UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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
November 11 2003 - 354,088,358 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 2
Item 1. Financial Statements 2
Consolidated Balance Sheet as of September 30, 2003 (unaudited) 2
Consolidated Statements of Operations for the three and
nine months ended September 30, 2003 and 2002 (unaudited) 3
Consolidated Statements of Cash Flows for the
nine months ended September 30, 2003 and 2002 (unaudited) 4
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis or Plan of Operations 16
Item 3. Controls and Procedures 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Change in Securities 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
CERTIFICATIONS 25
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MOONEY AEROSPACE GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(unaudited)
SEPTEMBER
30, 2003
--------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 396,000
Account receivable, net of allowance for doubtful
accounts of $2,000 127,000
Inventory, net of obsolenscence reserve of $280,000 9,099,000
Debt issuance costs 8,000
Prepaid expenses and other current assets 238,000
--------------
TOTAL CURRENT ASSETS 9,868,000
PROPERTY AND EQUIPMENT, net 4,314,000
TRADE NAME 1,802,000
DEBT ISSUANCE COSTS 1,429,000
--------------
TOTAL ASSETS $ 17,413,000
==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 4,669,000
Accrued expenses 2,814,000
Accrued interest and penalties 4,265,000
Liabilities related to abandoned property 14,099,000
Accrued warrant liability 17,000
Advanced deposits 2,135,000
Convertible debentures, current portion (including
related party convertible debentures of $168,000) 3,898,000
Notes payable, current portion (including related
party notes of $163,000) 2,165,000
--------------
TOTAL CURRENT LIABILITIES 34,062,000
CONVERTIBLE DEBENTURES, less current portion (including related
party convertible debentures of $68,000) 28,175,000
NOTES PAYABLE, less current portion 529,000
--------------
TOTAL LIABILITIES 62,766,000
--------------
STOCKHOLDERS' DEFICIT
Preferred stock, $0.0001 par value; 5,000,000 shares
authorized; 0 shares issued and outstanding;
100,000 shares designated as Series A
Series A, Cumulative Convertible Preferred Stock,
$100 stated value per share, 100,000 shares
authorized; 28,691 shares issued and outstanding 2,292,000
Class A Common stock, $0.0001 par value;
3,000,000,000 shares authorized; 311,250,256
shares issued and outstanding 31,000
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 92,839,000
Accumulated deficit (140,515,000)
--------------
TOTAL STOCKHOLDERS' DEFICIT (45,353,000)
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 17,413,000
==============
The accompanying notes are an integral part of these consolidated
financial statements
2
Mooney Aerospace Group, Ltd. And Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
30, 2003 30, 2002 30, 2003 30, 2002
------------- ------------- ------------- -------------
(as restated) (as restated)
NET SALES $ 6,357,000 $ 1,338,000 $ 10,869,000 $ 1,707,000
COST OF SALES 5,411,000 749,000 9,662,000 873,000
------------- ------------- ------------- -------------
GROSS PROFIT 946,000 589,000 1,207,000 834,000
------------- ------------- ------------- -------------
OPERATING EXPENSES
Research and development expenses 130,000 835,000 377,000 3,489,000
Selling and support expenses 618,000 501,000 1,379,000 844,000
General and administrative expenses 1,015,000 2,465,000 4,093,000 7,761,000
------------- ------------- ------------- -------------
TOTAL OPERATING EXPENSES 1,763,000 3,801,000 5,849,000 12,094,000
------------- ------------- ------------- -------------
LOSS FROM OPERATIONS (817,000) (3,212,000) (4,642,000) (11,260,000)
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE)
Interest income 1,000 9,000 11,000 77,000
Other income (expense), net 7,000 (27,000) (507,000) 143,000
Amortization of debt issue costs and discounts (172,000) (1,283,000) (3,277,000) (4,790,000)
Interest expense (665,000) (1,886,000) (5,327,000) (4,434,000)
------------- ------------- ------------- -------------
TOTAL OTHER INCOME (EXPENSE) (829,000) (3,187,000) (9,100,000) (9,004,000)
------------- ------------- ------------- -------------
LOSS BEFORE PROVISION FOR INCOME TAXES (1,646,000) (6,399,000) (13,742,000) (20,264,000)
PROVISION FOR INCOME TAXES -- -- -- --
------------- ------------- ------------- -------------
NET LOSS $ (1,646,000) $ (6,399,000) $(13,742,000) $(20,264,000)
============= ============= ============= =============
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.01) $ (0.09) $ (0.08) $ (0.32)
============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements
3
Mooney Aerospace Group, Ltd. And Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED
-----------------------------
SEPTEMBER SEPTEMBER
30, 2003 30, 2002
------------- -------------
(as restated)
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $(13,742,000) $(20,264,000)
Adjustment to reconcile net loss to net cash
used in operating activities:
Amortization of discount on convertible debentures 2,968,000 4,663,000
Amortization of debt issuance costs 309,000 127,000
Common stock and warrants issued for services 237,000 498,000
Depreciation and amortization expense 425,000 1,110,000
Convertible debentures issued for services 88,000 --
Changes in operating assets and liabilities:
Accounts receivable (82,000) (94,000)
Inventory (1,547,000) (2,856,000)
Prepaid expenses and other current assets 104,000 (343,000)
Accounts payable 2,064,000 (114,000)
Accrued expenses 1,300,000 3,336,000
Accrued interest and penalties 5,024,000 --
Accrued warrant liability 498,000 --
Advanced deposits 192,000 30,000
------------- -------------
Net cash used in operating activities (2,162,000) (13,907,000)
------------- -------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (37,000) (14,000)
Proceeds from sale of investments -- 1,953,000
Purchase of Mooney Airplane Company, Inc. -- (4,082,000)
------------- -------------
Net cash used in investing activities (37,000) (2,143,000)
------------- -------------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible debentures 473,000 14,580,000
Proceeds from issuance of notes payable 5,649,000 2,749,000
Proceeds from issuance of common stock -- 32,000
Payments for debt issue costs (380,000) (438,000)
Payments on capital lease obligation -- (111,000)
Payments on notes payable (4,560,000) (1,296,000)
------------- -------------
Net cash provided by financing activities 1,182,000 15,516,000
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,017,000) (534,000)
CASH AND CASH EQUIVALENTS, Beginning of period 1,413,000 681,000
------------- -------------
CASH AND CASH EQUIVALENTS, End of period $ 396,000 $ 147,000
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 280,000 $ 1,367,000
============= =============
Income taxes paid $ -- $ --
============= =============
The accompanying notes are an integral part of these consolidated financial statements
4
MOONEY AEROSPACE GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the nine months ended September 30, 2003, the Company converted: 1) 7,198
shares of Series A preferred stock into 61,478,866 shares of Class A common
stock valued at $560,000, 2) $1,984,000 of convertible debentures into
122,603,503 shares of Class A common stock, 3) $212,000 of accrued interest into
10,192,993 shares of Class A common stock, 4) $725,000 of deferred compensation
and consulting fees into 30,564,133 shares of Class A common stock, and 5)
issued $88,000 and $700,000 of convertible debentures for services rendered, and
commissions and fees, respectively . In addition, the Company issued 5,900,000
shares of Class A common stock for professional services valued at $237,000.
During the nine months ended September 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 8,189 shares of Series A preferred stock into 5,627,182 shares of
Class A common stock valued at $842,000 and 2) converted $2,542,000 of
convertible debentures into 16,731,549 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.
In 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).
The accompanying notes are an integral part of these consolidated
financial statements
5
MOONEY AEROSPACE GROUP. LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 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 nine months ended September 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 nine months ended September 30, 2003 of
$13,742,000 and at September 30, 2003, had an accumulated deficit of
$140,515,000 and a working capital deficit of $24,194,000. 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.
2. Management has restructured its current outstanding debt and raised
additional capital through the issuance of notes payable, including a
$5,000,000 long-term note issued on November 14, 2003, 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.
6
MOONEY AEROSPACE GROUP. LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
Stock Options
- -------------
The Company did not grant any new options and no options were cancelled or
exercised during the nine months ended September 30, 2003. As of September 30,
2003, no options were outstanding under the Company Stock Option Plan (the
"Plan"), and 300,000 options were 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 nine months ended September 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 Nine months
Ended Ended
-------------- ---------------
September 30, 2002
--------------------------------
Net loss, as previously reported $ (6,474,000) $ (18,951,000)
Prior period adjustment 75,000 (1,313,000)
-------------- ---------------
Net loss, as restated $ (6,399,000) $ (20,264,000)
============== ===============
Net loss per share, as previously reported $ (0.09) $ (0.30)
Prior period adjustment (0.00) (0.02)
-------------- ---------------
Net loss per share, as restated $ (0.09) $ (0.32)
============== ===============
NOTE 2 - EARNINGS PER SHARE
In 1997, the Financial Accounting Standards 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 September 30, 2003 and 2002 because the effect
would have been anti-dilutive:
2003 2002
-------------- --------------
Conversion of Series A preferred stock 74,716,146 37,194,391
Conversion of convertible debentures 1,464,335,341 436,273,309
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
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 --
-------------- --------------
1,549,243,440 574,069,078
============== ==============
7
MOONEY AEROSPACE GROUP. LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
NOTE 3 - INVENTORY
Inventory at September 30, 2003 consisted of the following:
Raw materials and purchased parts $ 1,121,000
Work-in-process 5,177,000
Semi-finished and finished goods 3,081,000
------------
9,379,000
Less allowance for obsolete
and slow-moving parts (280,000)
------------
$ 9,099,000
============
NOTE 4 - PROPERTYAND EQUIPMENT
Property and equipment at September 30, 2003 consisted of the following:
Aircraft $ 658,000
Office furniture and equipment 529,000
Machinery and equipment 4,080,000
------------
5,267,000
Less accumulated depreciation and amortization (953,000)
------------
$ 4,314,000
============
8
MOONEY AEROSPACE GROUP. LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
NOTE 5 - NOTES PAYABLE
Notes payable at September 30, 2003 consisted of the following:
Congress Note A $ --
Congress Note B 937,000
Congress Note C --
Notes Payable - July 31, 2002 200,000
Notes Payable - November 8, 2002 32,000
Notes Payable - January 16, 2003 62,000
Note 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 125,000
Mooney Aircraft Corporation 123,000
Kerrville Independent School District 175,000
City of Kerrville, Texas 69,000
Other 76,000
------------
2,694,000
Less current maturities (2,165,000)
------------
$ 529,000
============
At September 30, 2003, the Company had accrued interest of $255,000 related to
the above notes payable.
For the nine months ended September 30, 2003, the Company repaid $4,560,000 of
notes payable and entered into new notes payable totaling $5,649,000. Also, as a
result of the restructuring (See Note 12), the Company converted $6,322,000 of
notes payable into convertible debentures.
9
MOONEY AEROSPACE GROUP. LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
NOTE 6 - CONVERTIBLE DEBENTURES
Convertible debentures at September 30, 2003 consisted of the following:
March 27, 2001 Issuance $ 868,000
July 25, 2001 Issuance 192,000
June 27, 2001 Issuance 791,000
October 26, 2001 Issuance 7,396,000
February 27, 2002 Issuance 5,607,000
March 26, 2002 Issuance 1,547,000
April 11, 2002 Issuance 953,000
May 16, 2002 Issuance 768,000
June 6, 2002 Issuance 358,000
June 10, 2002 Issuance 550,000
June 18, 2002 Issuance 300,000
June 28, 2002 Issuance 1,890,000
July 10, 2002 Issuance 248,000
July 31, 2002 Issuance 300,000
September 10, 2002 Issuance 2,160,000
July 7, 2003 Issuance
1,837,000
Restructure of notes payable (See Notes 5 & 12) 6,308,000
-------------
32,073,000
Less current maturities (3,898,000)
-------------
$ 28,175,000
=============
At September 30, 2003, the Company had accrued interest for the above
convertible debentures of $4,010,000.
In 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 nine months ended September 30, 2003, $1,385,000 and
$1,984,000, 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. Also, in connection with
the restructuring, in July 2003, the Company issued $1,261,000 of convertible
debentures, of which, $473,000 was for cash, $88,000 for services rendered and
$700,000 for commissions and fees (recorded as debt issue costs) for raising
additional money as part of the restructuring.
10
MOONEY AEROSPACE GROUP. LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
NOTE 7 - COMMON STOCK
During the nine months ended September 30, 2003, the Company converted: 1) 7,198
shares of Series A preferred stock into 61,478,866 shares of Class A common
stock valued at $560,000, 2) $1,984,000 of convertible debentures into
122,603,503 shares of Class A common stock, 3) $212,000 of accrued interest into
10,192,993 shares of Class A common stock, 4) and $725,000 of deferred
compensation and consulting fees into 30,564,133 shares of Class A common stock.
In addition, the Company issued 5,900,000 shares of Class A common stock for
professional services valued at $237,000.
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 September 30, 2003, except as stated below and for
hedging relationships designated after September 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 September 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.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." Interpretation 46 changes the criteria by which one
company includes another entity in its consolidated financial statements.
Previously, the criteria were based on control through voting interest.
Interpretation 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. A company that consolidates a variable
interest entity is called the primary beneficiary of that entity. The
consolidation requirements of Interpretation 46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation requirements
apply to other entities in the first fiscal year or interim period beginning
11
MOONEY AEROSPACE GROUP. LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
after December 15, 2003. Certain of the disclosure requirements apply in all
financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The Company does not expect the
adoption to have a material impact on the Company's financial position or
results of operations.
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 September 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.
12
MOONEY AEROSPACE GROUP. LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 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 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 abandon
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 $106,167. 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 September 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 less 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
===============
13
MOONEY AEROSPACE GROUP. LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 and nine months ended September 30, 2003 and
2002:
For the three months ended For the nine months ended
September 30, September 30,
------------------------------- -------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- --------------
(as restated) (as restated)
Numerator
Net Loss $ (1,646,000) $ (6,399,000) $ (13,742,000) $ (20,264,000)
Amortization of discount on preferred stock (1,000) (116,000) (54,000) (176,000)
Dividends in Arrears (469,000) (415,000) (469,000) (415,000)
-------------- -------------- -------------- --------------
Numerator for basic loss per share $ (2,116,000) $ (6,930,000) $ (14,265,000) $ (20,855,000)
============== ============== ============== ==============
Denominator
Weighted average shares of Class B shares 1,014,000 1,014,000 1,014,000 1,309,000
Weighted average shares of Class A shares 280,037,000 72,874,000 182,817,000 64,072,000
-------------- -------------- -------------- --------------
Numerator for basic loss per share 281,051,000 73,888,000 183,831,000 65,381,000
============== ============== ============== ==============
Basic loss per share $ (0.01) $ (0.09) $ (0.08) $ (0.32)
============== ============== ============== ==============
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
$5,500,000 of new financing.
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
14
MOONEY AEROSPACE GROUP. LTD AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
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 - OTHER INCOME (EXPENSE)
Other income (expense) in the accompanying consolidated statements of operations
for the three and nine months ended September 30, 2003 is principally related to
the change in fair value of the accrued warrant liability, and for the three and
nine months ended September 30, 2002 is principally related to the gain (loss)
on the sale of fixed assets and investments.
NOTE 14 - SUBSEQUENT EVENTS
On October 2, 2003, the Company's stockholders approved increasing the number of
authorized shares to 3,000,000,000.
On November 14, 2003, the Company closed a note payable agreement that provides
the Company $5,000,000 in long-term financing.
From October 1, 2003 to November 11, 2003, the Company issued 42,838,102 shares
of common stock for conversions of preferred stock and convertible debentures.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with 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.
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
16
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 and 2004, 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. Roy 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 $10,869,000 in operating revenues for the nine months ended
September 30, 2003 from the sale of aircraft and spare parts sales, and have
incurred a net loss during the same period of $13,742,000. 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.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003, we had a negative working capital of $24,194,000 and a
stockholders' deficiency of $45,353,000. 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.
17
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 fixed prices in accordance with the restructuring that took
place in the 2nd quarter of 2003. The notes earn interest at the rate stated in
the note agreements and the payment terms vary with each agreement.
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 $5,500,000 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 unsecured notes have been reduced from
8% to 3%.
As a result of the restructuring, the Company has recognized a contribution to
capital of $8,770,000 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.
On November 14, 2003, we issued a long-term note payable in the amount of
$5,000,000, of which, some of the proceeds was used to repay the Congress notes
in full.
Our current cash balance, including the additional $5,000,000 funding obtained
subsequent to September 30, 2003 has been sufficient to finance our plan of
operations. Part of the proceeds were used to repay existing debt (including the
note payable to Congress Financial). The balance of the proceeds will be used
for working capital. We believe the cash generated from our operating activities
along with the proceeds of the $5,000,000 note payable will be sufficient to
meet our operating needs for the next 12 months.
18
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 consolidated 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 consolidated 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.
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
19
THREE MONTHS ENDED SEPTEMBER 30, 2003 VS. SEPTEMBER 30, 2002
Net sales for the three months ended September 30, 2003 increased by $5,019,000
or 375% from $1,338,000 for the three months ended September 30, 2002 compared
to $6,357,000 for the same period in 2003. During the three months ended
September 30, 2002, we sold 2 airplanes as compared to the sale of 14 airplanes
for the three months ended September 30, 2003.
Cost of sales for the three months ended September 30, 2003 increased by
$4,662,000 or 622% from $749,000 for the three months ended September 30, 2002
compared to $5,411,000 for the same period in 2003. The increase in cost of
sales is directly related to the significant increase in aircraft sales. 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. As we increase our production of airplanes we expect our gross margin
to improve.
Research and development costs for the three months ended September 30, 2003
decreased by $705,000 or 84% from $835,000 for the three months ended September
30, 2002 compared to $130,000 for the same period in 2003. The decrease is 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 September 30, 2003
increased by $117,000 or 23% from $501,000 for the three months ended September
30, 2002 compared to $618,000 for the same period in 2003. The increase is
directly related to the increase in aircraft sales.
General and administrative expenses for the three months ended September 30,
2003 decreased by $1,450,000 or 59% from $2,465,000 for the three months ended
September 30, 2002 compared to $1,015,000 for the same period in 2003. The
decrease is 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 three months ended September 30, 2003 increased
by $34,000 or 126% from other expense of $27,000 for the three months ended
September 30, 2002 to other income of $7,000 for the same period in 2003. The
increase is principally due to the decrease in the fair value of the warrant
liability from June 30, 2003 to September 30, 2003.
Amortization of debt issue costs and discounts for the three months ended
September 30, 2003 decreased by $1,111,000 or 87% from $1,283,000 for the three
months ended September 30, 2002 compared to $172,000 for the same period in
2003. The significant decrease is due to the debt discounts being written off in
the 2nd quarter of 2003 as a result of the debt restructuring. The amortization
for the three months ended September 30, 2003 only represents amortization of
the debt issue costs.
Interest expense for the three months ended September 30, 2003 decreased by
$1,221,000 or 65% from $1,886,000 for the three months ended September 30, 2002
compared to $665,000 for the same period in 2003. For the three months ended
September 30, 2002, we accrued penalties related to the non-registration of the
shares underlying the convertible debentures. As a result of the debt
restructuring in the 2nd quarter of 2003, the penalties were forgiven and future
penalties were waived.
NINE MONTHS ENDED SEPTEMBER 30, 2003 VS. SEPTEMBER 30, 2002
Net sales for the nine months ended September 30, 2003 increased by $9,162,000
or 537% from $1,707,000 for the nine months ended September 30, 2002 compared to
$10,869,000 for the same period in 2003. During the nine months ended September
30, 2002, we sold 2 airplanes as compared to the sale of 22 airplanes for the
nine months ended September 30, 2003.
20
Cost of sales for the nine months ended September 30, 2003 increased by
$8,789,000 or 1,007% from $873,000 for the nine months ended September 30, 2002
compared to $9,662,000 for the same period in 2003. The increase in cost of
sales is directly related to the significant increase in aircraft sales. 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. As we increase our production of airplanes we expect our gross margin
to improve.
Research and development costs for the nine months ended September 30, 2003
decreased by $3,112,000 or 89% from $3,489,000 for the nine months ended
September 30, 2002 compared to $377,000 for the same period in 2003. The
significant decrease is 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 nine months ended September 30, 2003
increased by $535,000 or 63% from $844,000 for the nine months ended September
30, 2002 compared to $1,379,000 for the same period in 2003. The increase is
directly related to the increase in aircraft sales.
General and administrative expenses for the nine months ended September 30, 2003
decreased by $3,668,000 or 47% from $7,761,000 for the nine months ended
September 30, 2002 compared to $4,093,000 for the same period in 2003. The
decrease is 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 nine months ended September 30, 2003 decreased by
$650,000 or 455% from other income of $143,000 for the nine months ended
September 30, 2002 to other expense of $507,000 for the same period in 2003. The
decrease is principally due to the increase in the fair value of the warrant
liability from January 1, 2003 to September 30, 2003.
Amortization of debt issue costs and discounts for the nine months ended
September 30, 2003 decreased by $1,513,000 or 32% from $4,790,000 for the nine
months ended September 30, 2002 compared to $3,277,000 for the same period in
2003. The decrease is due to the debt discounts being written off in the 2nd
quarter of 2003 as a result of the debt restructuring. There was no amortization
of debt discounts subsequent to the debt restructuring.
Interest expense for the nine months ended September 30, 2003 increased by
$893,000 or 20% from $4,434,000 for the nine months ended September 30, 2002
compared to $5,327,000 for the same period in 2003. The increase is due to
additional interest expense related to the increased debt in 2003, partially
offset by the forgiveness of non-registration penalties as a result of the debt
restructuring in the 2nd quarter of 2003.
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.
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
21
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.
- ---------------------------------------------------------------
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
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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 $106,167. 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 nine months ended September 30, 2003, the Company converted: 1) 7,198
shares of Series A preferred stock into 61,478,866 shares of Class A common
stock valued at $560,000, 2) $1,984,000 of convertible debentures into
122,603,503 shares of Class A common stock, 3) $212,000 of accrued interest into
10,192,993 shares of Class A common stock, 4) and $725,000 of deferred
compensation and consulting fees into 30,564,133 shares of Class A common stock.
In addition, the Company issued 5,900,000 shares of Class A common stock for
professional services valued at $237,000.
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
None.
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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.
November 14, 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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