Groen Brothers Aviation, Inc. (NASDAQ: GNBA) Benchmark Research

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rs Aviation, Inc. (NASDAQ: GNBA) Benchmark Rese Vassalotti / Investrend Research / 30 November, 2Groen Brothers Aviation, Inc,

(NASDAQ: GNBA) tial Benchmark Research Report

Gary Vassalotti, November 30, 2006

▫ ▫ ▫ 04 Rating ▫ ▫ ▫ Price Target: $NA ▫ ▫ ▫
Groen Brothers Aviation produces unique aircraft that have goodpotential with today’s security and general aviation consumers.
ymbol (NASDAQ): GNBA Year Ending June

ecent Price: 0.15 Year E/S PER REVS PSR

vg. Daily Vol. (3-Mo.): 9,300 2005 06/30 (0.11) NM 0.02 21.5X

ndustry: Aerospace Products & Services 2006 06/30 (0.15) NM 0.01 7.03

2 Month Target Valuation: $ NA 2007E NA NA NA NA

arket Capitalization ($mil): 24.16 2008E NA NA NA NA

apitalization: 06/30/06 Estimated 2007- 2008 Annualized

hares O/S1: 151,024,224 Growth Rate: NA

ash & Equiv: (06/31/06) $1,304,000 Dividend: Nil

et Working Capital: 2 (59,974,000) Yield: Nil

ong-term Debt: 62,242,000 Insider Ownership: 1 12,620,676 40.67%

hareholders Equity
(67,201,000) Rating: Speculative Buy / 4
,783 shares of Series B preferred stock and 1.40 million shares of Series A Preferred stock. referred Series B redeemable January 2007.

SECTION OF THIS REPORT FOR IMPORTANT DISCLOSURES AND DISCLAIMERS

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tion, Inc came about as the result of a reverse acquisition of Sego ed 3/21/86), into a publicly traded shell company called New corporation on 9/18/90. The resulting corporation was then ers Aviation, Inc.

d David Groen, started Sego Tool, Inc. to develop and sell cost for the general aviation market. A prototype was developed and ng the attention of private investors, allowing the company to ssive prototypes.

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Groen Brothers Aviation, Inc. (NASDAQ: GNBA) Benchmark Research Report Gary Vassalotti / Investrend Research / 30 November, 2006

DEVELOPMENT OF THE COMPANY’S PRODUCTS

The second aircraft was called the Hawk 1, a single seat gyroplane flown in 1992. GNBA further refined the concept with the release of the Hawk 2, a two seat craft that incorporated a unique airfoil design. The airfoil provided smoother vertical take offs. With the success of the aircraft models to this point, GNBA began to look to up market potential in the commercial, government, and military applications. Development of a 4-seat version culminated with the Hawk 4; a four or five seat craft that could attain FAA certification once development is restarted. (Development was put on hold due to funding requirements). GNBA is focusing its marketing efforts of the Hawk 4 on the government markets where FAA certification (a lengthy and expensive proposition) is not required. The vehicle in its present configuration represents an affordable, flexible law enforcement and surveillance vehicle. While the Hawk 4 is currently targeted at a very specific market, GNBA refined the kit-built version of its aircraft (the SparrowHawk) that is sold through the American Autogyro subsidiary. Previous gyroplanes from other manufactures had some safety issues related to the physics of rotor wing aircraft; they had a high thrust line could lead to accidents. GNBA products have a centerline thrust that corrects this issue. American Auto gyro developed a Stability Augmentation Kit for the RAF2000 (a product that is unrelated to Groen Brothers or American Autogyro) that alleviated the high thrust problem. The kit dramatically improved in-flight stability and safety for one of the most popular kit gyroplanes on the market. The augmented RAF2000 became the prototype of the SparrowHawk Gyroplanes. ‘Safety Sells’ in the aviation market, and GNBA has benefited from this kit (winning safety awards) and now has over 30 dealerships throughout the world that sell and / or assemble the SparrowHawk. The award winning SparrowHawk was further improved with a lighter, stronger cabin, more powerful alternator, rudder system, redesigned landing gear, and improved fuel delivery system and released as the SparrowHawk II in late 2005. The SparrowHawk II can be purchased in the APV configuration; ie, an Airborne Patrol Vehicle. The APV version provides law enforcement agencies a very cost effective method of surveillance from a craft that can achieve a very slow forward flight (almost a hover) with out the complexities and cost of the traditional helicopter.

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THE GENERAL AVIATION MARKETPLACE A definition of what exactly constitutes General Aviation is in order: First, general aviation is NOT military or scheduled commercial aviation. It is all other uses of aviation, such as private and sport flying, aerial photography, surveying, crop dusting, private business travel, police (including special event security), and fire fighting. Several types of craft fall into the General Aviation uses category from the small ultra light kit flyers, helicopters, restored war planes, to jet powered business jets. There are many factors that contribute to fluctuations in this market. I believe that fear from security in the commercial air transport sector could lead to an increase in the number of private pilots. This should lead to an increase in aircraft sales. GNBA’s Hawk 4 aircraft, an affordable gyroplane should benefit from this trend. The following chart, derived from FAA data, shows the growth rate of general aviation aircraft registrations that are expected until 2017. It is interesting to note that the FAA is expecting that Turbine Powered aircraft, including rotorcraft, to grow substantially faster than piston powered craft. GNBA’s Hawk 4 would fit into the Turbine Powered category.

ACTIVE GENERAL AVIATION AIRCRAFT CALENDAR YEARS 2005-2017

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1.9

1.4

4

3.43.7

4.1

1.1

0

0.5

1

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2

2.5

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3.5

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4.5

2005 2006 2007 2007-17

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Total Turbine

Source: FAA Aerospace Forecasts Fiscal Years 2006-2017

(http://www.faa.gov/data_statistics/aviation/aerospace_forecasts/2006-2017/media/FAA%20Aerospace%20Forecasts%202006-

17.pdf)

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Below is a table that shows the growth in the number and type of aircraft in the General Aviation category. Many of GNBA’s products fit into the Experimental category (such as the kit built SparrowHawk), which shows about 20,000 aircraft in 2000, up from 15,000 in use in 1995.

GENERAL AVIATION ACTIVE AIRCRAFT BY AIRCRAFT TYPE

(In Thousands) AIRCRAFT TYPE 2000 1999 1998 1997 1996 1/ 1995 1/1991 2/Fixed Wing - Total 183.3 184.7 175.2 166.8 163.7 162.3 182.6Piston -- Total 170.5 171.9 163.0 156.1 153.6 152.8 173.5 One Engine 149.4 150.9 144.2 140.0 137.4 137.0 152.8 Two Engine 21 20.9 18.7 15.9 16.1 15.7 20.6 Other Piston 0.1 0.1 0.1 0.1 0.1 0.0 0.1Turboprop -- Total 5.8 5.7 6.2 5.6 5.7 5.0 4.9 Single Engine 0.7 1.0 1.0 0.7 0.7 0.7 N/A Two Engine 5.0 4.6 5.1 4.9 4.9 4.3 4.4 Other Turboprop 0.0 0.0 0.1 0.0 0.1 0.0 0.5Turbojet -- Total 7.0 7.1 6.1 5.2 4.4 4.6 4.1 Two Engine 6.2 6.4 5.5 4.6 4.1 4.1 3.9 Other Turbojet 0.8 0.7 0.6 0.5 0.3 0.5 0.3Rotorcraft -- Total 7.2 7.4 7.4 6.8 6.6 5.8 6.2 Piston 2.7 2.6 2.5 2.3 2.5 1.9 2.4 Turbine 4.5 4.9 4.9 4.5 4.1 4.0 3.8 Single Engine 3.8 4.0 4.0 3.8 3.4 3.2 N/A Multi-engine 0.7 0.8 0.8 0.8 0.6 0.7 N/A Other -- Total 6.7 6.8 5.6 4.1 4.2 4.7 8.1Experimental -- Total 20.4 20.5 16.5 14.7 16.6 15.2 N/A Total All Aircraft 217.5 219.4 204.7 192.4 191.1 188.1 196.9 SOURCE: 1995 - 2000 General Aviation Activity and Avionics Surveys. 1/ Estimates have been revised to reflect changes in edit and estimation procedures, and may not be comparable to estimates prior to 1995.

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RISK FACTORS Liability issues have historically hurt the small aircraft industry, especially in the 80’s as lawyers all but shut down the industry. This is a significant risk factor that should be considered when evaluating any company in this industry. Beginning in 1978 and lasting until the mid 1990’s, there was a pronounced loss of 100,000 jobs in the industry. Aircraft production also greatly suffered and annual production dropped from 18,000 to just 928 in 1994. Manufacturers estimated that lawsuits had added 30% to the cost of production of an already premium priced product. The General Aviation Revitalization Act of 1994 began to alleviate the industry’s problems by enacting an 18-year time limit to liability issues related to aircraft models. This act covers the entire general aviation industry, including the kit built segment. It is worthy to note however, that in the few court cases that have gone to trial over fatalities in the kit built segment of this industry, the court has sided with the kit manufacturer. Class action suites have been not been filed, mostly due (an opinion of an industry attorney) to the fact that the kit manufacturers do not carry blanket liability insurance. Of course, another explanation could also be that the buyer becomes the ‘manufacturer’ and the liability would rest with the buyer. GNBA specific risk is inherent in its situation with its current notes payable entries on the balance sheet. The company is in technical default on $586,000 of notes payable. It should also be noted, however, that the company has been able to engage the note holders in negotiations to restructure or at least prevent a worsening situation.

DEALER NETWORK GNBA has about 33 dealers worldwide, with 25 in the US and 8 international dealers. The dealers are integral to the sales process of the SparrowHawk and participate in fly-ins where the aircraft is demonstrated to the buying public. I have listed the dealers below, taken from Groen Brothers’ website. The list contains some links to the dealer’s sites, and I encourage readers to explore the links and view the videos and pictures of the SparrowHawk in operation. The domestic dealers are:

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US Dealers

State Dealership

Arizona American Autogyro of Phoenix, AZ Lonny McClung 602-799-9418 Contact by Email I'm Fly'N MFG., LLC American Autogyro of Casa Grande Richard Ankrom 520-568-gyro (520-568-4976) [email protected]

Arkansas Ron's Gyros Ron Menzie 501-766-6456 Contact by Email www.ronsgyros.com

California American Autogyro of Long Beach, CA Frank Keiser 310-569-0650 Contact by Email

American Autogyro of San Diego, CA Tom Korrison Contact by Email 800-420-9586 Ramona, CA 760-789-3590

Mauricio de la Lama Se Habla Español (858) 342-2702 - Mobile (858) 793-4599 - Office (858) 793-4688 - FAX Southern California - Mexico Contact by Email

American Autogyro of San Jose, CA Lionel Drage Contact by Email 888-567-GYRO (4976)

Colorado American Autogyro of Denver, CO Contact by Email John Revenboer 720-989-3468

Florida American Autogyro of Opa-Locka, FL

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http://www.americanautogyro.com/Dealer/DealerInformation/PhoenixDealershipInfo.htm

http://www.americanautogyro.com/Dealer/[email protected]

http://www.imflyn.com/

http://www.americanautogyro.com/Dealer/DealerInformation/CasaGrandeDealershipInfo.htm

http://www.americanautogyro.com/Dealer/DealerInformation/CasaGrandeDealershipInfo.htm

mailto:[email protected]

http://www.americanautogyro.com/Dealer/DealerInformation/SearcyArkansasInfo.htm


http://www.ronsgyros.com/

http://www.americanautogyro.com/Dealer/DealerInformation/LongBeachCalifornia.htm


http://www.americanautogyro.com/Dealer/DealerInformation/SanDiegoDealershipInfo.htm



http://www.americanautogyro.com/Dealer/DealerInformation/SanJoseDealershipInfo.htm


http://www.americanautogyro.com/Dealer/DealerInformation/DenverColoradoDealershipInfo.htm


http://www.americanautogyro.com/Dealer/DealerInformation/Opa-LockaFLDealershipInfo.htm


Dan Palivoda 786-281-9858 Contact by Email

Georgia American Autogyro of Covington, GA Atlanta, GA Randy Stiles (770) 788-1449 Contact by Email

Illinois GBA Gyroplanes of Chicago Chuck Roberg, CFI Main - 630-983-7625 Cell - 630-207-2503 Contact by Email American Autogyro of Savanna, IL Todd England 815-273-3737 Contact by email

Maine American Autogyro of Maine Steve Waterman 207-594-4000 Contact by Email

Mississippi Wade and Son, Inc Jim Wade 662-873-2163 662-873-7437 [email protected]

Montana American Autogyro of Montana Shawn Johnson 406-591-1600 Contact by Email

New Hampshire New Hampshire Gyroplanes, LLC John Scibelli 603-448-2505 Contact by Email

Oklahoma American Autogyro of Tulsa, OK Scott Dawson 918-760-3896 Contact by Email

Ohio American Autogyro of Athens, OH Jeff Cole 740-541-0814 Contact by Email

Tennessee American Autogyro of Nashville, TN

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http://www.americanautogyro.com/Dealer/DealerInformation/AtlantaGeorgiainfo.htm


http://www.americanautogyro.com/Dealer/DealerInformation/Chicago_Dealership_Lansing_IL.htm

http://www.americanautogyro.com/Dealer/DealerInformation/SavannaDepotDealershipInfo.htm


http://americanautogyroofmaine.com/





mailto:John Scibelli %[email protected]%3e

http://www.americanautogyro.com/Dealer/DealerInformation/TulsaDealerInfo.htm



http://www.americanautogyro.com/Dealer/DealerInformation/NashvilleDealershipInfo.htm


Moose Moore Contact by Email http://www.aagyro.com/ 615-300-2763-Mobile

Texas American Autogyro of Grapevine, TX Bill Bracken Contact by Email 817-442-8685 817-925-4699

American Autogyro of San Antonio, TX Doug Rex Contact by Email 210-545-5681 Garry West - San Antonio Contact by Email 210-545-5681 West Texas Custom Gyros Harvey Cottrell Brownfield, TX 806-891-9620 Contact by Email

Utah AirGyro Aviation http://www.lettherebeflight.com/ Spanish Fork, Utah Nathan Oldham 801-794-3434 Contact by Email

AirGyro Aviation http://www.lettherebeflight.com/ Salt Lake City, Utah Jeff Williams 801-380-7028 Contact by Email

Virginia American Autogyro of Harrisonburg, VA Walter Grooms 540-434-3493 Contact by Email

Washington American Autogyro of Seattle, WA Randy Coplen Contact by Email 206-947-4900

Wyoming American Autogyro of Billings, MT. Shawn Johnson 406-591-1600

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http://www.aagyro.com/


http://www.americanautogyro.com/Dealer/DealerInformation/SanAntonioDealershipInfo.htm




http://www.americanautogyro.com/Dealer/DealerInformation/AirGyroAviation_SpanishFork.htm

http://www.lettherebeflight.com/


http://www.americanautogyro.com/Dealer/DealerInformation/AirGyroAviation_SLC.htm

http://www.lettherebeflight.com/



http://www.americanautogyro.com/Dealer/DealerInformation/SeattleDealershipInfo.htm



The domestic dealer network is rounded out with 8 international dealers. The dealers are listed below from the GNBA website, and some contain links to allow readers to explore their sites and locations.

International Dealers

Country Dealership

Australia American Autogyro of Sydney, Australia Greg Williams +61 2 44 232556 0400 119480 (mobile) Contact by Email

Bahamas American Autogyro of the Bahamas Bob Woodley 303-660-6442

Canada American Autogyro of British Columbia, Canada Emil Gulbranson Contact by Email 250-567-0611

Costa Rica American Autogyro of Costa Rica Dennis Lacombe - Se Habla Español Contact by Email 011-506-203-3943

Ecuador American Autogyro of Ecuador Domingo Cordovez, P. Se Habla Español Contact by Email 5932-227-5277 / 227-4086

Philippines Gyroplane Rotorcraft, Inc. Michael D. Cowen 0 917-5511951 [email protected]

South Africa American Autogyro of South Africa Hannes Scheepers Johannesburg, South Africa Phone 27 082 567 9159 Contact by email

International Representatives Country Representative

India Poonam Asthana Tel 9122 2670 3046 India email

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http://www.americanautogyro.com/Dealer/DealerInformation/BahamasDealershipInfo.htm

http://www.americanautogyro.com/Dealer/DealerInformation/BritishColumbiaDealershipInfo.htm

http://www.americanautogyro.com/Dealer/DealerInformation/BritishColumbiaDealershipInfo.htm


http://www.americanautogyro.com/Dealer/DealerInformation/CostaRicaDealershipInfo.htm

http://www.americanautogyro.com/Dealer/DealerInformation/CostaRicaDealershipInfo.htm


http://www.americanautogyro.com/Dealer/DealerInformation/EcuadorDealerInformation.htm






Korea Kim Inkil

Rimpact Associates, Inc. 82-2-555-5571 Tel 82-2-555-5230 Fax email

In addition to the 8 international dealers, GNBA has appointed sales representatives in Korea and India to represent the SparrowHawk to both government and civil clients. International sales are currently about 5% of sales. However, there should be great potential for the international segment, especially in Australia. The Australian population resides in six major urban centers, and air travel is the preferred method of travel between them. The Australia Bureau of Industry Economics projected a 10% growth of Sales of general aviation aircraft. GNBA has apparently recognized the market potential of the Asian countries and has hired Jason Chen as Vice President of Business Development in Asia. Meetings have taken place with Mr. Chen and high-ranking officials of the Chinese government. Mr. Chen has also led a delegation to the Beijing air show. Groen Brothers believes that China represents good potential for its entire product line, from the SparrowHawk, the Hawk 4, and also aircraft models still in development.

WHAT IS A GYROPLANE, YOU ASK? The gyroplane and the helicopter are rotor wing aircraft and derive lift from the spinning of their rotor system. In a gyroplane, an engine driven propeller provides thrust. A gyroplane’s simple, freely turning rotor system is tilted back as the gyroplane moves forward. Oncoming airflow through the rotor causes it to spin, much like wind through a windmill, producing lift. This is called autorotation. The gyroplane cannot stall like a fixed wing aircraft, flies safely at low altitudes and low speeds, but cannot hover. The helicopter’s complex, powered rotor system produces both lift and thrust and is tilted forward. It can hover, but a powered rotor requires a heavy transmission, and a

tail rotor to counteract the torque imposed on the aircraft. In the event of a power failure, a helicopter must have adequate forward speed and/or altitude to allow transition from powered flight into autorotation. The pilot must react immediately to complete this transition safely. If the power fails in a gyroplane, there is no transition as the gyroplane

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flies in constant autorotation. The pilot can easily guide the gyroplane to a safe landing with little or no ground roll, typically within the length of the rotor blades. ‘Kit’ Aircraft – The SparrowHawk The FAA created the 51% rule in 1952 that gave rise to the homebuilt, general aviation aircraft industry. This rule allows an individual to purchase an aircraft in pieces, assemble it themselves, and obtain an experimental airworthiness certificate for custom built aircraft. Last year there more ‘experimental’ aircraft registered in the US than manufactured aircraft. The term ‘experimental’ is a bit misleading. The FAA has used this term to describe kit aircraft for a long time, even though kits are not truly experimental, but tested models that usually have many units already in use. A manufactured aircraft must meet the requirements contained in FAR Part 23, a very restrictive regulation that contains rules and regulations that set limits for design, weight, and speed. However, amateur built aircraft are only required to be 51% built by the buyer.

The GNBA SparrowHawk fits the category of a ‘kit’ aircraft. It can be purchased through a network of over 30 dealers that can assist the owner in assembly and product support. The kit, and its price is detailed below (as shown on the American Autogyro website, http://www.americanautogyro.com/Pricing/Basic%20SparrowHawk%20Kit.htm):

Standard Equipment – Included with kit Item

Price

All Airframe Components Included Upholstered Seats (Choose Color - Black, White, Red, Royal Blue) Included Dual Control Assembly Included Engine: Subaru 160 hp EJ25 (Used) Included Electrical Switches and Breakers Included Alternator (80 amp, rebuilt) Included Pre-Rotator Included Molded Fiberglass Cabin Included Integrated Electronic Flight Information System Included Air Speed Indicator Included Altimeter Included Vertical Speed Indicator Included

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Fuel Gauge & Sensor Included Master Warning System that monitors flight and engine instruments Included Oil Pressure Included Engine Tachometer Included Volt Meter Included Water Temperature Included Pitot Tube Included Propeller: 3 Blade Warp Drive Included Rotor Blades: 30’ diameter Included Rotor Brake Assembly Included Rotor Tachometer Included Tail, Factory Pre-Built (in 3 pieces) Included Throttle Lock Assembly Included Price $39,500 Crating - 4 containers $480 Total $39,980 This is a pretty extensive list of parts and supplies that are included in the kit. The closest comparable craft seems to be the Rotary-Air Force RAF 2000 GTX FI 2.5. This is a logical comparable, since American Autogyro began by selling kits to augment the RAF2000’s handling and stability. The cost on the RAF 2000 is around $31,000, although it is difficult to determine if they have the same type or amount of basic equipment included at that price (does not show shipping). It can be viewed at: http://www.rotaryairforce.com/raf2000/specs.html American Autogyro, the unit that sells the SparrowHawk, has been delivering aircraft since the third quarter of Fiscal 2004, and recording revenues from the sales in the fourth quarter of Fiscal 2005. The long lead-time between the initial sale and the recording of the sale on the income statement is the result of accounting principals. These accounting principals dictate that the revenue not be recognized until the final parts are shipped. A total of 87 complete kits have been ordered, (period ending 6/30/06), with ‘final’ deliveries totaling 57, and an additional 29 orders for the stabilization kit were received and delivered. The SparrowHawk also comes in an APV (Air Patrol Vehicle) configuration for law enforcement agencies. Since government agencies are permitted to fly constructed, non-certified (i.e., FAA Certification) aircraft under the Public Use Rules (Public Law 103-411), the APV version can be purchased fully assembled.

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GNBA’S DEVELOPMENT PROJECTS I have briefly touched upon one of GNBA’s development products, the Hawk 4 Homeland Defender. Although the Hawk 4 development has been put on hold, as of 6/30/06 company has deposits totaling $2,145,000 for pre-orders. With this amount of committed money in mind, I would like to go a bit more into detail about the aircraft. The Hawk 4 is a Gyroplane, similar in function to the SparrowHawk.

The Hawk 4 looks like a helicopter, but is very different. As these diagrams illustrate, the helicopter has a complex power transmission system that moves power from the turbine engine to two rotors providing power and stability. The Hawk 4’s power transmission configuration is much simpler; power is only supplied to the attached propeller during flight. A smaller power transmission system applies power to the rotor to pre-rotate it to bring it up to speed prior to liftoff. A helicopters complex design requires the machine to undergo more hours in maintenance than hours in flight time. However, the Hawk 4 was available to fly 24-7, completing 67 missions with over 75 hours of maintenance free flight time while used by the Utah Olympic Public Safety Command for during the 2002 Winter Olympics. GNBA participated in a Homeland Security Expo co-sponsored by Senator Kerry during 2002. Kerry, a sailplane pilot, became very interested in both the SparrowHawk APV and the Hawk 4. The Hawk 4’s versatility and economical operation has also caught the attention of many law enforcement agencies across the nation; over 60 agencies have written letters indicating a commitment to develop

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airborne enforcement programs around the Homeland Defender. With the interest in the Hawk 4, and Kerry’s support, there is some hope that federal Homeland Security Agencies may fund the purchase of the vehicle for use by local enforcement authorities.

DARPA PROTOTYPE The proof of concept contract calls for the development of a gyrodyne capable of

doubling the flight speed and range of conventional helicopters. A gyrodyne is a gyroplane with tip jets. GNBA’s craft will have a cruise speed of 400 mph, and an un-refueled range of 1,152 miles, with a payload of 1,000 lbs. In Phase One of the potential multi-year $40 million Heliplane

program, GBA has received a $6.4 million contract for development of the preliminary design and perform key technology demonstrations. GBA received $1.15 million from DARPA in respect of its successfully meeting its first and second milestone objectives. (NOTE: Payment for the third milestone has been invoiced to DARPA in the amount if $1.4mm, as reported in GNBA’s 10q filing that was released just this report was being finished) Further Phase One payments are conditional on meeting further milestone objectives The Heliplane proof of concept aircraft will give GNBA the opportunity to develop its gyrodyne technology for a potentially wide array of military and civil applications, including Homeland Security missions, not easily served by either helicopters or fixed wing airplanes. As one example, the DARPA envisioned craft would be a capable rescue vehicle.

COMMERCIAL / OTHER VEHICLES GNBA has the commercial rights to the Heliplane project mentioned above and has explored commercial transportation via gyrodyne vehicles. One previous firm that had explored this possibility was Fairey with their rotodyne prototype. The Fairey rotodyne was a concept vehicle that was flown in England in 1957. Its rotor was powered at take off and landing with Tip Jets. This allowed the craft to achieve vertical take offs and landings, and to hover. The gyrodyne accomplishes these feats without the heavy transmission of a helicopter. The Fairey rotodyne incorporated short wings in conjunction with the rotor permitting it to achieve a top cruising speed of 190 miles per hour. A gyrodyne operates in cruise as a

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gyroplane since the tip jets are turned off after the plane achieves a forward speed of 60 mph. During its test program it carried over 1000 passengers, from airline chiefs to politicians. It also garnered many commitment letters for orders from both the military and civilian airlines, so why did the project die then? It was not due to a failure in the concept, but rather a political decision to decrease the number of aircraft manufacturers in business at the time in England. The British government decided to cut funding projects, and the military cancelled its orders. The company was not able to complete its development to produce a version for the airline orders. The use of wings along with a rotor to produce a heavy lift vehicle became a concept project for GNBA when it competed to enter into a development contract. The artist rendition is on the right, but Groen Brothers did build a test vehicle to prove the concept, a modified Cessena Skymaster.

THE COMPETITIVE LANDSCAPE Although there are many competitors in the kit-built, gyroplane market, their product line generally includes only the small kit built craft and not more advanced projects such as the Hawk 4, or the DARPA prototype projects. I have listed below a very small sample of some of the closest competitors that I found during an Internet search: 1. Magni Gyro (http://www.magnigyro.com/USA/usa.htm)

Magni Gyro, based in Italy, is a respected competitor to GNBA. Its products seem price competitive, but with the weaker US dollar have become a bit higher priced. They have a two-seat version, but it may not be as configurable as the SparrowHawk for different tasks.

2. Rotary Air Force (http://www.rotaryairforce.com/) RAF appears to have the closest, most competitive vehicle, as compared to the SparrowHawk. And for good reason, GNBA developed a strong selling stabilization kit for the RAF 2000, then went on to develop the SparrowHawk.

3. Air Command International (http://www.aircommand.com/)

AIC has a variety of models available, from very simple looking, low cost, single place gyrocopters to a tandem style, 2-seat gyrocopter. Their company

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does not have as many dealers as GNBA, but its product seems similar to the SparrowHawk.

FINANCIAL OVERVIEW

Revenues Significant increases in revenue were realized in FY 2006 with the proceeds received in relation to government contracting ($2,350000). Below is a table representing operating revenues: Year Ended (6/30) 2006 2005 Government Contracts $2,350,000 $ 0 SparrowHawk Kits & Parts* 667,000 802,000 Flight Training 62,000 62,000 Other Operating 36,000 0 -------------------------- -------------------------- Total Revenues $3,115,000 $ 864,000 =============== =============== * The ‘drop’ in revenues on SparrowHawk sales is partly due to changeover from the SparrowHawk to the SparrowHawk II kit as delays were required to complete the modification designs. Not shown on the revenues figures is $630,000 in deferred revenues from kits that have been ordered but have not been completely delivered.

Balance Sheet

Groen Brothers Aviation, Inc. Consolidated Balance Sheet

Assets 30-Jun-06 -------------------------- -------------------------- Current Assets Cash $ 4,000 Accounts Receivable 1,216,000 Related Party Accounts & Notes Receivable 84,000 Prepaid Expenses 2,000 Inventories 449,000 -------------------------- Total Current Assets 1,755,000 Property Plant & Equipment, Net 513,000

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-------------------------- Total Assets $ 2,268,000 Liabilities and Stockholders’ Equity ---------------------------------------------------- Current Liabilities Accounts Payable 1,992,000 Accrued Expenses 5,148,000 Stock Deposits 30,000 Deferred Revenue 630,000 Notes Payable 689,000 Related Party Notes Payable 7,532,000 Series B 15% Cumulative Redeemable non-voting Preferred 40,783,000 Liability to Issue additional shares of Series B 15% Pref 5,438,000 -------------------------- Total Current Liabilities 62,242,000 Long-Term Liabilities Accrued Expenses 4,021,000 Deferred Revenue 25,000 Long-Term Debt 105,000 Related Party Long-Term Debt 931,000 Dealer Deposits 2,145,000 -------------------------- Total Long-Term Liabilities 7,227,000 Total Liabilities 69,469,000 Stockholders’ Deficit Series A Convertible Preferred Stock 70,000 Common Stock 500,000,000 Authorized, 149,358,709 issued 29,236,000 Accumulated Deficit (96,507,000) -------------------------- Total Stockholders’ Deficit (67,201,000) Total Liabilities and Stockholders’ Deficit $ 2,268,000

The balance sheet does show a serious deficiency of working capital, however, GNBA is required to include its preferred shares as current liabilities because they mature

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1/1/07, which impacts the working capital numbers. GNBA’s 10k addresses the preferred share situation:

Included in current liabilities and the working capital deficiency at June 30, 2006 is a total of $46,221,000 in Series B Preferred Stock obligations that are payable on January 1, 2007, the current maturity date. The projected total Series B Preferred Stock obligation at January 1, 2007, including a $10.7 million obligation related to new shares of Series B Preferred Stock, is approximately $54.6 million. In order to repay this obligation in full or in part when due, the Company will be required to raise significant capital from other sources. Alternatively, the Company will be required to negotiate an extension of the Series B Preferred Stock maturity date, as it has accomplished in the past. There is no assurance that the Company will be successful in these endeavors.

Operations Statement

Groen Brothers Aviation, Inc Consolidated Statements of Operations

Years Ended June 30 2006 2005 Revenues $ 3,115,000 $ 864,000 Costs & Expenses Cost of Sales 3,358,000 1,237,000 Research & Development 2,534,000 1,874,000 General & Administrative Expenses 1,837,000 1,923,000 Total Costs & Expenses 7,729,000 5,034,000 Loss from Operations (4,614,000) (4,170,000) Other Income (Expense) Related Party interest Income 6,000 8,000 Interest and Other Income 6,000 25,000 Gain on extinguishment of debt 166,000 - Interest Expense (1,509,000) (1,214,000) Series B Pref Stock Expense (14,136,000) (8,003,000) Total Other income (expense) (15,467,000) (9,184,000)

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Loss before income taxes (20,081,000) (13,354,000) Net Loss (20,081,000) (13,354,000) Net loss per share - basic & diluted $ (0.15) $ (0.11) Wght. Avg. Common Outstanding 136,904,000 116,597,000 Revenues reflect a strong increase, due mainly to the DARPA contract. This contract should continue to add to revenues for the life of the project.

Groen Brothers Aviation, Inc. Consolidated Statement of Cash Flows

Years Ended June 30 2006 2005 Cash Flow from Operating Activities Net Loss $ (20,081,000) $(13,354,000) Adjustments to Reconcile Net Loss to Net Cash used in operating activities Depreciation and Amortization 160,000 117,000 Common Stock Issued for Interest Expense 190,000 13,000 Common Stock Issued for Services 71,000 32,000 Common Stock Issued for 401k Expense 99,000 88,000 Stock Options Issued for Interest Expense 56,000 73,000 Stock Options Issued for Services 38,000 - Interest Expense Accrued on Series B 15% Pref 14,136,000 8,003,000 Interest Expense on Put Option Liability 45,000 67,000 Interest Expense added to debt principal 23,000 24,000.00 Other Expenses added to debt principal 4,000 - Interest income added to related party notes receivable (6,000.00) (9,000.00) Gain on Extinguishment of Debt (166,000.00) - (Increase) Decrease in: Accounts and Notes Receivable (1,187,000) (32,000) Prepaid Expenses 2,000 - Inventories (54,000) 93,000 Increase (Decrease) in: Accounts payable 1,202,000 158,000 Accrued Expenses 1,737,000 1,386,000 Deferred Revenue 80,000 (24,000) Net cash used in Operating Activities $ (3,651,000.00) $ (3,365,000.00) Cash Flows from Investing Activities

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Purchase of property plant and equip (187,000) (95,000) Issuance of Related party notes receivable (29,000) - Payment of Related party notes receivable 5,000 89,000 Net Cash used in Investing Activities (211,000) (6,000) Cash Flows from Financing Activities Proceeds from Issuance of Related party debt 2,012,000 1,126,000 Repayment of third party debt (417,000) (193,000) Repayment of Debt (53,000) (14,000) Proceeds from Issuance of Common stock 2,280,000 2,515,000 Deposits received for purchase of Common 30,000 - Payment of Finders compensation on issuance of Common Stock (56,000) (20,000) Net cash provided by financing activities 3,796,000 3,414,000 Net Increase (decrease) in cash (66,000) 43,000 Cash at Beginning of Year 70,000 27,000 Cash, end of year $ 4,000 $ 70,000 Reviewing the cash flow statement reveals that GNBA is dependent on the issuance of debt and stock to over come cash flow shortfalls. These financing activities provided $3.8mm in cash in 2006, up from $3.4mm in 2005. GNBA will be dependent on this source of cash for at least the next few years, if not longer.

MANAGEMENT

GNBA’s management has good experience in the Aviation field, and in particular to the industries its’ aircraft are entering. Below is a short review of select management bio’s. More management information is available on the corporate web site at: http://www.groenbros.com/management2.php

David Groen, President & CEO As a founder of Groen Brothers Aviation, David Groen has performed in an executive management role for twenty years, nearly a decade and a half of which as its President & CEO. David and his brother Jay grew the company from just the two of them in 1986 to more than

130 people by 2001, all the while developing and re-discovering the science of autorotative flight.

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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 over 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 sorties. He is qualified as a pilot in most American and French helicopters, and has attended Aerospatiale factory schools.

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, wildlife management, predator control, heard management, back country tour guides, heli-skiing, forest fire fighting, long line seismic oil exploration, and wildcat on shore and off shore oil drilling operations.

These years of commercial flying, added to his tenure serving in management positions within the rotor-wing industry, gave Mr. Groen a wealth of management and leadership experience in a variety of related fields. David Groen is co-author, along with his brother Jay, of a best selling novel entitled Huey.

Robin H.H. Wilson, Executive Vice President and Head of Business Development As Head of Business Development, Robin Wilson plays a major role in introducing the aviation industry to Groen Brothers Aviation's new products, as the company expands its product line

beyond the Hawk 4 Gyroplane. His Executive VP role allows Mr. Wilson to impart to the company the benefits of his leadership and management wisdom gained during 40 years of executive management experience in the transportation industry.

Mr. Wilson brings to Groen Brothers an exceptional wealth of aviation industry experience. Among his leadership positions, Mr. Wilson served for 17 years at Trans World Airways (TWA) ending his first career there as Senior Vice President Chief Operating Officer (COO), responsible for managing an annual budget of $2 billion; President, Chief Operating Officer and Board member of Western Airlines, Inc.; President, CEO and director of Burlington Air Express; and Chief Technical Officer of Guinness Peak Aviation (GPA) then the world's largest aircraft leasing company. Immediately following his leaving TWA he was hired as the President of the Long Island Railroad where his positive impact on the operation of that railroad earned him an induction into the New York Hall of Fame.

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Following TWA entering Chapter 11 Bankruptcy in 1992, he was asked to return to the airline to serve as Co-chief Executive. After TWA's emergence from Chapter 11, he was appointed Vice Chairman with responsibility for the principal operating functions of the airline, resigning that position after the appointment of a new CEO. Most recently, he was partner and board member of SH&E, the international aviation consultants.

A native of Dublin, Ireland, Mr. Wilson received a Bachelor of Arts degree with honors in Mechanical Sciences from Cambridge University in 1958 and later a Master of Business Administration degree with honors from Harvard University. He also has an honorary Doctor of Laws from Adelphi University, New York.

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J J (Jaap) Van Der Westhuizen, Vice President Chief Technical Officer Mr. Van Der Westhuizen heads GBA's technology development efforts as the Vice President Chief Technical Officer (CTO). He also has leadership responsibility for GBA's engineering teams, and

management of the FAA Type Certification program for the Hawk 4 Gyroplane.

As the CTO at GBA, Mr. Van Der Westhuizen has oversight for the company's aircraft development programs including the Hawk series design effort. His superior engineering management skills has brought disciplined "out-of-the- box" thinking to the company, adding significantly to developing its understanding of autorotative flight.

His considerable experience in management covers functions such as manufacturing, program and project management, manufacturing engineering, marketing, sales, logistics, SAP and MIS. His career covers a long period in the aviation manufacturing industry where he held several important leadership positions at Denel Aviation of Johannesburg, South Africa. At Denel, previously called Simera and Atlas Aircraft Corporation, he was involved in the re- engineering of the organization resulting in such significant improvements that Denel Aviation won the exclusive rights to supply the RB 535 gearbox to Rolls Royce Aviation.

Al W. Waddill, Vice President of Sales Mr. Waddill has a strong background in sales, having spent his entire career in sales or sales management. This, combined with a lifelong interest in aviation, makes Mr. Waddill perfectly suited for the position of GBA Vice President of Sales. A licensed pilot since his seventeenth birthday, he was an active member of the United States Hang Gliding Association (USHGA) during its first

ten years. He opened and operated two USHGA flight parks, taught hang gliding and organized national flying competitions. For six years, Mr. Waddill published the premier magazine for the cellular telephone industry and sponsored national conferences annually. He was responsible for the national sales effort for the magazine's advertisers and distribution, as well as the conference sponsors and attendees. Mr. Waddill earned a Bachelor of Science degree in Physics from the University of Houston. He is a licensed stockbroker, formerly with Dean Witter.

Jason Chen, Vice President of Business Development for Asia A graduate of Harvard Law School (J.D. 1993) and Wharton

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Business School (University of Pennsylvania, B.S. in Finance and B.S. in Computer Science, 1989), Mr. Chen has devoted much of his career to the nonprofit and financial consulting fields, more recently taking executive positions in innovative corporations. On the financial side, Mr. Chen was with the Mergers & Acquisitions Department at Morgan Stanley in New York and later at a healthcare acquisition fund in Greenwich, CT. From 1994 to 1997, he served as the Vice President of Da-Yuan Consulting, Inc. in Taiwan and managed a wide range of financial and managerial consulting projects in China. On the nonprofit side, Mr. Chen was the Executive Director of Hwa-Yue Foundation in Taiwan responsible for the foundation's projects in China, Taiwan and Nepal (from 1994-1998). After moving to the U.S. in 1998, Mr. Chen served as the Executive Director for two nonprofits in California, managing programs ranging from international humanitarian services to medical research. In 2002, Mr. Chen started E&W Consulting, Ltd., providing financial advice to corporate clients in Asia and the United States. In 2004, he joined Pioneer Oil as a partner and the Chief Financial Officer and in 2005, he joined Groen Brothers Aviation Inc. as Vice President and Head of Business Development for Asia

CONCLUSION GNBA has some very unique aircraft that should find a place in the aviation industry. Is products are innovative, and have a high degree of safety coupled with lower operating costs compared to traditional rotorcraft. The products put forth by GNBA, both the current product line (the SparrowHawk), and potential future products (such as the Hawk 4) meet specific needs in a safe, cost effective ways. The pre-orders for the Hawk 4, and commitments put forth by law enforcement agencies for the SparrowHawk demonstrate a demand waiting to be met. Just a few additional sales for a company the size of GNBA will make a large positive impact on the bottom line. The company is stronger than it has been before, and has expanded its work force to provide manpower for the DARPA project. However, its working capital deficit does give cause for concern. The company will most likely be able to over come this deficit through the use of related party financing, private placements, and partnering with other aviation companies to bring its products to market. Working capital deficits and the current notes payable situation is not uncommon with micro cap companies that are just about to introduce the majority of their products. These companies can use their stock as a form of currency to help alleviate these conditions; hopefully, once sales and earnings materialize they will be large enough to overcome any dilution effects. I rate Groen Brothers Aviation, Inc, (GNBA) Speculative Buy / 4.

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Analyst’s Statement: “I have prepared this report, and the content within it, including all opinions, are solely my own.” Gary Vassalotti This report and other reports regarding this company and others are at: http://www.investrend.com/articles/secondlevel.asp?level=182 Groen Brothers Aviation, Inc., 2640 West California, Salt Lake City, UT 84104, David Groen, 801/973-0177, E-mail: [email protected] Web site: http://www.groenbros.com The company’s InvestorPower™ page is accessible from http://www.investrend.com/company/list.asp?sPathParam=yes Gary Vassalotti, is a member of CFA Institute. The analyst’s biographical details are at http://www.investrend.com/articles/secondlevel.asp?level=238 Investrend Research and Investrend Research Syndicate, Div., Investrend Communications, Inc., 603 W. 13th Street, Suite 1A-277, Austin, Texas 78701 Phone (718) 896-5060, Fax (718) 896-5316, e-mail: [email protected] . Web site: www.investrend.com and www.investrendresearch.com. Information, opinions or ratings contained in this report are submitted solely for advisory and information purposes by the qualified professional analyst. Investrend Research provides analyst facilitation, report publication and distribution services only. The information used and statements of fact made have been obtained from sources considered reliable but neither guarantee nor representation is made as to the completeness or accuracy. No representation whatsoever is made by Investrend. Such information and the opinions expressed are subject to change without notice. This report or study is not intended as an offering or a solicitation of an offer to buy or sell the securities mentioned or discussed. Please read full disclosures at http://www.investrend.com. Neither Investrend nor the analysts apply “recommendations” to any reports nor the companies covered. Any usage of the word “recommendation,” if any, is to be defined as a “rating” only. The usage of the word “target” in any Investrend report is defined as “target valuation,” and is NOT a predictor of stock price. It is instead a per-share “fair valuation” at the end of the period selected by the analyst, determined by dividing the company’s “fair valuation” at that point in time by the estimated number of shares, including potential dilution. Click here for Ratings Definitions: http://www.investrend.com/articles/secondlevel.asp?level=253 Enrollment fees in Investrend’s unique independent research program, which may be paid by anyone wanting to enroll a company for professional coverage, vary, from $5,780 for an Investrend Target Report, $9,950 for an Investrend Focus Report, $19,640 for a Criterion Report, $26,800 for continuous Benchmark Coverage, $36,890 for full Institutional Coverage, and to $46,840 for Wall Street comprehensive coverage, all continuous coverages including Research Reports, Research Updates and ResearchNotes. A Company of the Week Webcast is $3,940. The enrollment fees stated above for the Coverage Category described on the introductory page are being paid by the company. IMPORTANT: Investrend Research has been a pioneer in providing independent subscription-based and enrollment-based equities research publishing and distribution program championing higher standards of "accessibility", "scrutiny" and "disclosure" since

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Groen Brothers Aviation, Inc. (NASDAQ: GNBA) Benchmark Research