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, 2004
[] 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.)
165 AL MOONEY ROAD NORTH, 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 September 15, 2004 -
644,392,511 shares of common stock
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
MOONEY AEROSPACE GROUP, LTD.
(DEBTOR-IN-POSSESSION)
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION 2
Item 1. Financial Statements 2
Balance Sheet as of June 30, 2004 (unaudited) 2
Statements of Operations for the
three and six months ended June 30, 2004 and 2003 (unaudited) 3
Statements of Cash Flows for the
six months ended June 30, 2004 and 2003 (unaudited) 4
Notes to Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis or Plan of Operations 11
Item 3. Controls and Procedures 15
PART II. OTHER INFORMATION 16
Item 1. Legal Proceedings 16
Item 2. Change in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
CERTIFICATIONS
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MOONEY AEROSPACE GROUP, LTD.
(Debtor-in-Possession)
Balance Sheet
JUNE
30, 2004
--------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ --
Prepaid expenses 67,000
--------------
TOTAL CURRENT ASSETS 67,000
PROPERTY AND EQUIPMENT, net 152,000
--------------
TOTAL ASSETS $ 219,000
==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 8,000
Note payable, current portion 1,119
Secured convertible debentures 20,959,000
--------------
TOTAL CURRENT LIABILITIES 20,968,119
NOTE PAYABLE, net of current portion 146,881
--------------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE 21,115,000
LIABILITIES SUBJECT TO COMPROMISE 38,440,000
COMMITMENT AND CONTINGENCIES --
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; 17,572 shares issued and outstanding 1,428,000
Class A Common stock, $0.0001 par value; 3,000,000,000 shares
authorized; 638,342,852 shares issued and outstanding 64,000
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 101,220,000
Accumulated deficit (162,048,000)
--------------
TOTAL STOCKHOLDERS' DEFICIT (59,336,000)
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 219,000
==============
The accompanying notes are an integral part of these consolidated financial statements.
2
Mooney Aerospace Group, Ltd.
(DEBTOR-IN-POSSESSION)
Statements of Operations
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
JUNE JUNE JUNE JUNE
30, 2004 30, 2003 30, 2004 30, 2003
------------- ------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
NET SALES $ -- $ -- $ -- $ --
COST OF SALES -- -- -- --
------------- ------------- ------------- -------------
GROSS PROFIT (LOSS) -- -- -- --
------------- ------------- ------------- -------------
OPERATING EXPENSES
Reorganization expenses -- -- -- --
General and administrative expenses 797,000 1,445,000 1,660,000 2,130,000
Non-recurring expenses -- -- 10,052,000 --
------------- ------------- ------------- -------------
TOTAL OPERATING EXPENSES 797,000 1,445,000 11,712,000 2,130,000
------------- ------------- ------------- -------------
LOSS FROM OPERATIONS (797,000) (1,445,000) (11,712,000) (2,130,000)
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE)
Interest income -- -- -- 10,000
Other income, net -- (861,000) 66,000 (511,000)
Amortization of debt issue costs and discounts (1,778,000) (1,562,000) (2,511,000) (3,105,000)
Interest expense (320,000) (2,292,000) (784,000) (4,630,000)
------------- ------------- ------------- -------------
TOTAL OTHER INCOME (EXPENSE) (2,098,000) (4,715,000) (3,229,000) (8,236,000)
------------- ------------- ------------- -------------
LOSS BEFORE PROVISION FOR INCOME TAXES
AND DISCONTINTUED OPERATIONS (2,895,000) (6,160,000) (14,941,000) (10,366,000)
PROVISION FOR INCOME TAXES -- -- -- --
------------- ------------- ------------- -------------
LOSS BEFORE DISCONTINUED OPERATIONS (2,895,000) (6,160,000) (14,941,000) (10,366,000)
------------- ------------- ------------- -------------
DISCONTINUED OPERATION
Loss from operations of discontinued operation (377,000) (1,119,000) (1,885,000) (1,730,000)
Loss on disposition of discontinued operation (4,258,000) -- (4,258,000) --
------------- ------------- ------------- -------------
TOTAL DISCONTINUED OPERATION (4,635,000) (1,119,000) (6,143,000) (1,730,000)
------------- ------------- ------------- -------------
NET LOSS $ (7,530,000) $ (7,279,000) $(21,084,000) $(12,096,000)
============= ============= ============= =============
NET LOSS PER SHARE - BASIC AND DILUTED
Continuing operations $ (0.01) $ (0.04) $ (0.03) $ (0.08)
Discontinued operations (0.01) (0.01) (0.01) (0.01)
------------- ------------- ------------- -------------
$ (0.02) $ (0.05) $ (0.04) $ (0.09)
============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
3
Mooney Aerospace Group, Ltd.
(DEBTOR-IN-POSSESSION)
Statements of Cash Flows
SIX MONTHS ENDED
-----------------------------
JUNE JUNE
30, 2004 30, 2003
------------- -------------
(unaudited) (unaudited)
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss from continuing operations $(14,941,000) $(10,366,000)
Adjustment to reconcile net loss from continuing operations to net cash
provided by (used) in operating activities of continuing operations:
Noncash professional service expense 252,000 --
Amortization of debt discount 1,601,000 2,968,000
Amortization of debt issuance costs 908,000 137,000
Common stock and warrants issued for services 87,000
Payment of reorganization items (67,000) --
Changes in operating assets and liabilities:
Intercompany 1,982,000 (1,811,000)
Accounts payable (834,000) 100,000
Accrued expenses 368,000 1,043,000
Accrued interest 782,000 4,334,000
Accrued settlement of abandoned lease 10,053,000 --
Accrued warrant liability -- 510,000
Advanced deposits (100,000) --
------------- -------------
Net cash provided by (used in) operating activities of continuing operations 4,000 (2,998,000)
Net cash provided by (used in) operating activities of discontinued operation (6,459,000) 75,000
------------- -------------
Net cash used in operating activities (6,455,000) (2,923,000)
------------- -------------
CASH FLOW FROM INVESTING ACTIVITIES:
Cash sold with disposition of Mooney Airplane Company (799,000) --
Purchase of property and equipment (152,000) --
------------- -------------
Net cash used in investing activities of continuing operations (951,000) --
Net cash used in investing activities of discontinued operations (13,000) (21,000)
------------- -------------
Net cash used in investing activities (964,000) (21,000)
------------- -------------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable 148,000 4,780,000
Payments for debt issue costs -- (380,000)
Payments on notes payable -- (2,658,000)
------------- -------------
Net cash provided by financing activities of continuing operations 148,000 1,742,000
Net cash provided by financing activities of discontinued operation 6,096,000 404,000
------------- -------------
Net cash provided by financing activities 6,244,000 2,146,000
------------- -------------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (1,175,000) (798,000)
CASH AND CASH EQUIVALENTS, Beginning of period 1,175,000 1,413,000
------------- -------------
CASH AND CASH EQUIVALENTS, End of period $ -- $ 615,000
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ -- $ 266,000
============= =============
Income taxes paid $ -- $ --
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
4
MOONEY AEROSPACE GROUP, LTD.
(DEBTOR-IN-POSSESSION)
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the six months ended June 30, 2004, the Company: 1) converted 8,396
shares of Series A preferred stock into 26,644,035 shares of Class A common
stock valued at $653,443, 2) converted $1,938,115 of convertible debentures into
87,054,640 shares of Class A common stock, 3) converted $366,558 of accrued
interest into 15,869,326 shares of Class A common stock, 4) issued 11,712,010
shares of Class A common stock for accrued compensation of $157,348, 5) issued
12,745,185 shares of Class A common stock for consulting fees valued at
$257,925, 6) issued 17,391,304 shares of Class A common stock for a commitment
fee of $400,000, and 7) issued 9,523,810 shares of Class A common stock valued
at $200,000 and issued a convertible note in the amount of $190,000 as full
settlement for a legal claim.
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.
5
MOONEY AEROSPACE GROUP, LTD.
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The unaudited 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) that 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 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 financial statements
should be read in conjunction with the audited financial statements and
footnotes for the year ended December 31, 2003 included in the Company's Annual
Report on Form 10-KSB. The results of the six months ended June 30, 2004 are not
necessarily indicative of the results to be expected for the full year ending
December 31, 2004.
The interim unaudited financial statements have been prepared on a going concern
basis, which assumes continuity of operations and realization of assets and
satisfaction of liabilities in the ordinary course of business, and in
accordance with Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by
Entities in Reorganization under the Bankruptcy Code." Accordingly, all
pre-petition liabilities subject to compromise have been segregated in the
unaudited balance sheets and classified as "liabilities subject to compromise,"
at the estimated amount of allowable claims. Liabilities not subject to
compromise are separately classified as current and non-current. Revenues,
expenses, realized gains and losses, and provisions for losses resulting from
the reorganization are reported separately as reorganization items, net in the
unaudited statements of operations. Cash used in reorganization items is
disclosed separately in the unaudited statements of cash flows.
Stock Options
- -------------
The Company did not grant any new options and no options were cancelled or
exercised during the six months ended June 30, 2004. As of June 30, 2004, no
options were outstanding under the Company Stock Option Plan (the "Plan"), and
300,000 were options outstanding that were issued outside the Plan in July 2002
that were fully vested on that date. The pro forma information regarding the
effect on operations that is required by SFAS 123 and SFAS 148 has not been
presented since there is no pro forma expense to be shown for the six months
ended June 30, 2004 and 2003.
NOTE 2 - EARNINGS PER SHARE
In 1997, the Financial Accounting Standard Boards ("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 9 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, 2004 and 2003 because the effect would
have been anti-dilutive:
6
MOONEY AEROSPACE GROUP, LTD.
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
2004 2003
--------------- ---------------
Conversion of Series A preferred stock 57,291,302 81,773,438
Conversion of convertible debentures 1,449,523,010 1,439,694,010
Stock options issued to employees 300,000 300,000
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 3,623,189
--------------- ---------------
1,517,006,265 1,531,659,401
=============== ===============
NOTE 3 - DISCONTINUED OPERATIONS
On May 28, 2004, in order to preserve the value of its Mooney Airplane Company
("MAC") subsidiary, and avoid a cessation of operations, and the loss of jobs
and other economic dislocations, the Company entered into a Stock Purchase
Agreement ("Agreement") with Allen Holding & Finance Ltd., a corporation formed
and existing under the laws of Switzerland ("Allen"). The Company, in lieu of
foreclosure, voluntarily turned over its ownership of 100 shares of MAC common
stock, which represented all the issued and outstanding shares of MAC, to Allen
who is the designee of the secured convertible debenture holders. Pursuant to
the Agreement the Company sold its wholly owned subsidiary, MAC to Allen in
exchange for the assumption of approximately $21,000,000 of secured convertible
debentures. Although Allen assumed approximately $21,000,000 of debt, the
Company was not released of its obligation for this debt. The Company has
recognized a loss on the disposition of MAC in the amount of $4,258,000. The
historical financial statements have been restated to present MAC as a
discontinued operation.
Below is a summary of the operating results of MAC for the period of January 1,
2004 to May 28, 2004 and the six months ended June 30, 2003:
2004 2003
--------------- --------------
Net sales $ 5,415,254 $ 4,512,357
=============== ==============
Gross profit (loss) $ (340,990) $ 261,591
=============== ==============
Operating expenses $ 1,298,456 $ 1,956,464
=============== ==============
Net loss $ (1,884,857) $ (1,730,171)
=============== ==============
NOTE 4 - PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
On June 10, 2004 ("Petition Date"), Mooney Aerospace Group, Ltd filed voluntary
petitions for reorganization under Chapter 11 of the federal bankruptcy laws in
the United States Bankruptcy Court for the district of Delaware ("Court") under
case number 04-11733. The Company is currently operating its business as
debtors-in-possession pursuant to the Bankruptcy Code.
The Company seeks judicial reorganization based upon a judgment issued against
the Company by the Superior Court of the State of California, Los Angeles County
in excess of $23 million. As a debtor-in-possession, the Company is authorized
to continue to operate as an ongoing business, but may not engage in
transactions outside the ordinary course of business without the approval of the
Court, after notice and an opportunity for a hearing.
7
MOONEY AEROSPACE GROUP, LTD.
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
Under the Bankruptcy Code, actions to collect pre-petition indebtedness, as well
as most other pending litigation, are stayed and other contractual obligations
against the Company generally may not be enforced. Absent an order of the Court,
substantially all pre-petition liabilities are subject to settlement under a
plan of reorganization to be voted upon by creditors and equity holders and
approved by the Court.
The plan of reorganization, which has been submitted to the Court for approval
and is continuing to undergo revision and adjustments, provides for the
restructured company to repurchase MAC from Allen for 50% of the its outstanding
common stock, issue 46% of its common stock to unsecured creditors, issue 2% of
its common stock to the preferred stockholders and the remaining 2% would remain
with the current common stockholders. In addition, the restructured company
would still be liable for the secured convertible debentures.
NOTE 5 - LIABILITIES SUBJECT TO COMPROMISE
Under bankruptcy law, actions by creditors to collect indebtedness the Company
owes prior to the Petition Date are stayed. All pre-petition liabilities have
been classified as liabilities subject to compromise in the unaudited balance
sheet. Adjustments to the claims may result from negotiations, payments
authorized by Court order, additional rejection of executory contracts including
leases, or other events.
Pursuant to an order of the Court, we mailed notices to all known creditors that
the deadline for filing proofs of claim with the Court is December 15, 2004.
Amounts that we have recorded may be different than amounts filed by our
creditors. The number and amount of allowed claims cannot be presently
ascertained.
The following table summarizes the components of the liabilities classified as
liabilities subject to compromise in our unaudited balance sheet as of June 30,
2004:
Accounts payable $ 1,241,000
Accrued expenses 937,000
Notes payable 444,000
Accrued interest 4,095,000
Airplane deposits 1,115,000
Legal judgment 24,152,000
Unsecured convertible debentures 6,456,000
--------------
$ 38,440,000
==============
NOTE 6 - PROPERTYAND EQUIPMENT
In June 2004, the Company purchased real estate in the state of New Jersey for
$152,000.
8
MOONEY AEROSPACE GROUP, LTD.
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
NOTE 7 - NOTES PAYABLE
Notes payable at June 30, 2004 consisted of the following:
Notes payable to individual, accrues interest at 8.5%
per annum with monthly principal and interest
payments of $1,138; secured by real estate
purchased in New Jersey; due on June 8, 2034. 148,000
-------------
148,000
Less current maturities (1,119)
-------------
$ 146,881
=============
NOTE 8 - COMMON STOCK
During the six months ended June 30, 2004, the Company: 1) converted 8,396
shares of Series A preferred stock into 26,644,035 shares of Class A common
stock valued at $653,443, 2) converted $1,938,115 of convertible debentures into
87,054,640 shares of Class A common stock, 3) converted $366,558 of accrued
interest into 15,869,326 shares of Class A common stock, 4) issued 11,712,010
shares of Class A common stock for accrued compensation of $157,348, 5) issued
12,745,185 shares of Class A common stock for consulting fees valued at
$257,925, 6) issued 17,391,304 shares of Class A common stock for a commitment
fee of $400,000, and 7) issued 9,523,810 shares of Class A common stock valued
at $200,000 and issued a convertible note in the amount of $190,000 as full
settlement for a legal claim.
9
MOONEY AEROSPACE GROUP, LTD.
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
NOTE 9 - 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, 2004 and 2003:
For the three months ended For the six months ended
June 30, June 30,
------------------------------- -------------------------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Numerator
Loss before discontinued operations $ (2,895,000) $ (6,160,000) $ (14,941,000) $ (10,366,000)
Amortization of discount on preferred stock -- (14,000) -- (53,000)
Dividends in Arrears (393,000) (476,000) (393,000) (476,000)
-------------- -------------- -------------- --------------
Numerator for basic loss per share from $ (3,288,000) $ (6,650,000) $ (15,334,000) $ (10,895,000)
============== ============== ============== ==============
Numerator for basic loss per share from
discontinued operation $ (4,635,000) $ (1,119,000) $ (6,143,000) $ (1,730,000)
============== ============== ============== ==============
Denominator
Weighted average shares of Class B shares 1,014,000 1,014,000 1,014,000 1,014,000
Weighted average shares of Class A shares 629,615,000 163,362,000 578,597,000 133,400,000
-------------- -------------- -------------- --------------
Numerator for basic loss per share 630,629,000 164,376,000 579,611,000 134,414,000
============== ============== ============== ==============
Basic loss per share from continuing $ (0.01) $ (0.04) $ (0.03) $ (0.08)
============== ============== ============== ==============
Basic loss per share from discontinued $ (0.01) $ (0.01) $ (0.01) $ (0.01)
============== ============== ============== ==============
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.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with our
financial statements and related footnotes for the year ended December 31, 2003
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 acquired substantially
all of MACorp's assets and intended to return to full production of the Mooney
aircraft line. MACorp's assets were 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 believed that the acquisition of MACorp's assets would 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.
We commenced the commercial sale of aircraft, and we derive a substantial
portion of our revenues from the sale of a relatively small number of aircraft.
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).
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.
11
On May 28, 2004, in order to preserve the value of our MAC subsidiary, and avoid
a cessation of operations, and the loss of jobs and other economic dislocations,
we entered into a Stock Purchase Agreement with Allen Holding & Finance Ltd., a
corporation formed and existing under the laws of Switzerland. We, in lieu of
foreclosure, voluntarily turned over our ownership of 100 shares of MAC common
stock, which represented all the issued and outstanding shares of MAC, to Allen
who is the designee of the secured convertible debenture holders.
On June 10, 2004, we filed voluntary petitions for reorganization under Chapter
11 of the federal bankruptcy laws in the United States Bankruptcy Court for the
district of Delaware under case number 04-11733. We are currently operating our
business as debtors-in-possession pursuant to the Bankruptcy Code.
CRITICAL ACCOUNTING POLICIES
We are currently operating our business as debtors-in-possession pursuant to the
Bankruptcy Code and in accordance with Statement of Position 90-7 ("SOP 90-7"),
"Financial Reporting by Entities in Reorganization under the Bankruptcy Code."
Accordingly, all pre-petition liabilities subject to compromise have been
segregated in the unaudited balance sheets and classified as "liabilities
subject to compromise," at the estimated amount of allowable claims. Liabilities
not subject to compromise are separately classified as current and non-current.
Revenues, expenses, realized gains and losses, and provisions for losses
resulting from the reorganization are reported separately as reorganization
items, net in the unaudited statements of operations. Cash used in
reorganization items is disclosed separately in the unaudited statements of cash
flows.
When we prepare these financial statements, we are required to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. On an on-going basis, we evaluate our estimates and judgments,
including those related to investments, long-lived assets, deferred tax assets,
other liabilities and revenue recognition. We base our estimates and judgments
on historical experience and on various other factors that we believe to be
reasonable under the circumstances, the results of which form the basis for our
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
For further information regarding the accounting policies that we believe to be
critical accounting policies and that affect our more significant judgments and
estimates used in preparing our financial statements, see our December 31, 2003
financial statements in our annual report contained in our Form 10-KSB filed on
March 30, 2004.
DISCONTINUED OPERATIONS
On May 28, 2004, in order to preserve the value of our MAC subsidiary, and avoid
a cessation of operations, and the loss of jobs and other economic dislocations,
we entered into a Stock Purchase Agreement with Allen Holding & Finance Ltd., a
corporation formed and existing under the laws of Switzerland. We, in lieu of
foreclosure, voluntarily turned over our ownership of 100 shares of MAC common
stock, which represented all the issued and outstanding shares of MAC, to Allen
who is the designee of the secured convertible debenture holders. Pursuant to
the agreement we sold our wholly owned subsidiary, MAC to Allen in exchange for
the assumption of approximately $21,000,000 of secured convertible debentures.
Although Allen assumed approximately $21,000,000 of debt, we were not released
of our obligation for this debt. We recognized a loss on the disposition of MAC
in the amount of $4,258,000. The historical financial statements have been
restated to present MAC as a discontinued operation.
12
Below is a summary of the operating results of MAC for the period of January 1,
2004 to May 28, 2004 and the six months ended June 30, 2003:
2004 2003
--------------- ---------------
Net sales $ 5,415,254 $ 4,512,357
=============== ===============
Gross profit (loss) $ (340,990) $ 261,591
=============== ===============
Operating expenses $ 1,298,456 $ 1,956,464
=============== ===============
Net loss $ (1,884,857) $ 1,730,171)
=============== ===============
BANKRUPTCY
On June 10, 2004 we filed voluntary petitions for reorganization under Chapter
11 of the federal bankruptcy laws in the United States Bankruptcy Court for the
district of Delaware under case number 04-11733. We seek judicial reorganization
based upon a judgment issued against us by the Superior Court of the State of
California, Los Angeles County in excess of $23 million. As a
debtor-in-possession, we are authorized to continue to operate as an ongoing
business, but may not engage in transactions outside the ordinary course of
business without the approval of the Court, after notice and an opportunity for
a hearing.
Under the Bankruptcy Code, actions to collect pre-petition indebtedness, as well
as most other pending litigation, are stayed and other contractual obligations
against us generally may not be enforced. Absent an order of the Court,
substantially all pre-petition liabilities are subject to settlement under a
plan of reorganization to be voted upon by creditors and equity holders and
approved by the Court.
The plan of reorganization, which has been submitted to the Court for approval
and is continuing to undergo revision and adjustments, provides for the
restructured company to repurchase MAC from Allen for 50% of the its outstanding
common stock, issue 46% of its common stock to unsecured creditors, issue 2% of
its common stock to the preferred stockholders and the remaining 2% would remain
with the current common stockholders. In addition, the restructured company
would still be liable for the secured convertible debentures.
Pursuant to an order of the Court, we mailed notices to all known creditors that
the deadline for filing proofs of claim with the Court is December 15, 2004.
Amounts that we have recorded may be different than amounts filed by our
creditors. The number and amount of allowed claims cannot be presently
ascertained.
The following table summarizes the components of the liabilities classified as
liabilities subject to compromise in our unaudited balance sheet as of June 30,
2004:
Accounts payable $ 1,241,000
Accrued expenses 937,000
Notes payable 444,000
Accrued interest 4,095,000
Airplane deposits 1,115,000
Legal judgment 24,152,000
Unsecured convertible debentures 6,456,000
---------------
$ 38,440,000
===============
13
RESULTS OF OPERATIONS
Three months ended June 30, 2004 vs. June 30, 2003
- --------------------------------------------------
General and administrative expenses for the three months ended June 30, 2004
decreased by $648,000 or 45% from $1,445,000 for the three months ended June 30,
2003 compared to $797,000 for the same period in 2004. The decrease is
principally due to lower professional and consulting fees.
Other income (expense) for the three months ended June 30, 2004 decreased by
$861,000 from $861,000 for the three months ended June 30, 2003 to $0 for the
same period in 2004. Other expense for the three months ended June 30, 2003 was
related to the increase in the fair value of detachable warrants associated with
the convertible debentures. All these warrants were canceled in June 2003, as a
result there is no such change in the warrant valuation for the three months
ended June 30, 2004.
Amortization of debt issue costs and discounts for the three months ended June
30, 2004 increased by $216,000 or 14% from $1,562,000 for the three months ended
June 30, 2003 compared to $1,778,000 for the same period in 2004. The increase
is due the write off of all debt issue costs due to us filing bankruptcy.
Interest expense for the three months ended June 30, 2004 decreased by
$1,972,000 or 86% from $2,292,000 for the three months ended June 30, 2003
compared to $320,000 for the same period in 2004. For the three months ended
June 30, 2003, 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.
Six months ended June 30, 2004 vs. June 30, 2003
- ------------------------------------------------
General and administrative expenses for the six months ended June 30, 2004
decreased by $470,000 or 22% from $2,130,000 for the six months ended June 30,
2003 compared to $1,660,000 for the same period in 2004. The decrease is
principally due to lower professional and consulting fees.
Non-recurring expenses for the six months ended June 30, 2004 relates to the
additional accrual for a legal judgment related to litigation with our former
landlord. On May 28, 2004 the Superior Court of the State of California, Los
Angeles County upheld the arbitrator's Arbitration Award. On May 3, 2004, we and
our former landlord completed arbitration proceedings of a claim for alleged
damages due to termination by us of our lease at our former headquarters in Long
Beach, California. The arbitrator's Preliminary Arbitration Award provides for
the payment by us of $23,902,000 to AP-Long Beach Airport LLC, plus attorney's
fees to be determined at a later date. It is our intention to seek a jury trial.
During the six months ended June 30, 2004, we have accrued an additional
$10,053,000 related to this litigation, bring the total accrual related to this
litigation to $24,152,000, the amount awarded by the arbitrator plus $250,000 in
estimated attorney fees.
Other income (expense) for the six months ended June 30, 2004 decreased by
$577,000 from other expense of $511,000 for the six months ended June 30, 2003
to other income of $66,000 for the same period in 2004. Other expense for the
six months ended June 30, 2003 was related to the increase in the fair value of
detachable warrants associated with the convertible debentures. All these
warrants were canceled in June 2003, as a result there is no such change in the
warrant valuation for the six months ended June 30, 2004. For the six months
ended June 30, 2004, the other income relates to the settlement of certain
deposits for less that the recorded amount.
14
Amortization of debt issue costs and discounts for the six months ended June 30,
2004 decreased by $594,000 or 19% from $3,105,000 for the six months ended June
30, 2003 compared to $2,511,000 for the same period in 2004. The 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 six months ended June 30,
2004 represents write off of all debt issue costs due to us filing bankruptcy
and the beneficial conversion feature of the revolver loan.
Interest expense for the six months ended June 30, 2004 decreased by $3,846,000
or 83% from $4,630,000 for the six months ended June 30, 2003 compared to
$784,000 for the same period in 2004. For the six months ended June 30, 2003, 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.
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.
Our disclosure controls and procedures 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 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.
15
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, 2004, for which a settlement agreement
was reached and completed in May 2004. This agreement calls for a settlement of
$200,000 paid out over six months from the proceeds of sales of Class A common
stock. Since the Company did not issue the common stock, the settlement amount
increased to $400,000. The $400,000 liability is shown in liabilities subject to
compromise.
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 sought return
of the $390,000 deposit on a variety of theories, including breach of contract,
account stated, and fraud. A settlement has been reached and the terms include
$200,000 from the issuance of 9,523,810 shares of Class A common stock and a
convertible note for the amount of $190,000, which is convertible into Class A
common stock at the conversion price of .021 cents per share, or 9,047,619
shares. The note carries an interest rate of 3% and is restricted to conversion
of no more than $50,000 in any 30 day period. The 9,523,810 shares of Class A
common stock were issued March 26, 2004.
AP-LONG BEACH AIRPORT LLC v. MOONEY AEROSPACE GROUP, LTD.
- ---------------------------------------------------------
The Company leased approximately 10 acres of land located on the Long Beach
Airport in Long Beach, California. The lease commenced on January 14, 1998 and
had a term of 30 years with an option to renew for an additional 10 year term.
The lease contained options to lease other airport properties. The lease
contained incremental increases, which escalated the monthly rent to
approximately $15,600 after 5 years.
Pursuant to an Agreement dated May 19, 1999, the Company sold its leasehold
interest in real property located at 3205 Lakewood Boulevard, Long Beach,
California, together with the manufacturing hangar facility (approximately
205,000 square feet) and finished office space (approximately 22,000 square
feet) owned by the Company. The cash purchase price was $9,800,000. As part of
this transaction, the Company entered into an agreement to sublease the land and
lease the manufacturing hangar facility and finished office space 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. On December 3, 2003, in
connection with the lawsuit in the Superior Court of the State of California for
the County of Los Angeles, South District, the Company and AP entered into a
16
stipulation regarding: Admission of Liability and Binding Arbitration of
Damages. Under the Stipulation, the Company admitted liability to all of AP's
claims, except that the Company and AP agreed to enter into binding arbitration
with respect to (i) the calculation of damages sought by AP and (ii) whether AP
properly mitigated its damages. On May 3, 2004, the Company and its former
landlord completed the arbitration proceedings. The arbitrator's Preliminary
Arbitration Award provides for the payment by the Company of $23,902,000 to
AP-Long Beach Airport LLC, plus attorney's fees to be determined at a later
date. On May 28, 2004 the Superior Court of the State of California, Los Angeles
County upheld the arbitrator's Arbitration Award. During the three months ended
March 31, 2004, the Company has accrued an additional $10,053,000 related to
this litigation, bringing the total accrual related to this litigation to
$24,152,000, the amount awarded by the arbitrator plus $250,000 in estimated
attorney fees.
ITEM 2. CHANGE IN SECURITIES
During the six months ended June 30, 2004, the Company: 1) converted 8,396
shares of Series A preferred stock into 26,644,035 shares of Class A common
stock valued at $653,443, 2) converted $1,938,115 of convertible debentures into
87,054,640 shares of Class A common stock, 3) converted $366,558 of accrued
interest into 15,869,326 shares of Class A common stock, 4) issued 11,712,010
shares of Class A common stock for accrued compensation of $157,348, 5) issued
12,745,185 shares of Class A common stock for consulting fees valued at
$257,925, 6) issued 17,391,304 shares of Class A common stock for a commitment
fee of $400,000, and 7) issued 9,523,810 shares of Class A common stock valued
at $200,000 and issued a convertible note in the amount of $190,000 as full
settlement for a legal claim.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company was in default on its Secured Convertible Debentures and as a result
the Company, in lieu of foreclosure, voluntarily turned over its ownership of
100 shares of MAC common stock, which represented all the issued and outstanding
shares of MAC, to Allen who is the designee of the secured convertible debenture
holders.
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
17
(b) Reports on Form 8-K
On May 10, 2004, the Company filed a Current Report on Form 8-K announcing that
on May 3, 2004, the Company and its former landlord AP-Long Beach Airport LLC
completed arbitration proceedings of a claim for alleged damages due to
termination by the Company of its lease at its former headquarters in Long
Beach, California. The arbitrator's Preliminary Arbitration Award provides for
the payment by the Company of $23,901,618 to AP-Long Beach Airport LLC, plus
attorney's fees to be determined at a later date.
On June 3, 2004, the Company filed a Current Report on Form 8-K announcing that
on May 28, 2004, the Company entered into a Stock Purchase Agreement with Allen
Holding & Finance Ltd., a private investment company, pursuant to which the
Company sold its wholly owned subsidiary Mooney Airplane Company to Allen. In
addition, the Company announced that on May 28, 2004, the Superior Court of the
State of California, Los Angeles County issued a judgment against the Company,
affirming a preliminary arbitration award providing for the payment by the
Company of $23,901,618 to AP-Long Beach Airport LLC, plus attorney's fees to be
determined at a later date. The judgment was issued in connection with
proceedings of a claim for alleged damages due to termination by the Company of
its lease at its former headquarters in Long Beach, California.
18
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.
September 24, 2004 By: /s/ J. Nelson Happy
--------------------------------------------
J. Nelson Happy
Vice Chairman, President & Chief Financial
Officer and Secretary (Principal Executive
Financial and Accounting Officer)
19