Mooney Aerospace MASG.OB

Das kommt gut !

14-Nov-2003

Quarterly Report


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



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.


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.



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




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.


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.