --
Compensation recognized under SFAS 123
-- --
Pro forma net loss $ 4,817,000 $ 7,071,000
Restatement
- -----------
The financial statements for the three months ended March 31, 2002 have been
restated to properly account for amortization of discount attributable to
warrants and beneficial conversion features of convertible debentures, in
accordance with Emerging Issues Task Force Abstract 00-27. This restatement
resulted in the following change:
Net loss, as previously reported $ (5,674,000)
Prior period adjustment (1,397,000)
-------------
Net loss, as restated $ (7,071,000)
=============
Net loss per share, as previously reported $ (0.11)
Prior period adjustment (0.03)
-------------
Net loss per share, as restated $ (0.14)
=============
NOTE 2 - EARNINGS PER SHARE
In 1997, the Financial Accounting Standard Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS No.
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. Basic earnings per
share is computed using the weighted-average number of common shares outstanding
during the period. Common equivalent shares are excluded from the computation if
their effect is anti-dilutive. The following potential common shares have been
excluded from the computation of diluted net loss per share as of March 31, 2003
and 2002 because the effect would have been anti-dilutive:
9
MOONEY AEROSPACE GROUP. LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
2003 2002
--------------- ---------------
Conversion of Series A preferred stock 375,077,777 16,373,810
Conversion of convertible debentures 3,947,746,311 216,236,251
Stock options issued to employees 300,000 1,322,000
Class A warrants -- 20,400,000
Class B warrants -- 6,900,000
Warrants issued with convertible debentures 62,939,612 47,035,328
Warrants issued with Series A preferred stock 2,771,002 2,771,002
Warrants issued with equity line 4,268,764 4,268,764
Warrants issued with severance package 2,000,000 2,000,000
Warrants issued with acquisition of MAC 3,623,189 --
--------------- ---------------
4,398,726,655 317,307,155
=============== ===============
NOTE 3 - INVENTORY
Inventory at March 31, 2003 consisted of the following:
Raw materials and purchased parts $ 1,754,000
Work-in-process 3,953,000
Semi-finished and finished goods 3,436,000
-------------
9,143,000
Less allowance for obsolete
and slow-moving parts (220,000)
-------------
$ 8,923,000
=============
NOTE 4 - PROPERTY AND EQUIPMENT
The cost of property and equipment at March 31, 2003 consisted of the following:
Aircraft $ 658,000
Office furniture and equipment 529,000
Machinery and equipment 4,059,000
-------------
5,246,000
Less accumulated depreciation and amortization (670,000)
-------------
$ 4,576,000
=============
10
MOONEY AEROSPACE GROUP. LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
NOTE 5 - NOTES PAYABLE
Notes payable at March 31, 2003 consisted of the following:
Congress Note A $ --
Congress Note B 1,667,000
Congress Note C 247,000
Notes Payable - May 24, 2002 1,075,000
Notes Payable - July 31, 2002 175,000
Notes Payable - August 23, 2002 500,000
Notes Payable - August 29, 2002 200,000
Notes Payable - August 30, 2002 272,000
Notes Payable - October 4, 2002 1,350,000
Notes Payable - November 8, 2002 99,000
Notes Payable - November 22, 2002 50,000
Notes Payable - December 30, 2002 1,015,000
Notes Payable - January 16, 2003 62,000
Notes Payable - January 16, 2003 62,000
Notes Payable - February 7, 2003 930,000
Notes Payable - March 11, 2003 370,000
Notes Payable - March 20, 2003 25,000
Mooney Aircraft Corporation 137,000
Kerrville Independent School District 341,000
City of Kerrville, Texas 128,000
Other 76,000
-----------
8,781,000
Less current maturities (5,587,000)
-----------
$3,194,000
===========
At March 31, 2003, the Company had accrued interest of $338,000 related to the
above notes payable.
11
MOONEY AEROSPACE GROUP. LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
NOTE 6 - CONVERTIBLE DEBENTURES
Convertible debentures at March 31, 2003 consisted of the following:
her
March 27, 2001 Issuance $ 944,000
July 25, 2001 Issuance 195,000
June 27, 2001 Issuance 1,000,000
October 26, 2001 Issuance 8,045,000
February 27, 2002 Issuance 5,923,000
March 26, 2002 Issuance 1,595,000
April 11, 2002 Issuance 1,045,000
May 16, 2002 Issuance 803,000
June 6, 2002 Issuance 358,000
June 10, 2002 Issuance 550,000
June 18, 2002 Issuance 385,000
June 28, 2002 Issuance 2,000,000
July 10, 2002 Issuance 275,000
July 31, 2002 Issuance 300,000
September 10, 2002 Issuance 2,160,000
-------------
25,578,000
Less discount (18,560,000)
-------------
7,018,000
Less current maturities (5,958,000)
-------------
$ 1,060,000
=============
At March 31, 2003, the Company had accrued interest and accrued penalties for
failure to register the shares of Class A common stock underlying these
convertible debentures of $2,750,000 and $6,059,000, respectively.
NOTE 7 - COMMON STOCK
During the three months ended March 31, 2003, the Company converted: 1) 2,132
shares of Series A preferred stock into 14,286,525 shares of Class A common
stock valued at $165,000, 2) $286,000 of convertible debentures into 19,151,509
share of Class A common stock, and 3) $32,000 of accrued interest into 2,466,014
share of Class A common stock.
As a result of the $286,000 of convertible debentures being converted into Class
A common stock the Company wrote off $206,000 of unamortized discounts related
to these debentures.
12
MOONEY AEROSPACE GROUP. LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
NOTE 8 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During April 2003, the FASB issued SFAS 149 - "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", effective for contracts entered
into or modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. In addition, except as stated
below, all provisions of this Statement should be applied prospectively. The
provisions of this Statement that relate to Statement 133 Implementation Issues
that have been effective for fiscal quarters that began prior to June 15, 2003,
should continue to be applied in accordance with their respective effective
dates. In addition, paragraphs 7(a) and 23(a), which relate to forward purchases
or sales of WHEN-ISSUED securities or other securities that do not yet exist,
should be applied to both existing contracts and new contracts entered into
after June 30, 2003. The Company does not participate in such transactions,
however, is evaluating the effect of this new pronouncement, if any, and will
adopt FASB 149 within the prescribed time.
During May 2003, the FASB issued SFAS 150 - "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity", effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. This Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a freestanding financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as equity.
Some of the provisions of this Statement are consistent with the current
definition of liabilities in FASB Concepts Statement No. 6, ELEMENTS OF
FINANCIAL STATEMENTS. The Company is evaluating the effect of this new
pronouncement and will adopt FASB 150 within the prescribed time.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Litigation
- ----------
L. PETER LARSON AND DALE RUHMEL v. MOONEY AEROSPACE GROUP, INC. This cause of
action was filed in Los Angeles County Superior Court on December 31, 2002. The
initial complaint against the Company was filed by two former executives, R.
Peter Larson and Dale Ruhmel. The causes of action are for Breach of Contract,
Labor Code Violations, Intentional Misrepresentation, Slander and Intentional
Infliction of Emotional Distress in Violation of the California Unfair Labor
Code.
Peter Larson was employed as an Executive Vice President and Chief Financial
Officer of Mooney, Dale Ruhmel was Executive Vice President of Engineering and
became Chief Operating Officer. Both plaintiffs had entered into a written
employment agreement with the Company on or about January 8, 2002. Plaintiffs
were employed by the Company until the end of October 2002. Plaintiffs claim
that the Company breached their employment agreements by terminating their
employment without good cause and failing to pay severance payments as required
by the agreements. Plaintiffs also claim that at the time of the termination
they were not paid all of their vacation and wages owed as required by the
California Labor Code. Plaintiffs also claim that the Company misrepresented its
intentions to honor the agreements and that plaintiffs relied upon this to their
detriment. There were also allegations of intentional infliction of emotional
distress and slander.
13
MOONEY AEROSPACE GROUP. LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
The damages sought in the complaint include attorneys fees, tort damages if
defamation or fraud can be proven, contractual damages (the contract provides
for a year's severance if terminated without cause or notice). The Company has
filed a cross-complaint against the two individuals. The Company has accrued
damages for this action as of March 31, 2003, which are included in accrued
expenses.
WHITEFORD JET WINGS, LTD. v. MOONEY AEROSPACE GROUP, LTD. ET AL., Cal. Super.
Ct. (Los Angeles County, Long Beach District), Case No. NC033548 (filed January
21, 2003). This case was filed by a company that alleged it had signed an
agreement to be the exclusive regional distributor of Jetcruzer aircraft in
Illinois, Indiana, Kentucky, and Wisconsin, and that it had put down a deposit
of $390,000 for the first 39 aircraft it was to purchase. The suit seeks return
of the $390,000 deposit on a variety of theories, including breach of contract,
account stated, and fraud. The primary issue is whether the deposits (which the
agreement provide are non-refundable) must be returned. The Company has recorded
an advanced deposit, which is included in accrued expenses in the accompanying
balance sheet, $390,000 related to this matter. The Company does not believe
that any potential negative outcome from this case will have a material impact
in its financial position or results of operations.
AP-LONG BEACH AIRPORT LLC v. MOONEY AEROSPACE GROUP, LTD. The Company leased
approximately 10 acres of land located on the Long Beach Airport in Long Beach,
California. The lease commenced on January 14, 1998 and had a term of 30 years
with an option to renew for an additional 10 year term. The lease contained
options to lease other airport properties. The lease contained incremental
increases which escalated the monthly rent to approximately $15,600 after 5
years.
Pursuant to an Agreement dated May 19, 1999, the Company sold its leasehold
interest in real property located at 3205 Lakewood Boulevard, Long Beach,
California, together with the manufacturing hangar facility (approximately
205,000 square feet) and finished office space (approximately 22,000 square
feet) owned by the Company. The cash purchase price was $9,800,000. As part of
this transaction, the Company entered into an agreement to sublease the land and
lease the manufacturing hangar facility and finished office space to the Company
for a term of 18 years, plus an option to extend the lease for an additional 10
years. The $246,000 deferred gain on the sale of the facility was being
amortized over the 18 year lease term and is now recorded in liabilities related
to abandoned building.
Effective January 1, 2001, the lessor of the building amended the payment terms
of the lease to include escalating payments through June 1, 2008, after which
the payments escalate according to Consumer Price Index (CPI) increases. As a
result of the change in payment terms, the cost of the building and the capital
lease obligation were increased by $3,200,000, increasing the cost value of the
building to $13,000,000, which approximated fair value at the time of the
amendment. As the fair value was less than the present value of the amended
future minimum lease payments, the total amount recorded including this
adjustment was limited to the fair value of the building, as required by SFAS
No. 13, ACCOUNTING FOR LEASES.
AP Long Beach Airport, LLC ("AP"), the lessor, has filed a complaint in the Los
Angeles Superior Court, alleging breach of a Sublease Agreement by the Company
for failure to pay rent. Specifically, AP alleges that AP and the Company
entered into a Lease Agreement for the lease of real property located in Long
Beach, California to the Company for a thirty year term. AP and the Company
later entered into first, an Assignment and Assumption Agreement and then, a
Sublease Agreement wherein AP sublet the property to the Company for a term of
eighteen years at a monthly rent of $106,166.67. AP seeks to recover the fair
rental value of the property and base rent pursuant to the Lease and Sublease
Agreements in addition to its attorneys' fees and costs.
14
MOONEY AEROSPACE GROUP. LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
Previously, on December 30, 2002, the Company filed suit in the 198th Judicial
District, Kerr County, Texas alleging that the Sublease Agreement was void and
specifically fraudulent transfer, breach of the duty of good faith and fair
dealing, usury and requesting declaratory relief. The Company maintains that
this transaction, although structured as a sale and leaseback, was in reality a
financing transaction in which the interest charged by AP was usurious.
On March 5, 2003, in response to AP's California suit, the Company filed its
Motion to Stay or Dismiss Action ("Motion"). In its Motion, the Company argued
that the California Court should dismiss the action before it because the claims
could more appropriately be resolved in the previously filed, and currently
pending, Texas action initiated by the Company on December 30, 2002, involving
the same parties and the same transaction. In its Motion, the Company sought to
assure the California Court that the Texas Court has jurisdiction over AP and
that the interest of the parties and judicial economy mitigate in favor of
dismissing the California action and allowing the dispute to be resolved by the
Texas Court. In the alternative, the Company requested that the California Court
stay the action filed by AP until the Texas Court has had an opportunity to rule
on AP's Motion to Dismiss the Texas action for lack of personal jurisdiction.
The Company's Motion is currently pending before the Superior Court of Los
Angeles and a hearing has been scheduled for July 8, 2003. The Company does not
believe that any potential negative outcome from this case will have a material
impact in its financial position or results of operations.
In the ordinary course of business, the Company is generally subject to claims,
complaints, and legal actions. At March 31, 2003, management believes that the
Company is not a party to any action which would have a material impact on its
financial condition, operations, or cash flows.
NOTE 10 - LIABILITIES RELATED TO ABANDONED PROPERTY
In 2002, the Company abandoned its facility in Long Beach, California that it
had used for its research and development activities and its corporate office
building in connection with the move of all operations to Kerrville, Texas.
There were certain obligations related to this building, principally to the
owner/lessor, for which the Company remains legally obligated (see Note 9).
Although management believes that the obligations will be settled at amounts
significantly lesser than their recorded amounts, the Company does not yet have
a formal settlement with the lessor, and accordingly the obligations continue to
be presented at their contractual amounts. In the accompanying balance sheet,
the Company has the following liabilities remaining that relate to this
building:
Lease obligation (present value of remaining
lease payments) $ 12,622,000
Accrued interest on lease obligation 926,000
Other, net 551,000
-------------
$ 14,099,000
=============
The Company believes they will settle the lawsuit described in Note 9 and that
the actual damages will be substantially less than the liability.
15
MOONEY AEROSPACE GROUP. LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
NOTE 11 - PER SHARE INFORMATION
The Company calculates basic net loss per share as required by SFAS No. 128,
"EARNINGS PER SHARE." Basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities, and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. The following table sets forth the computation of
basic loss per share for the three months ended March 31, 2003 and 2002:
2003 2002
-------------- --------------
Numerator
Loss before extraordinary item $ (4,817,000) $ (7,071,000)
Amortization of discount on preferred stock (39,000) (36,000)
Dividends in Arrears (471,000) (367,000)
-------------- --------------
Numerator for basic loss per share $ (5,327,000) $ (7,474,000)
============== ==============
Denominator
Weighted average shares of Class B shares 1,014,000 1,900,000
Weighted average shares of Class A shares 103,106,000 52,081,000
-------------- --------------
Numerator for basic loss per share 104,120,000 53,981,000
============== ==============
Basic loss per share $ (0.05) $ (0.14)
============== ==============
There is no difference between the loss per common share amounts computed for
basic and dilutive purposes because the impact of convertible debt and preferred
stock, options and warrants would be anti-dilutive.
NOTE 12 - SUBSEQUENT EVENTS
Subsequent to March 31, 2003, certain convertible debenture holders converted
approximately $48,000 of debt into approximately 10,593,000 shares of the
Company's common stock. In addition, certain holders of Series A preferred stock
converted 805 shares of Series A preferred stock into approximately 15,798,000
shares of the Company's common stock.
Subsequent to March 31, 2003, the Company has received approximately $700,000
from the issuance of promissory notes with terms ranging from 30 days to 3 years
and interest rates of 8%.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with the our
consolidated financial statements and related footnotes for the year ended
December 31, 2002 included in our Annual Report on Form 10-KSB. The discussion
of results, causes and trends should not be construed to imply any conclusion
that such results or trends will necessarily continue in the future.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB and the documents incorporated herein by
reference contain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. This Act provides a "safe harbor" for
forward looking statements to encourage companies to provide prospective forward
looking information about themselves so long as they identify these statements
as forward looking and provide meaningful cautionary statements identifying
important factors that could cause actual results to differ from the projected
results. All statements other than statements of historical fact made in this
Quarterly Report on Form 10-QSB are forward looking. In particular, the
statements herein regarding industry prospects and future results of operations
or financial position are forward-looking statements. Forward-looking statements
reflect management's current expectations and are inherently uncertain. Our
actual results may differ significantly from management's expectations.
GENERAL
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 that
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 that the acquisition of MACorp's assets will allow us to create a
dynamic general aviation company by returning Mooney to full production and
creating substantial potential for earnings growth for the Company and its
shareholders.
In July 2002, Nicolas Chabbert joined the company as Executive Vice President of
Sales & Marketing. Mr. Chabbert is considered an expert in general aviation
sales and marketing, having among his achievements the successful introduction
of the Socata TBM-700 single engine turboprop aircraft to the United States.
17
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 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: Eagle2 (Mooney
M20S), Ovation2 (Mooney M20R) and the Bravo2 (Mooney M20M). We are making good
progress in getting the factory up to full production.
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. J. Nelson
Happy, then Executive Vice-President and General Counsel, was named vice
chairman.
On November 1, 2002, Mr. Larson resigned his position and subsequent to that
date, the board of directors terminated Mr. Ruhmel. On November 14, 2002, Mr. J.
Nelson Happy, Executive Vice President-General Counsel was named President and
Chief Financial Officer and continued as vice chairman.
We have generated $1,865,000 in operating revenues for the three months ended
March 31, 2003 from the sale of aircraft and spare parts sales, and have
incurred a net loss during the same period of $4,817,000. 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 March 31, 2003 has been sufficient to finance our plan of operations. We are
currently seeking to raise additional capital either from individual investors
or from commercial lending institutions, 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, 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.
18
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, we had a negative working capital of $33,061,000 and a
stockholders' deficiency of $30,499,000. 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 we 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 we are unable to generate cash flow through its operations as necessary, we
will have to continue to obtain financing through equity or debt financing. No
assurance can be made that we will be able to obtain sufficient equity or debt
financing under terms acceptable to us to allow us to maintain operations
according to our 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.
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 March 31, 2003, the Company has included in
accrued interest and penalties a total of $6,059,000 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.
The specific circumstances regarding the events of default and non-registration
have been discussed in greater detail within Note 6 of the footnotes to the
financial statements for the year ended December 31, 2002 included in Form
10KSB.
Of the total outstanding principal balance of $25,578,000 recorded at March 31,
2003, $19,550,000 has been recorded as short-term, either due to the maturity
date or because of an event of default.
19
The proceeds raised from the February 2002 transactions were used to make the
cash payment to Congress in our acquisition of the assets of MACorp as described
earlier. Under the terms of our agreements with Congress, we paid $8,000,000 to
acquire their position as a senior secured creditor. $3,500,000 of the purchase
price was paid in cash and $4,500,000 in secured notes as follows: (1) a Secured
Promissory Note for $500,000, (2) a Secured Promissory Note for $2,500,000, and
(3) a Secured Promissory Note for $1,500,000, each due at various times with
varying schedules for interest payments and the repayment of principal. These
notes are secured by substantially all the assets acquired from Congress.
As additional security for our compliance with the fulfillment of our
obligations to Congress, there is a Limited Recourse Secured Promissory Note for
$5,700,000. This note is a contingent note, payable in the event that we default
under the payment terms of the other notes. This note is also secured by
substantially all the assets acquired from Congress.
While there is no assurance that additional financing will be available, we
believe that we have developed a financial plan that, if executed successfully,
will substantially improve our ability to meet our working capital requirements
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
March 31, 2003 have been sufficient to finance our plan of operations 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 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.
Revenue Recognition - We recognize revenue on substantially all aircraft sales
and parts and service sales when each of the following four criteria is met: 1)
a contract or sales arrangement exists; 2) products have been shipped or
services have been rendered; 3) the price of the products or services is fixed
or determinable; and 4) collectibility is reasonably assured. We also recognize
revenue on aircraft sales under bill-and-hold transactions when each of the
following seven criteria are met: 1) the risk of ownership has passed to the
buyer; 2) the buyer has made a fixed commitment to purchase the goods; 3) the
buyer has requested that the transaction be on a bill-and-hold basis and has a
substantial business purpose for ordering so; 4) there is a fixed schedule for
delivery of the goods and the delivery date is reasonable and consistent with
the buyer's business practices; 5) we have not retained any specific performance
obligations such that the earnings process is not complete; 6) the aircraft has
been segregated from our inventory and is not subject to being used to fill
other orders; and 7) the aircraft must be complete and ready for shipment.
Inventory Obsolescence -- We provide an inventory obsolescence reserve for parts
whose values have been determined to be impaired or whose future utility appears
limited.
20
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 consolidated financial statements contained in
our Annual Report on Form 10-KSB for the year ended December 31, 2002.
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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 VS. MARCH 31, 2002
Net sales for the three months ended March 31, 2003 increased by $1,865,000 as
compared to the same period in 2002, due to the acquisition of MACorp's assets.
We had no sales prior to this acquisition.
Cost of sales for the three months ended March 31, 2003 increased by $1,532,000
as compared to the same period in 2002, due to the acquisition of MACorp's
assets. There were no cost of sales prior to this acquisition.
Research and development costs for the three months ended March 31, 2003
decreased by $1,661,000 as compared to the same period in 2002, due to the
closure of the Long Beach, California facility in the 4th quarter of 2002 whose
principal function was research and development.
Selling and support expenses for the three months ended March 31, 2003 increased
by $479,000 as compared to the same period in 2002, due to the acquisition of
MACorp's assets. There were no sales and support expenses prior to this
acquisition.
General and administrative expenses for the three months ended March 31, 2003
decreased by $1,010,000 as compared to the same period in 2002, due to the
closure of the Long Beach, California facility being closed in the 4th quarter
of 2002.
Other income for the three months ended March 31, 2003 increased by $303,000 as
compared to the same period in 2002, principally due to the decrease in the fair
value of the warrant liability of $350,000 from December 31, 2002 to March 31,
2003.
Amortization of debt issue costs and discounts for the three months ended March
31, 2003 decreased by $741,000 as compared to the same period in 2002, due to
the write-off of the unamortized discount at the conversion date that occurred
during the three months ended March 31, 2002.
Interest expense for the three months ended March 31, 2003 increased by
$1,322,000 as compared to the same period in 2002, due to the increase of debt
and the accrual of penalties for non-registration of shares underlying the
convertible debentures.
21
Cash used in operating activities for the three months ended March 31, 2003
decreased by $1,161,000 as compared to the same period in 2002.
Due to the acquisition of MACorp assets on April 19, 2002, the changes in
operating assets and liabilities are mainly related to the operations of that
business, including changes in inventory, property and equipment and accounts
payable.
We continue to accrue convertible note interest of non-registration damages and
executive compensation.
Cash used in investing activities for the three months ended March 31, 2003
decreased by $1,718,000 as compared to the same period in 2002. We made a
deposit payment for the acquisition of MACorp. during 2002 for cash of
$3,658,000. This was offset by the sale of investments held to fund the
acquisition and operating activities of $1,926,000.
Cash provided by financing activities for the three months ended March 31, 2003
decreased by $6,190,000 as compared to the same period in 2002. During the three
months ended March 31, 2002, we issued approximately $7,184,000 of convertible
debentures to fund the acquisition of MACorp.
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
March 31, 2003 have been sufficient to finance our plan of operations and
acquisitions to date, it and expected cash flow from operations will not be
sufficient to fund operations for the next 12 months. Additional funding will be
required and is expected, either through additional stock issuances or debt
financing obtained from certain private parties. Based upon past experience with
such parties we believe such funding will be forthcoming, however no firm
commitment from such parties currently exists. If sources of financing are
unavailable, we will have to curtail our plans and will be unable to pay our
obligations to Congress.
ITEM 3. CONTROLS AND PROCEDURES
As required by SEC rules, we have evaluated the effectiveness of the design and
operation of our disclosure controls and procedures within 90 days of the filing
of this quarterly report. This evaluation was carried out under the supervision
and with the participation of our management, including our principal executive
officer and principal financial officer. Based on this evaluation, these
officers have concluded that the design and operation of our disclosure controls
and procedures are effective. There were no significant changes to our internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of their evaluation.
Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by us in the reports that we file under the Exchange Act is
accumulated and communicated to our management, including principal executive
officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure.
22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
L. PETER LARSON AND DALE RUHMEL V. MOONEY AEROSPACE GROUP, INC.
- ---------------------------------------------------------------
This suit was filed in Los Angeles County Superior Court on December 31, 2002.
The complaint was filed against the Company by two former executives, R. Peter
Larson and Dale Ruhmel. The causes of action are for Breach of Contract, Labor
Code Violations, Intentional Misrepresentation, Slander and Intentional
Infliction of Emotional Distress in Violation of the California Unfair Labor
Code.
L. Peter Larson was employed as an Executive Vice President and Chief Financial
Officer of Mooney, Dale Ruhmel was Executive Vice President of Engineering and
became Chief Operating Officer. Both plaintiffs had entered into written
employment agreements with the Company on or about January 8, 2002. Plaintiffs
were employed by the Company until the end of October 2002. Plaintiffs claim
that the Company breached their employment agreements by terminating their
employment without good cause and failing to pay severance payments as required
by the agreements. Plaintiffs also claim that at the time of the termination
they were not paid all of their vacation and wages owed as required by the
California Labor Code. Plaintiffs also claim that the Company misrepresented its
intentions to honor the agreements and that plaintiffs relied upon this to their
detriment. There were also allegations of intentional infliction of emotional
distress and slander. The damages sought in the complaint include attorneys
fees, tort damages if defamation or fraud can be proven, contractual damages
(the contract provides for a year's severance if terminated without cause or
notice).
The Company has filed a cross-complaint against the two individuals. The Company
does not believe that any possible negative outcome from this case will have a
material impact in its financial position or results of operations.
WHITEFORD JET WINGS, LTD. V. MOONEY AEROSPACE GROUP, LTD. ET AL., CAL. SUPER.
CT. (LOS ANGELES COUNTY, LONG BEACH DISTRICT), CASE NO. NC033548
(FILED JANUARY 21, 2003)
- --------------------------------------------------------------------------------
This case was filed by a company that alleged it had signed an agreement to be
the exclusive regional distributor of Jetcruzer aircraft in Illinois, Indiana,
Kentucky, and Wisconsin, and that it had put down a deposit of $390,000 for the
first 39 aircraft it was to purchase. The suit seeks return of the $390,000
deposit on a variety of theories, including breach of contract, account stated,
and fraud. The primary issue is whether the deposits (which the agreement
provide are non-refundable) must be returned. The Company has recorded as
advanced deposits in the accompanying balance sheet, $390,000 related to this
matter. The Company does not believe that any possible negative outcome from
this case will have a material impact in its financial position or results of
operations.
AP-LONG BEACH AIRPORT LLC V. MOONEY AEROSPACE GROUP, LTD.
- ---------------------------------------------------------
AP Long Beach Airport, LLC ("AP") filed a complaint in the Los Angeles Superior
Court, alleging breach of a Sublease Agreement by the Company for failure to pay
rent. Specifically, AP alleges that AP and the Company entered into a Lease
Agreement for the lease of real property located in Long Beach, California to
the Company for a term of thirty years . AP and the Company later entered into
first an Assignment and Assumption Agreement and then a Sublease Agreement
wherein AP sublet the property to the Company for a term of eighteen years at a
monthly rent of $106,166.67. AP seeks to recover the fair rental value of the
property and base rent pursuant to the Lease and Sublease Agreements in addition
to its attorneys' fees and costs.
23
Previously, on December 30, 2002, the Company filed suit in the 198th Judicial
District, Kerr County, Texas alleging that the Sublease Agreement was void and
specifically fraudulent transfer, breach of the duty of good faith and fair
dealing, usury and requesting declaratory relief. The Company maintains that
this transaction, although structured as a sale and leaseback, was in reality a
financing transaction in which the interest charged by AP was usurious.
On March 5, 2003, in response to AP's California suit, the Company filed its
Motion to Stay or Dismiss Action ("Motion"). In its Motion, the Company argued
that the California Court should dismiss the action before it because the claims
could more appropriately be resolved in the previously filed, and currently
pending, Texas action initiated by the Company on December 30, 2002, involving
the same parties and the same transaction. In its Motion, the Company sought to
assure the California Court that the Texas Court has jurisdiction over AP and
that the interest of the parties and judicial economy mitigate in favor of
dismissing the California action and allowing the dispute to be resolved by the
Texas Court. In the alternative, the Company requested that the California Court
stay the action filed by AP until the Texas Court has had an opportunity to rule
on AP's Motion to Dismiss the Texas action for lack of personal jurisdiction.
The Company's Motion is currently pending before the Superior Court of Los
Angeles and a hearing has been scheduled for July 8, 2003. The Company does not
believe that any possible negative outcome from this case will have a material
impact in its financial position or results of operations.
ITEM 2. CHANGE IN SECURITIES
During the three months ended March 31, 2003, we converted: 1) 2,132 shares of
Series A preferred stock into 14,286,525 shares of Class A common stock valued
at $165,000, 2) $286,000 of convertible debentures into 19,151,509 share of
Class A common stock, and 3) $32,000 of accrued interest into 2,466,014 share of
Class A common stock
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
We are currently in default on certain convertible debentures and certain notes
payable. (See Notes 5 and 6 to our audited consolidated financial statements
included in Form 10-KSB for the year ended December 31, 2002).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Not applicable
24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On April 23, 2003, and subsequently amended on May 12, 2003, the Company filed
an amended Current Report on Form 8-K, announcing that on March 6, 2003, Ernst &
Young LLP ("E&Y") terminated the client-auditor relationship between itself and
Mooney Aerospace Group, Ltd (the "Company") by delivering to the Company a
letter of resignation as the Company's independent auditors. On March 10, 2003
the Company engaged Stonefield Josephson, Inc. ("Stonefield") as its independent
auditors for the fiscal year ending December 31, 2002. The decision to engage
Stonefield was approved by the Board of Directors of the Company. E&Y's reports
on the consolidated financial statements of the Company for fiscal years 2001
and 2000 did not contain any adverse opinion or a disclaimer of opinion, and
were not qualified or modified as to uncertainty, audit scope or accounting
principles. However, the report of E&Y for these fiscal years was qualified with
respect to uncertainty as to the Company's ability to continue as a going
concern. During fiscal years 2001 and 2000 and the subsequent interim period
through March 6, 2003, there were no disagreements with E&Y regarding any
matters of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of E&Y, would have caused E&Y to make reference to the subject
matter of the disagreements in connection with its report. During our two most
recent fiscal years and through March 6, 2003, there were no reportable events
as that term is defined in Item 304 (a)(1)(v) of Regulation S-K.
We engaged Stonefield Josephson, Inc. as our new independent accountants as of
March 10, 2003. During the two most recent fiscal years and through March 10,
2003, we have not consulted with Stonefield Josephson, Inc. regarding either (i)
the application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
our financial statements; or (ii) any matter that was either the subject of a
disagreement, as that term is defined in Item 304 (a) (1) (iv) of Regulation S-K
and the related instructions to Item 304 of the Regulation S-K, or a reportable
event, as that term is defined in Item 304 (a) (1) (iv) of Regulation S-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOONEY AEROSPACE GROUP, LTD.
June 19, 2003 By: /s/ J. Nelson Happy
------------------------------------------
J. Nelson Happy
Vice Chairman, President & Chief Financial
Officer and Secretary (Principal Executive
Financial and Accounting Officer)
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CERTIFICATIONS
I, J. Nelson Happy, 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 to make the statements made, in light of the circumstances
under which 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. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
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; and
6. I have indicated in this quarterly report whether 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: June 19, 2003
/s/ J. Nelson Happy
------------------------------------------
Vice Chairman, President, Chief Financial
Officer and Secretary (principal Executive
and Financial and Accounting Officer)
26