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, 1999
Commission File Number 0-18958
Groen Brothers Aviation, Inc.
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(Exact name of Registrant as specified in its charter)
Utah 87-0376766
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(State or other jurisdiction of I.R.S. Employer Identification Number
Incorporation or organization)
2640 W. California Ave. Ste A, Salt Lake City, UT 84104-4593
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(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)
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(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
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As of June 30, 1999, the Registrant had outstanding 57,844,801 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
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Item 1. Business
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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. (GBA) and its wholly-owned
subsidiary, Sego Tool, Inc.
In an effort to pursue an easy-to-fly and cost-efficient gyroplane that
could effectively compete in the general aviation market, the Groen Brothers
(Jay and David) had first to build a proof-of-concept aircraft. They formed a
private company and spent their own money to test their design of a collective
pitch controlled rotor system. In 1987, the Groen Brothers' first
proof-of-concept prototype flew successfully. With the support of private
investors they soon after began the development of the Hawk 1 (one seat)
prototype. In 1990, Groen Brothers Aviation became a fully-reporting public
corporation (stock symbol "GNBA") to facilitate the raising of capital and to
give minority shareholders the flexibility of owning publicly traded stock.
When the Hawk 1 successfully flew in December, 1992, the Groen Brothers
had moved much closer toward achieving their ultimate goals and objectives. The
development of the Hawk 2 followed, and in February, 1997 their third prototype
achieved a vertical takeoff at a world record breaking density altitude for
gyroplanes. Today, after having spent more than thirteen years bringing their
idea to fruition, enthusiasm for the GBA Hawk within the aviation community runs
high. In recent months, the Company has been approached by many interested law
enforcement agencies, commercial flying entities, and individuals in the U.S.
and abroad, which has helped position the Company to attract the investment
needed to accelerate the current transition into production.
THE PRODUCT
What is a Gyroplane?
Gyroplane is an official term designated by the Federal Aviation
Administration (FAA) describing an aircraft that gets its lift from rotor blades
and its thrust from an engine-driven propeller. Historically, this type of
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aircraft was known as the autogiro and/or the gyrocopter, which were both
trademark names. A gyroplane's rotor blades turn freely in flight and are tilted
back to catch the air. The rushing air spins the rotor as the aircraft is thrust
forward by its propeller. Early gyroplanes were powered in a tractor (pulling)
configuration. The Hawk 4 uses a pusher propeller, giving unobstructed
visibility.
Since the rotor blades on gyroplanes are powered in flight only by the
onrushing air (autorotation), much like a windmill, there is no torque to the
system, and therefore no need for a tail rotor. The gyroplane is a stable flying
platform. This is not so with helicopters, which pull the air down through
engine-powered rotor blades making it possible to hover, but also making the
aircraft unstable, mechanically complicated and difficult to fly. Due to the
inherent simplicity of gyroplanes, they are easier to operate and much less
expensive to maintain than helicopters.
The single attraction of helicopters over gyroplanes is their ability
to hover, which is necessary in some situations such as sea rescue or sling-load
work. Even so, the percentage of today's helicopter market that requires
hovering is rather small, perhaps no more than 10 percent. In air surveillance
and point-to-point flying, the inability to hover is not a disadvantage, because
the Hawk takes off and lands vertically without having to hover. Helicopters at
low altitude, out of ground effect, avoid hovering whenever possible. It is too
dangerous. In a low level surveillance roll, such as law enforcement, border
patrol, traffic control, etc., proper procedure for all rotorcraft is to circle
in a slow orbit, something the Hawk can do efficiently and safely.
Gyroplanes in flight, being in constant autorotation, are much safer in
low and slow flight than helicopters and airplanes. If power fails in a
gyroplane the autorotation continues and the aircraft can be guided softly to
the ground from any altitude. When power fails in a helicopter, the pilot must
convert from powered flight to autorotative flight to keep the rotor blades
turning. This is an unforgiving process, requiring split second reaction by the
pilot, and requiring a minimum altitude and/or airspeed. If a helicopter is too
low and too slow during a power failure, a condition shown on graphs in the
helicopter's flight manual (known as the "dead man's curve"), the pilot cannot
avoid a crash landing. Airplanes flying low and slow risk a stall/spin crash,
which cannot happen in a gyroplane.
Interrupted History of the Gyroplane
Autorotative flight was developed in 1919 by Spanish aviator, Juan de
la Cierva, who named his invention the "autogiro," which means "self turning."
His intention was to eliminate the risk of stalling, as in an airplane. In the
1920s and 1930s an American, Harold Pitcairn, under license from Cierva,
designed and built many gyroplanes which eventually made vertical takeoffs and
landings. Wallace Kellett, a colleague of Pitcairn, was another well-known
American designer who added to our knowledge of this form of flight.
The autogiro concept was proven commercially successful in many
applications during the 1930s and early 1940s. An outstanding example was its
use by the U.S. Postal Service for nearly ten years, for mail delivery from the
roofs of post offices. Thousands of flights carrying millions of pieces of mail
were performed by Kellett and Pitcairn gyroplanes flying in Camden,
Philadelphia, Chicago, New Orleans, Washington, D.C., and other cities.
By the 1940s the private aircraft market had collapsed with the Great
Depression, and the main source of investment in aviation came from the U.S.
military. At the time, Igor Sikorsky was supplying the government with a number
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of different transport airplanes of his own design. He then decided to design a
helicopter, and he began by licensing rotor technology from Pitcairn. He then
convinced the U.S. military to invest in the helicopter rather than the
gyroplane, which effectively shelved the gyroplane. To the military, the
helicopter appeared to be the next logical step in the evolution of rotorcraft.
Apparently the economy and safety of gyroplanes did not count for much, because
the helicopter promised more versatility for military purposes.
Helicopter flight proved more difficult than the military first
imagined. The promise of the helicopter was not fully realized until the middle
of the Vietnam War, thirty years later, during the early 1970s. It was only
after billions of tax dollars were spent adapting and upgrading expensive jet
turbine engines, that payload weights were increased enough to move large
numbers of soldiers and their equipment into and out of the jungle. The Vietnam
War clearly demonstrated the versatility of vertical flight, but the helicopter
had proved too expensive for widespread civilian use.
During the late 1950s and early 1960s three commercial gyroplanes were
developed and FAA Certified by private companies. The Umbaugh (later the Air &
Space 18A), the Avian (a Canadian design of that same period that reached FAA
certification, but was never produced), and the McCulloch J-2. Each of the above
gyroplanes had only two seats. In every case, as an expedient to FAA
certification, the designers adapted helicopter rotors and blades, and thus did
not fully use the gyroplane technology created by their 1930s predecessors. As a
result, none of these gyroplanes performed well and the companies failed (the
Air & Space 18A and the McCulloch each delivered about 100 units). Also during
the 1950s, Igor Benson, a colleague of Sikorsky, developed a home-built
gyroplane kit for amateurs. He called it the "gyrocopter." His idea for this
open-frame model came from a German observation gyroplane, towed behind U-boats
during the war. Home-built kits, most of which seat one person, continue to be
popular today with more than a dozen small manufacturers now in the market.
Large aviation companies capable of developing and bringing a
commercial-sized gyroplane to market, such as Boeing and Bell, have had tunnel
vision regarding the helicopter, mainly because of lucrative military contracts.
The civilian side of helicopter production has not been highly profitable. Yet
there is no doubt that major aviation companies understand the commercial
potential of vertical takeoff and landing (VTOL) as evidenced by their
continuing investment into the development of aircraft targeted for the civilian
market, including a civilian tilt-rotor. Over the years, the helicopter
companies have committed large capital outlays toward improving the helicopter,
and now developing tilt-rotor technology, and until GBA's gyroplanes are flying
in large numbers, are not likely to pursue a product type that competes with
their current product lines. In addition, under a climate of reduced military
sales, the helicopter companies have much less discretionary budget for research
and development.
GBA Hawk Series
GBA is now in the process of developing for manufacture two basic
models of high performance gyroplanes, the Hawk 4 (four seat) andHawk 6 (six
seat). A Hawk 8 (eight seat) is planed to follow. The Hawk series is being
designed and built to conform to FAA regulations for rotorcraft (FAR Part 27).
The primary technical difference between the Hawk and the gyroplanes that came
before it, is that the Hawk has an infinitely variable collective pitch control
(pitch is the blade's angle of attack to the relative wind) that can be operated
between two extreme settings. This means that during flight, by moving a
collective pitch control lever, the pilot can change, in varying degrees, the
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pitch of the rotor blades collectively, (both at the same time and in equal
amounts). The ideal amount of pitch needed to fly at a given airspeed and given
operational weight can differ slightly under changing conditions. The patented
Hawk rotor head allows the pilot to optimize the rotor blade pitch to the
existing conditions (minimize drag and maximize lift). The variable pitch rotor
makes possible a smoothly controlled vertical takeoff and landing. Early
vertical takeoff gyroplanes employed a two-position pitch control rotor head
that was pre-rotated at flat pitch and then released suddenly into fixed pitch
for flying. This produced a vertical takeoff, but it was a rather startling
"jump," with no control over the amount of pitch in the rotor nor the rate at
which the pitch was increased.
The GBA Hawk series models will all be capable of vertical takeoffs and
landings, eliminating the need for runways. The first of the series, the Hawk 4,
uses a pre-rotator to spin the rotor blades at flat pitch to approximately 140%
of in-flight rotor RPM. The pilot then increases collective pitch using the
excess inertia in the spinning rotor to takeoff vertically. Just before liftoff,
the power to the rotor is disengaged, and there is no need for antitorque force
(tail rotor) in flight. On the ground, during spin-up the wheels and brakes
counteract the torque. This procedure, originally called the "jump takeoff," was
first done in the 1930s in the Pitcairn PA-36. A two-position rotor was spun up
at flat pitch. When the proper RPM was reached, the prerotator was disconnected
and the rotor was suddenly locked into a fixed flight pitch, causing the
gyroplane to jump off the ground.
The Hawk 4, with its variable pitch rotor, is capable of a smoothly
controlled vertical takeoff using a prerotation technique. The Hawk 4's
Continental 350 hp engine provides prerotation power and thrust following
liftoff. The main powerplants for both the Hawk 6 and Hawk 8 will be jet
turboprops, and the Company expects to have a turbine version for the Hawk 4.
Turbines, compared to piston engines, are expensive, but the cost per passenger
mile of the Hawk series should remain a fraction of a comparable helicopter.
Vertical landing is normally a power-off, steep approach to the landing
site, followed by a slight pull back on the control stick and an increase in
collective pitch. With high inertia rotor blades, there is a built-in safety
margin during landing. A flare on final approach, started too high, can be
corrected by adding more pitch than normal, which lets the Hawk settle softly to
the landing pad. Rolling takeoffs and landings are also possible with the GBA
gyroplanes, which all have wheeled landing gear instead of skids.
FAA Type-Certificate
Type certification is the process that conforms the Hawk gyroplane
engineering and flight characteristics to FAA requirements. The type
certification process legally enables a US manufacturer to mass-produce its
aircraft "type," insuring that each gryoplane that flies away from Groen
Brothers' factory meets identical safety and performance requirements. The
regulations governing an FAA Type-Certificate for the Hawk Gyroplane are
contained in Federal Aviation Rules (FAR) Part 27, which regulates certification
of helicopters and gyroplanes. The FARs require the manufacturer to provide
drawings and engineering data for every component of the aircraft. The
engineering data must show precisely what stresses will be imposed on the
component during its operational life. Its capabilities must exceed these
stresses by a minimum of 50 percent. The Hawk is designed with even greater
margins of safety when weight is not a penalty. The quality of each component
must also be shown to be repeatable during the manufacturing process, and when
GBA buys a part from another manufacturer, the part must also be certified by
GBA, or under a specific "Technical Standard Order (TSO)" by the FAA.
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GBA's certification plan, which had to be approved by the FAA, is a
description of the method GBA is using to prove compliance with the FAR's. The
Company employs FAA Designated Engineering Representatives (DERs - approve the
engineering and drawings) and FAA Designated Airworthiness Representatives (DARs
- - ensure conformity to the approved engineering). Our DERs and DARs are highly
experienced in rotorcraft design and certification, and in effect, approve our
work as though they were the FAA. Type-certifying the Hawk series gyroplanes
with the FAA is a tedious and expensive process, but once achieved, in addition
to guaranteeing a high standard of quality, becomes a significant barrier to
competition. A type- certificate is the permanent property of the manufacturer,
and is the core of an aircraft manufacturer's business assets.
GBA held its Pre-Type-Certificate Board Meeting, on March 3, 1998, and
at that meeting submitted to the FAA its formal application for the Type
Certificate on the Hawk 4 gyroplane. An esteemed gathering of aviation experts
met to conduct the Pre-Type Certificate Board Meeting at the Salt Lake City
headquarters of Groen Brothers Aviation. The FAA board members came from several
regional directorates, making up the highly competent government team necessary
to type certify Groen Brothers' 21st century version of the gryoplane. Also
attending were representatives of Continental Motors, ATI and Simula, as well as
a host of FAA DERs and FAA DARs (consulting specialists approved by the FAA for
this work). The meeting is historically important, because GBA has added new
technology and capability to a form of flight that has had no commercial
significance for more than half a century.
Never has a gyroplane, or helicopter, had to meet such stringent
government regulations. An example of the new regulatory climate is the seat in
the Hawk 4, which is being supplied by Simula Inc., an Arizona-based company.
Simula has developed the seat technology for a pilot or passenger to survive
thirty vertical-Gs. Although the gyroplane is a simple and safe form of
rotorcraft, it is the history of the helicopter that led to this FAA requirement
for all new rotorcraft. Modern government requirements have spawned other
specialized aircraft parts manufacturers, including rotor blade, landing gear,
wheel and brake, etc. GBA is relying heavily on FAA certified suppliers for
these parts, because it reduces the time and cost of type certification.
Manufacturing and Materials Management
GBA is implementing materials management procedures to guide the
manufacturing process. In broad terms, materials management is an administrative
and operational function that directly supports manufacturing activities in
providing all the materials and component parts that go into the finished
product. Materials control will manage the company's program to maintain parts
history files in accordance with FAA requirements.
The manufacturing plan includes a transition period during which GBA is
currently assembling the first Hawk 4s in its Salt Lake City facility. A larger
manufacturing plant will be planned. The Company has developed a family of FAA
certified suppliers for subcontracting the cutting, machining and forming of
metal and composite components; and the purchasing of off- the-shelf components,
such as wheels, instruments, avionics, switches, etc. Purchased parts and
materials are scheduled to optimize quantity and timing of deliveries. The need
to have readily available spare parts to meet the requirements of service to
customers, as well as to replace parts scrapped in manufacturing dictates the
maintenance of parts inventories at levels that satisfy delivery of finished
product requirements. Close coordination with suppliers, engineering, marketing
and sales is necessary and is taken into account in each department's long-range
plan.
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Procedural manuals have been developed for requisitioning, purchasing, materials
control, store keeping, parts lists, raw materials controls and accounting.
THE MARKET
As helicopters have become commonplace, many potential users of VTOL
aircraft have realized how useful vertical flight would be if only they could
afford it. This demand for affordable vertical flight should provide a market
for GBA gyroplanes that is much larger than the existing helicopter market.
Government and Commercial Aviation
The market for the Hawk is large and varied. The world has become dependent upon
helicopters where runways are not available or if slow flight is required. The
Company believes the Hawk is a low cost alternative, which can perform
competitively with helicopters and airplanes in many roles including the
following:
1. Law enforcement (police, sheriff, border patrol, customs, and drug
interdiction),
2. Public service organizations (fire patrol, medical transport, wildlife
and land management),
3. Military (courier, armed surveillance, VIP transport, forward artillery
control, ground attack, unmanned aerial vehicle,
4. Commercial (oil, gas, and power line patrol and inspection, land
survey, aerial photography, crop spraying, herd management, air taxi
service, corporate transport, and flight training).
5. Private (commuting, sport flying, training).
Dealer Network
Groen Brothers Aviation is presently establishing Authorized Dealers in
major cities across the United States. GBA Dealers will be responsible for
sales, service, maintenance, and flight training. To become a dealer, aircraft
deposits are given to GBA based on a quota for each metropolitan statistical
area. At present, the Company has received 123 down payment deposits from its
dealers and private individuals. The dealers in turn take deposits from
customers as orders are received. Dealers will handle all sales, including
government agencies and fleet sales, except military sales, which will be made
directly by GBA.
During the past ten years of developing the Hawk gyroplane, GBA has
received sales inquiries from thousands of potential customers, domestic and
foreign. In addition to establishing a USA dealer network, the Company is now in
discussion with several overseas companies about foreign dealerships. In support
of all this, the Company has established its own internet site with two
addresses, www.groenbros.com and www.GBAGyros.com. Each GBA Dealer will be
linked to the main GBA web site as well as having their own internet site. The
Company also makes available out printed material.
The Company introduced the Hawk 4 gyroplane at the world's largest air
show, AirVenture '99 in Oshkosh, Wisconsin the last week of July 1999. The
Company's booth and outside display were busy with visitors from across the U.S.
and around the world. GBA dealers were also at the show.
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Export Sales
GBA has been approached by companies in more than a dozen foreign
countries on five continents requesting to be dealers. The Company is having
detailed discussions with several different foreign companies and governments at
present, but has signed an agreement with only one country, China. China was the
first foreign country to express an interest in the Hawk gyroplane. The Company
has signed a conditional agreement with Shanghai Energy and Chemicals
Corporation (SECC) for the purchase of 200 Hawk gyroplanes, with options on an
additional 300 gyroplanes. The condition is that the Company first type certify
the Hawk 4 with the FAA. Following certification, the gyroplane purchase
contract calls for deliveries of the aircraft over a three year period, with
first payments contingent upon GBA qualifying its Hawk gyroplanes for flight in
China.
Groen Brothers Aviation Chairman Jay Groen, who speaks fluent Chinese,
held high level meetings with China Civil Aviation Authorities (CAAC - the
Chinese counterpart to the FAA). These authorities confirmed that once FAA
certification is achieved, they will issue a verified type certificate allowing
the Hawk to be flown in China. The Chairman of GBA also met with Aviation
Industries of China (AVIC), a single entity tasked with managing national
aviation manufacturing. Additional meetings were held with the Nanjing
University of Aeronautics and Astronautics, a prestigious body capable of
performing airworthiness testing. Each of these entities has confirmed the need
for this type of aircraft in dealing with China's burgeoning transportation
crisis. Groen Brothers Aviation is working with Albury Overseas Corporation
(AOC), a company in Nanjing, which helped secure the agreement with SECC, and
which gives the Company continuous representation in China.
SECC is a major corporation in Shanghai that principally develops and
produces clean energy, fine chemicals and electro-mechanical equipment, however,
the company has recently made a significant move into the transportation
industry. Established in 1990, SECC has grown into a comprehensive entity with
more than 20 subsidiary companies. SECC owns facilities in the provinces of
Jiangsu, Zhejiang and Shanghai. Shanghai Energy and Chemicals Corporation plans
to establish a private air taxi company in China, using GBA gyroplanes as its
main form of transport.
Patents
GBA presently owns three US patents and several international patents
which relate to collective pitch and flight controls. The important element of
these patents is collective pitch control on a semi-rigid, teetering rotorhead
for gyroplanes. This is different from similar sounding claims for helicopters
as this concept has never before been applied to gyroplanes. The patent claims
are written very broadly, which makes it difficult to design around them, and
the patent process is ongoing. The Company adds claims as improvements are made
to the rotorhead, which extends the patent life. GBA's patent opportunity
existed because of a fifty- year hiatus in development in gyroplane technology.
The Company has filed for patent protection in nearly every country in the world
containing aircraft manufacturing capability of any significance and with which
the U.S. has reciprocal agreements on intellectual property. Groen Brothers
Aviation's patents are filed in Japan, Korea, Canada, and Brazil. In addition to
the three US Patents, GBA has been awarded international patents in Australia,
the EU, Belgium, France, Germany, Italy, Netherlands, Portugal, Spain,
Switzerland, and the United Kingdom.
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Item 2. Properties
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The Company leases its Salt Lake City, Utah facility of approximately
25,000 square feet, within which it is assembling the Hawk 4, and designing the
follow-on models. This interim development/ manufacturing facility is located at
2640 W. California Avenue, Suite A, Salt Lake City, UT 84104-4593. In addition,
the Company leases a flight facility in Buckeye Airport, Arizona, of
approximately 12,000 square feet.
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
this fiscal year.
Item 4. Submission of Matters to a Vote of Security Holders
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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
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Matters
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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
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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
3rd .72 .53
4th .81 .47
1999 1st .78 .47
2nd 1.68 .59
The number of shareholders of record for the company's Common stock as of June
30, 1998 were 931, and the number of shares issued and outstanding were
57,844,801.
Item 6. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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Results of Operations
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Revenue
During 1999, total revenue decreased compared to 1998, from $14,000 to
$4,000 because there was a decrease in interest income. Company revenue in 1999
and 1998 consisted only of interest income.
Research and Development Costs
During 1999, development costs increased from $1,670,000 in 1998 to
$6,140,000, a 268 percent increase. The increase took place across the board as
the number of employees and consultants doubled, and tooling and equipment costs
went up by a large multiple in preparation for production of the Hawk 4.
During 1998, part of the same trend, development costs increased from
approximately $768,000 in 1997 to $1,669,000, a 117 percent increase.
General and Administrative Costs
General and administrative costs in 1999 increased to $2,079,000 from
$1,275,000, in 1997, an increase of 63 percent. The increase was needed to
support the large increase in R & D personnel and FAA certification process.
General and administrative costs in 1998 increased to $1,275,000 from
$1,026,000, in 1997, an increase of 24 percent. 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 1999 and 1998 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 continue at the
present pace over the next year. The Company is now making the transition into
manufacture of the Hawk 4. The actual schedule of the planned expansion
ultimately depends upon the Company's ability to attract capital.
Over the next twelve months the Company plans to fund its operations
with up to $5 million in equity investments and/or loans. Beginning in 1999,
sales of gyroplanes is providing 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.
Item 7. Financial Statements
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Index to Consolidated Financial Statements
Independent auditors' report of Tanner + Co. F-1
Financial statements:
Consolidated balance sheet, June, 30, 1999. F-2
Consolidated statement of operations for the
two years ended June 30, 1999 and 1998 and
cumulative amounts. F-3
Consolidated statement of stockholder's (deficit)
for the two years ended June 30, 1999 and 1998
and cumulative amounts. F-4
Consolidated statement of cash flows for the
two years ended June 30, 1999 and 1998 and
cumulative amounts. F-6
Notes to consolidated financial statements. F-7
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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, 1999, and the related consolidated statements of operations,
stockholder's deficit and cash flows for the two years ended June 30, 1999 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, 1999, and the results of their
operations and their cash flows for the two years ended June 30, 1999, 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 2 to the
consolidated financial statements, the Company has suffered recurring losses,
has a stockholders' deficit and has a net working capital deficiency. These
conditions 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 2. 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 11, 1999
F-1
<PAGE>
<TABLE>
<CAPTION>
GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Balance Sheet
June 30, 1999
- ----------------------------------------------------------------------------------------------------------
Assets
Current assets:
<S> <C>
Cash $ 488,000
Receivables 25,000
Prepaid expenses 316,000
------------------
Current assets 829,000
Investment art held for sale 1,149,000
Machinery and equipment, net 631,000
------------------
Total assets $ 2,609,000
------------------
- ----------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 1,644,000
Accrued liabilities 1,258,000
Note payable 100,000
Related party notes payable 1,260,000
Current portion of long-term debt 588,000
------------------
Total current liabilities 4,850,000
------------------
Long-term debt 585,000
------------------
Commitments and contingencies -
Stockholders' deficit:
Preferred stock, par value $.001 authorized
50,000,000 shares, no shares outstanding -
Common stock, par value $.005, authorized
100,000,000 shares, issued and outstanding 57,844,801 shares 289,000
Additional paid-in capital 14,274,000
Accumulated deficit (17,389,000)
------------------
Total stockholders' deficit (2,826,000)
------------------
Total liabilities and stockholders' deficit $ 2,609,000
------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Operations
Years Ended June 30, and Cumulative Amounts
- ----------------------------------------------------------------------------------------------------------
Cumulative
1999 1998 Amounts
------------------------------------------------------
Revenue-
<S> <C> <C> <C>
interest and other $ 4,000 $ 14,000 $ 40,000
------------------------------------------------------
Expenses:
Research and development 6,140,000 1,670,000 9,352,000
General and administrative expenses 2,079,000 1,275,000 5,637,000
Interest expense 124,000 125,000 572,000
------------------------------------------------------
Total expenses 8,343,000 3,070,000 15,561,000
------------------------------------------------------
Net loss $ (8,339,000) $ (3,056,000) $ (15,521,000)
------------------------------------------------------
Net loss per share - basic and diluted $ (.17) $ (.07) $ (.41)
------------------------------------------------------
Weighted average equivalent shares -
basic and diluted 50,471,000 42,650,000 38,633,000
------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
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
Years Ended June 30, 1999, 1998 and Cumulative Amounts
- -----------------------------------------------------------------------------------------------------------
Additional
Common Stock Paid-In Accumulated
-----------------------------
Shares Amount Capital Deficit Total
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, July 1, 1993 27,153,509 $ 136,000 $ 938,000 $ (1,868,000) $ (794,000)
Issuance of common stock for:
Cash 1,083,611 5,000 275,000 - 280,000
Collateral on a loan 4,000,000 20,000 (20,000) - -
Commissions 40,857 - 10,000 - 10,000
Satisfaction of debt obligations 172,222 1,000 29,000 - 30,000
Services 63,185 - 15,000 - 15,000
Cancellation of shares previously
issued (50,000) - - - -
Issuance of stock options at 50% of
bid at option date - - 10,000 - 10,000
Net loss - - - (480,000) (480,000)
-------------------------------------------------------------------------
Balance, June 30, 1994 32,463,384 162,000 1,257,000 (2,348,000) (929,000)
Issuance of common stock for:
Assets 2,286 - 1,000 - 1,000
Cash 1,028,923 5,000 427,000 - 432,000
Commissions 18,546 - 9,000 - 9,000
Satisfaction of debt obligation 487,027 3,000 52,000 - 55,000
Services 138,860 1,000 60,000 - 61,000
Net loss - - - (710,000) (710,000)
-------------------------------------------------------------------------
Balance, June 30, 1995 34,139,026 171,000 1,806,000 (3,058,000) (1,081,000)
Issuance of common stock for:
Assets 100,000 1,000 50,000 - 51,000
Cash 1,669,404 8,000 539,000 - 547,000
Commissions 124,719 1,000 40,000 - 41,000
Satisfaction of debt obligation 10,000 - 2,000 - 2,000
Services 686,708 3,000 165,000 - 168,000
Net loss - - - (1,046,000) (1,046,000)
-------------------------------------------------------------------------
Balance, June 30, 1996 36,729,857 184,000 2,602,000 (4,104,000) (1,318,000)
- ----------------------------------------------------------------------------------------------------------
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 Accumulated
----------------------------
Shares Amount Capital Deficit Total
---------------------------------------------------------------------
Issuance of common stock for:
<S> <C> <C> <C> <C> <C>
Assets 2,500,000 13,000 2,188,000 - 2,201,000
Cash 1,359,442 7,000 1,209,000 - 1,216,000
Commissions 11,607 - 13,000 - 13,000
Satisfaction of debt obligation 689,802 3,000 474,000 - 477,000
Services 468,003 2,000 265,000 - 267,000
Net loss - - - (1,890,000) (1,890,000)
---------------------------------------------------------------------
Balance, June 30, 1997 41,758,711 209,000 6,751,000 (5,994,000) 966,000
Issuance of common stock for:
Cash 1,613,622 8,000 795,000 - 803,000
Commission 109,299 1,000 53,000 - 54,000
Services 79,617 - 58,000 - 58,000
Net loss - - - (3,056,000) (3,056,000)
---------------------------------------------------------------------
Balance, June 30, 1998 43,561,000 218,000 7,657,000 (9,050,000) (1,175,000)
Issuance of common stock for:
Assets 2,954,944 15,000 1,211,000 - 1,226,000
Cash 9,458,124 47,000 4,560,000 - 4,607,000
Commission 1,574,216 8,000 678,000 - 686,000
Debt 194,935 1,000 73,000 - 74,000
Services 101,333 - 41,000 - 41,000
Issuance of common stock options for:
Cash - - 50,000 - 50,000
Services - - 4,000 - 4,000
Net loss - - - (8,339,000) (8,339,000)
---------------------------------------------------------------------
Balance, June 30, 1999 57,844,801 $ 289,000 $14,274,000 $(17,389,000) $ (2,826,000)
---------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
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, and Cumulative Amounts
- -----------------------------------------------------------------------------------------------------
Cumulative
1999 1998 Amounts
--------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (8,339,000) $ (3,056,000) $ (15,521,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization expense 191,000 157,000 498,000
Common stock issued for services 727,000 111,000 1,430,000
Stock options issued for services 4,000 - 14,000
Loss on disposal of assets - 26,000 26,000
(Increase) decrease in:
Accounts receivable 3,000 -
Prepaid expense (156,000) (110,000) (266,000)
Increase (decrease) in:
Accounts payable 1,513,000 120,000 1,596,000
Accrued liabilities 229,000 141,000 1,071,000
--------------------------------------------------
Net cash used in
operating activities (5,831,000) (2,608,000) (11,152,000)
--------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (339,000) (219,000) (574,000)
Sale of property and equipment - 2,200,000 2,200,000
Increase in note receivable (24,000) - (30,000)
Collections on notes receivable and advances - - 6,000
Proceeds from art sale 2,000 - 2,000
--------------------------------------------------
Net cash (used in) provided by
investing activities (361,000) 1,981,000 1,604,000
--------------------------------------------------
Cash flows from financing activities:
Proceeds from long-term debt 1,080,000 - 1,362,000
Reduction of long-term debt (50,000) (3,000) (121,000)
Increase in capitalized lease obligation 887,000 - 887,000
Reduction of capitalized lease obligation (134,000) (146,000) (406,000)
Proceeds from related party debt - - 489,000
Reduction of related party debt - - (117,000)
Proceeds from issuance of common stock 4,607,000 804,000 7,886,000
Proceeds from issuance of options 50,000 - 50,000
--------------------------------------------------
Net cash provided by
financing activities 6,440,000 655,000 10,030,000
--------------------------------------------------
Net increase in cash 248,000 28,000 482,000
Cash, beginning of period 240,000 212,000 6,000
--------------------------------------------------
Cash, end of period $ 488,000 $ 240,000 $ 488,000
--------------------------------------------------
- -----------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
</TABLE>
GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 1999
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies
Organization
The financial statements include those of Groen Brothers Aviation,
Inc., and its wholly owned subsidiary Sego Tool, Inc. (the
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.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, and
its subsidiary. All significant intercompany balances and transactions have been
eliminated.
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.
- --------------------------------------------------------------------------------
F-7
<PAGE>
GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies
Continued
Machinery and Equipment
Machinery and equipment are carried at cost, less accumulated depreciation.
Depreciation is computed under an accelerated method based on the estimated
useful lives of the assets. When assets are retired or otherwise disposed of,
the cost and related accumulated depreciation are removed and any resulting gain
or loss is recognized in operations for the period. The cost of maintenance and
repairs is charged to operations as incurred; significant renewals and
betterments are capitalized.
Investment Art Held For Resale
During the year ended June 30, 1999, the Company acquired investment art in
exchange for common stock. The investment art was valued at the estimated fair
value of the common shares issued. The Company carries the investment art at the
lower of cost or market.
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.
Revenue
Revenue consists of interest and is recognized when earned.
Loss Per Common and Common Equivalent Share The computation of basic loss per
common share is computed using the weighted average number of common shares
outstanding during the year.
- --------------------------------------------------------------------------------
F-8
<PAGE>
GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies
Continued
Loss Per Common and Common Equivalent Share - Continued The computation of
diluted loss per common share is based on the weighted average number of shares
outstanding during the year plus common stock equivalents which would arise from
the exercise of stock options and warrants outstanding using the treasury stock
method and the average market price per share during the year. Common stock
equivalents are not included in the diluted loss per share calculation when
their effect is antidilutive.
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 liabilities and 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.
Actual results could differ from those estimates.
2. 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, the stockholders
deficit, 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. As outlined in note 14, management of the
Company has arranged for equity financing through the issuance of common stock.
However, it is not possible to predict the outcome of future operations or
whether financing arrangements can be restructured or if the financing mentioned
above and in note 14 will be adequate for the Company's operations in the
current period. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
- --------------------------------------------------------------------------------
F-9
<PAGE>
GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
3. Machinery and Equipment
Machinery and equipment consists of the following:
Aircraft $ 88,000
Office equipment 308,000
Shop equipment and tools 676,000
Furniture 56,000
Leasehold improvements 37,000
Vehicles 22,000
-----------------
1,187,000
Less accumulated depreciation and
amortization (556,000)
-----------------
$ 631,000
-----------------
4. Note Payable
At June 30, 1999, the Company had a $100,000 note payable to a bank. The note is
due on demand and has an interest rate of prime plus 2% (7.75% at June 30,
1999). The note is secured by stand-by letters of credit. Subsequent to year
end, this note was paid in full.
5. Related Party Transactions
The Company has an unsecured note payable totaling $180,000 to Hawk Autogyro,
owned by some of the members of senior management with interest at 12%. The note
is due on demand and has accrued interest of $96,000.
Included in accrued expenses is payroll payable to officers/shareholders
totaling $697,000.
The Company has unsecured notes payable to a shareholder totaling $950,000 with
interest at 18%. The notes are due on demand and have accrued interest of
$38,000.
- --------------------------------------------------------------------------------
F-10
<PAGE>
GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
5. Related Party Transactions
Continued
The Company has unsecured notes payable to shareholders totaling $130,000 with
interest ranging from 8% to 15%. The notes are due in August and October 1999,
and have accrued interest totaling $2,000. Subsequent to year end, these notes
were paid in full.
6. Long-Term Debt
Long-term debt is comprised of the following:
Unsecured notes payable to a local $ 150,000
governmental agency, including
interest at the prime rate plus 2%
(8.5% at June 30, 1999). After
principal amount is paid, monthly
installments of 3% of monthly gross
revenues are due until an
additional $150,000 is paid (see
note 11). The notes are in default
and are due on demand.
Unsecured notes payable to a
governmental sponsored organization
due in monthly installments of 3%
of gross monthly revenues,
including interest at prime rate
plus 2% (8.5% at June 30, 1999). 100,000
Unsecured note payable to a company
at 15% interest, due on demand. 10,000
Capital lease obligations (see note
7) 913,000
-----------------
1,173,000
Less current portion (588,000)
-----------------
$ 585,000
-----------------
- --------------------------------------------------------------------------------
F-11
<PAGE>
GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
6. Long-Term Debt
Continued
Future maturities of long-term debt are as follows:
Year Ending June 30: Amount
-----------------
2000 $ 588,000
2001 224,000
2002 220,000
2003 141,000
-----------------
$ 1,173,000
-----------------
7. Capital Lease Obligations
The Company has entered into capital lease agreements with financial
institutions for certain property and equipment. Assets under capital lease have
been capitalized and are included in machinery and equipment as follows:
Office equipment $ 161,000
Shop equipment and tools 1,085,000
Furniture 19,000
Leasehold Improvements 37,000
-----------------
Total property and equipment 1,302,000
Accumulated amortization (193,000)
-----------------
$ 1,109,000
-----------------
- --------------------------------------------------------------------------------
F-12
<PAGE>
GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
7. Capital Lease Obligations
Continued
Future minimum lease payments at June 30, 1999 are as follows:
Year Ending June 30,
2000 $ 408,000
2001 278,000
2002 274,000
2003 174,000
-----------------
Total minimum lease payments 1,134,000
Less amount representing interest (221,000)
-----------------
Present value of net minimum lease $ 913,000
payments
-----------------
The Company has entered into an arrangement with a third party in which the
person has the option to pay one of the capital leases on behalf of the Company
in a dollar-for-dollar exchange for stock valued at $.40 per share. At June 30,
1999, the number of shares under this option is approximately 1,030,0000 shares,
none of which have been exercised.
8. Income Taxes
The benefit for income taxes differs from the amount computed at the federal
statutory rate as follows:
Years Ended June 30, Cumulative
------------------------------
1999 1998 Amounts
----------------------------------------------
Income tax benefit
at federal
statutory rates $ 2,835,000 $ 1,039,000 $ 5,913,000
Change in valuation
allowance (2,835,000) (1,039,000) (5,913,000)
----------------------------------------------
Total current
income taxes $ - $ - $ -
----------------------------------------------
- --------------------------------------------------------------------------------
F-13
<PAGE>
GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
8. Income Taxes
Continued
Deferred tax assets (liabilities) at June 30, 1999 is as follows:
Tax benefit of net operating loss carryforward $ 5,913,000
Valuation allowance (5,913,000)
-----------------
$ -
-----------------
The Company has incurred net operating losses totaling approximately
$17,390,000. The operating loss carryforwards begin to expire in 2006.
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.
9. 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, 1999, no
preferred stock has been issued.
- --------------------------------------------------------------------------------
F-14
<PAGE>
GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
10. Stock Options and Stock-Based Compensation
A summary of the stock option and warrant activity for fiscal years 1998 and
1999 is as follows:
Number Range of
of Exercise
Options Prices
--------------------------------
Outstanding at July 1, 1997 7,843,139 $ .09 - 2.00
Granted 86,667 2.00
Exercised - -
Expired (500,000) .40
-----------------
Outstanding at June 30, 1998 7,429,806 .09 - 2.00
Granted 7,419,114 .35 - 2.00
Exercised (1,021,889) .23 - .39
-----------------
Outstanding at June 30, 1999 13,827,031 $ .09 - 2.00
-----------------
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation.
Accordingly, no compensation cost has been recognized in the financial
statements. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for awards in 1999 and 1998
consistent with the provisions of SFAS No. 123, the Company's net earnings and
earnings per share would have been reduced to the pro forma amounts indicated
below:
Years Ended June 30,
------------------------------------
1999 1998
------------------------------------
Net loss - as reported $ (8,339,000) $ (3,056,000)
Net loss - pro forma $ (12,903,000) $ (3,147,000)
Loss per share - as reported $ (.17) $ (.05)
Loss per share - pro forma $ (.26) $ (.07)
------------------------------------
- --------------------------------------------------------------------------------
F-15
<PAGE>
GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
10. Stock Options and 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,
----------------------------------
1999 1998
----------------------------------
Expected dividend yield $ - $ -
Expected stock price volatility 152 % 152 %
Risk-free interest rate 5.0 % 5.6 %
Expected life of options .5 - 5 years 5 years
----------------------------------
The weighted average fair value of options granted during 1999 and 1998 are $.62
and $1.07, respectively.
The following table summarizes information about fixed stock options outstanding
at June 30, 1999:
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 6/30/99 (Years) Price 6/30/99 Price
- ----------------------------------------------------------------------------
$ .09 to .22 5,250,000 4.06 $ 0.10 5,250,000 $ 0.10
.25 to .50 7,490,364 4.95 0.73 7,490,364 0.73
2.00 1,086,667 1.96 2.00 1,086,667 2.00
- ----------------------------------------------------------------------------
$ .09 to 2.00 13,827,031 4.38 $ 0.59 13,827,031 $ 0.59
- ----------------------------------------------------------------------------
11. Commitments
Part of the conditions to obtaining financing from a local government agency,
the Company has agreed to 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, 1999.
- --------------------------------------------------------------------------------
F-16
<PAGE>
GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
11. Commitments
Continued
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 pay monthly royalties of
3% of its gross revenues up to a total of $149,000.
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, Amount
-----------------
2000 $ 163,000
2001 175,000
2002 152,000
-----------------
$ 490,000
-----------------
Rental expenses for noncancellable operating leases were $119,000 and $142,000
for the years ended June 30, 1999 and 1998, respectively.
The Company has 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 inventors who are also officers of the Company.
- --------------------------------------------------------------------------------
F-17
<PAGE>
GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
12. Supplemental Cash Flow Information
During the year ended June 30, 1999:
o The Company issued common stock in exchange for
investment art valued at $1,201,000.
o The Company prepaid advertising expenses in exchange
for investment art valued at $50,000.
o The Company issued common stock in exchange for
machinery and equipment of $25,000.
o The Company acquired machinery and equipment in
exchange for capital lease obligations of $865,000.
o The Company issued common stock in exchange for debt
of $74,000.
Years Ended Cumulative
---------------------------------
1999 1998 Amounts
--------------------------------------------------
Actual amounts of cash
paid for:
Interest $ 19,000 $ 76,000 $ 121,000
--------------------------------------------------
Income taxes $ 200 $ 100 $ 700
--------------------------------------------------
13. Fair Value of Financial Instruments
None of the Company's financial instruments are held for trading purposes. The
Company estimates that the fair value of all financial instruments at June 30,
1999, does not differ materially from the aggregate carrying values of its
financial instruments recorded in the accompanying balance sheet. The estimated
fair value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. Considerable judgement is
necessarily required in interpreting market data to develop the estimates of
fair value, and, accordingly, the estimates are not necessarily indicative of
the amounts that the Company could realize in a current market exchange.
- --------------------------------------------------------------------------------
F-18
<PAGE>
GROEN BROTHERS AVIATION, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
14. Subsequent Event
Subsequent to year-end, the Company issued approximately 10,267,000 shares of
common stock for approximately $6,250,000.
- --------------------------------------------------------------------------------
F-19
<PAGE>
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 48 Director and President
H. Jay Groen 55 Director
James P. Mayfield 51 Director and Vice-President
Term of Office
The terms of service of Messrs. Groen, and Mayfield as members of the
Board of Directors continue until the next annual meeting of the stockholders.
Excepting Mr. Mayfield, who replaced deceased Director Philip Cannon in 1998,
these persons' respective appointments were adopted, ratified and approved by
the stockholders at a meeting 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
11
<PAGE>
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 Vietnam and Asia, logging
more than 100 combat missions. 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 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.
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
12
<PAGE>
career U.S. Marine Corps officer, Mr. Mayfield retired from the Marines in 1989
following nearly 25 years of distinguished service. 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 has two baccalaureate degrees, psychology
and 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. Jay Groen and
David Groen each holds options of 2,475,000 shares at $.09 per share to be
purchased by 2003, each holds options of 25,000 shares at $.50 per share to be
purchased by 2004, and each holds options of 2,000,000 at $1.00 per share to be
purchased by 2004. Jim Mayfield holds options of 500,000 shares at $.50 per
share to be purchased by 2003, and options of 525,000 shares at $.50 per share
to be purchased by 2004.
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 Beneficial Owner Ownership of Class
- ------------------- --------- --------
David Groen, President 8,657,968 14.97
2640 California Avenue
Salt Lake City, UT 84104
Jay Groen, Director 6,085,078 10.52
2640 California Avenue
Salt Lake City, UT 84104
James P. Mayfield, Vice President 71,000 .00
2640 W. California Avenue
Salt Lake City, UT 84104
All Officers and Directors 14,814,046 25.49
Lyle Campbell 3,604,400 06.23
c/o Chapman & Cuttler
111 W. Monroe Street
Chicago, IL 60603
Does not include options by David Groen, Jay Groen, and Jim Mayfield to
purchase 4,475,000 shares, 4,475,000 shares, and 1,025,000 shares respectively.
If such shares were purchased, their ownership would equal 22.71 percent, 18.26
percent, and 1.78 percent respectively.
13
<PAGE>
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.
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
Page
Independent auditors' report of Tanner + Co. F-1
Financial statements:
Consolidated balance sheet, June, 30, 1999. F-2
Consolidated statement of operations for the
two years ended June 30, 1999, 1998 and
cumulative amounts. F-3
Consolidated statement of stockholder's
equity (deficit) for the two years ended
June 30, 1999, 1998 and cumulative amounts. F-4
Consolidated statement of cash flows for
the two years ended June 30, 1999, 1998
and cumulative amounts. F-6
Notes to consolidated financial statements. F-7
14
<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: October 4, 1999
------------------------- -------------------------
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: October 4, 1999
------------------------- -------------------------
H. Jay Groen, Director
/s/ David L. Groen Date: October 4, 1999
------------------------- -------------------------
David L. Groen, Director
/s/ James P. Mayfield Date: October 4, 1999
------------------------- -------------------------
James P. Mayfield, Director
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GROEN
BROTHERS AVIATION, INC. AND SUBSIDIARY FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 488,000
<SECURITIES> 0
<RECEIVABLES> 25,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 829,000
<PP&E> 1,187,000
<DEPRECIATION> 556,000
<TOTAL-ASSETS> 2,609,000
<CURRENT-LIABILITIES> 4,850,000
<BONDS> 585,000
0
0
<COMMON> 289,000
<OTHER-SE> 14,274,000
<TOTAL-LIABILITY-AND-EQUITY> 2,609,000
<SALES> 0
<TOTAL-REVENUES> 4,000
<CGS> 0
<TOTAL-COSTS> 8,343,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 124,000
<INCOME-PRETAX> (8,339,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,339,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,339,000)
<EPS-BASIC> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
