UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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)
(830) 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 August 10, 2003 - 273,055,127 shares of common stock
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
MOONEY AEROSPACE GROUP, LTD. AND SUBSIDIARY
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Consolidated Balance Sheet as of June 30, 2003 (unaudited) 3-4
Consolidated Statements of Operations for
the three months ended June 30, 2003 and 2002 (unaudited) 5
Consolidated Statements of Operations for
the six months ended June 30, 2003 and 2002 (unaudited) 6
Consolidated Statements of Cash Flows for
the six months ended June 30, 2003 and 2002 (unaudited) 7-9
Notes to Consolidated Financial Statements (unaudited) 10-19
Item 2. Management's Discussion and Analysis or Plan of Operation 20-26
Item 3. Controls and Procedures 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26-27
Item 2. Change in Securities 27
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 28
CERTIFICATIONS 29-30
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MOONEY AEROSPACE GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JUNE 30, 2003
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 615,000
Accounts receivable, less allowance for
doubtful accounts of $0 129,000
Inventory, net of obsolescence reserve
of $220,000 9,909,000
Debt issuance costs 358,000
Prepaid expenses and other current assets 74,000
----------------
Total current assets 11,085,000
PROPERTY AND EQUIPMENT, net 4,439,000
TRADE NAME 1,802,000
DEBT ISSUANCE COSTS 551,000
----------------
TOTAL ASSETS $ 17,877,000
================
See accompanying notes to the consolidated financial statements.
3
MOONEY AEROSPACE GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 4,417,000
Accrued expenses 4,002,000
Accrued interest and penalties 3,742,000
Liabilities related to abandoned property 14,099,000
Accrued warrant liability 29,000
Advanced deposits 2,004,000
Convertible debentures, current portion 4,182,000
Notes payable, current portion (including related party notes of $433,000) 3,136,000
----------------
Total current liabilities 35,611,000
CONVERTIBLE DEBENTURES, less current portion 27,409,000
NOTES PAYABLE, less current portion 995,000
----------------
TOTAL LIABILITIES 64,015,000
----------------
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; 31,401 shares issued and outstanding 2,503,000
Class A Common Stock, $0.0001 par value, 625,000,000 shares authorized;
212,671,600 shares issued and outstanding 21,000
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 90,206,000
Accumulated deficit (138,868,000)
----------------
Total stockholders' deficit (46,138,000)
----------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 17,877,000
================
See accompanying notes to the consolidated financial statements.
4
MOONEY AEROSPACE GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
2003 2002
------------ ------------
(restated)
NET SALES $ 2,647,000 $ 369,000
COST OF SALES 2,719,000 124,000
------------ ------------
GROSS PROFIT (LOSS) (72,000) 245,000
------------ ------------
OPERATING EXPENSES
Research and development expenses 247,000 993,000
Selling and support expenses 282,000 343,000
General and administrative expenses 1,937,000 3,145,000
------------ ------------
2,466,000 4,481,000
LOSS FROM OPERATIONS (2,538,000) (4,236,000)
------------ ------------
OTHER INCOME (EXPENSES):
Interest income -- 65,000
Other income (expense), net (855,000) 132,000
Amortization of debt issue costs and discounts (1,562,000) (1,223,000)
Interest expense (2,324,000) (1,532,000)
------------ ------------
TOTAL OTHER INCOME (EXPENSES) (4,741,000) (2,558,000)
------------ ------------
LOSS BEFORE INCOME TAXES (7,279,000) (6,794,000)
INCOME TAXES -- --
------------ ------------
NET LOSS $(7,279,000) $(6,794,000)
============ ============
NET LOSS PER SHARE:
BASIC AND DILUTED $ (0.05) $ (0.10)
============ ============
See accompanying notes to the consolidated financial statements.
5
MOONEY AEROSPACE GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
2003 2002
------------- -------------
(restated)
NET SALES $ 4,512,000 $ 369,000
COST OF SALES 4,251,000 124,000
------------- -------------
GROSS PROFIT 261,000 245,000
------------- -------------
OPERATING EXPENSES
Research and development expenses 247,000 2,654,000
Selling and support expenses 761,000 343,000
General and administrative expenses 3,078,000 5,296,000
------------- -------------
4,086,000 8,293,000
LOSS FROM OPERATIONS (3,825,000) (8,048,000)
------------- -------------
OTHER INCOME (EXPENSES):
Interest income 10,000 68,000
Other income (expense), net (514,000) 170,000
Amortization of debt issue costs and discounts (3,105,000) (3,507,000)
Interest expense (4,662,000) (2,548,000)
------------- -------------
TOTAL OTHER INCOME (EXPENSES) (8,271,000) (5,817,000)
------------- -------------
LOSS BEFORE INCOME TAXES (12,096,000) (13,865,000)
INCOME TAXES -- --
------------- -------------
NET LOSS $(12,096,000) $(13,865,000)
============= =============
NET LOSS PER SHARE:
BASIC AND DILUTED $ (0.09) $ (0.23)
============= =============
See accompanying notes to the consolidated financial statements.
6
MOONEY AEROSPACE GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
2003 2002
------------- -------------
(restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(12,096,000) $(13,865,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of discount on convertible debentures 2,968,000 3,420,000
Amortization of debt issuance costs 137,000 87,000
Common stock and warrants issued for services 87,000 498,000
Depreciation and amortization expense 284,000 722,000
(Increase) decrease in:
Accounts receivable (84,000) (86,000)
Inventory (2,357,000) (771,000)
Prepaid expenses and other current assets 268,000 (284,000)
Increase (decrease) in:
Accounts payable 1,812,000 (1,377,000)
Accrued liabilities 1,153,000 2,581,000
Accrued interest and penalties 4,334,000 --
Accrued warrant liability 510,000 --
Advanced deposits 61,000 (14,000)
------------- -------------
Net cash used in operating activities (2,923,000) (9,089,000)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (21,000) (14,000)
Proceeds from sale of investments -- 1,926,000
Deposit on acquisition of Mooney Airplane Company, Inc. -- (4,082,000)
------------- -------------
Net cash used in investing activities (21,000) (2,170,000)
------------- -------------
See accompanying notes to the consolidated financial statements.
7
MOONEY AEROSPACE GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
2003 2002
------------- -------------
(restated)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible debentures -- 12,026,000
Proceeds from issuance of notes payable 5,280,000 --
Proceeds from the issuance of common stock -- 32,000
Payments for debt issue costs (380,000) (343,000)
Payments on capital lease obligation -- (70,000)
Payments on notes (2,754,000) (142,000)
------------- -------------
Net cash provided by financing activities 2,146,000 11,503,000
------------- -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (798,000) 244,000
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 1,413,000 681,000
------------- -------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 615,000 $ 925,000
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 266,000 $ 939,000
============= =============
Income taxes paid $ -- $ --
============= =============
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the six months ended June 30, 2003, the Company converted: 1) 4,488
shares of Series A preferred stock into 53,576,751 shares of Class A common
stock valued at $348,000, 2) $598,000 of convertible debentures into 71,761,918
shares of Class A common stock, and 3) $45,000 of accrued interest into
3,922,170 shares of Class A common stock. In addition, the Company issued
2,900,000 shares of Class A common stock for professional services valued at
$87,000.
During the six months ended June 30, 2002, the Company acquired certain assets
of MACorp for $9,881,000. Of the total consideration paid, approximately
$4,082,000 was in cash, of which, $3,500,000 was paid directly to Congress;
$4,500,000 was in the form of notes payable to Congress; 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 trade name, inventory and property, and
equipment, and totaled $1,287,000, $5,348,000 and $5,193,000 respectively.
Liabilities assumed totaled to $1,947,000. In addition, the Company: 1)
converted 8,001 shares of Series A preferred stock into 5,430,919 shares of
Class A common stock valued at $826,000 and 2) converted $2,458,000 of
convertible debentures into 15,752,221 shares of Class A common stock, 3)
exchanged 886,752 shares of Class B common stock for 886,752 shares of Class A
common stock, 4) issued 880,000 shares of Class A common stock for professional
services valued at $178,000 and issued 2,000,000 warrants as part of a severance
package valued at $320,000.
See accompanying notes to the consolidated financial statements.
8
MOONEY AEROSPACE GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES (Continued):
During the six months ended June 30, 2003, the Company implemented a
restructuring plan whereby certain convertible debenture noteholders agreed to
waive all outstanding defaults including waiver of penalties due to them
totaling $8,300,000 as a contribution to capital and wrote off the remaining
debt discount related to the convertible debentures of $17,070,000. See Note 12.
In addition, as part of the restructuring plan, $6,322,000 of promissory notes
were converted to convertible debentures (see Notes 5,6 and 12).
See accompanying notes to the consolidated financial statements.
9
MOONEY AEROSPACE GROUP. LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 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 six months ended June 30, 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 a net loss for the six months ended June 30, 2003 of
$12,096,000 and at June 30, 2003, had an accumulated deficit of $138,868,000 and
a working capital deficit of $24,526,000. 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 June 30, 2003 is insufficient to meet the
Company's needs beyond the end of 2003.
2. Management has restructured its current outstanding debt and
raised additional capital through the issuance of notes
payable that it believes will be sufficient to fund its
current operations and increase the number of airplanes
produced to generate sufficient revenue to achieve profitable
operating results.
3. 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.
10
MOONEY AEROSPACE GROUP. LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
STOCK OPTIONS
- -------------
The Company did not grant any new options and no options were cancelled or
exercised during the six months ended June 30, 2003. As of June 30, 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.
RESTATEMENT
- -----------
The financial statements for the three and six months ended June 30, 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:
Three months Six months
Ended Ended
June 30, 2002 June 30, 2002
------------ ----------
Net loss, as previously reported $ (6,803,000) $ (12,477,000)
Prior period adjustment 9,000 (1,388,000)
---------------- ----------------
Net loss, as restated $ (6,794,000) $ (13,865,000)
================ ================
Net loss per share, as previously reported $ (0.10) $ (0.21)
Prior period adjustment (0.00) (0.02)
---------------- ----------------
Net loss per share, as restated $ (0.10) $ (0.23)
================ ================
11
MOONEY AEROSPACE GROUP. LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
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. (See Note 11 for per share information) The
following potential common shares have been excluded from the computation of
diluted net loss per share as of June 30, 2003 and 2002 because the effect would
have been anti-dilutive:
2003 2002
----------------- ------------------
Conversion of Series A preferred stock 81,773,438 18,298,769
Conversion of convertible debentures 1,439,694,010 138,281,100
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 - 52,478,472
Warrants issued with Series A preferred stock - 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 -
------------------ -------------------
1,531,659,401 246,720,107
================== ===================
NOTE 3 - INVENTORY
Inventory at June 30, 2003 consisted of the following:
Raw materials and purchased parts $ 1,095,000
Work-in-process 4,988,000
Semi-finished and finished goods 4,046,000
----------------
10,129,000
Less allowance for obsolete
and slow-moving parts (220,000)
----------------
$ 9,909,000
================
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment at June 30, 2003 consisted of the following:
Aircraft $ 658,000
Office furniture and equipment 529,000
Machinery and equipment 4,064,000
----------------
5,251,000
Less accumulated depreciation and amortization (812,000)
----------------
$ 4,439,000
================
12
MOONEY AEROSPACE GROUP. LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
NOTE 5 - NOTES PAYABLE
Notes payable at June 30, 2003 consisted of the following:
Congress Note A $ --
Congress Note B 1,250,000
Congress Note C 3,000
Notes Payable - July 31, 2002 175,000
Notes Payable - October 4, 2002 695,000
Notes Payable - November 8, 2002 99,000
Notes Payable - November 22, 2002 50,000
Notes Payable - January 16, 2003 62,000
Notes Payable - January 16, 2003 62,000
Notes Payable - March 11, 2003 370,000
Notes Payable - March 20, 2003 25,000
Notes Payable - April 4, 2003 500,000
Notes Payable - April 11, 2003 250,000
Mooney Aircraft Corporation 137,000
Kerrville Independent School District 252,000
City of Kerrville, Texas 125,000
Other 76,000
------------
4,131,000
Less current maturities (3,136,000)
------------
$ 995,000
============
At June 30, 2003, the Company had accrued interest of $150,000 related to the
above notes payable.
For the three months ended June 30, 2003, the Company repaid $1,408,000 of notes
payable and entered into 5 new notes payable totaling $3,080,000. Also, as a
result of the restructuring (See Note 12), the Company converted $6,322,000 of
notes payable into convertible debentures.
13
MOONEY AEROSPACE GROUP. LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
NOTE 6 - CONVERTIBLE DEBENTURES
Convertible debentures at June 30, 2003 consisted of the following:
March 27, 2001 Issuance $ 941,000
July 25, 2001 Issuance 195,000
June 27, 2001 Issuance 1,000,000
October 26, 2001 Issuance 7,910,000
February 27, 2002 Issuance 5,833,000
March 26, 2002 Issuance 1,595,000
April 11, 2002 Issuance 1,045,000
May 16, 2002 Issuance 768,000
June 6, 2002 Issuance 358,000
June 10, 2002 Issuance 550,000
June 18, 2002 Issuance 339,000
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
Restructure of notes payable
(see Notes 5 and 12) 6,322,000
-------------
31,591,000
Less current maturities (4,182,000)
-------------
$ 27,409,000
=============
At June 30, 2003, the Company had accrued interest for the above convertible
debentures of $3,601,000.
During the three months ended June 30, 2003, $7,420,000 of accrued penalties
related to the convertible debentures were forgiven and recorded as a capital
contribution. (see Note 12).
During the three and six months ended June 30, 2003, $312,000 and $598,000,
respectively, of convertible debentures were converted into common stock (see
Note 7).
In connection with the restructuring (See note 12), the Company wrote off,
directly to additional paid in capital, the remaining unamortized debt discounts
related to the convertible debentures of $17,070,000.
14
MOONEY AEROSPACE GROUP. LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
NOTE 7 - COMMON STOCK
During the six months ended June 30, 2003, the Company converted: 1) 4,488
shares of Series A preferred stock into 53,576,751 shares of Class A common
stock valued at $348,000, 2) $598,000 of convertible debentures into 71,761,918
shares of Class A common stock, and 3) $45,000 of accrued interest into
3,922,170 shares of Class A common stock. In addition, the Company issued
2,900,000 shares of Class A common stock for professional services valued at
$87,000.
As a result of the $598,000 of convertible debentures being converted into Class
A common stock, the Company wrote off $411,000 of unamortized discounts related
to these debentures.
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.
15
MOONEY AEROSPACE GROUP. LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
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.
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 June 30, 2003, which the Company believes are
adequate to settle any damages that may arise from these claims.
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.
16
MOONEY AEROSPACE GROUP. LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
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.
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. 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 June 30, 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
==================
17
MOONEY AEROSPACE GROUP. LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
The Company believes they will settle the lawsuit described in Note 9 and that
the actual damages will be substantially less than the liability.
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 and six months ended June 30, 2003 and 2002:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
-------------------------- ------------------------
JUNE 30, JUNE 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----
Numerator
Loss before extraordinary item $ (7,279,000) $ (6,794,000) $ (12,096,000) $ (13,865,000)
Amortization of discount on preferred stock (14,000) (24,000) (53,000) (60,000)
Dividends in Arrears (476,000) (372,000) (476,000) (372,000)
-------------- -------------- -------------- --------------
Numerator for basic loss per share $ (7,769,000) $ (7,190,000) $ (12,625,000) $ (14,297,000)
============== ============== ============== ==============
Denominator
Weighted average shares of Class B shares 1,014,000 1,014,000 1,014,000 1,457,000
Weighted average shares of Class A shares 163,362,000 71,650,000 133,400,000 59,607,000
-------------- -------------- -------------- --------------
Numerator for basic loss per share 164,376,000 72,664,000 134,414,000 61,064,000
============== ============== ============== ==============
Basic loss per share $ (0.05) $ (0.10) $ (0.09) $ (0.23)
============== ============== ============== ==============
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 - RESTRUCTURING
On June 17, 2003, the Company implemented a restructuring plan whereby all
convertible note holders agreed to waive all outstanding defaults, including
waiver of the penalties for non-registration of the shares underlying the
convertible debentures, and set fixed note conversion prices of $0.0192 and
$0.0384 for the secured and unsecured debenture holders, respectively. In
connection with the restructuring plan, the Company has received more than
$5,000,000 of new financing.
18
MOONEY AEROSPACE GROUP. LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
The debt holders were, due to their beneficial ownership of significant equity
interests in the Company, considered to be related parties as defined in
Statement of Financial Accounting Standards No. 57, "Related Party Disclosures".
Therefore the Company accounted for this restructuring consistent with its
economic substance, as set forth in Statement of Financial Accounting Standards
No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings".
Since the debt holders had agreed to the restructuring primarily to ensure the
Company's continuation as a going concern thereby protecting their equity
interests, the restructuring was accounted for as an equity transaction and no
amounts were charged to operations. The contribution of the warrants and the
forfeiture of the original beneficial conversion rights were treated as a
contribution to capital. The elimination of the unamortized debt discount
attributable to these equity features was similarly treated as an equity
distribution to these debt holders. A summary follows:
Waiver of interest and penalties for non-registration
of securities $ 7,420,000
Contribution of warrant rights, at net book value of warrant
liability at date of restructuring 880,000
Elimination of unamortized discount at date of restructuring,
accounted for as a distribution of rights to equity holders (17,070,000)
-------------
Net distribution to related parties at date of restructuring $ (8,770,000)
=============
NOTE 13 - SUBSEQUENT EVENTS
Subsequent to June 30, 2003, the Company has received approximately $1,300,000
from the issuance of notes.
From July 1, 2003 to August 10, 2003, the Company issued 60,383,527 shares of
common stock for conversions of preferred stock and convertible debentures.
19
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.
20
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 the remainder of 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 $4,512,000 in operating revenues for the six months ended June
30, 2003 from the sale of aircraft and spare parts sales, and have incurred a
net loss during the same period of $12,096,000. 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 June 30, 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.
21
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003, we had a negative working capital of $24,526,000 and a
stockholders' deficiency of $46,138,000. 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 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
June 30, 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.
22
On June 17, 2003, we implemented a restructuring plan whereby all convertible
note holders agreed to waive all outstanding defaults, including waiver of the
penalties for non-registration of the shares underlying the convertible
debentures, and set fixed note conversion prices of $0.0192 and $0.0384 for the
secured and unsecured debenture holders, respectively. In connection with the
restructuring plan, the Company has received more than $5,000,000 of new
financing. The Company did not take a charge to earnings as a result of fixing
the conversion prices since the conversion prices are higher than the market
price of the Company stock at the time the agreements were reached with
investors.
Pursuant to the restructuring plan, holders of secured notes have a conversion
price that is half of the conversion price for holders of unsecured convertible
notes and preferred stock. In addition to waiving all outstanding defaults,
holders of convertible notes agreed to cancel all outstanding warrants currently
held by them. The maturity dates for unsecured notes is extended by three years
to June 2006. Interest rates on the notes have been reduced from 8% to 3%.
As a result of the restructuring, the Company has recognized a contribution to
capital of $8,300,000 as follows: $7,420,000 due to the waiver of the
non-registration penalties that the Company had accrued and $880,000 which is
the fair value of the 65,710,614 warrants that were canceled. These warrants had
previously been accounted for using fair value accounting in accordance with
EITF 00-19; therefore removing this liability resulted in a contribution to
capital of $880,000. In addition, the Company wrote off the remaining
unamortized debt discounts related to the convertible debentures of $17,070,000.
The convertible debenture holders are considered related parties in accordance
with SFAS No. 57 due to their ability to convert their debt to equity;
therefore, write off has been treated as a distribution to shareholders and
charged directly to additional paid in capital.
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.
23
Inventory Obsolescence -- We provide an inventory obsolescence reserve for parts
whose values have been determined to be impaired or whose future utility appears
limited.
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 JUNE 30, 2003 VS. JUNE 30, 2002
Net sales for the three months ended June 30, 2003 increased by $2,278,000 as
compared to the same period in 2002, due to the acquisition of MACorp's assets.
We had no sales prior to this acquisition and for the three months ended June
30, 2002, the net sales consisted only of spare airplane parts. No airplanes
were sold during this period as compared to the sale of 5 airplanes for the
three months ended June 30, 2003.
Cost of sales for the three months ended June 30, 2003 increased by $2,595,000
as compared to the same period in 2002, due to the acquisition of MACorp's
assets. The negative gross margin for the three months ended June 30, 2003 is a
result of high fixed costs associated with the manufacturing of the airplanes
that could only be spread over the airplanes sold. We have the capacity to
produce more airplanes than have been produced in the past thereby reducing the
fixed manufacturing costs associated with each airplane produced.
Research and development costs for the three months ended June 30, 2003
decreased by $746,000 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 June 30, 2003 decreased
by $61,000 as compared to the same period in 2002, due to the acquisition of
MACorp's assets. We have not spent as much on selling and support expenses
during the three months ended June 30, 2003 due to our current cash position.
General and administrative expenses for the three months ended June 30, 2003
decreased by $1,208,000 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; thus reducing general and administrative expenses in 2003.
24
Other income (expense) for the three months ended June 30, 2003 increased by
$2,183,,000 as compared to the same period in 2002, principally due to the
increase in the fair value of the warrant liability of $860,000 from March 31,
2003 to June 30, 2003.
Amortization of debt issue costs and discounts for the three months ended June
30, 2003 increased by $339,000 as compared to the same period in 2002, due to
the increase in the debt discounts that resulted from the issuance of additional
convertible debentures in the latter half of 2002.
Interest expense for the three months ended June 30, 2003 increased by $792,000
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. The non-registration penalties were accrued through June 17, 2003,
the date of the restructuring.
SIX MONTHS ENDED JUNE 30, 2003 VS. JUNE 30, 2002
Net sales for the six months ended June 30, 2003 increased by $4,143,000 as
compared to the same period in 2002, due to the acquisition of MACorp's assets.
We had no sales prior to this acquisition and for the period from the date of
acquisition to June 30, 2002, the net sales consisted only of spare airplane
parts. No airplanes were sold during this period as compared to the sale of 8
airplanes for the six months ended June 30, 2003.
Cost of sales for the six months ended June 30, 2003 increased by $4,127,000 as
compared to the same period in 2002, due to the acquisition of MACorp's assets.
The very small gross margin for the six months ended June 30, 2003 is a result
of high fixed costs associated with the manufacturing of the airplanes that
could only be spread over the airplanes sold. We have the capacity to produce
more airplanes than have been produced in the past thereby reducing the fixed
manufacturing costs associated with each airplane produced.
Research and development costs for the six months ended June 30, 2003 decreased
by $2,407,000 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 six months ended June 30, 2003 increased by
$418,000 as compared to the same period in 2002, due to higher selling expense
being incurred during the beginning of 2003.
General and administrative expenses for the six months ended June 30, 2003
decreased by $2,218,000 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; thus reducing general and administrative expenses in 2003.
Other income (expense) for the six months ended June 30, 2003 increased by
$2,454,000 as compared to the same period in 2002, principally due to the
increase in the fair value of the warrant liability of $510,000 from December
31, 2002 to June 30, 2003.
Amortization of debt issue costs and discounts for the six months ended June 30,
2003 decreased by $402,000 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 six months ended June 30, 2002 offset by higher amortization due to
increased debt discount balances resulting from the issuance of additional
convertible debentures. There were more debentures converted into common stock
for the six months ended June 30, 2002 as compared to 2003.
25
Interest expense for the six months ended June 30, 2003 increased by $2,114,000
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. The non-registration penalties were accrued through June 17, 2003,
the date of the restructuring.
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.
While there is no assurance that additional financing will be available, we
believe that we have developed a financial plan that, if executed successfully,
will substantially improve our ability to meet our working capital requirements
throughout the next year. We are currently pursuing other financing to ensure
that we have sufficient funds through the next twelve months. Although our
current cash balance including the additional funding obtained subsequent to
June 30, 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 at the end of the period
covered by this 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
L. PETER LARSON AND DALE RUHMEL V. MOONEY AEROSPACE GROUP, INC.
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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.
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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)
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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.
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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. 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 six months ended June 30, 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
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 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 June 20, 2003, we filed a current report on Form 8-K announcing the
restructuring of our convertible debentures.
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.
August 19, 2003 By: /S/ J. NELSON HAPPY
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J. Nelson Happy
Vice Chairman, President & Chief Financial
Officer and Secretary (Principal Executive
Financial and Accounting Officer)
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