FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
Commission file number 018958
GROEN BROTHERS AVIATION, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Utah 87-0376766
------------------------------------------ -----------------
State of other jurisdiction of I.R.S. Employer
Incorporation or organization Identification No.
2640 W. California Ave., Suite A
Salt Lake City, Utah 84104
------------------------------------------------ ---------
Address of principal executive offices Zip Code
Registrant's telephone number, including area code (801) 973-0177
--------------
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 X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Outstanding at
Class September 30, 2000
----------------------------------------------- ----------------------
Common Stock, No Par Value 73,715,688
Page 1 of 13 consecutively numbered pages.
1
<PAGE>
TABLE OF CONTENTS
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet,
September 30, 2000 (unaudited).....................................3
Consolidated Statement of Operations for the three
and three months ended September 30, 2000 and 1999
and cumulative amounts since development stage (unaudited).........4
Consolidated Statement of Cash Flows for the three months
ended September 30, 2000 and 1999 and cumulative amounts
since development stage (unaudited)................................5
Notes to Consolidated Financial Statements.........................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................8
Part II - Other Information
Item 1 Legal Proceedings..................................................10
Item 2 Changes in the Securities of the Company...........................10
Item 3 Defaults Upon Senior Securities....................................10
Item 4 Submission of Matters to a Vote of Security Holders................10
Item 5 Other Information..................................................10
Item 6 Exhibits and Reports on Form 8K....................................11
2
<PAGE>
GROEN BROTHERS AVIATION, INC.
(A Development Stage Company)
Index to Consolidated Financial Statements
--------------------------------------------------------------------------------
Page
----
Consolidated balance sheet,
September 30, 2000 (unaudited) F-1
Consolidated statement of
operations for three months ended
September 30, 2000 and 1999 and
cumulative amounts since development
stage (unaudited) F-2
Consolidated statement of
cash flows for the three months ended
September 30, 2000 and 1999 and
cumulative amounts since development
stage (unaudited) F-3
Notes to consolidated financial
statements F-5
--------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
GROEN BROTHERS AVIATION, INC.
(A Development Stage Company)
Consolidated Balance Sheet
----------------------------------------------------------------------------------------------------------
September 30,
2000
Assets (Unaudited)
------ -------------------
<S> <C>
Current assets:
Cash $ 17,000
Related party receivables 121,000
Prepaid expenses 66,000
-------------------
Current assets 204,000
Investment art held for sale 575,000
Machinery and equipment, net 1,010,000
-------------------
Total assets $ 1,789,000
-------------------
----------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Accounts payable $ 690,000
Accrued liabilities 1,725,000
Related party notes payable 1,065,000
Current portion of long-term debt 486,000
-------------------
Total current liabilities 3,966,000
Long-term debt 840,000
Deposits 2,979,000
-------------------
Total liabilities 7,785,000
-------------------
Commitments and contingencies -
Stockholders' equity:
Preferred stock, no par value, 200,000,000 shares authorized;
no shares outstanding -
Common stock, no par value, 200,000,000 shares authorized;
73,715,688 shares issued and outstanding 22,916,000
Accumulated deficit (28,912,000)
-------------------
Total stockholders' deficit (5,996,000)
-------------------
Total liabilities and stockholders' deficit $ 1,789,000
===================
----------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. F-1
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GROEN BROTHERS AVIATION, INC.
(A Development Stage Company)
Consolidated Statement of Operations (Unaudited)
----------------------------------------------------------------------------------------------------------
Cumulative
Amounts
Three Months Ended Since
September 30, Development
-----------------------------------
2000 1999 Stage
-----------------------------------------------------
<S> <C> <C> <C>
Revenue -
interest and other $ 9,000 $ 32,000 $ 175,000
------------------ --------------- ----------------
Total revenue 9,000 32,000 175,000
------------------ --------------- ----------------
Costs and expenses:
Research and development 1,485,000 1,302,000 17,288,000
General and administrative expenses 1,188,000 1,941,000 9,097,000
Interest expense 63,000 57,000 834,000
------------------ --------------- ----------------
Total costs and expenses 2,736,000 3,300,000 27,219,000
------------------ --------------- ----------------
Net loss before income taxes (2,727,000) (3,268,000) (27,044,000)
Provision for income taxes - - -
------------------ --------------- ----------------
Net loss $ (2,727,000) $ (3,268,000) $ (27,044,000)
================== =============== ================
Net loss per share - basic and diluted $ (.04) $ (.05) $ (.61)
================== =============== ================
Weighted average common and common
equivalent shares - basic and diluted 73,088,000 65,865,000 44,191,000
------------------ --------------- ----------------
----------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. F-2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GROEN BROTHERS AVIATION, INC.
(A Development Stage Company)
Consolidated Statement of Cash Flows (Unaudited)
----------------------------------------------------------------------------------------------------------
Cumulative
Three Months Ended Amounts Since
September 30, Development
------------------------------
2000 1999 Stage
-----------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,727,000) $ (3,268,000) $ (27,044,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization expense 82,000 59,000 911,000
Common stock issued for services and expenses 2,000 1,471,000 1,448,000
Common stock issued for interest - - 31,000
Stock options issued for services - - 14,000
Research and development and royalty costs 385,000 - 385,000
Loss on disposal of assets - - 44,000
Decrease in prepaid expense 103,000 52,000 97,000
Increase (decrease) in:
Accounts payable 212,000 (1,199,000) 837,000
Accrued liabilities 239,000 8,000 1,910,000
Deposits 325,000 504,000 2,141,000
--------------- ------------ --------------
Net cash used in
operating activities (1,379,000) (2,373,000) (19,226,000)
--------------- ------------ --------------
Cash flows from investing activities:
Purchase of property and equipment (128,000) (88,000) (1,105,000)
Sale of property and equipment - - 2,212,000
Increase in related party receivables (2,000) (66,000) (126,000)
Collections on notes receivable and advances - - 6,000
Proceeds from art sale - 9,000 39,000
--------------- ------------ --------------
Net cash (used in) provided by
investing activities (130,000) (145,000) 1,026,000
--------------- ------------ --------------
Cash flows from financing activities:
Proceeds from long-term debt - - 1,362,000
Reduction of long-term debt - (130,000) (251,000)
Increase in capitalized lease obligation - - 1,226,000
Reduction of capitalized lease obligation (82,000) (172,000) (829,000)
Proceeds from related party debt 615,000 - 1,374,000
Reduction of related party debt - - (117,000)
Proceeds from issuance of common stock 819,000 5,433,000 15,391,000
Proceeds from issuance of options - - 55,000
--------------- ------------ --------------
Net cash provided by
financing activities 1,352,000 5,131,000 18,211,000
--------------- ------------ --------------
Net increase (decrease)
in cash (157,000) 2,613,000 11,000
Cash, beginning of period 174,000 488,000 6,000
--------------- ----------- --------------
Cash, end of period $ 17,000 $ 3,101,000 $ 17,000
=============== ============ ==============
----------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. F-3
</TABLE>
<PAGE>
GROEN BROTHERS AVIATION, INC.
(A Development Stage Company)
Consolidated Statement of Cash Flows (Unaudited)
Continued
--------------------------------------------------------------------------------
During the three months ended September 30, 2000:
o The Company exchanged $495,000 of artwork to retire long-term debt
of $150,000, accrued interest of $195,000 and royalties of
$150,000.
o The Company retired 44,861 shares of common stock in exchange for
$20,000 of investment art held for sale.
o The Company paid research and development expenses in exchange for
a capital lease of $235,000.
o The Company issued 281,845 shares of common stock in exchange for
prepaid advertising of $113,000.
o The Company issued 10,571 shares of the Company's common stock to
retire accounts payable of $11,000.
During the three months ended September 30, 1999:
o The Company issued 18,300 shares of its restricted common stock in
exchange for equipment of $18,000.
o The Company issued 314,037 shares of its restricted common stock
in exchange for a reduction of accounts payable in the amount of
$155,000.
o The Company exchanged $513,000 of related party debt in exchange
for deposits.
<TABLE>
<CAPTION>
Cumulative
Amounts
Three Months Ended Since
September 30, Development
-----------------------------------
2000 1999 Stage
-----------------------------------------------------
<S> <C> <C> <C>
Cash paid during the period for:
Interest $ 63,000 $ 20,000 $ 352,000
================== =============== ================
Income taxes $ - $ - $ -
================== =============== ================
----------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. F-4
</TABLE>
<PAGE>
GROEN BROTHERS AVIATION, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
(1) The unaudited consolidated financial statements include the accounts of
Groen Brothers Aviation, Inc. and include all adjustments (consisting
of normal recurring items) which are, in the opinion of management,
necessary to present fairly the financial position as of September 30,
2000 and the results of operations for the three months ended September
30, 2000 and 1999 and cash flows for the three months ended September
30, 2000 and 1999. The results of operations and cash flows for the
three months ended September 30, 2000 are not necessarily indicative of
the results to be expected for the entire year.
(2) Loss per share is based on the weighted average number of shares
outstanding at September 30, 2000 and 1999, respectively.
--------------------------------------------------------------------------------
F-5
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following is management's discussion and analysis of certain
significant factors which have affected the Company's financial position and
operating results during the period reported in the accompanying condensed
consolidated financial statements. The "Company" refers to the Registrant, and
its wholly-owned subsidiary, Sego Tool, Inc. (Sego). Unless otherwise stated,
the financial activities described herein are those of Sego, which was the sole
operating entity during the reporting period.
During the first quarter of the current fiscal year, the Company
continued its flight testing of the Hawk 4 (four seat) gyroplane at its Buckeye
facility in Arizona. The Hawk 4 will be the Company's first FAA certified
gyroplane. Certification of the Hawk 4, currently being performed and managed at
the Company's Salt Lake City facility, began in March of 1998, and is now
expected to be completed in 2002.
The Hawk 4 is powered by a Rolls-Royce turbine engine. The advantage of
the turbine engine over a piston engine is that there will be a higher useful
load, more horsepower, and the worldwide availability of kerosene fuels, such as
Jet A, etc.
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).
Groen Brothers Aviation is presently establishing a worldwide dealer
network in major U.S. cities and major cities abroad. GBA Authorized 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 148 down
payment deposits from its dealers. The dealers in turn take deposits from
customers as orders are received. Dealers will handle all sales, including civil
government agencies and fleet sales, except military sales, which will be made
directly by GBA. The Company's first international dealer is GBA Gyroplanes of
Costa Rica.
8
<PAGE>
The Company has attended many conventions to introduce its Hawk
Gyroplane. These include the National Agricultural Aircraft Association (NAAA),
the Aircraft Owners and Pilots Association (AOPA), the National Business
Aircraft Association (NBAA), and the two Experimental Aircraft Association (EAA)
shows. Manned by Company employees and GBA Authorized Dealers, the booth and
displays were busy with visitors from across the U.S. and around the world.
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.
Results of Operations
Comparing the three months ended September 30, 2000 to the same period
ended September 30, 1999, revenues decreased to $9,000 from $32,000 as a result
of decreased bank interest, general and administrative expenses decreased to
$1,188,000 from $1,941,000, and research and development expenses increased to
$1,485,000 from $1,302,000. The Company continued to hire additional engineers,
draftsmen, and outside consultants to accelerate the Hawk 4 program. During the
three months ended September 30, 2000, the resulting net loss was $2,727,000 as
compared to a net loss of $3,268,000 for the same period ended September
30,1999.
Liquidity and Capital Resources
The Company estimates that capital requirements will continue at the
present pace over the balance of fiscal year 2001. 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 past three fiscal years the Company has raised $14.7 million
for operations through the sale of equity, of which $7.4 million was raised
during the past fiscal year. In the past the Company has been successful in
raising capital as needed. During fiscal year 2001 the Company will need to
raise approximately $12 million for operations at its current development level.
Since September 30, 2000, the Company has already accepted $5 million from an
institutional investor. There can be no guarantee or assurance that the Company
will be successful in its ability to raise additional capital at favorable rates
or at all.
Sales of gyroplanes, which began in 1999, are 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 during fiscal year 2001.
9
<PAGE>
Year 2000
The Company's computer system and software are warranted by the vendor
to be Y2K compliant. There does not appear to be any material internal issues at
this time.
The Company has communicated with its primary vendors and has
determined that all are Y2K compliant.
The financial institutions with which the Company has its material
relationships have represented to the Company that they are Y2K compliant.
Part II - Other Information
Item 1 Legal Proceedings. None.
Item 2 Changes in the Securities of the Company. None.
Item 3 Defaults Upon Senior Securities. None.
Item 4 Matters Submitted to a Vote of Security Holders. None
Item 5 Other Information.
Following the end of the third quarter the Company received an equity
investment from an institutional investor ("the Purchaser"). Pursuant to the
funding terms, a total of 12,500,000 shares ("the Shares") of common stock were
purchased for an aggregate of $5 million and includes the issuance of put and
call options, and warrants. The Shares cannot be publicly resold for a period of
three years. In connection with the Share purchases, the investors hold a "put"
option exercisable in three years. The Company, at its option, may honor the put
(if exercised) in stock or in cash. If paid in stock, the exercise price is at
$2.00 per share and the number of shares to be issued would be based on the
average bid price for the twenty trading days prior to the put. If paid in cash,
the exercise price is $1.60 per share. Additionally, the Company holds a "call"
option to purchase the Shares at anytime up to twenty-four months from issue at
$1.20 per share, from twenty-four to thirty months at $1.40 per share and from
thirty months to thirty-six months at $1.60 per share. The Purchaser was also
issued warrants in the amount of 1,250,000 shares which are exercisable at the
average bid price for the twenty trading days prior to the time of issue.
The Board of Directors of the Company (the "Board") has, for a long
time, believed that it would be in the best interest of the Company to provide
additional executive compensation to David Groen, Co-Founder, Director, CEO and
President of the Company (the "Founder"). For more than six years of the past
fifteen years, the Founder served without paid compensation, and he has devoted
all of his time, energy, and efforts solely to the business of the Company.
Additionally, the need to fund the Company by issuing additional shares of
10
<PAGE>
the Company over the past fifteen years has substantially diluted the Founder's
equity position in the Company.
The Compensation Committee of the Board, after fully considering the
issue of executive compensation and various plans to compensate the Founder,
deemed it in the best interest of the Company to issue shares of preferred stock
to the Founder as a plan for compensation and incentive. Therefore, in exchange
for a three year full recourse promissory note bearing an interest rate of five
percent (5%) per annum, principle and accrued interest due and payable in one
lump sum upon maturity in the amount of $10,000,000 (ten million dollars), the
Company issued to David Groen Ten Million (10,000,000) shares of Class A
Preferred Stock ("the Shares"). The Shares have the following terms, conditions,
and preferences: each Share may cast four votes in any meetings or matters to be
voted on by the shareholders of the Company; the Shares are convertible into
common stock of the Company on a one for four (1:4) basis, at a conversion price
of $1 per share. Conversion is allowed at the rate of two million five hundred
thousand preferred shares for each $30 million in cumulative sales of the
Company's products, for a total of $120 million in sales. The Shares are
non-transferrable and non-assignable until the respective milestones have been
met, shall have no dividend rights, and shall have the "last" liquidation
rights, meaning that secured creditors, unsecured creditors, and the common
shareholders shall all have superior liquidation priority.
Item 6 Exhibits and Reports on Form 8K. None
11
<PAGE>
Forward Outlook and Risks
The Company, from time to time, may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological development, new products, research and development
activities and similar matters. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements. In order to comply
with the terms of the safe harbor, the Company notes that a variety of factors
could cause the Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in any of the
Company's forward-looking statements. The risks and uncertainties that may
affect the operations, performance, development and results of the Company's
business include, but are not limited to, the following: (a) the failure to
obtain additional borrowed and/or equity capital on favorable terms for
acquisitions and expansion; (b) adverse changes in federal and state laws, or
other matters affecting the Company's business; (c) the demand for the Company's
products and services; and (d) other risks detailed in the Company's Securities
and Exchange Commission filings.
This Form 10-QSB contains and incorporates by reference certain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act with respect to results of operations
and businesses of the Company. All statements, other than statements of
historical facts, included in this Form 10-QSB, including those regarding market
trends, the Company's financial position, business strategy, projected costs,
and plans and objectives of management for future operations, are
forward-looking statements. In general, such statements are identified by the
use of forward-looking words or phrases including, but not limited to,
"intended, will, should, may, expect, anticipate, estimates, projects" or the
negative thereof or variations thereon or similar terminology.
Forward-looking statements are based on the Company's current
expectations. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, there can be no assurance that
such expectations will prove to be correct. Because forward-looking statements
involve risk and uncertainty, the Company's actual results could differ
materially. Important factors that could cause actual results to differ
materially from the Company's expectations are disclosed hereunder and elsewhere
in this Form 10-QSB. These forward-looking statements represent the Company's
judgement as of the date of this Form 10-QSB. All subsequent written and oral
forward-looking statements attributable to the Company are expressly qualified
in their entirety by the Cautionary Statements. The Company disclaims, however,
any intent or obligation to update its forward-looking statements.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned there unto duly authorized.
Date: November 14, 2000 GROEN BROTHERS AVIATION, INC.
By: /s/ David Groen
----------------------------
David Groen, President & CEO
13
