SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
Annual Report Pursuant to Section 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended June 30, 1998
Commission File Number 0-18958
Groen Brothers Aviation, Inc.
(Exact name of Registrant as specified in its charter)
Utah 87-0376766
(State or other jurisdiction of I.R.S. Employer Identification Number
Incorporation or organization)
2640 W. California Ave. Ste A, Salt Lake City, UT 84104-4100
(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (801) 973-0177
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (Par Value $.005)
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days . Yes XX No
As of June 30, 1998, the Registrant had outstanding 43,561,249 shares
of common stock, par value $.005 per share, which is the Registrant's only class
of common stock.
Documents Incorporated by Reference: None
Note: Exhibit index required by item 601 of Regulation S-K appears on page 12.
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PART I
Item 1. Business
The Company
Groen Brothers Aviation, Inc. ("the Company") was incorporated in the
state of Utah on July 28, 1980. On September 18, 1990, the Company exchanged 80
percent of its common stock for 100 percent of the common stock of Sego Tool,
Inc., a Utah Corporation. This was in effect a reverse acquisition of the
Company by the owners of Sego Tool. The Company changed its name from New Wave
Energy to Groen Brothers Aviation on October 3, 1990. Prior to July 1, 1993 the
Company's intent was to lease the technology to other entities to develop the
gyroplane, and the Company would receive royalties on its technology. Effective
July 1, 1993, the Company determined that it would complete development and
manufacture the gyroplane by itself. Because of this change in business focus,
the Company became a development stage business on July 1, 1993 under SFAS No.
7.
The Company, through its now wholly-owned Subsidiary, Sego Tool, is
developing for manufacture the Hawk gyroplane. The Company's only operations are
through its wholly-owned subsidiary. Hereafter, "the Company" will refer to the
operations of Groen Brothers Aviation, Inc. and its wholly-owned subsidiary,
Sego Tool, Inc.
The Product
The Company's product, the Hawk gyroplane (Hawk), flies on the same
principle as the gyroplane (or autogiro) of the 1930s, but with modern aerospace
design and performance. The Hawk is a rotorcraft which is a hybrid cross between
the helicopter and the airplane, employing a free-spinning rotor blade for lift
and an engine driven propeller for thrust. It is far easier to operate and
maintain and it is quieter in flight than all helicopters and many airplanes.
The Hawk is capable of vertical takeoff and landing, and yet is relatively
inexpensive to operate.
The Company has completed flight testing the third flying prototype,
the H2X, from which the Company has derived the Hawk III (3 seats). The H2X was
flown successfully demonstrating vertical takeoff and landing (VTOL) capability,
employing the Company's patented rotorhead technology. The H2X VTOL performance
has been a significant improvement over that of gyroplanes in the past. In 1997,
the Company set a weight and density altitude record for vertical takeoffs by a
gyroplane. Such benchmarks have brought attention to the Company
internationally.
FAA Type Certified Hawk Series
The Hawk III is the Company's first production gyroplane, and it is
undergoing FAA certification. Presently, the Company is constructing four Hawk
IIIs, which will serve as certification and flight test aircraft through
completion ofl FAA certification in the year 2000 or before.
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The Hawk III will be the basis of a subassembly package to be assembled
and sold in China, and will also be offered in finished form to additional
markets described below. The Hawk III is the first of four planned gyroplane
models to be FAA type-certified for manufacture, including the Hawk III (3
seat), Hawk V (5 seat), Night Hawk (tandem 2 seat), and Hawk VIII (8 seat).
The Hawk V may finally account for the majority of the Company's
planned gyroplane production. The Hawk V will seat two in front and three in
back, similar to helicopters of this size. All models will be variants of the
Hawk III, using the same basic rotor system. The fuselage of the Hawk V will be
longer than the Hawk III, and that of the Hawk VIII will be stretched further.
The fuselage of the Nighthawk will be a narrow version of the Hawk V used in air
surveillance and crop spraying. A mockup of the Hawk V now exists. It is
designed to carry five people, each weighing 180 pounds, and five bags, each
weighing 35 pounds. The planned range of the Hawk V is 500 miles.
Jets may be added to the tips of the rotor blades of the heavier
gyroplanes of the Hawk series to better facilitate vertical takeoff and landing.
At present the company is evaluating ramjets and pulse jets for this role. With
the exception of the Hawk III, which uses Continental Motors' TSIO 550 (350 hp)
piston engine, the main powerplants on the other of the Hawk series will be FAA
certified turboprop jet engines.
The Company presently has forty-five full-time employees. The Company
employs dozens of additional consultants, including FAA airworthiness,
conformity and engineering personal. For further discussion see Item 7 and Item
13.
Marketing
The projected market for gyroplanes can be broken into three general
categories, with their respective sub-categories as shown in the following
tabulation.
Public Sector Sales
A. Law Enforcement Agencies (Hawk III, Night Hawk)
1. Police Forces
2. Highway Patrol
3. Border Patrol
4. Coast Guard
5. Sheriff Departments
6. Customs and Excise Departments
7. Drug Enforcement Agencies
B. Public Protection Services (Night Hawk, Hawk III, V, VIII)
1. Fire Departments
2. Forest Management and Fire Patrol
3. Fish and Wildlife
4. Land Management
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C. Military (Night Hawk)
1. Manned & Unmanned Observation and Surveillance
2. Armed Escort
3. Ground Attack
Commercial Sector Sales (Hawk III, V, VIII, Night Hawk)
A. Oil/Gas Pipe Line and Power Line Inspection
B. Land Survey and Inspection
C. Aerial Photography
D. Agricultural Spraying, Herd Management, Etc.
E. Air Taxi Services
Private Sector Sales (Hawk III, V, VIII)
A. Personal Travel
B. Flying Clubs
C. Sport Aviation
At present the world market for rotorcraft described above is largely
not being served. Airplanes are not capable of vertical takeoff and landing,
which is often a requirement of the above markets, and helicopters are too
expensive. While the selling price of a Hawk V and a Bell 206 helicopter (5
seat) will be about the same, the operating cost (fuel, maintenance, insurance)
of the Hawk will be less than half that of the Bell. It is the Company's plan,
with its gyroplanes, to deliver rotary wing (helicopter) performance at near
fixed wing (airplane) operating costs. The estimated price of the Hawk III is
$250 thousand. The estimated prices of the Hawk V and Hawk VIII are to be $900
thousand and $1.2 million respectively.
The Company is attempting to serve the U.S. market first. However,
there has been acute interest by foreign companies and governments, with
attractive monetary offers, for locating manufacturing facilities in those
countries. These include Canada, China, and the United Arab Emirates. The
Company has signed a contract with a private company in China, the Shanghai
Energy and Chemical Company (SECC). This contract is for the Company to supply
200 Hawk III gyroplanes, an order totaling more than $50 million, with options
for 300 of the larger models, which will be worth more than $200 million. The
Company's financial statements do not reflect these pending orders, as no money
has yet changed hands. A key provision of the sales contract with SECC is that
the gyroplanes first be certified in China.
The China Market
SECC delivers natural gas and propane to urban housing, and fine
chemicals to industry. In doing so, it has entered the transportation business
to distribute its products. As an extension of this business, SECC plans to
transport people in a regional air-taxi business, using the Hawk Gyroplane.
Provisions in the Contract between the Company and SECC will allow SECC to
substitute, at the higher cost, Hawk Vs for Hawk IIIs as they become available.
The plan is to ship subassemblies of the Hawk III to China for final assembly by
a Chinese subsidiary which is wholly owned by the Company. Creating a subsidiary
in China is more difficult than participating in a joint venture, but it insures
complete control by the Company.
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It is common practice for aircraft manufacturing companies to take
orders up to two years before delivery, especially on a new design such as the
Hawk gyroplane. The Hawk V and VIII will eventually be used in China. Following
extensive studies of the Company's projected models, the Chinese see roles in
private and government use.
China's economy is growing at a real rate of more than ten percent per
year on a very large economic base, and the population of 1.2 billion is showing
signs of stabilizing. The transportation sector, which serves an area as large
as the U.S. with no comparable highway system, is falling behind due to
increased demand for personal travel and the movement of goods. All forms of
transport will remain heavily oversubscribed for years to come. The air taxi
service eventually will fill an important market niche serving high government
officials, wealthy Chinese, and foreign residents who cannot afford to spend the
distressingly long time it takes to travel by train or bus to cities that are
not served by airlines. The Hawk V will be able to take off and land vertically,
eliminating the need for runways, but it will be much safer than a helicopter
and will operate at a fraction of the cost. The taxi service will be most
profitable at distances up to 350 miles, but could reach 550 miles on one
fueling.
United States Public Use-Market
The public-use market includes all civil government use of aircraft,
primarily law enforcement. Under pubic-use law, government entities may fly
aircraft that have not been certified by the FAA, because these entities do not
fall under the jurisdiction of the FAA. Although the Company is building its
aircraft to FAA specifications (FAR Part 27), and expects to achieve an FAA type
certificate, it has an opportunity to enter the commercial market before
certification, through public-use. In recent months, the Company has received
over five hundred direct inquiries from Sheriff and Police Departments from
numerous states.
Manufacturing
In 1997, the Company moved into a new facility with enough floor space
to create an interim manufacturing facility, with parts being made by
subcontractors. This interim manufacturing plan provides guidelines and
procedures for all materials management, floor plan, FAA quality control, and
assembly. The Company plans eventually to build a larger factory, but the
current facility will be capable of producing up to 300 gyroplanes per year. The
Company presently has a manufacturing plant design that can be constructed
anywhere in the world. This design, which has taken eight years to develop, is
capable of producing up to 1,800 gyroplanes per year from one plant.
Item 2. Properties
The Company leases its present facility of approximately 25,000 square
feet, within which it is assembling the Hawk III, and designing the follow on
models. This interim development/ manufacturing facility is located at 2640 W.
California Avenue, Suite A, Salt Lake City, UT 84104-4100.
Item 3. Legal Proceedings
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The Company is a plaintiff in litigation in Germany. Pursuant to a loan
agreement with a German citizen and two European banks, the Company delivered
four million shares of common stock as collateral in July of 1993. A loan was
never received on the collateral and in December of 1993 the Company filed
criminal charges and retained a law firm in Germany to commence civil
litigation. In 1997, the German Courts judged favorably for the Company on all
counts. The defendant appealed on a technicality and the appellate court ruled
in favor of the Company. The Company expects to have its stock returned during
fiscal year 1999.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters
The Company's common stock, $.005 par value, traded Over The Counter,
is listed on the OTC Bulletin Board as GNBA. No cash dividends have been paid
for the past four quarters.
Quarterly Common Stock Bid Price Ranges (Calendar Year)
Year Quarter High Low
- ---- ------- ---- ---
1996 1st .44 .25
2nd .66 .44
3rd 2.75 .94
4th 2.00 .94
1997 1st 1.88 1.25
2nd 1.69 .94
3rd 1.38 1.00
4th 1.31 .50
1998 1st .75 .41
2nd 1.09 .35
The number of shareholders of record for the company's common stock as of June
30, 1998 were 690, and the number of shares issued and outstanding were
43,561,249.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Revenue
During 1998, total revenue increased over seven-fold compared to 1997,
from $1,694 to $14,474 because there was an increase in interest income.
Although the percentage increase is large, the base for comparison was small.
Company revenue in 1998 and 1997 consisted only of interest income.
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During 1997, total revenue decreased by 358 percent compared to 1996,
from $7,761 to $1,694, because there was a decrease in interest income. Although
the percentage decrease is large, the base for comparison was small.
Research and Development Costs
During 1998, development costs increased from $768,424 in 1997 to
$1,669,819, a 117 percent increase. The increase took place across the board as
the number of employees doubled, and tooling and equipment costs went up in
preparation for production of the Hawk III.
During 1997, development costs increased to $768,424 from $477,138 in
1996 a 61 percent increase.
General and Administrative Costs
General and administrative costs in 1998 increased to $1,275,534 from
$1,026,798, in 1997, an increase of 24 percent. The increase was adequate for
supporting the large increase in R & D personnel.
General and administrative costs in 1997 increased 106 percent compared
to 1996 to $1,026,798 from $497,814. The large increase reflected a larger work
force and a move into a bigger facility, which will accommodate initial
manufacturing of the Company's aircraft.
Net Earnings
During 1998 and 1997 the Company continued to record losses as it
conducted flight tests, built new models, and made the transition toward full
marketing and manufacturing of the Hawk gyroplane series .
Liquidity and Capital Resources
The Company estimates that capital requirements will increase
significantly over the next year as more resources are required to reach planned
goals. The Company is now making the transition into manufacture of the Hawk
III. The actual schedule of the planned expansion ultimately depends upon the
Company's ability to attract capital.
Over the next six months the Company plans to fund its operations with
up to $5 million in equity investments from accredited investors. The Company
anticipates that beginning in 1999, sales of gyroplanes will provide an
additional source of capital in the form of cash from down payments. It is
common practice in the aircraft industry to take down payments to establish
delivery positions on new aircraft which may not be delivered for two years or
more. High capital costs, and the lack of competition resulting from strict FAA
regulation are responsible for this practice.
Management does not anticipate that revenues or expenses will be
materially affected by inflation over the next twelve months.
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Item 7. Financial Statements
Index to Consolidated Financial Statements
Independent auditors' report of Tanner + Co.
Financial statements:
Consolidated balance sheet, June, 30, 1998.
Consolidated statement of operations for the two years ended
June 30, 1998 and 1997.
Consolidated statement of stockholder's (deficit) for the two
years ended June 30, 1998 and 1997.
Consolidated statement of cash flows for the two years ended
June 30, 1998 and 1997.
Notes to consolidated financial statements.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There has been no change of accountants or reporting disagreements on
any matter of accounting principle, practice, financial statement disclosure or
auditing scope or procedure.
Item 9. Directors and Executive Officers of the Registrant
The following table contains the names and ages of all directors; all
positions and offices with the Registrant held by each such person.
Name Age Positions
---- --- ---------
David L. Groen 47 Director and President
H. Jay Groen 54 Director
Philip F. Cannon(1) 84 Director
James P. Mayfield(2) 50 Vice-President
Term of Office
The terms of service of Messrs. Groen, and Mayfield as members of the Board of
Directors
- --------
1 At June 30, 1998, Mr. Cannon was a director of registrant. Just prior
to this filing, Mr. Cannon passed away and was replaced by Mr. Mayfield.
2 Mr. Mayfield was appointed to fill Mr. Cannon's vacancy.
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continue until the next annual meeting of the stockholders. These persons
respective appointments were adopted, ratified and approved by the stockholders
at a meeting thereof called for that purpose on October 7, 1991. Stockholders'
meetings have been waived since then. With the exception of compliance with the
duties of a director as set forth in the Articles of Incorporation or Bylaws of
the Registrant or in the provisions of the Utah Business Corporation Act, there
are no arrangements or understandings pursuant to which any of the foregoing
persons were selected to serve on the Board of Directors of the Registrant. Each
of the foregoing persons consented to serve as a director of the Registrant
prior to their designation and subsequent election as such.
Family Relationships
H. Jay Groen and David L. Groen are brothers.
Background on Directors and Officers
David Groen is President & CEO, Secretary and Treasurer, and a Director
of the Registrant. Immediately prior to forming Groen Brothers Aviation, David
Groen was a founding partner and Chief Financial Officer (CFO) for Seagull
Recycling Company. Previously, he has held numerous executive positions in the
helicopter industry with Sales and Marketing, Safety Officer, Branch Manager,
and Chief Pilot responsibilities. Having extensive military and commercial
experience in helicopters, Mr. Groen has logged 7,000 hours in rotor-wing
aircraft and 400 hours in fixed-wing aircraft. Mr. Groen received his
Certificate of Graduation in 1970 from the U.S. Army Warrant Officer Flight
Training School, was awarded Army Aviator Wings and promoted to the rank of
Warrant Officer. As a combat helicopter pilot and Aircraft Commander in Vietnam,
he flew hundreds of combat missions and was awarded the Air Medal and Bronze
Star. He is qualified as a pilot in most American and French helicopters, and
has attended Aerospatiale factory schools on the SA315B Lama and the SA316 and
SA319 Alouette III helicopters. Over the years, Mr. Groen's numerous commercial
helicopter missions have involved such work as EMS (emergency medical service
hospital air ambulance), power line construction and patrol, topographical
survey, USGS map making, forest fire fighting, long line seismic oil
exploration, and wildcat on shore and off shore oil drilling operations. David
Groen is co-author, along with his brother Jay, of a best selling novel entitled
Huey.
H. Jay Groen, Chairman is a Director of the Registrant. Before joining
GBA, Jay Groen co-founded Seagull Recycling Company, an organization that
developed an original supply of secondary paper fiber for sale to domestic and
Far East markets. Prior to this business venture, he was the President of China
West, Inc., a Washington D.C. based organization representing U.S. firms in the
Peoples Republic of China. In this role, Mr. Groen negotiated joint venture and
trade agreements in such diverse industries as machine building, petroleum,
coal, agriculture, light manufacturing, handicrafts, and forest products. Early
in his career, Mr. Groen spent ten years as an Economist for the Central
Intelligence Agency (CIA) doing original research on Asia, with a particular
interest on the People's Republic of China. As part of his responsibilities with
the CIA, Mr. Groen prepared written and oral briefs for the White House staff
and members of Congress, and lectured at the National War College. Mr. Groen
served in the U.S. Air Force as a Chinese Linguist in both Vietnam and Asia,
logging more than 100 combat missions in a special airborne intelligence
function. He is the co-author, along with his brother David, of a best selling
book entitled Huey, a novel about the Vietnam War. Mr. Groen has also published
several other writings including: 1) "The Sweet and Sour China Market", China
Under Four Modernizations; and, 2) "Buying from China", U.S.-China Economic
9
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Relations: A reappraisal. Mr. Groen has an M.A. in Economics from Virginia
Polytechnic Institute, a B.A. in Economics from the University of Utah and. a
Language Certificate in Mandarin Chinese from Yale University. A private pilot
with a practical background in aeronautical design, Mr. Groen has added much
innovation to the Hawk gyroplane.
Philip F. Cannon was a Director of the Registrant through the end of
the current reporting period. Philip Cannon began his distinguished career in
international business as an engineer for Colgate Company, then assumed
management consulting and production manufacturing posts with McKinsey &
Company, Emhart Manufacturing, Federal Pacific Electric Company, and Hoover
Worldwide Corporation. As a Vice President at Hoover, Mr. Cannon oversaw all of
the company's production trouble-shooting in Canada, Latin America and England.
He was a founder of Coloney, Cannon, Main and Pursell, a diversified management
consulting firm with offices in London and New York. This firm was acquired by
Towers, Perrin, from which Mr. Cannon retired as Vice President in 1979.
Following an additional six years of private consulting in Europe, Cannon
returned to Salt Lake City and joined GBA as Director of Manufacturing in 1990.
Mr. Cannon was responsible for the overall production strategy and management
for the manufacturing of GBA's Hawk series gyroplanes. He wrote a comprehensive
manufacturing plan and facilities plan for the continuing phases of the
company's development.
James P. Mayfield III, is a Vice President, Chief Operating Officer
(COO), Chief of Flight Operations, and replaces Philip Cannon as a Director of
the Registrant. James Mayfield, one of only a handful of individuals certified
as a gyroplane pilot examiner by the FAA, brings to GBA more than 3,300 hours of
flight time in gyroplanes. As GBA's Chief Test Pilot, Mr. Mayfield was recently
honored by being inducted into "The Society of Experimental Test Pilots," an
elite world-wide organization of only 1800 pilots, whose distinguished
membership include Chuck Yeager, Deke Slayton, Scott Crossfield and Jimmy
Doolittle II. Mr. Mayfield has logged more than 12,800 total hours flight time
that includes extensive experience test flying a wide range of aircraft. A
career U.S. Marine Corps officer, Mr. Mayfield retired from the Marines in 1989
following nearly 25 years of distinguished service and leadership experience.
His last tour of duty was in the Operations Department at Camp Pendleton,
California, responsible for the safety and security of Special Weapons in the
Pacific region. With a staff of 400 people reporting to him, he was responsible
for training, outfitting, and evaluating the First Marine Division (30,000
Marines) in Special Weapons employment and defense. Mr. Mayfield possesses two
baccalaureate degrees, one in psychology and a second in sociology bestowed by
the University of New York.
Item 10. Executive Compensation
No director or executive officer of the Registrant received cash
compensation in excess of $100,000 during the past fiscal year. Each Jay Groen
and David Groen hold options of 2,475,000 shares at $.09 per share to be
purchased by 1999.
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Item 11. Security Ownership of Certain Beneficial Owners and
Management
The following shows the shares of common stock owned as of June 30,
1998 by all the Directors and Officers individually and as a group. No
individual investors, other than those shown, own more than five percent of the
outstanding common stock. Each individual has sole voting power and sole
investment power with respect to the number of shares beneficially owned.
Name and Address Amount of Percent of
of Beneficial Owner Ownership Class
- ------------------- --------- ---------
David Groen, President 8,928,988 20.49
2640 California Avenue
Salt Lake City, UT 84104
Jay Groen, Director 6,160,078 14.14
2640 California Avenue
Salt Lake City, UT 84104
Philip Cannon, Director 161,544 00.37
2640 California Avenue
Salt Lake City, UT 84104
James P. Mayfield, Vice President 71,000 00.16
2640 W. California Avenue
Salt Lake City, UT 84104
All Officers and Directors 15,321,610 35.16
Lyle Campbell 3,604,400 08.27
c/o Chapman & Cuttler
111 W. Monroe Street
Chicago, IL 60603
Does not include options by David Groen and Jay Groen to purchase
2,450,000 shares each. If such shares were purchased, their ownership would
equal 23.48 percent and 17.77 percent respectively.
Item 12. Certain Relationships and Related Transactions
The Company owes $180,000, plus accrued interest, to a company owned by
Directors Jay and David Groen.
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Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) The following financial statements are included in Part II: Report of
Independent Certified Public Accountants
Index to Consolidated Financial Statements
and Supplemental Schedules
- --------------------------------------------------------------------------------
Page
Independent auditors' report F-1
Financial statements:
Consolidated balance sheet, June 30, 1998 F-2
Consolidated statement of operations for the two years
ended June 30, 1998 and 1997 and cumulative amounts since
July 1, 1993 (date of commencement of development stage) F-3
Consolidated statement of stockholders' deficit for the
two years ended June 30, 1998 and 1997 and cumulative
amounts since July 1, 1993 (date of commencement of
development stage) F-4
Consolidated statement of cash flows for the two
years ended June 30, 1998 and 1997 and cumulative
amounts since July 1, 1993 (date of commencement
of development stage) F-7
Notes to consolidated financial statements. F-9
- --------------------------------------------------------------------------------
<PAGE>
GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
(A Development Stage Company)
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Groen Brothers Aviation, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of Groen Brothers
Aviation, Inc. and subsidiary, (the Company), a development stage company, as of
June 30, 1998, and the related consolidated statements of operations,
stockholder's deficit and cash flows for each of the two years in the period
ended June 30, 1998 and cumulative amounts since July 1, 1993 (date of
commencement of development stage). These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Groen Brothers
Aviation, Inc. and subsidiary, as of June 30, 1998, and the results of their
operations and their cash flows for each of the two years in the period ended
June 30, 1998, and cumulative amounts since July 1, 1993 (date of commencement
of development stage), in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 10 to
the consolidated financial statements, the Company has suffered recurring losses
and has a net working capital deficiency that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in note 10. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
TANNER + CO.
Salt Lake City, Utah
August 4, 1998
F-1
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<TABLE>
<CAPTION>
GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Balance Sheet
June 30, 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C>
Assets
Current assets:
Cash $ 240,150
Receivables 812
Prepaid expense 109,947
------------------
Current assets 350,909
Machinery and equipment less accumulated
depreciation of $364,615 459,469
------------------
Total assets $ 810,378
------------------
- ----------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Deficit Current liabilities:
Accounts payable $ 140,516
Accrued liabilities 1,030,527
Note payable 150,000
Current portion of related party note payable 198,137
Current portion of long-term debt 411,351
------------------
Total current liabilities 1,930,531
------------------
Long-term debt 45,851
Long-term portion of related party note payable 9,463
Commitments and contingency -
------------------
Total liabilities 1,985,845
------------------
Stockholders' deficit:
Common stock, par value $.005 per share;
authorized 100,000,000 shares, issued and
outstanding 43,561,249 shares 217,807
Additional paid-in capital 7,657,141
Retained deficit (9,050,415)
------------------
Total stockholders' deficit (1,175,467)
------------------
Total liabilities and stockholders' deficit $ 810,378
------------------
</TABLE>
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<TABLE>
<CAPTION>
Consolidated Statement of Operations
Years Ended June 30, 1998, 1997 and
Cumulative Amounts Since July 1, 1993
(Date of Commencement of Development Stage)
- ----------------------------------------------------------------------------------------------------------
Cumulative
Amounts
Since July 1,
1998 1997 1993
-----------------------------------------------------
<S> <C> <C> <C>
Revenue-
Interest and other $ 14,474 $ 1,694 $ 35,501
-----------------------------------------------------
Expenses:
Research and development 1,669,819 768,424 3,211,825
General and administrative expenses 1,275,534 1,026,798 3,559,026
Interest expense 125,415 96,074 447,510
-----------------------------------------------------
Total expenses 3,070,768 1,891,296 7,218,361
-----------------------------------------------------
Net loss $ (3,056,294) $ (1,889,602) $ (7,182,860)
-----------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-2
</TABLE>
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<TABLE>
<CAPTION>
GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statement of Stockholders' Deficit
Years Ended June 30, 1998 and 1997 and Cumulative Amounts Since
July 1, 1993 (Date of Commencement of Development Stage)
- ----------------------------------------------------------------------------------------------------------
Additional
Common Stock Paid-In Retained
-------------------------------
Shares Amount Capital Deficit Total
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, July 1, 1993 27,153,509 $ 135,768 $ 937,642 $ (1,867,555) $ (794,145)
Issuance of common stock for:
Cash 1,083,611 5,418 275,377 - 280,795
Collateral on a loan 4,000,000 20,000 (20,000) - -
Satisfaction of debt
obligations 172,222 861 28,927 - 29,788
Services 63,185 316 14,572 - 14,888
Commissions 40,857 204 9,642 - 9,846
Cancellation of shares
previously issued (50,000) (250) 250 - -
Issuance of stock
options at 50% of bid
at option date - - 10,000 - 10,000
Net loss for the year
ended June 30, 1994 - - - (479,995) (479,995)
-------------------------------------------------------------------------------
Balance, June 30,
1994 32,463,384 162,317 1,256,410 (2,347,550) (928,823)
Issuance of common stock for:
Services 138,860 694 59,525 - 60,219
Satisfaction of debt
obligation 487,027 2,435 54,253 - 56,688
Commissions 18,546 93 8,907 - 9,000
Cash 1,028,923 5,145 426,777 - 431,922
Assets 2,286 11 989 - 1,000
- -------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statement of Stockholders' Deficit
Continued
- ----------------------------------------------------------------------------------------------------------
Additional
Common Stock Paid-In Retained
------------------------------
Shares Amount Capital Deficit Total
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net loss for the year
ended June 30, 1995 - - - (711,207) (711,207)
------------------------------------------------------------------------------
Balance, June 30, 1995 34,139,026 170,695 1,806,861 (3,058,757) (1,081,201)
Issuance of common stock for:
Services 686,708 3,434 164,800 - 168,234
Satisfaction of debt
obligation 10,000 50 2,450 - 2,500
Commissions 124,719 624 39,782 - 40,406
Cash 1,669,404 8,347 539,103 - 547,450
Assets 100,000 500 49,500 - 50,000
Net loss for the year
ended June 30, 1996 - - - (1,045,762) (1,045,762)
------------------------------------------------------------------------------
Balance, June 30, 1996 36,729,857 183,650 2,602,496 (4,104,519) (1,318,373)
Issuance of common stock for:
Services 468,003 2,340 265,266 - 267,606
Satisfaction of debt
obligation 689,802 3,449 474,451 - 477,900
Commissions 11,607 58 12,879 - 12,937
Cash 1,359,442 6,797 1,208,674 - 1,215,471
Assets 2,500,000 12,500 2,187,500 - 2,200,000
Net loss for the year
ended June 30, 1997 - - - (1,889,602) (1,889,602)
------------------------------------------------------------------------------
Balance, June 30, 1997 41,758,711 208,794 6,751,266 (5,994,121) 965,939
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statement of Stockholders' Deficit
Continued
- ----------------------------------------------------------------------------------------------------------
Additional
Common Stock Paid-In Retained
------------------------------
Shares Amount Capital Deficit Total
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock for:
Services 79,617 398 57,638 - 58,036
Commission 109,299 547 52,769 - 53,316
Cash 1,613,622 8,068 795,468 - 803,536
Net loss for the year
ended June 30, 1998 - - - (3,056,294) (3,056,294)
------------------------------------------------------------------------------
Balance, June 30, 1998 43,561,249 $ 217,807 $ 7,657,141 $ (9,050,415) $ (1,175,467)
------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statement of Cash Flows
Years Ended June 30, 1998, 1997 and
Cumulative Amounts Since July 1, 1993
(Date of Commencement of Development Stage)
- ----------------------------------------------------------------------------------------------------------
Cumulative
Amounts
Since July 1,
1998 1997 1993
-----------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (3,056,294) $ (1,889,602) $ (7,182,860)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation expense 156,911 110,762 307,258
Common stock issued for services 111,352 280,543 702,876
Stock options issued below market - - 10,000
Loss on disposal of assets 25,713 - 25,713
(Increase) decrease in:
Accounts receivable 3,063 (1,000) (812)
Prepaid expense (109,948) - (109,948)
Increase (decrease) in:
Accounts payable 120,102 (13,600) 82,991
Accrued payroll 88,439 (32,169) 521,928
Accrued interest 49,524 34,052 213,791
Accrued liabilities 3,637 (7) 107,125
-----------------------------------------------------
Net cash used in
operating activities (2,607,501) (1,511,021) (5,321,938)
-----------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (218,672) - (234,916)
Sale of property and equipment 2,200,000 30 2,200,030
Increase in note receivable - - (6,250)
Collections on notes receivable and
advances - - 6,250
-----------------------------------------------------
Net cash provided by
investing activities 1,981,328 30 1,965,114
-----------------------------------------------------
Cash flows from financing activities:
Proceeds from long-term debt - 150,000 282,000
Reduction of long-term debt (3,228) - (70,728)
Reduction of capitalized lease obligation (145,803) (118,286) (271,639)
Proceeds from related party debt - 350,000 488,894
Reduction of related party debt - - (116,690)
Proceeds from issuance of common stock 803,536 1,215,471 3,279,174
-----------------------------------------------------
Net cash provided by
financing activities 654,505 1,597,185 3,591,011
-----------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statement of Cash Flows
Continued
- ----------------------------------------------------------------------------------------------------------
Cumulative
Amounts
Since July 1,
1998 1997 1993
-----------------------------------------------------
<S> <C> <C> <C>
Net increase in cash 28,332 86,194 234,187
Cash, beginning of period 211,818 125,624 5,963
-----------------------------------------------------
Cash, end of period $ 240,150 $ 211,818 $ 240,150
-----------------------------------------------------
Schedule of supplemental disclosures:
Interest paid $ 75,891 $ 71,023 $ 102,125
-----------------------------------------------------
Income taxes paid $ 100 $ 100 $ 500
-----------------------------------------------------
</TABLE>
Schedule of non-cash investing and financing activities:
During the year ended June 30, 1997:
o The Company issued 689,802 shares of its restricted common stock to
satisfy $469,400 of related party debt and $8,500 of accrued interest.
o The Company issued 2,500,000 shares of its restricted common stock to
purchase equipment held for sale costing $2,200,000 .
o The Company assumed capital lease obligations totaling $299,882 in
exchange for the use of property and equipment.
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 1998
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Organization
The financial statements include those of Groen Brothers Aviation, Inc.,
and its wholly owned subsidiary Sego Tool, Inc. (Company).
The primary business purpose of the Company is the manufacturing and
marketing of the "gyroplane."
Development Stage Company
Effective July 1, 1993, the Company is considered a development stage Company as
defined in SFAS No.7. The Company has, at the present time, not paid any
dividends and any dividends that may be paid in the future will depend upon the
financial requirements of the Company and other relevant factors.
Machinery and Equipment
Machinery and equipment are carried at cost, less accumulated depreciation.
Depreciation is computed under the accelerated method based on estimated useful
lives of five to thirty-nine years. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from the
accounts, and any resulting gain or loss is recognized in income for the period.
The cost of maintenance and repairs is charged to income as incurred;
significant renewals and betterments are capitalized.
Income Taxes
The Company accounts for its income taxes based on the provisions of SFAS 109
"Accounting for Income Taxes." The asset and liability method requires the
recognition of deferred tax liability and assets for the expected future tax
consequences of temporary differences between tax bases and financial reporting
bases of other assets and liabilities.
Income (Loss) Per Common Share
Income (loss) per share of common stock is calculated based on the weighted
average number of common and common equivalent shares outstanding during the
period. Common equivalent shares consist of the Company's stock options and are
considered to be dilutive common equivalents, using the treasury stock method.
Fully diluted earnings per share is the same or antidilutive, and, accordingly,
is not presented.
- --------------------------------------------------------------------------------
F-8
<PAGE>
GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Continued
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and labilities and disclosure of
contingent assets and labilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Concentration of Credit
The Company is in the business of developing and manufacturing the gyroplane.
Substantially all operations relate to this business.
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts. The Company believes it is not exposed to any significant credit
risk on cash and cash equivalents.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments with a maturity of three months or less to be cash
equivalents.
Revenue
Revenue consists of interest and sales-of-information packages. Revenue is
recognized when earned.
- --------------------------------------------------------------------------------
F-9
<PAGE>
GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Machinery and Equipment
Machinery and equipment consisted of the following at June 30:
Aircraft $ 87,997
Office equipment 180,655
Shop equipment and tools 57,982
Furniture 36,649
Leased property under capital leases 438,811
Vehicles 21,990
-----------------
824,084
Less accumulated depreciation and amortization 364,615
-----------------
$ 459,469
-----------------
3. Note Payable
At June 30, 1998, the Company had a note payable consisting of a line of credit
payable to a bank of $150,000. The line of credit matured on March 1998.
Interest is at the banks prime lending rate plus 2.0%. The line of credit is
secured by stand-by letters of credit. The line of credit is callable by the
bank. The Company and the bank are in negotiations to extend the terms of this
agreement.
- --------------------------------------------------------------------------------
F-10
<PAGE>
GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
4. Long-Term Debt
Long-term debt consist of the following at June 30:
Notes payable to a local governmental agency, including interest at 2% above the
prime rate (8.5% at June 30, 1998). After principal amount is paid, monthly
installments of 3% of monthly gross revenues are due until an additional
$150,000 is paid. The notes were in default at June 30, 1998 $ 150,000
Notes payable to a governmental sponsored organization due in monthly
installments of 3% of gross monthly revenues, including interest at 2% above the
prime rate (8.5% at June 30, 1998) 100,000
Note payable to a company at 15% interest, due
on demand, unsecured $ 10,000
Capital lease obligations (see note 5) 197,202
-----------------
457,202
Less: current portion (411,351)
-----------------
$ 45,851
-----------------
Future maturities of long-term debt at June 30, 1998, are as follows:
Year Amount
-----------------
1999 $ 411,351
2000 45,851
-----------------
$ 457,202
-----------------
- --------------------------------------------------------------------------------
F-11
<PAGE>
GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
5. Capital Lease Obligations
During the year ended June 30, 1997, the Company entered into capital lease
agreements with a financial institution for certain property and equipment.
Assets under capital lease have been capitalized and are included in property
and equipment as follows:
Office equipment $ 161,034
Shop equipment and tools 222,260
Furniture 18,778
Leasehold Improvements 36,739
-----------------
Total property and equipment 438,811
Accumulated amortization (192,657)
-----------------
$ 246,154
-----------------
Future minimum lease payments at June 30, 1998 are as follows:
Year Ending June 30,
1999 $ 171,727
2000 48,386
-----------------
Total minimum lease payments 220,113
Less amount representing interest (22,911)
-----------------
Present value of net minimum lease payments $ 197,202
-----------------
The Company has entered into an arrangement with a third party in which the
person has the option to pay the capital lease in a dollar-for-dollar exchange
for stock valued at $.40 per share. At June 30, 1998, the number of shares under
this option is 1,030,140 shares, none of which have been exercised as of June
30, 1998.
- --------------------------------------------------------------------------------
F-12
<PAGE>
GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
6. Preferred Stock
The Company filed amended Articles of Incorporation in which the Company
authorized four additional classes of preferred stock. Each class is authorized
to have 50,000,000 shares having a $.001 par value. The rights, terms, and
preferences are to be set by the board of directors. As of June 30, 1998, no
preferred stock has been issued.
7. Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128) "Earnings Per Share," which
requires companies to present basic earnings per share (EPS) and diluted
earnings per share, instead of the primary and fully diluted EPS as previously
required. The new standard also requires additional informational disclosures,
and makes certain modifications to the previously applicable EPS calculations
defined in Accounting Principles Board No. 15. The new standard is required to
be adopted by all public companies for reporting periods ending after December
15, 1997, and requires restatement of EPS for all prior periods reported. During
the year ended June 30, 1998, the Company adopted this standard.
Earnings per share information in accordance with SFAS 128 is as follows:
Year Ended June 30, 1998
-----------------------------------------------
Loss Shares Per-Share
(Numerator) (Denominator) Amount
-----------------------------------------------
Net loss $ (3,056,294)
Less preferred stock
dividends -
----------------
Basic EPS
Loss available to
common stockholders (3,056,294) 42,649,921 $ (.07)
--------------
Effect of Dilutive Securities
Stock options - -
---------------------------------
Diluted EPS
Loss available to common
stockholders plus assumed
conversions $ (3,056,294) 42,649,921 $ (.07)
-----------------------------------------------
- --------------------------------------------------------------------------------
F-13
<PAGE>
GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
7. Earnings Per Share
Continued
Year Ended June 30, 1997
-----------------------------------------------
Loss Shares Per-Share
(Numerator) (Denominator) Amount
-----------------------------------------------
Net loss $ (1,889,602)
Less preferred stock
dividends -
----------------
Basic EPS
Loss available to
common stockholders (1,889,602) 38,296,858 $ (.05)
--------------
Effect of Dilutive Securities
Stock options - -
---------------------------------
Diluted EPS
Loss available to common
stockholders plus assumed
conversions $ (1,889,602) 38,296,858 $ (.05)
-----------------------------------------------
8. Related
Party
Transactions
The Company has notes payable to shareholders totaling $27,600 at June 30, 1998.
These notes are all due within one year at interest rates of 8.00%, unsecured.
The Company has a note payable totaling $180,000 to Hawk Autogyro, a company
related by common ownership with interest at 12%. The note was past due at
September 26, 1995, and remains delinquent at June 30, 1998. Accrued interest
totaled $96,108 at June 30, 1998.
Included in accrued expenses is payroll payable to officer shareholders totaling
$600,289.
Future maturities of related party debt at June 30, 1998 are as follows:
Year Ending June 30,
1999 $ 198,137
2000 6,182
2001 3,281
-----------------
$ 207,600
-----------------
- --------------------------------------------------------------------------------
F-14
<PAGE>
GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
9. Commitments
As conditions to obtain financing from a local government agency, the Company
has agreed to, in effect, pay royalties to the agency. The royalties will be 3%
of the monthly revenues until a total of $150,000 has been paid. No royalties
have been earned or paid as of June 30, 1998.
Also, as conditions to obtain financing from a government sponsored
organization, the Company has agreed to assume a royalty agreement of a company
related by common ownership, previously licensed with the autogyro technology.
The terms of the agreement state that the Company must, in effect, pay monthly
royalties of 3% of its gross revenues up to a total of $149,100.
The Company leases certain property and facilities under noncancellable
operating leases. Future minimum rental payments required under these leases are
as follows:
Year Ending June 30,
1999 $ 103,236
2000 103,236
2001 103,236
2002 103,236
2003 -
-----------------
$ 412,944
-----------------
During the year ended June 30, 1997, the Company entered into a
sublessor/sublessee relationship, where the Company is the sublessor. The terms
of this relationship is for the sublessee to occupy the office space and assume
the terms of the lease. The lease expires December 31, 2002.
Rental expenses for noncancellable operating leases were $141,748 and $60,738
for the years ended June 30, 1998 and 1997, respectively.
- --------------------------------------------------------------------------------
F-15
<PAGE>
GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
9. Commitments
Continued
Effective September 1, 1990, the Company entered into employment agreements with
several officers of the Company. The employment agreements can be terminated at
any time. Upon termination, the Company retains all rights to the gyroplane and
the relating technology and the officers have a covenant not to compete for a
period of three years. Royalty payments of 1% of the gross sales price of the
gyroplane are to be paid to the majority shareholders.
10. Going Concern
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Because of significant operating
losses, the excess of current liabilities over current assets, and negative cash
flows from operations, the Company's ability to continue as a going concern is
dependent on attaining future profitable operations, restructuring its financing
arrangements, and obtaining additional outside financing and/or capital.
Management of the Company is currently following a plan to obtain additional
working capital through a capital infusion and/or governmental and corporate
borrowing. As part of the plan, the Company has been given a fifteen acre parcel
of real estate by a governmental unit in which to construct a manufacturing
facility. It is not possible to predict the outcome of future operations or
whether the necessary alternative financing or additional capital may be
arranged. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
11. Unasserted Claim
In 1990, the Company has been informed that an action may be brought against the
Company as a result of the termination of the agreement to develop and
manufacture the gyroplane. Management is unable to determine the financial
impact, if any, of the proposed action against the Company and no amounts have
been reflected in the financial statements. As of the date of the financial
statements, no claim has been made.
12. Income Taxes
The Company accounts for its income taxes under SFAS No. 109, "Accounting for
Income Taxes," which requires the liability approach to account for the effects
of income taxes.
- --------------------------------------------------------------------------------
F-16
<PAGE>
GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
12. Income Taxes
Continued
The (provision) benefit for income taxes differs from the amount computed at the
federal statutory rate as follows:
1998 1997
-----------------------------------
Income tax benefit at federal
statutory rates $ 1,039,000 $ 705,000
Valuation allowance (1,039,000) (705,000)
-----------------------------------
Total current income taxes $ - $ -
-----------------------------------
At June 30, 1998, the Company had incurred net operating losses totaling
approximately $9,052,000. These losses will be carried forward to offset taxable
income in future periods. This operating loss carryforward begins to expire in
2006. The consolidated taxable loss of GBA includes the operations of GBA for
the seven years ended June 30, 1998, and the operations of Sego Tool, Inc., for
the period from September 18, 1990, to June 30, 1998 The deferred tax asset at
June 30, 1998 is as follows:
Tax benefit of net operating loss carryforward $ 3,078,000
Valuation allowance (3,078,000)
-----------------
Net tax benefit $ -
-----------------
Due to uncertainties surrounding the utilization of the net operating loss
carryforwards, a valuation allowance has been established to offset a deferred
income tax benefit of such net operating loss carryforwards.
- --------------------------------------------------------------------------------
F-17
<PAGE>
GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
13. Stock-Based
Compensation
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS 123) which established financial accounting and reporting
standards for stock-based compensation. The new standard defines a fair value
method of accounting for an employee stock option or similar equity instrument.
This statement gives entities the choice between adopting the fair value method
or continuing to use the intrinsic value method under Accounting Principles
Board (APB) Opinion No. 25 with footnote disclosures of the pro forma effects if
the fair value method had been adopted. The Company has opted for the latter
approach. Accordingly, no compensation expense has been recognized for the stock
option plans. Had compensation expense for the Company's stock option plan been
determined based on the fair value at the grant date for awards in 1998 and 1997
consistent with the provisions of FAS No. 123, the Company's results of
operations would have been reduced to the pro forma amounts indicated below:
June 30,
------------------------------------
1998 1997
------------------------------------
Net Income - as reported $ (3,056,294) $ (1,889,602)
Net Income - pro forma $ (3,147,469) $ -
Earnings per share - as reported $ (.07) $ (.05)
Earnings per share - pro forma $ (.07) $ (.05)
------------------------------------
- --------------------------------------------------------------------------------
F-18
<PAGE>
GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
13. Stock-Based Compensation
Continued
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:
June 30,
-----------------------------------
1998 1997
-----------------------------------
Expected dividend yield $ - $ -
Expected stock price volatility 152 % 157 %
Risk-free interest rate 5.6 % 4.5 %
Expected life of options 5 years 1-3 years
-----------------------------------
The weighted average fair value of options granted during 1998 and 1997 are
$1.07 and $0, respectively.
The following table summarizes information about fixed stock options outstanding
at June 30, 1998:
Options Outstanding Options Exercisable
------------------------------------------------------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Outstanding Contractual Average Exercisable Average
Exercise at Life Exercise at Exercise
Prices 6/30/98 (Years) Price 6/30/98 Price
- --------------------------------------------------------------------------------
$ .09 to .23 5,268,261 5.06 $ 0.10 5,268,261 $ 0.10
.25 to .63 2,074,878 3.38 0.32 2,074,878 0.32
2.00 to 2.00 86,667 2.84 2.00 86,667 2.00
- --------------------------------------------------------------------------------
$ .09 to 2.00 7,429,806 4.56 $ 0.18 7,429,806 $ 0.18
- --------------------------------------------------------------------------------
F-19
<PAGE>
Signatures
Pursuant to the requirements of Section or 15 (d) of the Securities
Exchange Act of 1934, Groen Brothers Aviation, Inc. has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized:
Groen Brothers Aviation, Inc.
/s/ David L. Groen Date: September 24, 1998
------------------------------- ----------------------------
David L. Groen, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
/s/ H. Jay Groen Date: September 24, 1998
------------------------------- ----------------------------
H. Jay Groen, Director
/s/ David L. Groen Date: September 24, 1998
------------------------------- ----------------------------
David L. Groen, Director
/s/ James P. Mayfield Date: September 24, 1998
----------------------------- ----------------------------
James P. Mayfield, Director
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GROEN
BROTHERS' AVIATION, INC. JUNE 30, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIREITY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 240,150
<SECURITIES> 0
<RECEIVABLES> 812
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 350,909
<PP&E> 824,084
<DEPRECIATION> 364,615
<TOTAL-ASSETS> 810,378
<CURRENT-LIABILITIES> 1,930,531
<BONDS> 55,314
0
0
<COMMON> 217,807
<OTHER-SE> (1,393,274)
<TOTAL-LIABILITY-AND-EQUITY> 810,378
<SALES> 0
<TOTAL-REVENUES> 14,474
<CGS> 0
<TOTAL-COSTS> 2,945,353
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 125,415
<INCOME-PRETAX> (3,056,294)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,056,294)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,056,294)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
