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, 2000
Commission File Number 0-18958
Groen Brothers Aviation, Inc.
--------------------------------
(Exact name of Registrant as specified in its charter)
Utah 87-0376766
------------------------------- -------------------------------------
(State or other jurisdiction of I.R.S. Employer Identification Number
Incorporation or organization)
2640 W. California Ave. Ste A, Salt Lake City, UT 84104-4593
------------------------------------------------------------
(Address of principal executive offices)
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 (No Par Value)
--------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes XX No
As of June 30, 2000, the Registrant had outstanding 72,445,064 shares
of common stock, no par value per share, which is the Registrant's only class of
common stock.
1
<PAGE>
Documents Incorporated by Reference: None
Note: Exhibit index required by item 601 of Regulation S-K appears on page 11.
2
<PAGE>
PART I
------
Item 1. Business
--------------------
THE COMPANY
Groen Brothers Aviation, Inc. ("the Company") was incorporated in the
State of Utah on July 28, 1980. On September 18, 1990, the Company exchanged 80
percent of its common stock for 100 percent of the common stock of Sego Tool,
Inc., a Utah Corporation. This was in effect a reverse acquisition of the
Company by the owners of Sego Tool. The Company changed its name from New Wave
Energy to Groen Brothers Aviation on October 3, 1990. Prior to July 1, 1993 the
Company's intent was to lease the technology to other entities to develop the
gyroplane, and the Company would receive royalties on its technology. Effective
July 1, 1993, the Company determined that it would complete development and
manufacture the gyroplane by itself. Because of this change in business focus,
the Company became a development stage business on July 1, 1993 under SFAS No.
7.
The Company, through its now wholly-owned subsidiary, Sego Tool, Inc.,
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 fourteen years bringing their
idea to fruition, enthusiasm for the GBA Hawk within the aviation community runs
high. The Company has experienced significant interest from 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.
3
<PAGE>
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
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 can take off and land 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
4
<PAGE>
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
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
5
<PAGE>
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, are 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) and Hawk 6 (six
seat). A Hawk 8 (eight seat) is planned 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
(collective 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 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
6
<PAGE>
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
Rolls-Royce Model 450 Series 450 shp gas turbine engine provides prerotation
power and thrust following liftoff. The main powerplants for both the Hawk 6 and
Hawk 8 will be jet turboprops. Although turbine engines, compared to piston
engines, are expensive, 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 cyclic 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. Short 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 U.S. 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.
7
<PAGE>
GBA's FAA certification plan is a detailed description of the method
GBA is using to prove compliance with the FARs. 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 a
vertical impact of thirty 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
8
<PAGE>
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. 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 and Canada. GBA Dealers will be
responsible for sales, service, maintenance, and flight training. To become a
9
<PAGE>
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 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 for 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 collateral printed materials and videos of the Hawk
Gyroplane.
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. At the AirVenture 2000
show in July 2000, the Company flew its Rolls-Royce turbine-powered Hawk 4
Gyroplane.
Export Sales
GBA has been approached by companies in more than a dozen foreign
countries on five continents requesting to be dealers. At present, the Company
is having detailed discussions with several different foreign companies and
governments. GBA has appointed to the position of International Sales Manager,
an individual who is a specialist in selling rotor-wing aircraft in the
international market. This sales professional has decades of successful
international sales experience with a major helicopter manufacturer and begins
full time employment with GBA in September 2000.
Patents
GBA presently owns three U.S. 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 rotor head
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 rotor head, 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
10
<PAGE>
the U.S. has reciprocal agreements on intellectual property. GBA's patents are
filed in Japan, Korea, Canada, and Brazil. In addition to the three U.S.
patents, GBA has been awarded international patents in Australia, the EU,
Belgium, France, Germany, Italy, Netherlands, Portugal, Spain, Switzerland, and
the United Kingdom.
Item 2. Properties
----------------------
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
-----------------------------
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
---------------------------------------------------------------
At the Annual Meeting of Shareholders, May 20, 2000, the shareholders
voted on and approved the following items:
1. Election of David L. Groen, H. Jay Groen, and James P. Mayfield III as
directors to hold office until the 2001 Annual Meeting of Shareholders
or until their successors shall have been duly elected and qualified.
2. Ratify the Board of Directors' appointment of Tanner + Co., Certified
Public Accountants, as independent auditors to the Company for its
fiscal year ended June 30, 2001.
3. Approve Amended and Restated Articles of Incorporation, that include an
increase in the number of authorized shares of the Company and a
limitation on the liability of directors pursuant to Section 841 of the
Utah Revised Business Corporations Act, as amended (the "Revised Act").
4. Approve th number of shares under the Company's 2000 Stock Optio
Plan.
5. Approve a voting process whereby shareholders can approve an action,
without holding a meeting, if a written consent setting forth the
action is signed by a majority of the shareholders pursuant to Section
11
<PAGE>
704 of the Revised Act (or such greater vote as may be required).
Item 5. Market for the Registrant's Common Stock and
--------------------------------------------------------
Related Security Holder Matters
-------------------------------
The Company's common stock, no 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
---- ------- ---- ---
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
3rd 2.63 1.06
4th 1.31 .81
2000 1st 1.56 .75
2nd 1.56 1.03
The number of shareholders of record for the Company's common stock as
of June 30, 2000, were 1,202, and the number of shares issued and outstanding
were 72,445,064.
Item 6. Management's Discussion and Analysis of Financial
-------------------------------------------------------------
Condition and Results of Operations
-----------------------------------
Results of Operations
Revenue
During 2000, total revenues increased to $126,000, compared to $4,000
in 1999. This was due to an increase in interest income. The majority of Company
revenue in 2000 and 1999 consisted of interest income.
12
<PAGE>
Costs and Expenses
During 2000, research and development costs increased to $6,451,000,
compared to $6,140,000 in 1999, a 5 percent increase. That increase took place
across the board as the number of employees and consultants increased, and
tooling and equipment costs went up by a corresponding multiple in preparation
for production of the Hawk 4.
General and administrative costs in 2000 increased to $2,272,000,
compared to $2,079,000 in 1999, an increase of 9 percent. The increase was in
support of the continuing FAA certification process and an increase in
personnel.
Net Earnings
During 2000 and 1999 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 past three 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 the next fiscal year the Company will need to raise
approximately $9 million for operations at its current development level. There
can be no guarantee or assurance that the Company will be successful in its
ability to raise 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 over the next twelve months.
Item 7. Financial Statements
--------------------------------
Page
----
Index to Consolidated Financial Statements
13
<PAGE>
Independent auditors' report of Tanner + Co. F-1
Financial statements:
Consolidated balance sheet, June, 30, 2000. F-2
Consolidated statement of operations for
the two years ended June 30, 2000 and 1999,
and cumulative amounts. F-3
Consolidated statement of stockholder's
deficit for the two years ended June 30,
2000 and 1999, and cumulative amounts. F-4
Consolidated statement of cash flows for
the two years ended June 30, 2000 and 1999,
and cumulative amounts. F-7
Notes to consolidated financial statements. F-8
Groen Brothers Aviation
Consolidated Financial Statements
June 30, 2000
<PAGE>
<TABLE>
<CAPTION>
GROEN BROTHERS AVIATION, INC.
(A Development Stage Company)
Index to Consolidated Financial Statements
------------------------------------------------------------------------------------------------
Page
----
<S> <C>
Independent auditors' report F-1
Consolidated balance sheet F-2
Consolidated statement of operations F-3
Consolidated statement of stockholders' deficit F-4
Consolidated statement of cash flows F-7
Notes to consolidated financial statements. F-8
------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Groen Brothers Aviation, Inc.
We have audited the accompanying consolidated balance sheet of Groen Brothers
Aviation, Inc., (the Company), a development stage company, as of June 30, 2000,
and the related consolidated statements of operations, stockholders' deficit and
cash flows for the two years ended June 30, 2000 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., as of June 30, 2000, and the results of their operations and
their cash flows for the two years ended June 30, 2000, 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.
Salt Lake City, Utah
August 11, 2000 except for note 15, which
is dated September 26, 2000
F-1
<PAGE>
<TABLE>
<CAPTION>
GROEN BROTHERS AVIATION, INC.
(A Development Stage Company)
Consolidated Balance Sheet
June 30, 2000
-----------------------------------------------------------------------------------------------------------
<S> <C>
Assets
------
Current assets:
Cash $ 174,000
Related party receivables 119,000
Prepaid expenses 56,000
------------------
Current assets 349,000
Investment art held for sale 1,090,000
Property and equipment, net 964,000
------------------
Total assets $ 2,403,000
------------------
----------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Accounts payable $ 489,000
Accrued expenses 1,681,000
Related party notes payable 450,000
Current portion of long-term debt 590,000
------------------
Total current liabilities 3,210,000
Long-term debt 733,000
Deposits 2,654,000
------------------
Total liabilities 6,597,000
------------------
Commitments and contingencies -
Stockholders' deficit:
Preferred stock, no par value, 200,000,000 shares
authorized; no shares outstanding -
Common stock, no par value, 200,000,000 shares
authorized; 72,445,064 shares issued and outstanding 21,991,000
Accumulated deficit (26,185,000)
------------------
Total stockholders' deficit (4,194,000)
------------------
Total liabilities and stockholders' deficit $ 2,403,000
------------------
-----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GROEN BROTHERS AVIATION, INC.
(A Development Stage Company)
Consolidated Statement of Operations
Years Ended June 30, and Cumulative Amounts
----------------------------------------------------------------------------------------------------------
Cumulative
2000 1999 Amounts
------------------------------------------------------
<S> <C> <C> <C>
Revenues-
interest and other $ 126,000 $ 4,000 $ 166,000
------------------------------------------------------
Costs and expenses:
Research and development 6,451,000 6,140,000 15,803,000
General and administrative expenses 2,272,000 2,079,000 7,909,000
Interest expense 199,000 124,000 771,000
------------------------------------------------------
Total costs and expenses 8,922,000 8,343,000 24,483,000
------------------------------------------------------
Net loss before income taxes (8,796,000) (8,339,000) (24,317,000)
Provision for income taxes - - -
------------------------------------------------------
Net loss $ (8,796,000) $ (8,339,000) $ (24,317,000)
------------------------------------------------------
Net loss per share - basic and diluted $ (.13) $ (.17) $ (.54)
------------------------------------------------------
Weighted average common and common
equivalent shares - basic and diluted 70,186,000 50,471,000 44,742,000
------------------------------------------------------
----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GROEN BROTHERS AVIATION, INC.
(A Development Stage Company)
Consolidated Statement of Stockholders' Deficit
Years Ended June 30, 2000 and 1999 and Cumulative Amounts
---------------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock
--------------------------------------------------- Accumulated
Shares Amount Shares Amount Deficit Total
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1993 - $ - 27,153,509 $ 1,074,000 $ (1,868,000) $ (794,000)
Issuance of common stock for:
Cash - - 1,083,611 280,000 - 280,000
Collateral on a loan - - 4,000,000 - - -
Commissions - - 40,857 10,000 - 10,000
Debt - - 172,222 30,000 - 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 1,419,000 (2,348,000) (929,000)
Issuance of common stock for:
Assets - - 2,286 1,000 - 1,000
Cash - - 1,028,923 432,000 - 432,000
Commissions - - 18,546 9,000 - 9,000
Debt - - 487,027 55,000 - 55,000
Services - - 138,860 61,000 - 61,000
Net loss - - - - (710,000) (710,000)
------------------------------------------------------------------------------------
Balance, June 30, 1995 - - 34,139,026 1,977,000 (3,058,000) (1,081,000)
Issuance of common stock for:
Assets - - 100,000 51,000 - 51,000
Cash - - 1,669,404 547,000 - 547,000
Commissions - - 124,719 41,000 - 41,000
Debt - - 10,000 2,000 - 2,000
Services - - 686,708 168,000 - 168,000
Net loss - - - - (1,046,000) (1,046,000)
------------------------------------------------------------------------------------
Balance, June 30, 1996 - - 36,729,857 2,786,000 (4,104,000) (1,318,000)
---------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GROEN BROTHERS AVIATION, INC.
(A Development Stage Company)
Consolidated Statement of Stockholders' Deficit
Continued
---------------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock
--------------------------------------------------- Accumulated
Shares Amount Shares Amount Deficit Total
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock for:
Assets - - 2,500,000 2,201,000 - 2,201,000
Cash - - 1,359,442 1,216,000 - 1,216,000
Commissions - - 11,607 13,000 - 13,000
Debt - - 689,802 477,000 - 477,000
Services - - 468,003 267,000 - 267,000
Net loss - - - - (1,890,000) (1,890,000)
------------------------------------------------------------------------------------
Balance, June 30, 1997 - - 41,758,711 6,960,000 (5,994,000) 966,000
Issuance of common stock for:
Cash - - 1,613,622 803,000 - 803,000
Commission - - 109,299 54,000 - 54,000
Services - - 79,617 58,000 - 58,000
Net loss - - - - (3,056,000) (3,056,000)
------------------------------------------------------------------------------------
Balance, June 30, 1998 - - 43,561,000 7,875,000 (9,050,000) (1,175,000)
Issuance of common stock for:
Assets - - 2,954,944 1,226,000 - 1,226,000
Cash - - 9,458,124 4,607,000 - 4,607,000
Commission - - 1,574,216 686,000 - 686,000
Debt - - 194,935 74,000 - 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 14,563,000 (17,389,000) (2,826,000)
---------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GROEN BROTHERS AVIATION, INC.
(A Development Stage Company)
Consolidated Statement of Stockholders' Deficit
Continued
---------------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock
--------------------------------------------------- Accumulated
Shares Amount Shares Amount Deficit Total
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock for:
Cash - - 12,776,233 6,686,000 - 6,686,000
Investment art - - 100,000 70,000 - 70,000
Property and equipment - - 58,410 34,000 - 34,000
Accounts payable - - 303,883 147,000 - 147,000
Accrued expenses - - 212,734 177,000 - 177,000
Long-term debt - - 1,090,010 537,000 - 537,000
Services - - 15,146 16,000 - 16,000
Interest expense - - 43,847 31,000 - 31,000
Issuance of common stock options for:
Cash - - - 5,000 - 5,000
Property and equipment - - - 13,000 - 13,000
Accounts payable - - - 7,000 - 7,000
Cancellation of stock options in
exchange for deposits - - - (295,000) (295,000)
Net loss - - - - (8,796,000) (8,796,000)
------------------------------------------------------------------------------------
Balance, June 30, 2000 $ - $ - 72,445,064 $ 21,991,000 $ (26,185,000) $ (4,194,000)
------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GROEN BROTHERS AVIATION, INC.
(A Development Stage Company)
Consolidated Statement of Cash Flows
Years Ended June 30, and Cumulative Amounts
----------------------------------------------------------------------------------------------------------
Cumulative
2000 1999 Amounts
-----------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (8,796,000) $ (8,339,000) $ (24,317,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization expense 331,000 191,000 829,000
Common stock issued for services 16,000 727,000 1,446,000
Common stock issued for interest 31,000 - 31,000
Stock options issued for services - 4,000 14,000
Loss on disposal of assets 18,000 - 44,000
(Increase) decrease in:
Accounts receivable - - -
Prepaid expense 260,000 (156,000) (6,000)
Increase (decrease) in:
Accounts payable (971,000) 1,483,000 625,000
Accrued liabilities 600,000 229,000 1,671,000
Deposits 1,816,000 30,000 1,816,000
-----------------------------------------------------
Net cash used in
operating activities (6,695,000) (5,831,000) (17,847,000)
-----------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (403,000) (339,000) (977,000)
Sale of property and equipment 12,000 - 2,212,000
Increase in note receivable (94,000) (24,000) (124,000)
Collections on notes receivable and advances - - 6,000
Proceeds from art sale 37,000 2,000 39,000
-----------------------------------------------------
Net cash (used in) provided by
investing activities (448,000) (361,000) 1,156,000
-----------------------------------------------------
Cash flows from financing activities:
Proceeds from long-term debt - 1,080,000 1,362,000
Reduction of long-term debt (130,000) (50,000) (251,000)
Increase in capital lease obligation 339,000 887,000 1,226,000
Reduction of capital lease obligation (341,000) (134,000) (747,000)
Proceeds from related party debt 270,000 - 759,000
Reduction of related party debt - - (117,000)
Proceeds from issuance of common stock 6,686,000 4,607,000 14,572,000
Proceeds from issuance of options 5,000 50,000 55,000
-----------------------------------------------------
Net cash provided by
financing activities 6,829,000 6,440,000 16,859,000
-----------------------------------------------------
Net increase (decrease) in cash (314,000) 248,000 168,000
Cash, beginning of period 488,000 240,000 6,000
-----------------------------------------------------
Cash, end of period $ 174,000 $ 488,000 $ 174,000
-----------------------------------------------------
----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-7
</TABLE>
<PAGE>
GROEN BROTHERS AVIATION, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
June 30, 2000
--------------------------------------------------------------------------------
1. Organization Organization
and The financial statements include those of Groen
Summary of Brothers Aviation, Inc., and its wholly owned
Significant subsidiary Sego Tool, Inc. (the Company). The
Accounting primary business purpose of the Company is the
Policies 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's development stage activities consists
of the development and FAA certification of the Hawk
Gyroplane. Sources of financing for these
development stage activities have been primarily
debt and equity financing. 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-8
<PAGE>
GROEN BROTHERS AVIATION, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Property and Equipment
and Property and equipment are carried at cost, less
Summary of accumulated depreciation. Depreciation is computed
Significant under an accelerated method based on the estimated
Accounting useful lives of the assets. When assets are retired
Policies or otherwise disposed of, the cost and related
Continued 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 years ended June 30, 2000 and 1999, the
Company acquired investment art which is held for
resale. The Company carries the investment art at
the lower of cost or market.
Deposits
Deposits consist of amounts received on aircraft in
anticipation of full-scale production of the
Company's gyroplane. The deposit guarantees the
depositor a delivery sequence number and represents
a percentage of the total purchase price.
Income Taxes
The Company accounts for its income taxes based on
the provisions of SFAS No. 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 primarily 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 period.
--------------------------------------------------------------------------------
F-9
<PAGE>
GROEN BROTHERS AVIATION, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Loss Per Common and Common Equivalent Share -
and Continued
Summary of The computation of diluted loss per common share is
Significant based on the weighted average number of shares
Accounting outstanding during the period plus common stock
Policies equivalents which would arise from the exercise of
Continued stock options and warrants outstanding using the
treasury stock method and the average market price
per share during the period. 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.
Reclassifcation
Certain amounts in the financial statements for 1999
have been reclassified to conform with the current
year presentation. A reclassification was made
related to the change in the Company's common stock
from a $.005 par value to a no par value.
2. Going The accompanying financial statements have been
Concern prepared assuming that the Company will continue as
a going concern. Because of recurring 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. Management
anticipates that the Company will be able to obtain
additional financing sufficient to fund operations
during the next fiscal year, however, there can be
no assurance they will be successful. The financial
statements do not include any adjustments that might
result from the outcome of this uncertainty.
--------------------------------------------------------------------------------
F-10
<PAGE>
GROEN BROTHERS AVIATION, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
3. Related Party Related party receivables consist primarily of
Receivables unsecured, non-interest bearing receivables from
officers/shareholders. The amounts are due on
demand.
4. Property Property and equipment consists of the following:
and
Equipment Aircraft $ 88,000
Office equipment 318,000
Shop equipment and tools 992,000
Furniture 70,000
Leasehold improvements 54,000
Vehicles 39,000
Computer equipment 280,000
------------
1,841,000
Less accumulated depreciation and
amortization (877,000)
------------
$ 964,000
------------
--------------------------------------------------------------------------------
F-11
<PAGE>
GROEN BROTHERS AVIATION, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
5. Related
Party Notes
Payable
Related party notes payable is comprised of the
following:
Unsecured note payable to an entity which is
owned by some of the members of senior
management. The note bears interest at 12%
and is due on demand $ 180,000
Unsecured note payable to a shareholder with
interest at 18%. The note is due on demand 250,000
Unsecured note payable to a shareholder with
interest at 12%. The note is due on demand 20,000
-----------
$ 450,000
-----------
--------------------------------------------------------------------------------
F-12
<PAGE>
GROEN BROTHERS AVIATION, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
6. Long-Term Long-term debt is comprised of the following:
Debt
Unsecured notes payable to a local
governmental agency, including interest
at the prime rate plus 2% (9.5% at June 30,
2000). After principal amount is
paid, monthly installments of 3% of
monthly gross revenues are due until an
additional $150,000 is paid (see note 14).
At June 30, 2000, the notes are in default
and are due on demand. Subsequent to June
30, 2000, this obligation was satisfied
(see note 15). $ 150,000
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% (9.5% at June 30, 2000). 100,000
Unsecured note payable to a company with
interest at 15%, due on demand. 10,000
Capital lease obligations (see note 7) 1,063,000
-----------
1,323,000
Less current portion (590,000)
-----------
$ 733,000
-----------
--------------------------------------------------------------------------------
F-13
<PAGE>
GROEN BROTHERS AVIATION, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
6. Long-Term Future maturities of long-term debt are as follows:
Debt
Continued Years Ending June 30: Amount
--------------------- ------
2001 $ 590,000
2002 358,000
2003 247,000
2004 83,000
2005 45,000
-----------------
$ 1,323,000
-----------------
7. Capital The Company has entered into capital lease
Lease agreements with financial institutions for certain
Obligations property and equipment. The assets under lease are
secured by property and equipment and research and
development components. Assets held under capital
lease and included in property and equipment are as
follows:
Shop equipment and tools $ 266,000
Accumulated amortization (38,000)
-----------------
$ 228,000
-----------------
Future minimum lease payments are as follows:
Years Ending June 30: Amount
--------------------- ------
2001 $ 432,000
2002 421,000
2003 273,000
2004 93,000
2005 48,000
-----------------
Total minimum lease payments 1,267,000
Less amount representing
interest (204,000)
-----------------
Present value of minimum
lease payments $ 1,063,000
-----------------
--------------------------------------------------------------------------------
F-14
<PAGE>
GROEN BROTHERS AVIATION, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
7. Capital The Company has entered into an arrangement with a
Lease third party in which the person has the option to
Obligations make the payments on one of the capital leases on
Continued behalf of the Company in a dollar-for-dollar
exchange for stock valued at $.40 per share. At June
30, 2000, the number of shares under this option is
approximately 887,500 shares, none of which have
been exercised.
8. Income The benefit for income taxes differs from the amount
Taxes computed at the federal statutory rate as follows:
Years Ended June 30, Cumulative
-------------------------------
2000 1999 Amounts
----------------------------------------------
Income tax benefit at
federal statutory rate $ 2,990,000 $ 2,835,000 $ 8,903,000
Change in valuation
allowance (2,990,000) (2,835,000) (8,903,000)
----------------------------------------------
$ - $ - $ -
----------------------------------------------
Deferred tax assets (liabilities) are as follows:
Net operating loss carryforwards $ 8,903,000
Valuation allowance (8,903,000)
-------------
$ -
-------------
At June 30, 2000, the Company has net operating loss
carryforwards available to offset future taxable
income of approximately $26,185,000 which will begin
to expire in 2006. The utilization of the net
operating loss carryforwards is dependent upon the
tax laws in effect at the time the net operating
loss carryforwards can be utilized.
Due to uncertainties surrounding the utilization of
the net operating loss carryforwards, a valuation
allowance has been established to offset the
deferred income tax asset resulting from such net
operating loss carryforwards.
--------------------------------------------------------------------------------
F-15
<PAGE>
GROEN BROTHERS AVIATION, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
9. Related Included in accrued expenses is payroll payable to
Party officers/shareholders totaling $952,000 and accrued
Transactions interest of $122,000 related to the related party
notes payable (see note 5).
The Company has certain receivables and payables to
related parties (see notes 3 and 5).
10. Supplemental During the year ended June 30, 2000:
Cash Flow
Information o The Company issued 100,000 shares of common stock
in exchange for investment art valued at $70,000.
o The Company issued 40,110 shares of common stock
and exchanged investment art valued at $80,000 for
property and equipment of $96,000.
o The Company acquired property and equipment in
exchange for long-term debt of $152,000.
o The Company issued 18,300 shares of common stock
in exchange for property and equipment valued at
$18,000.
o The Company issued 1,393,893 shares of common
stock to retire long-term debt of $537,000 and
accounts payable of $147,000.
o The Company issued stock options in exchange for
property and equipment of $13,000.
o The Company recorded deposits of $295,000 in
exchange for the cancellation of stock options.
o The Company issued stock options in satisfaction
of accounts payable of $7,000.
o The Company issued 212,734 shares of common stock
in satisfaction of accrued expenses of $177,000.
o The Company recorded deposits in satisfaction of
long-term debt of $513,000.
--------------------------------------------------------------------------------
F-16
<PAGE>
GROEN BROTHERS AVIATION, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
10. Supplemental During the year ended June 30, 1999:
Cash Flow
Information o The Company issued common stock in exchange for
Continued 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
property and equipment of $25,000.
o The Company acquired property and equipment in
exchange for capital lease obligations of
$865,000.
o The Company issued common stock in exchange for
debt of $74,000.
Actual amounts of cash paid for:
Years Ended Cumulative
-----------------------------------
2000 1999 Amounts
-----------------------------------------------------
Interest $ 168,000 $ 19,000 $ 289,000
-----------------------------------------------------
Income taxes $ - $ - $ -
-----------------------------------------------------
11. Preferred The Company has authorized preferred stock having no
Stock par value. The rights, terms, and preferences are to
be set by the board of directors at such time as any
shares are issued. As of June 30, 2000, no preferred
stock had been issued.
--------------------------------------------------------------------------------
F-17
<PAGE>
GROEN BROTHERS AVIATION, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
12. Stock A summary of the stock options are as follows:
Options
and Stock-
Based
Compensation
Number Range of
of Options Exercise Prices
---------------------------------------
Outstanding at July 1, 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
Granted 1,128,176 .40 - 1.41
Exercised (184,236) .22 - .55
Expired (71,250) (.40)
---------------------------------------
Outstanding at June 30, 2000 14,699,721 $ .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 for
stock options granted to employees. Had compensation
cost for the Company's stock option plans been
determined based on the fair value at the grant date
consistent with the provisions of SFAS No. 123, the
Company's net loss and loss per share would have
been as indicated below:
Years Ended June 30, Cumulative
---------------------------------------------------
2000 1999 Amounts
---------------------------------------------------
Net loss - as reported $ (8,796,000) $ (8,339,000) $ (24,317,000)
Net loss - pro forma $ (8,910,000) $ (12,903,000) $ (29,731,000)
Loss per share -
as reported $ (.13) $ (.17) $ (.54)
Loss per share -
pro forma $ (.13) $ (.26) $ (.66)
---------------------------------------------------
--------------------------------------------------------------------------------
F-18
<PAGE>
GROEN BROTHERS AVIATION, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
12. Stock Options The fair value of each option granted is estimated
and Stock- on the date of grant using the Black-Scholes option
Based pricing model with the following assumptions:
Compensation
Continued
June 30,
-----------------------------------
2000 1999
-----------------------------------
Expected dividend yield $ - $ -
Expected stock price volatility 150 % 152 %
Risk-free interest rate 5.0 % 5.0 %
Expected life of options 3 - 5 years .5 - 5 years
-----------------------------------
The weighted average fair value of options granted
during 2000 and 1999 was $.87 and $.62,
respectively.
The following table summarizes information about
stock options outstanding at June 30, 2000:
Options Outstanding Options Exercisable
------------------------------------------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (Years) Price Exercisable Price
--------------------------------------------------------------------------------
$ .09 to .22 5,102,500 3.04 $ .09 5,102,500 $ .09
.25 to .50 4,280,714 2.70 .42 4,280,714 .42
1.00 to 2.00 5,316,507 2.75 1.21 5,316,507 1.21
--------------------------------------------------------------------------------
$ .09 to 2.00 14,699,721 2.84 $ .59 14,699,721 $ .59
--------------------------------------------------------------------------------
13. Fair Value of The Company's financial instruments consist of cash,
Financial receivables, payables, and notes payable. The
Instruments carrying amount of cash, receivables and payables
approximates fair value because of the short-term
nature of these items. The aggregate carrying amount
of the notes payable approximates fair value as the
individual borrowings bear interest at market
interest rates.
--------------------------------------------------------------------------------
F-19
<PAGE>
GROEN BROTHERS AVIATION, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
14. Commitments As part of the conditions in 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, 2000. Subsequent to
the year ended June 30, 2000, the Company satisfied
the royalty obligation (see note 15).
In addition, in order 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. No royalties have been earned or paid
as of June 30, 2000.
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
-------------------- -----------------
2001 $ 216,000
2002 125,000
-----------------
$ 341,000
-----------------
Rental expenses for noncancellable operating leases
were $209,000 and $119,000 for the years ended June
30, 2000 and 1999, respectively.
The Company has entered into employment agreements
with certain 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-20
<PAGE>
GROEN BROTHERS AVIATION, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
15. Subsequent On September 26, 2000, the Company satisfied
Events obligations to a government agency in exchange for
investment art. The obligations consisted of a note
payable of $150,000 (see note 6), related accrued
interest of $123,000 and a royalty obligation of
$150,000 (see note 14). The Company also satisfied
accrued liabilities of $73,000 in exchange for
investment art.
Also on September 26, 2000, the Company exchanged
investment art of $20,000 for 44,861 shares of the
Company's common stock.
--------------------------------------------------------------------------------
F-21
<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
--------------------------------------------------------------
14
<PAGE>
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 49 Director and President
H. Jay Groen 56 Director
James P. Mayfield 52 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.
These persons' respective appointments were adopted, ratified and approved by
the stockholders at a meeting for that purpose on May 20, 2000. With the
exception of compliance with the duties of a director as set forth in the
Articles of Incorporation or By-laws of the Registrant or in the provisions of
the Utah Business Corporation Act, there are no arrangements or understandings
pursuant to which any of the foregoing persons were selected to serve on the
Board of Directors of the Registrant. Each of the foregoing persons consented to
serve as a director of the Registrant prior to their designation and subsequent
election as such.
Family Relationships
H. Jay Groen and David L. Groen are brothers.
Background on Directors and Officers
David Groen is President & CEO, 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 more than 7,000 hours in rotor-wing and
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.
15
<PAGE>
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 Vice President, Chief Operating Officer
(COO), Chief of Flight Operations, and 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 1,800 pilots, whose distinguished membership
include Chuck Yeager, Deke Slayton, Scott Crossfield and Jimmy Doolittle II. Mr.
Mayfield has logged more than 14,900 total hours flight time that includes
extensive experience test flying a wide range of aircraft. A career U.S. Marine
Corps officer, Mr. Mayfield retired from the Marines in 1989 following nearly 25
years of distinguished service. 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
16
<PAGE>
purchased by 2003, and each holds options of 2,000,000 at $1.00 per share to be
purchased by 2003. 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. JoRene Bishop holds options of 10,000 shares at $.50 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,
2000, 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 9,942,184 13.72
2640 California Avenue
Salt Lake City, UT 84104
Jay Groen, Director 5,623,791 7.76
2640 California Avenue
Salt Lake City, UT 84104
James P. Mayfield, Vice President 70,760 0.01
2640 W. California Avenue
Salt Lake City, UT 84104
JoRene Bishop, Secretary 209,731 0.29
2640 W. California Avenue
Salt Lake City, UT 84104
All Officers and Directors 15,846,466 21.87
Lyle Campbell 4,425,660 6.11
c/o Chapman & Cuttler
111 W. Monroe Street
Chicago, IL 60603
17
<PAGE>
The above does not include options by David Groen, Jay Groen, Jim
Mayfield, and JoRene Bishop to purchase 4,500,000 shares, 4,500,000 shares,
1,025,000, and 10,000 shares respectively. If such shares were purchased, their
ownership would equal 17.51 percent, 12.27 percent, 1.33 percent, and 0.27
percent respectively.
Item 12. Certain Relationships and Related Transactions
--------------------------------------------------------
The Company owes $180,000, plus accrued interest, to a company owned by
Directors Jay and David Groen.
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, 2000. F-2
Consolidated statement of operations for
the two years ended June 30, 2000and 1999,
and cumulative amounts. F-3
Consolidated statement of stockholder's
equity (deficit) for the two years ended
June 30, 2000 and 1999, and cumulative amounts. F-4
Consolidated statement of cash flows for
the two years ended June 30, 2000 and 1999,
and cumulative amounts. F-7
Notes to consolidated financial statements. F-8
18
<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 5, 2000
------------------------- -------------------------
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 5, 2000
------------------------- ---------------------------
H. Jay Groen, Director
/s/David L. Groen Date: October 5, 2000
------------------------- ---------------------------
David L. Groen, Director
/s/James P. Mayfield Date: October 5, 2000
------------------------- ---------------------------
James P. Mayfield, Director
19
<PAGE>
