gnba10q20081231ex10-1.htm


    Exhibit 10.1

    
      

      

    

    Execution
Version

     

     

    NOTE
PURCHASE AGREEMENT

     

    This NOTE
PURCHASE AGREEMENT is made as of October 9, 2008, by and among GROEN BROTHERS AVIATION, INC., a Utah corporation (the “Company”), and the lenders
appearing on the signature pages hereto (each a “Lender” and collectively,
the “Lenders”).

     

    WHEREAS, the Company desires to
issue and the undersigned Lenders desire to purchase from time to time secured
promissory notes on the terms set forth herein.

     

    NOW, THEREFORE, for good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereby agree as follows:

     

    1.           PURCHASE
AND SALE OF NOTES; CLOSING.

     

    1.1           Note Purchase.  Subject
to the terms and conditions of this Agreement, the Company agrees from time to
time to sell to each Lender and each Lender severally agrees from time to time
to purchase from the Company at one or more Closings (as defined below), Secured
Promissory Notes in the form attached to this Agreement as Exhibit A (individually a
“Note” and collectively
the “Notes”) in the aggregate
principal amounts of up to one million five hundred thousand dollars
($1,500,000) (the “Aggregate Principal Amount”).  Capitalized
terms not otherwise defined herein shall have the meaning set forth in the form
of Note.

     

    1.2           Closing.  Subject
to the terms and conditions of this Agreement, the purchase and sale of the
Notes shall take place at the offices of the Company (or remotely via the
exchange of facsimile signature pages), at closings (each, a “Closing” and,
together with all such closings hereunder, the “Closings”) to be
held on dates mutually agreeable to the Company and the Lender; provided, however, that (i) the Company will
provide to the Lender a Draw Notice (as defined below) at least five (5)
business
days prior to any proposed sale of a Note, (ii) the aggregate principle amount
of the Notes issued hereunder will not exceed one million five hundred thousand
dollars ($1,500,000), and (iii) each purchase of a Note
will be at the sole and absolute discretion of each Lender and will be in
allocations among the Lenders
as determined by the Lenders in their sole discretions.  Each such
notice (a “Draw Notice”) must be given in
writing (by telecopy, electronic transmission or overnight courier) and shall
include the principal loan amount requested, the specific intended use of
proceeds, the proposed Closing date, and additional information required under
Section 3 hereof. At each Closing, each Lender will deliver to the Company an
amount equal to the principal amount of the Note being purchased by such Lender
by (i) a check payable to the Company’s order, (ii) wire transfer of funds to
the Company, or (iii) any combination
of the foregoing.  At such Closing, the Company will deliver to each
Lender a duly executed Note in
substantially the form attached hereto as Exhibit A.

     

    1.3           Tax Reporting.  The
Company and the Lenders, having adverse interests and as a result of
arms-length bargaining, agree that (i) neither the Lenders nor any of their
respective officers, directors, representatives, partners, members or employees
has rendered or has agreed to render any services to the Company
in connection with this Agreement or the issuance of the Notes; and (ii) for the
purposes and within
the meaning of Section 1273(c)(2) of the Code the issue price of the Notes to be
sold at the Closing(s)
is the aggregate face value of such Notes.

     

    1.4           Use of Proceeds. The Company may
only use the proceeds from the sale of a particular Note for
the specific purposes set forth in the Draw Notice.

     

    
      
        
           


        

        
           


          
            

          

        

        
           


        

      

    

     

    2.           REPRESENTATIONS
AND WARRANTIES OF THE COMPANY.

     

    In order
to induce the Lenders to enter into this Agreement and consummate the
transactions contemplated hereby, the Company hereby makes to the Lenders the
following representations and warranties, which representations and warranties
shall be qualified as set forth on schedules of exceptions attached hereto (the
“Disclosure Schedules”), which exceptions
shall be deemed to qualify the corresponding sections of this Section 2 as
specifically set forth on the Disclosure Schedules:

     

    2.1           Organization, Good Standing and Qualification. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Utah and has all requisite corporate power and authority to
carry on its business as now conducted and as proposed to be conducted. The
Company is duly qualified to transact business and is in good standing in Utah
and in each other jurisdiction in which the failure so to qualify could
reasonably be expected to have a Material Adverse Effect. For purposes of this
agreement, “Material Adverse Effect” means any change,
development or effect that has been or would reasonably be expected to have
(individually or in the aggregate) a materially
adverse effect on the business, assets, liabilities, operations, financial
condition, operating results, or earnings of the Company or its subsidiaries
taken as a whole or on the ability of any party hereto to
consummate timely the transactions contemplated hereby.

     

    2.2           Capitalization. The authorized
capital stock of the Company consists of Seven Hundred Million (700,000,000)
shares of stock, no par value, of which Five Hundred Million (500,000,000)
shares are designated as Common Stock, and Two Hundred Million (200,000,000)
shares of which are designated Preferred Stock.  Of the authorized
shares of Preferred Stock, Fifty Million (50,000,000) shares have been
designated as Series A Preferred Stock and Fifty Million (50,000,000) shares
have been designated as Series B Preferred Stock.  As of the date
hereof, there are (i) 171,317,499 shares of Common Stock issued and outstanding;
(ii) 140,000 shares of Series A Preferred Stock issued and outstanding; (iii)
65,633.94 shares of Series B Preferred Stock issued and outstanding; (iv) no
shares of Series C Preferred Stock issued and outstanding; (v) no shares of
Series D Preferred Stock issued and outstanding; and (vi) except as set forth on
Schedule 2.2 attached hereto, no options to purchase Common Stock have been
issued and remain outstanding to employees, officers, directors or consultants
immediately prior to the Closing.  Except as contemplated under this
Agreement there are no other outstanding subscriptions, warrants, options,
rights or other commitments obligating the Company to issue or
sell any shares of capital stock and there are no claims, charges, liens or
encumbrances on, or in respect of, any shares of capital stock of the
Company.  Other than as set forth in the Restated Charter, the Company
is not a party or subject to any agreement or understanding, and to the
Company’s knowledge there is no agreement or understanding between any persons
or entities that affects or relates to the voting or giving of written consents
with respect to any security or by a director of the Company.  All
issued and outstanding shares of the capital stock of the Company are duly and
validly authorized and issued, fully paid and nonassessable, and were issued in
accordance with the registration or qualification provisions of the Securities
Act of 1933, as amended (the “Securities Act”) and any relevant
state securities laws or pursuant to valid exemptions therefrom.  All
options granted to employees, officers, directors or consultants of the Company
have been granted in accordance with applicable law and the Company’s stock
option plan.

     

    2.3           Subsidiaries. The Company does
not own or control, directly or indirectly, any interest in any other
corporation, association, or other business entity.  Each of the
Company’s subsidiaries is qualified to carry on its business under the laws of
each jurisdiction in which it carries on a material portion of its business. All
of the issued and outstanding shares of the Company’s subsidiaries are validly
issued as fully paid and non-assessable. The Company is, directly or indirectly,
the beneficial holder of all such
issued and outstanding shares and holds such shares with valid and marketable
title to the shares free and clear of any liens, pledges, charges, encumbrances,
security interests or other claims whatsoever (other
bank security), and no person, firm, corporation or other entity holds any
securities convertible or exchangeable into shares of any of the subsidiaries or
has any agreement, warrant, option, right or privilege (whether pre-emptive or
contractual) being or capable of becoming an agreement, warrant, option or right
or warrants of any of the subsidiaries. The Company is not a participant in any
joint venture, partnership or similar arrangement.


    

      
        
           


        

        
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    2.4           Authorization of Transaction Documents.  All
corporate action on the part of the Company, and its officers, directors and
stockholders necessary for the authorization, execution and delivery of this
Agreement, the Notes and the Security Agreement (the “Security Agreement”), the form of
which is attached as Exhibit B, and the
Intellectual Property Security Agreement (the “IP Security Agreement” and, together with
the Security Agreement, the “Security Agreements”), the form of
which is

    attached
hereto as Exhibit C, and all other
agreements and documents entered into in connection therewith (collectively,
the “Transaction Documents”), and the
performance of all obligations of the Company under each of the Transaction
Documents, has been taken or will be taken on the date hereof and/or at the
Closings
(as applicable). The Transaction Documents constitute valid and legally binding
obligations of the
Company, enforceable in accordance with their terms, except (a) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium and other laws of
general application affecting enforcement of creditors’ rights generally or by
equitable principles, (b) as limited by laws relating to the availability of
specific performance, injunctive relief or other equitable remedies and (c) to
the extent that the enforceability of indemnification provisions may be limited
by applicable laws. The execution, delivery and performance by the Company of
the Transaction Documents and the consummation by the Company of the
transactions contemplated thereby and the fulfillment by the Company of the
terms thereof, do not and will not, directly or indirectly (with or without
notice or lapse of time), violate, breach, conflict with, constitute a default
under, result in the imposition of any lien or encumbrance upon any asset or
property of the Company pursuant to, or accelerate or permit the acceleration of
the performance required by, (x) any of the terms of the Restated Articles of
Incorporation of the Company, as amended (the “Restated Charter”) or Bylaws of the
Company, or any resolution adopted by the board of directors of the Company or
stockholders of the Company, (y) any note, debt instrument, security agreement,
mortgage or any other contract to which the Company is a party or by which it is
bound, or (z) any law, judgment, decree, order or other legal requirement of any
government authority applicable to the Company.

     

    2.5           Litigation.

     

    (a)           There
is no action, suit, proceeding, investigation or other legal, administrative, or
governmental proceeding pending or, to the Company’s knowledge, currently
threatened against the Company or affecting the properties or assets of the
Company, or, as to matters related to the Company, against any officer, director
or stockholder or key employee of the Company, including without limitation any
litigation that (a) questions the validity of the Transaction Documents or the
transactions contemplated
thereunder or the right of the Company to enter into the Transaction Documents
or to consummate the transactions contemplated thereby, (b) will have, either
individually or in the aggregate, a
Material Adverse Effect, (c) will result in any change in the current equity
ownership of the Company, or (d)
involves the prior employment of any of the Company’s employees, their use in
connection with the Company’s business of any information or techniques
allegedly proprietary to any of their former employers,
or their obligations under any agreements with prior employers. There is no
action, suit, proceeding
or investigation by the Company currently pending or that the Company intends to
initiate. No claim has been asserted in writing against the Company for
renegotiation or price redetermination of any business transaction.

    


    (b)           None
of the U.S. Securities and Exchange Commission, nor any other securities
commission or similar regulatory authority or exchange in Canada or the United
States has issued any order which is currently outstanding preventing or
suspending trading in any securities of the Company, and no
such proceeding is, to the knowledge of the Company, pending, contemplated or
threatened. The Company is not in default of any material requirement of
applicable securities laws and the Company is entitled to avail itself of the
applicable prospectus exemptions available under such applicable securities
laws.

    


    
      
        
           


        

        
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    2.6           Corporate Records. The corporate
record books of the Company accurately record all corporate action taken by its
stockholders, Board of Directors and committees thereof. The copies of the
corporate records of the Company, as made available to the Lenders for review,
are true and complete copies of the originals of such documents.

     

    2.7           Financial Statements; Activity Reports. The Company has
delivered to the Lenders its financial statements (including balance sheet) for
the nine-month period ended March 31, 2008 (collectively referred to as the
“Financial Statements”). The Financial
Statements have in all material respects been prepared in accordance with United
States generally accepted accounting principles (“GAAP”) applied on a
consistent basis throughout the periods indicated and with each other, except
that the Financial Statements may not contain all footnotes required by GAAP and
are subject to normal year end adjustments. The Financial Statements contain no
material misstatements and fairly present, in all material respects, the
financial condition and operating results of the Company as of the dates, and
for the periods, indicated therein.

     

    2.8           Absence of Undisclosed Liabilities.

     

    (a)           There
has not been any material change in the capital, assets, liabilities (absolute,
accrued, contingent or otherwise), obligations, business, operations, capital or
condition (financial or otherwise) of the Company and its subsidiaries (taken as
a whole) except as set forth in the Financial Statements. There has not been any
adverse material change in the capital, assets, liabilities (absolute, accrued,
contingent or otherwise), obligations, business, operations, capital or
condition (financial or otherwise) of the Company and its subsidiaries (taken as
a whole) since March 31, 2008 and since that date there have been no material
facts, transaction, events or occurrences which could have a Material Adverse
Effect.

     

    (b)           The
Company does not have any material liabilities or obligations of any nature,
whether accrued, absolute, contingent or otherwise, asserted or unasserted,
known or unknown (including, without limitation, liabilities for taxes due or to
become due, regardless of whether claims in respect thereof had been asserted as
of such date), other than (i) liabilities incurred in the ordinary course of
business of the Company subsequent to March 31, 2008 and (ii) obligations under
contracts and commitments incurred in the ordinary course of business and not
required under GAAP to be reflected in the Financial Statements, which, in both
cases, individually or in the aggregate are not material to the financial
condition or operating results of the Company.  The Company maintains
and will continue to maintain a standard system of accounting established and
administered in accordance with GAAP.

     

    2.9           Transactions with Affiliates.  To the
knowledge of the Company, no stockholder, director,
officer or employee of the Company, or any of their respective spouses or family
members, owns directly or indirectly on an individual or joint basis any
interest in, or serves as an officer or director, or in another similar
capacity, of any competitor, customer, distributor or supplier of the Company or
any organization which has a material contract or arrangement with the
Company.  No employee, officer, stockholder or director of the Company
or member of his or her immediate family is indebted to the Company, nor is the
Company indebted (or committed to make loans or extend or guarantee credit) to
any of them, other than (i) for payment of salary for services rendered, (ii)
reimbursement for reasonable expenses incurred on behalf of the Company, and
(iii) for other standard employee benefits made generally available to
all employees (including stock option
agreements outstanding approved by the Board of
Directors of the Company).  To the Company’s knowledge, except as
provided for in this Agreement or in connection with employment arrangements, no
officer, director, or stockholder or any member of their immediate families is,
directly or indirectly, interested in any contract or transaction with the
Company.

     

    
      
        
           


        

        
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    2.10           Title to Properties.

     

    The
Company has good, valid and (if applicable) marketable title to all of its
assets (tangible and intangible), free and clear of all liens, restrictions or
encumbrances and none of such assets is subject to any mortgage, pledge, lien or
conditional sale agreement. To the Company’s knowledge, such assets constitute
all property which is necessary to the business of the Company and all equipment
included therein is in good condition and repair (ordinary wear and tear
excepted) and all leases of real or personal property to which the Company is a
party are fully effective and, to its knowledge, afford the Company peaceful
possession of the subject matter of the lease and true and complete copies
thereof have been made available to the Lenders or their counsel. To its
knowledge, the Company is not in violation of any zoning, building or safety
ordinance, regulation or requirement or other law or regulation applicable to
the operation of its leased properties, nor has it received any notice of such
violation. There are no defaults by the Company, or, to the knowledge of the
Company, by any other party, which might curtail in any respect the present use
of the property of the Company.  The performance by the Company of the
Transaction Documents and the transactions contemplated thereby will not result
in the termination of, or in any increase of any amounts payable under, any of
its leases for real property or material liens for personal property or will
require the consent or approval from any other party to such
leases.

     

    2.11          Tax Matters. The Company has
timely and properly filed all federal, state, local and foreign tax returns
required to be filed by it through the date hereof, all such returns being true
and correct in all material respects when filed, and has paid or caused to be
paid all taxes, required to be paid by it through the date hereof whether
disputed or not, except taxes which have not yet accrued or otherwise become
due. There are no currently pending, and to the Company’s knowledge, there are
no threatened, examinations or audits of any tax returns or reports by any
federal, state, local, or foreign tax agency. The provisions for taxes in the
Financial Statements and balance sheets therein are sufficient as of their
respective dates for the payment of any accrued and unpaid taxes of any nature
of the Company.  All taxes and other assessments and levies which the
Company was or is required to withhold or collect have been withheld and
collected and have been paid over to the proper governmental authorities. The
Company has never received written notice of any audit or of any proposed
deficiencies from the Internal Revenue Service (the “IRS”) or any other
taxing authority (other than routine audits undertaken in the ordinary course
which have been resolved on or prior to the date hereof). There are in effect no
waivers of applicable statutes of limitations with respect to any taxes owed by
the Company for any year.  Neither the IRS nor any other taxing
authority is now asserting or, to the knowledge of the Company, threatening to
assert against the Company any deficiency or claim for additional taxes or
interest thereon or penalties in connection therewith in respect of the income
or sales of the Company.  The Company has never been a member of an
affiliated group of corporations filing a combined federal income tax return nor
does the Company have any liability for taxes of any other person under Treasury
Regulations §1.1502.6 (or any similar provision of foreign, state or local law)
or otherwise. The Company is not a party to any tax allocation or sharing
arrangement.  The Company is not a party to any contract, agreement,
plan or arrangement covering any employee or former employee thereof, that,
individually or collectively, could give rise to the payment of any amount that
would not be deductible pursuant to Section 280G or 162 of the Internal Revenue
Code (the “Code”). The Company is
not a “foreign person” within the meaning of Section 145 of the Code and
Treasury Regulations § 1.1445-2.

     

    2.12 Labor Matters.  Except
as specifically disclosed by the Company to the Lenders prior to the date
hereof, the Company is not delinquent in payments to any of its employees,
consultants or independent
contractors for any wages, salaries, commissions, bonuses or other direct
compensation for any service performed for it to the date hereof or amounts
required to be reimbursed to such employees, consultants or independent
contractors. The Company is in compliance in all respects with all applicable
laws and regulations, respecting labor, employment, fair employment practices,
terms and conditions of employment, and wages and hours, except where such
noncompliance would not reasonably be expected to have a Material Adverse
Effect. The Company has not received any written or oral notice of any charges
of employment discrimination, sexual harassment or unfair labor practices, nor
are there any strikes, slowdowns, stoppages of work, or any other concerted
interference with normal operations existing, pending or, to the knowledge of
the Company, threatened against or involving the Company. There are no union
organizing activities pending, or, to the knowledge of the Company, threatened
with respect to the Company.  To the knowledge of the Company, there
are no grievances, complaints or charges that have been filed against the
Company under any dispute resolution procedure (including, but not limited to,
any proceedings under any dispute resolution procedure under any collective
bargaining agreement).  No arbitration or similar proceeding is
pending and, to the knowledge of the Company, no claim therefor has been
asserted against the Company.  To the knowledge of the Company, no
collective bargaining agreement is in effect or is currently being or is about
to be negotiated by the Company.  To its knowledge, the Company is,
and at all times the Company has been, in compliance with the requirements of
the Immigration Reform Control Act of 1986. There are no changes pending or, to
the knowledge of the Company, threatened including, without limitation, the
resignation of senior management or any key employee or independent contractors
of the Company, nor has the Company received any notice or information
concerning any prospective change with respect to such senior management, key
employees or
independent contractors.

    


    
      
        
           


        

        
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    2.13           Employee Benefit Programs. The terms and
operation of every employee deferred compensation agreement, employee bonus plan
or incentive plan, employee profit sharing plan, employee retirement agreement
or plan, employee benefits plan, stock option plan, pension plan, retirement
plan and other
similar plan or arrangement of the Company (each, an “Employee Program”) comply in all
material respects with all applicable laws and regulations relating to such
Employee Program.

     

    2.14           Certain Contracts and Arrangements.

     

    The
Company is not a party or subject to or bound by:

     

    (i)           any
contract or agreement involving (i) potential commitment or payment
by the Company in excess of $10,000 or (ii) which is otherwise material to the
operation of the
Company’s business and not entered into in the ordinary course of
business;

     

    (ii)           the
license of any Intellectual Property Right (as defined in Section 2.16)
to or
from the Company;

    


    (iii)           any
indenture, mortgage, promissory note, loan agreement, guaranty or other
agreement or commitment for borrowing or any pledge or security
arrangement;

     

    (iv)           any
agreement with any stockholder of the Company which includes, without
limitation, anti-dilution rights, registration rights, preemptive rights, voting
arrangements or operating covenants and any other agreement concerning the
securities of the Company;

     

    (v)           any
loans or advances to any person or entity other than ordinary advances for
travel;

    


    
      
        
           


        

        
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    (vi)           any
royalty, dividend or similar arrangement based on the revenues or profits of the
Company;

     

    (vii)           any
joint venture, partnership, manufacturer, development, distribution, supply or
similar agreement; or

     

    (viii)           any
acquisition, merger, sale of assets outside the ordinary course of business, or
similar agreement.

     

    2.15           Intellectual Property Rights.  The
Company owns or has the right to use all trademarks, tradenames, copyrights,
patents, trade secrets, licenses, information and proprietary rights and
processes and know-how and other intellectual property necessary to its business
as currently conducted or proposed to be conducted (the “Intellectual Property Rights”).

     

    2.16           Insurance. The Company is
insured by insurers of recognized financial responsibility against such losses
and risks and in such amounts that are customary in the business in which it is
engaged; to the best of the Company’s knowledge, all policies of insurance and
fidelity or surety bonds insuring the Company or its business, assets,
employees, officers and directors are in full force and effect, the Company is
in compliance with the terms of such policies and instruments in all material
respects and there are no material claims by the Company under any such policy
or instrument as to which any insurance company is denying liability or
defending under a reservation of rights clause; and the Company
has no reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue
its business at a cost that would not have a Material Adverse Effect on the
condition (financial or otherwise),
prospects, earnings, business or properties of the Company.

     

    2.17           Permits; Compliance with Laws and Instruments. The Company has
all franchises, permits, licenses, and any similar authority (“Permits”) necessary to
permit it to own its property and to conduct its business as it is presently
conducted and all such Permits are valid and in full force and effect, except
where the failure to obtain such a Permit or its invalidity, in whole or in
part, would not have a Material Adverse Effect. No Permit is subject to
termination as a result of the execution of the Transaction Documents or
consummation of the transactions contemplated thereby.  The Company is
in compliance with all applicable statutes, ordinances, orders, rules and
regulations promulgated by any federal, state, municipal or other governmental
authority, which apply to the conduct of its business, except where the failure
to so comply would not have a Material Adverse Effect. The Company has
never
entered into or been subject to any judgment, consent decree, compliance order
or administrative order with respect to any aspect of the business, affairs,
properties or assets of the Company or received any request for information,
notice, demand letter, administrative inquiry or formal or informal complaint or
claim from any regulatory agency with respect to any aspect of the business,
affairs, properties or assets of
the Company.  The Company is not in violation of its Restated Charter
or Bylaws or in violation of or default under any material indenture, audit
agreement, mortgage, lease, agreement, instrument, commitment
or arrangement to which it is a party or by which it is bound.

     

    2.18           Information Supplied by the Company.  This
Agreement, and the disclosures and the certificates and statements furnished
pursuant to this Agreement by or on behalf of the Company do not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements contained therein not misleading in the light of
the circumstances under which they were made.  There is no material
fact directly relating to the business, operations, condition or prospects of
the Company (including any competitive developments but other than facts which
relate to general economic or industry trends or conditions) that materially
adversely affects the same that has not been set forth in this Agreement or in
written disclosures to the Lenders.  To the knowledge of the Company,
none of the officers
or directors of the Company during the previous five years has been (a) subject
to voluntary or involuntary petition under the federal bankruptcy laws or any
state insolvency law or the appointment of a receiver, fiscal agent or similar
officer by a court for his business or property; (b) convicted in a criminal
proceeding or named as a subject of a pending criminal proceeding (excluding
traffic violations and other minor offenses); (c) subject to any order,
judgment, or decree (not subsequently reversed, suspended or vacated) of any
court of competent jurisdiction permanently or temporarily enjoining him from,
or otherwise imposing limits or conditions on his, engaging in any securities,
investment advisory, banking, insurance or other type of business or acting as
an officer or director of a public company; or (d) found by a court of competent
jurisdiction in a civil action or by the Securities and Exchange Commission or
the Commodity Futures Trading Commission to have violated any federal or state
commodities, securities or unfair trade practices law, which such judgment or
finding has not been subsequently reversed, suspended,
or vacated.

     

    
      
        
           


        

        
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    2.19           Absence of Certain Developments.  Since
September 1, 2008 the Company has conducted its business only in the ordinary
course consistent with past practice and, there has not been:

     

    (a)           any
adverse change in the financial condition, properties, assets, liabilities,
business, operations or prospects of the Company;

     

    (b)           any
mortgage, encumbrance or lien placed on any of the properties of the
Company
or any incurrence of indebtedness or guarantee of the indebtedness of another
person;

     

    (c)           any
purchase, sale or other disposition, or any agreement or other arrangement for
the purchase, sale or other disposition, of any material properties or assets by
the Company, including any of its Intellectual Property Rights;

     

    (d)           to
the knowledge of the Company, any damage, destruction or loss, whether or not
covered by insurance;

     

    (e)           any
declaration, setting aside or payment of any dividend by the Company, or the
making of any other distribution in respect of the capital stock of the Company,
or any direct or indirect redemption, purchase or other acquisition by the
Company of its own capital stock;

     

    (f)           any
labor trouble or claim of unfair labor practices involving the Company, any
change in the compensation payable or to become payable by the Company to any of
its officers or employees other than normal merit increases in accordance with
its usual practices, or any bonus payment or arrangement made to or with any of
such officers or employees or any establishment or creation of any employment,
deferred compensation or severance arrangement or employee benefit plan with
respect to such persons or the amendment of any of the foregoing;

     

    (g)           material
loss of personnel of the Company or change in the terms and conditions of the
employment of the Company’s officers or key personnel;

     

    (h)           any
payment or discharge of a material lien or liability of the Company which was
not shown on the Financial Statements or incurred in the ordinary course of
business thereafter;

     

    (i)           any
cancellation of any material debt or claim owing to, or waiver of any material
right of, the Company, including any write-off or compromise of any accounts
receivable;

     

    (j)           any
material change in accounting methods or practices, collection policies, pricing
policies or payment policies of the Company;

    


    
      
        
           


        

        
          -8-

          
            

          

        

        
           


        

      

    

     

    (k)           any
loss, of any significant supplier, customer, distributor or account of the Company;

     

    (l)           any
amendment or termination of any material contract or agreement to which the
Company is a party or by which it is bound;

     

    (m)           any
arrangements relating to any royalty, dividend or similar payment based on the
sales volume of the Company, whether as part of the terms of the Company’s
capital stock or by any separate agreement;

     

    (n)           any
agreement with respect to the endorsement of the Company’s products or services;

     

    (o)           any
transaction or agreement involving fixed price terms or fixed volume arrangements;

     

    (p)           any
other material transaction entered into by the Company other than transactions
in the ordinary course of business;

     

    (q)           any
transaction with an employee or holder of the Company’s securities other than
payment of salary or as contemplated by this Agreement; or

     

    (r)           any
agreement or understanding whether in writing or otherwise, for the Company
to take any of the actions specified in paragraphs (a) through (q)
above.

     

    2.20           Environmental.

     

    (a)           Except
to the extent that any violation or other matter referred to in this Section
2.20 does
not have a Material Adverse Effect on the business, financial condition, assets,
properties, liabilities or operations of the Company or its subsidiaries (taken
as a whole):

    


    (i)           the
Company and each of its subsidiaries is not in violation of any applicable
federal, provincial, state, municipal or local laws, regulations, orders,
government decrees or ordinances with respect to environmental, health or safety
matters (collectively, “Environmental Laws”);

     

    (ii)           the
Company and each of its subsidiaries has operated its business at all times has
received, handled, used, stored, treated, shipped and disposed of all
contaminants without violation of Environmental Laws;

     

    (iii)           there
have been no spills, releases, deposits or discharges of hazardous or toxic
substances, contaminants or wastes into the earth, air or into any body of water
or any municipal or other sewer or drain water systems by the Company or its
subsidiaries, if any, that have not been remedied;

     

    (iv)           no
orders, directions or notices have been issued and remain outstanding pursuant
to any Environmental Laws relating to the business or assets of the Company or
any subsidiary of which the Company has notice;

     

    (v)           the
Company and each of its subsidiaries has not failed to report to the proper
federal, provincial, state, municipal or other political subdivision,
government, department,
commission, board, bureau, agency or instrumentality, domestic or foreign
(“Government Authority”) the occurrence of
any event which is required to be so reported by any Environmental Law;
and

    


    
      
        
           


        

        
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    (vi)           the
Company and each of its subsidiaries holds all licenses, permits and approvals
required under any Environmental Laws in connection with the operation of its
business and the ownership and use of such assets, all such licenses, permits
and approvals are in full
force and effect, and except for notifications and conditions of general
application to assets of the type owned by the Company, the Company has not
received any notification pursuant to any Environmental
Laws that any work, repairs, constructions or capital expenditures are required
to be made
by it as a condition of continued compliance with any Environmental Laws, or any
license, permit or approval issued pursuant thereto, or that any license, permit
or approval referred
to above is about to be reviewed, made subject to limitation or conditions,
revoked, withdrawn
or terminated.

     

    (b)           In
the ordinary course of its business, the Company has periodically reviewed the
effect of Environmental Laws on its business, operations and properties in the
course of which it identifies
and evaluates associated costs and liabilities (including, without limitation,
any capital or operating expenditures required for cleanup, closure of
properties, abandonment of wells or compliance with
Environmental Laws, or any permit, license or approval, any related constraints
on operating activities and any potential liabilities to third parties); the
Company also has conducted pre-acquisition investigations
of new properties to identify potential violations of Environmental Laws, trains
management personal in the recognition of and proper response to incidents of
noncompliance with Environmental Laws and establishes procedures for
communicating such incidents to its senior management.
On the basis of such review, the Company has concluded that any associated costs
and liabilities would not, singly or in the aggregate, have a Material Adverse
Effect on the condition (financially
or otherwise), prospects, earnings, business or properties of the Company,
whether or not arising from transactions in the ordinary course of
business.

     

    2.21           Books and Records. The minute books
for each of the Company and its subsidiaries contain full, true and correct
copies of the incorporating documents and the bylaws of the Company and
its
subsidiaries, as applicable, and contain copies of all minutes of all meetings
and all consent resolutions of the
directors, committees of directors and shareholders of the Company and its
subsidiaries, respectively, and all such meetings were duly called and properly
held and all consent resolutions were properly adopted.

     

    2.22           Brokers.  Except
as contemplated in this Agreement, the Company has not incurred and will not
incur any obligation or liability to any broker, finder or agent with respect to
the transactions contemplated by this Agreement.

     

    3.           CONDITIONS
TO CLOSING.

     

    3.1           Conditions to Lenders’ Obligations at the Closing. The obligations of
any Lender to acquire Notes at any Closing are subject to the fulfillment, on or
before such Closing, of each of the following conditions:

     

    (a)           the
Company shall have delivered to each Lender a Draw Notice, which Draw Notice (i)
specifies the aggregate principal amount of the Note(s) being proposed for sale
and the proposed Closing date, (ii) certifies that each of the representations
and warranties of the Company contained
in Section 2 shall be true and correct on and as of such Closing, and (iii)
certifies that no default exists under any previously issued Note;

    


    
      
        
           


        

        
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    (b)           the
Company shall have performed and complied with all agreements, obligations and
conditions contained in this Agreement that are required to be performed or
complied with by it on or before such Closing and shall have obtained all
approvals, consents and qualifications necessary to complete the purchase and
sale described herein;

     

    (c)           the
Board of Directors of the Company shall have duly adopted resolutions and shall
have taken all action necessary for the purpose of authorizing the Company to
consummate all of the transactions contemplated to occur at such Closing hereby
including, without limitation, the issuance of the Notes;

     

    (d)           the
Company shall have delivered to each Lender a Note in the form of Exhibit A in the
principal amount set forth on the corresponding Draw Notice;

     

    (e)           in
connection with the initial Closing hereunder, the Company shall have delivered
to the Lenders an executed copy of the Security Agreement in the form attached
hereto as Exhibit B, and the IP
Security Agreement in the form attached hereto as Exhibit C;

     

    (f)           the
Company shall have delivered to each Lender evidence of having obtained any
consents required to consummate the transactions contemplated
hereby;

     

    (g)           in
connection with the initial Closing only, the Company shall have delivered to
the Lenders certificates of good standing issued by (i) the Secretary of State
of the State of Utah, and (ii) the relevant governmental authority in each of
those jurisdictions in which the Company is qualified as a foreign corporation;
and

     

    (h)           the
Company shall have issued a promissory note to each holder of the Series B
15%
Cumulative Non-Voting Preferred Stock of the Company (the “Series B Stock”) set forth on
Schedule
3.1(h), in a principal amount set forth adjacent to the name of each such holder
thereon (which amount is equal to the unpaid dividends on such holder’s shares
of Series B Stock accrued through the date hereof), such note to be
substantially in the form attached hereto as Exhibit D.

     

    3.2           Conditions to Company’s Obligations. The obligations
of the Company to sell and issue Notes to each Lender at any Closing are subject
to the fulfillment or waiver on or before such Closing of the following
conditions by such Lender:

     

    (a)           such
Lender shall have performed and complied with all agreements, obligations and
conditions contained in this Agreement that are required to be performed or
complied with by it on or before such Closing and shall have obtained all
approvals, consents and qualifications necessary to complete the purchase and
sale described herein; and

     

    (b)           each
Lender shall have delivered to the Company payment in full by check payable to
the Company’s order and/or by wire transfer of funds to the Company for the
principal amount of the Note in the amount set forth opposite such Lender’s name
on the corresponding Draw Notice.

     

    4.           COVENANTS
The Company covenants and agrees with each Lender that:

     

    4.1           Financial Statements, Reports, Etc. The Company shall
furnish to each Lender the following reports for so long as such Lender holds a
Note:

    

      
        
           


        

        
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    (a)           Annual Financial Statements.  Within
ninety (90) days after the end of each fiscal year of the Company, a
consolidated balance sheet of the Company and its subsidiaries, if any, as of
the end of such fiscal year and the related consolidated statements of income,
equityholders’ equity and cash flows for the fiscal year then ended, prepared in
accordance with generally accepted accounting principles and certified by a firm
of independent public accountants of recognized national standing selected by
the Board of Directors of the Company.

     

    (b)           Quarterly Financial Statements. Within forty-five
(45) days after the end of each quarter in each fiscal year (including the last
quarter in each fiscal year), a consolidated balance sheet of the Company and
its subsidiaries, if any, and the related consolidated statements of income,
equityholders’ equity and cash flows, unaudited but prepared in accordance with
generally accepted accounting principles and certified by the Chief Financial
Officer of the Company, such consolidated balance sheet to be as of the end of
such quarter and such consolidated statements of income, equityholders’ equity
and cash flows to be for such quarter and for the period from the beginning of
the fiscal year to the end of such quarter, in each case with comparative
statements for the prior fiscal year and with a written management discussion
and analysis on such financial statements and a summary of the state
of the business. In addition, the Company shall provide copies of any internal
service reports and any notices or reports prepared for or received from its
other lenders.

     

    (c)           Weekly Status Calls. The Company will
make its senior management available to the
Lenders, their designees and advisors for weekly conference calls to discuss the
current status of the Company,
including without limitation its financial performance and business
prospects.

     

    (d)           Annual Budget. No later than
thirty (30) days prior to the start of each fiscal year, consolidated capital
and operating expense budgets, cash flow projections and income and loss
projections for the Company and its subsidiaries in respect of such fiscal year,
all itemized in reasonable detail and prepared on a monthly basis, and, promptly
after preparation, any revisions to any of the foregoing.

     

    (e)           Monthly Budgets.  No
later than five (5) days prior to the start of each calendar month, an
accounting of expenses to be paid, expenses accrued, expenses outstanding, and
sources of cash for the Company and its subsidiaries in respect of such month,
all itemized in reasonable detail, and, promptly after preparation, any
revisions to any of the foregoing.

     

    (f)           Notices. (i) Notice of the
occurrence of any Event of Default (as defined in the Note) or any default under
any other indebtedness of the Company and (ii) promptly after the commencement
thereof, notice of all actions, suits, claims, proceedings, investigations and
inquiries that could materially and adversely affect the Company or any of its
subsidiaries, if any.

     

    4.2           Corporate Existence. The Company shall
maintain and cause each of its subsidiaries, if any,
to:

     

    (a)           carry
on and conduct its business in substantially the same manner and in
substantially the same fields of enterprise as it is presently
conducted;

     

    (b)           do
all things necessary to remain duly incorporated or organized, validly existing
and (to the extent such concept applies to such entity) in good standing as a
domestic corporation, partnership or limited liability company in its
jurisdiction of incorporation or organization, as the case may be, and maintain
all requisite authority to conduct its business in each jurisdiction in which
its business is conducted;

     

    
      
        
           


        

        
          -12-

          
            

          

        

        
           


        

      

    

     

    (c)           keep
adequate books and records with respect to its business activities in which
proper entries, reflecting all financial transactions, are made in accordance
with GAAP and on a basis consistent with the Financial Statements delivered to
the Lenders pursuant to Section 4.1; and

     

    (d)           at
all times maintain, preserve and protect all of its assets and properties used
or useful in the conduct of its business, and keep the same in good repair,
working order and condition in all material respects (taking into consideration
ordinary wear and tear) and from time to time make, or cause to be made, all
necessary or appropriate repairs, replacements and improvements thereto
consistent with industry practices.

     

    4.3           Properties, Business Insurance. The Company shall
obtain and maintain and cause each of its Subsidiaries to maintain with
financially sound and reputable insurers having an A rating from Best’s Rating
Service insurance with respect to their respective properties and businesses
against such casualties and contingencies as are in accordance with the general
practices of businesses engaged in similar activities in similar geographic
areas.  If the Company or any of its Subsidiaries at any time or times
hereafter shall fail to obtain or maintain any of the policies of insurance
required above or to pay all premiums relating thereto, such Lender may at any
time or times thereafter obtain and maintain such policies of insurance and pay
such premiums and take any other action with respect thereto which such Lender
deems advisable. No Lender shall have any obligation to obtain insurance for the
Company or any
subsidiary or pay any premiums therefor.  By doing so, such Lender
shall not be deemed to have waived any Default or Event of Default arising from
the Company or any subsidiary’s failure to maintain such
insurance or pay any premiums therefor.  All sums so disbursed,
including reasonable attorneys’ fees,
court costs and other charges related thereto, shall be payable on demand by the
Company to such Lender
and shall be additional obligations hereunder secured by the Collateral (as
defined in the Security Agreement).

     

    4.4           Appraisals. Whenever a Default
or Event of Default exists under the Note, and at such other times as an Lender
reasonably requests, the Company shall, at its sole expense, provide such Lender
with appraisals or updates thereof of their assets from an appraiser selected
and engaged by such Lender, and prepared on a basis satisfactory to such Lender,
such appraisals and updates to include, without limitation, information required
by applicable law and regulations and by the internal policies of such
Lender.

     

    4.5           Inspection, Consultation and Advice. The Company shall
permit and cause each of its subsidiaries, if any, to permit the Lenders and
such persons as such Lender may designate, at such Lender’s expense, to visit
and inspect any of the properties of the Company and its subsidiaries, examine
their books and take copies and extracts therefrom, discuss the affairs,
finances and accounts of the Company and its subsidiaries with their officers,
employees and public accountants (and the Company hereby authorizes said
accountants to discuss with such Lender and such designees such affairs,
finances and accounts), and consult with and advise the management of the
Company and its subsidiaries as to their affairs, finances and accounts, all at
reasonable times and upon reasonable notice during normal business
hours.

     

    4.6           Restrictive Agreements Prohibited. Neither the
Company nor any of its subsidiaries shall become a party to any agreement which
by its terms expressly restricts the Company’s performance of any of
the Transaction Documents or that prohibits, restricts or imposes any condition
upon (a) its ability to
create, incur or permit to exist any Lien upon any of its property or assets, or
(b) the ability of any of the Company’s subsidiaries to pay dividends or other
distributions with respect to any equity interests or to make or repay loans or
advances to the Company or to guarantee indebtedness of the
Company.

     

    
      
        
           


        

        
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    4.7           Compliance with Laws and Taxes. The Company shall
comply, and cause each of its direct and indirect subsidiaries to comply, with
all applicable laws, rules, regulations and orders, noncompliance with which
could materially adversely affect its business or condition, financial or
otherwise. The Company will timely file complete and correct U.S. federal and
applicable foreign, state and local tax returns required by law and pay when due
all taxes, assessments and governmental charges and levies upon it or its
income, profits, or property, except those which are being contested in good
faith by appropriate proceedings and with respect to which adequate reserves
have been set aside in accordance with GAAP.

     

    4.8           Prohibited Actions. Without the prior
written consent of the holder(s) of the Note(s) representing a majority of the
Aggregate Principal Amount of the Note(s) then outstanding (a “Majority Interest”), the Company
shall not (by way of merger, consolidation, operation of law or otherwise) and
shall not permit any subsidiary to:

     

    (a)           liquidate,
dissolve or wind up its operations, effect a recapitalization or reorganization
(including, without limitation, any reorganization into a limited liability
company, a partnership or any other non-corporate entity which is treated as a
partnership for federal income tax purposes);

     

    (b)           declare
or pay any dividends or make any distributions of cash, property or securities
of the Company in respect to any of its equity interests, or directly or
indirectly redeem, retire, purchase or otherwise acquire for consideration (or
pay into or set aside for a sinking fund for such purpose), directly or
indirectly, through subsidiaries or otherwise, any of its equity
interests;

     

    (c)           permit
any subsidiary of the Company to issue any equity interests, other than to the Company;


     

    (d)           issue
notes of the Company or otherwise incur indebtedness, except for indebtedness
not to exceed $57,000,000 in the aggregate (the “Debt Cap”); provided that, subject to
Section 4.18 hereof, the Company may incur indebtedness in excess of the Debt
Cap if all proceeds from such indebtedness are applied immediately upon receipt
by the Company toward the repayment of the Notes or other outstanding debt of
the Company owing to the Lender and/or its affiliates;

     

    (e)           make
any changes to the Company’s governing documents (including its Restated
Charter and by-laws), option plans or Board of Directors;

     

    (f)           make
any expenditure in excess of $10,000, or expenditures in excess of $25,000 in
the aggregate, which are not approved by the Board of Directors of the
Company;

     

    (g)           sell
or exchange any equity interests or rights, options or warrants to acquire
equity interests of any subsidiary;

     

    (h)           enter
into (A) a merger or consolidation of the Company with or into another entity
(with respect to which less than a majority of the outstanding voting power of
the surviving or consolidated company immediately following such event is held
by persons or entities who were equityholders of the Company immediately prior
to such event); (B) any acquisition by any person (or group of affiliated or
associated persons) of beneficial ownership of a majority of the equity of the
Company or any material subsidiary (whether or not newly-issued shares) in a
single transaction or a series of related transactions; (C) the redemption or
repurchase of shares representing a majority of the voting power of the
outstanding equity interests of the Company; or (D) any other change of control
of 50% or more
of the outstanding voting power of the Company;

    


    
      
        
           


        

        
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    (i)           effect
any acquisitions (asset, stock or otherwise) or enter into any agreement with
respect thereto;

     

    (j)           effect
the sale, transfer or license, in a single transaction or a series of
transactions, of any assets of the Company or any subsidiary outside the
ordinary course of business or effect any securitization transaction, except as
expressly permitted hereunder;

     

    (k)           enter
into any acquisition of beneficial ownership of a majority of the equity of
another entity in a single transaction or a series of related
transactions;

     

    (l)       
    form or permit the formation of any direct or indirect
subsidiary;

     

    (m)           engage
in any sale-leaseback, synthetic lease or similar transaction involving any
assets of the Company or any subsidiary;

     

    (n)           directly
or indirectly make any material change in the nature of its business or add any
material lines of business not presently conducted by it; or

     

    (o)           permit
any affiliate or direct or indirect subsidiary to enter into any activity that
could reasonably be deemed competitive with the business of the
Company.

     

    4.9           Liens. For so long as any
of the Notes remain outstanding, the Company will not create, incur, or suffer
to exist any lien (statutory or other), mortgage, pledge, hypothecation,
assignment, deposit arrangement, encumbrance or preference, priority or other
security agreement or preferential arrangement of any kind or nature whatsoever
(including, without limitation, the interest of a vendor or lessor under any
conditional sale, capitalized lease or other title retention agreement) (a
“Lien”) in, of, or on its
property or the property of its subsidiaries, if any, except the following
(collectively, “Permitted Liens”):

     

    (a)           Liens
for taxes, fees, assessments, or other governmental charges or levies on the
property of the Company or its subsidiaries if such taxes (A) shall not at the
time be delinquent or (B) do not secure obligations in excess of $10,000, are
being contested in good faith and by appropriate proceedings diligently pursued,
adequate reserves in accordance with GAAP have been set aside on the books of
such Credit Party, and a stay of enforcement of such Lien is in
effect;

     

    (b)           Liens
imposed by law, such as carrier’s, warehousemen’s, and mechanic’s Liens and
other similar Liens arising in the ordinary course of business which secure
payment of obligations not more than ten days past due or which are being
contested in good faith by appropriate proceedings diligently pursued and for
which adequate reserves shall have been set aside on the Company or its
subsidiaries’ books;

     

    (c)           statutory
Liens in favor of landlords of real property leased by the Company or
its
subsidiaries; provided that, such entity is current
with respect to payment of all rent and other amounts due to such landlord under
any lease of such real property;

     

    (d)           Liens
arising out of pledges or deposits under worker’s compensation laws,
unemployment insurance, old age pensions, or other social security or retirement
benefits, or similar legislation or to secure the performance of bids, tenders,
or contracts (other than for the repayment of indebtedness) or to secure
indemnity, performance, or other similar bonds for the performance of bids,
tenders, or contracts (other than for the repayment of indebtedness) or to
secure statutory obligations (other than liens arising under ERISA or
environmental laws) or surety or appeal bonds, or to secure indemnity,
performance, or other similar bonds;

     

    
      
        
           


        

        
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    (e)           utility
easements, building restrictions, and such other encumbrances or charges against
real property as are of a nature generally existing with respect to properties
of a similar character and which do not in any material way affect the
marketability of such real property or interfere with the use thereof in the
business of the Company or its subsidiaries;

     

    (f)           purported
Liens evidenced by the filing of UCC financing statements relating solely to
operating leases of personal property entered into in the ordinary course of
business.

     

    If Liens
other than Permitted Liens exist, the Company and its subsidiaries immediately
shall take, execute and deliver all actions, documents and instruments as are
reasonably necessary to release and terminate such Liens.

     

    4.10           Prepayment of Indebtedness.  Neither
the Company nor any of its subsidiaries shall, directly or indirectly,
voluntarily purchase, redeem, defease or prepay any principal of, premium, if
any, interest or other amount payable in respect of any indebtedness prior to
its scheduled maturity, other than (i) the Note; or (ii) indebtedness secured by
a Permitted Lien if the asset securing such indebtedness has been sold or
otherwise disposed of in accordance with this Agreement.

     

    4.11           Cancellation of Indebtedness. The Company shall
not, and shall not permit any of its subsidiaries to, cancel any claim or debt
owing to it or sell or otherwise dispose of any notes receivable, except for
reasonable consideration negotiated on an arm’s-length basis and in the ordinary
course of its business consistent with past practices.

     

    4.12           Blocked Persons and Prohibited Transactions. Neither the
Company nor any of its subsidiaries (i) will be or become a person whose
property or interests in property are blocked or subject to blocking pursuant to
Section 1 of Executive Order 13224 of September 23, 2001 Blocking Property and
Prohibiting Transactions With Persons Who Commit, Threaten to Commit or Support
Terrorism (66 Fed. Reg.
49079(2001), (ii) will engage in any dealings or transactions prohibited by
Section 2 of such executive order, or otherwise be associated with any such
person in any manner violative of Section 2 of such
executive order, or (iii) otherwise will become a person on the list of
Specially Designated Nationals and Blocked Persons or subject to the limitations
or prohibitions under any other OFAC regulation or executive
order.

     

    4.13           Affiliated Transactions. All transactions
by and between the Company and any officer, employee, director or equityholder
of the Company or persons controlling, controlled by, under common control with
or otherwise affiliated with such officer, employee, director or equityholder
shall be conducted on an arm’s-length basis, shall be on terms and conditions no
less favorable to the Company than could be obtained from nonrelated persons and
shall be approved in advance by a Majority Interest.

     

    4.14           Management Compensation.  Compensation
paid by the Company to its management and other employees will be both
reasonably comparable to compensation paid to similarly situated employees
in companies in the same or similar businesses of similar size and maturity and
with comparable financial performance and reasonable in relation to the
Company’s overall compensation structure.
Any grants of equity interests or options to employees, officers, directors or
consultants of the Company shall be made pursuant to the Equity Incentive Plan,
and conditioned upon the grantee agreeing to be bound by the terms of an option
and/or stock agreement containing first refusal rights of the Company
with respect to the transfer of such stock or options and such other provisions
as are approved or requested by a Majority Interest.

    


    
      
        
           


        

        
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    4.15           Financings. The Company will
promptly provide to the Lenders the details and terms of, and any brochures or
investment memoranda prepared by the Company related to, any possible financing
of any nature for the Company, whether initiated by the Company or any other
person or entity.

     

    4.16           [intentionally
omitted]

     

    4.17           Indemnification.

     

    (a)           Without
limitation of any other provision of this Agreement or any agreement executed in
connection herewith, the Company agrees to defend, indemnify and hold each
Lender, its respective affiliates and direct and indirect partners (including
partners of partners and equityholders and members of partners), members,
equityholders, directors, officers, employees and agents and each person who
controls any of them within the meaning of Section 15 of the Securities Act, or
Section 20 of the Exchange Act (collectively, the “Lender Indemnified Parties” and,
individually, an “Lender Indemnified Party”) harmless from and
against any and all claims, damages, liabilities, losses, Taxes, fines,
penalties, costs and expenses (including, without limitation, reasonable fees of
a single counsel representing the Lender Indemnified Parties), as the same are
incurred, of any kind or nature whatsoever (whether or not arising out of
third-party claims and including all amounts paid in investigation, defense or
settlement of the foregoing) which may be sustained or suffered by any of the
Lender Indemnified Party (“Losses”), based upon,
arising out of, or by reason of (i) any breach of any representation or warranty
made by the Company in this Agreement or any other Transaction Document, (ii)
any breach of any covenant or agreement made by the Company in this Agreement,
in any other Transaction Document or in any other agreement executed in
connection herewith or therewith, or (iii) any third party or governmental
claims relating in any way to such Lender Indemnified Party’s status as a
security holder, creditor, director, agent, representative or controlling person
of the Company or otherwise relating to such Lender Indemnified Party’s
involvement with the Company (including, without limitation, any and all Losses
under the Securities Act, the Exchange Act or other federal or state statutory
law or regulation, at common law or otherwise, which relate directly or
indirectly to the registration, purchase, sale or ownership of any securities of
the Company or to any fiduciary obligation owed with respect thereto),
including, without limitation, in connection with any third party or
governmental action or claim relating to any action taken or omitted to be taken
or alleged to have been taken or omitted to have been taken by any Lender
Indemnified Party as security holder, director, agent, representative or
controlling person of the Company or otherwise, alleging so-called control
person liability or securities law liability; provided, however, that the Company
will not be liable to the extent that such Losses arise from and are based on
(A) an untrue statement or omission or alleged untrue statement or omission in a
registration statement or prospectus which is made in reliance on and in
conformity with written information furnished to the Company by or on behalf of
such Lender Indemnified Party, or (B) conduct by an Lender Indemnified Party
which constitutes fraud or willful misconduct.

     

    (b)           If
the indemnification provided for in Section 4.17(a) above for any reason is held
by a court of competent jurisdiction to be unavailable to an Lender Indemnified
Party in respect of any Losses referred to therein, then the Company, in lieu of
indemnifying such Lender Indemnified Party thereunder, shall contribute to the
amount paid or payable by such Lender Indemnified Party as a result of such
Losses (i) in such proportion as is appropriate to reflect the relative benefits
received by the Company and such Lender, or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company and such Lender in connection
with the action or inaction which resulted in such Losses, as well as any other
relevant equitable considerations. The relative fault of the Company and such
Lender shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
and the Lender and the parties’ relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.

     

    
      
        
           


        

        
          -17-

          
            

          

        

        
           


        

      

    

     

    (c)           Each
of the Company and the Lenders agrees that it would not be just and equitable if
contribution pursuant to Section 4.17(b) were determined by pro rata or per
capita allocation or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately preceding
paragraph.

     

    4.18           Right of First Refusal. The Company agrees
that it will not (a) sell or issue:  (i) any shares of capital stock
of the Company, (ii) securities convertible into or exercisable or exchangeable
for capital stock of the Company, (iii) options, warrants or rights carrying any
rights to purchase capital stock of the Company, or (iv) debt (in any form), or
(b) enter into a Sale Event (as defined below), unless the Company first submits
a written notice to the Lenders identifying the terms of the proposed
transaction (including price, number or aggregate principal amount of securities
and/or debt and all other material terms), and offers to the Lenders the
opportunity to purchase the such securities and/or assets on terms and
conditions, including price, not less favorable than those on which the Company
proposes to sell such securities and/or assets to a third party or
parties.  The Company’s offer pursuant to this Section 4.18 shall
remain
open and irrevocable for a period of seven (7) days following receipt by the
Lenders of such written
notice.  “Sale Event” shall mean either: (Y) a transaction or series
of related transactions in which a person, or a group of related persons,
acquires from stockholders of the Company shares representing more than fifty
percent (50%) of the outstanding voting power of the Company, or (Z) a
transaction that is or could be treated as a Liquidation Event (as defined in
the Restated Charter).

     

    4.19           Intellectual Property.  The
Company will, and will cause each subsidiary to conduct its business and affairs
without infringement of or interference with any Intellectual Property of any
other person.

     

    4.20           ERISA.  The
Company shall not, nor shall it permit any subsidiary to, cause or permit any
ERISA Affiliate to, cause or permit to occur an event which could result in the
imposition of a Lien under Section 412 of the IRC or Section 302 or 4068 of
ERISA.

     

    4.21           No Impairment of Intercompany Transfers. The Company shall
not, nor shall it permit any subsidiary to enter into or become bound by any
agreement, instrument, indenture or other obligation (other than this Agreement
and the other Transaction Documents) which could directly or indirectly
restrict, prohibit or require the consent of any person with respect to the
payment of dividends or distributions or the making or repayment of intercompany
loans by a subsidiary to the Company.

     

    4.22           No Speculative Transactions. The Company shall
not, nor shall it permit any subsidiary to engage in any transaction involving
commodity options, futures contracts or similar transactions, except solely to
hedge against fluctuations in the prices of commodities owned or purchased by it
and the values of foreign currencies receivable or payable by it and interest
swaps, caps or collars.

     

    4.23           Further Assurances.  At any
time or from time to time upon the request of the Lenders, the
Company will, at its expense, promptly execute, acknowledge and deliver such
further documents and do such other acts and things as the Lenders may
reasonably request in order to effect fully the purposes of the
Transaction Documents.  In furtherance and not in limitation of the
foregoing, the Company shall take such
actions as the Lenders may reasonably request from time to time to ensure that
the Company’s obligations under the Transaction Documents and are secured by
substantially all of the assets of the Company, and shall give the Lenders
prompt written notice of its acquisition of any asset or assets with a value in
excess of $5,000 to the extent that the Lenders’ security interest therein to
secure such obligations
will not be perfected by the Uniform Commercial Code
filings currently in effect at such time.

     

    
      
        
           


        

        
          -18-

          
            

          

        

        
           


        

      

    

     

    4.24           Amended and Restated Articles of Incorporation. As soon as
practicable after the execution hereof, but in no case later than ten (10) days
following the date hereof, the Company shall have filed amended and restated
Articles of Incorporation with the Secretary of State of the State of Utah in
the form attached hereto as Exhibit E.

     

    5.           MISCELLANEOUS.

     

    5.1           Survival of Representations and Warranties. The
representations, warranties, covenants and agreements made herein or in any
certificates or documents executed in connection herewith shall survive the
execution and delivery hereof and the Closings contemplated hereby and shall
bind the successors and assigns of the relevant party, whether so expressed or
not, and all such covenants, agreements, representations and warranties shall
inure to the benefit of the successors and assigns of the parties hereto and to
transferees of the Notes, whether so expressed or not.

     

    5.2           Entire Agreement. The Transaction
Documents constitute the full and entire understanding and agreement among the
parties hereto with respect to the subject matters hereof and thereof, and any
and all other written or oral agreements existing prior to or contemporaneously
herewith are expressly superseded and canceled.

     

    5.3           Amendments, Waivers and Consents.  For the
purposes of this Agreement, and all agreements, documents and instruments
executed pursuant hereto, except as otherwise specifically set forth herein or
therein, no course of dealing between the Company on the one hand and any Lender
on the other and no delay on the part of any party hereto in exercising any
rights hereunder or thereunder shall operate as a waiver of the rights hereof
and thereof.  Any term or provision of this Agreement, the Transaction
Documents, and all agreements, documents and instruments executed pursuant
thereto, may be amended, terminated or waived (either generally or in a
particular instance and either retroactively or prospectively) with the written
consent of the Company and a Majority Interest. Any amendment or waiver effected
in accordance with this Section 5.3 shall be binding upon each holder of Notes
purchased under this Agreement at the time outstanding and the
Company.

     

    5.4           Notices and Demands.  All
notices, requests, demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given if faxed (with transmission
acknowledgment received), delivered personally or mailed by certified or
registered mail (return receipt requested) as follows:

     

    
      
        	
                 
      

              	To the Company:  	
                
                  Groen
      Brothers Aviation, Inc.

                  2640
      West California Avenue, Suite A Salt Lake City, Utah 84104

                  Facsimile:
      (801) 973-4027

                  Attention:  David
      Groen

                

              


      

       

    

    
      
        
          	
                   
      

                	To the Lenders: 	
                  
                    
                      To
      the addresses indicated on the signature pages
      hereto

                    

                  

                


        

      

    

     

    
      	
               
      

            	
              With
      a copy to:

            	
              Proskauer
      Rose LLP

              One
      International Place

              Boston,
      MA 02110

              
                Attention:  Alexander
      B. Temel

                Telecopy
      No.:  (617)
529-9899

              

            


    

     

    or to
such other address or fax number of which any party may notify the other parties
as provided above. Notices shall be effective as of the date of such delivery,
mailing or fax.

     

    
      
        
           


        

        
          -19-

          
            

          

        

        
           


        

      

    

     

    5.5           Severability.  Whenever
possible, each provision of this Agreement shall be interpreted in such a manner
as to be effective and valid under applicable law, but if any provision of this
Agreement shall be deemed prohibited or invalid under such applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity,
and such prohibition or invalidity shall not invalidate the remainder of such
provision or the other provisions of this Agreement.

     

    5.6           Expenses. The Company agrees
to pay all reasonable expenses of the Lenders, including reasonable fees and
disbursements of Proskauer Rose LLP as the counsel to all of the Lenders, in
connection with the negotiation, preparation and consummation of the Transaction
Documents.

     

    5.7           Counterparts. This Agreement and
any Exhibit or Schedule hereto may be executed in multiple counterparts, each of
which shall constitute an original but all of which shall constitute but one and
the same instrument. One or more counterparts of this Agreement or any Exhibit
or Schedule hereto may be delivered via telecopier, with the intention that they
shall have the same effect as an original counterpart hereof.

     

    5.8           Effect of Headings; Construction. The descriptive
headings in this Agreement have been inserted for convenience only and shall not
be deemed to limit or otherwise affect the construction of any provision thereof
or hereof. The parties have participated jointly in the negotiation and drafting
of the Transaction Documents with counsel sophisticated in investment
transactions. In the event an ambiguity or question of intent or interpretation
arises, this Agreement and the agreements, documents and instruments executed
and delivered in connection herewith shall be construed as if drafted jointly by
the parties and no presumption or burden of proof shall arise favoring or
disfavoring any party by virtue of the authorship of any provisions of this
Agreement and the agreements, documents and instruments executed and delivered
in connection herewith.

     

    5.9           Governing Law.  This
Agreement shall be governed by and construed in accordance with the laws of the
state of New York without giving effect to conflict of laws principles in such
jurisdiction. Each of the parties hereto irrevocably and unconditionally submits
to the non-exclusive general jurisdiction of any state or federal court of
competent jurisdiction in New York, New York.

     

    5.10           Waiver of Jury Trial.  EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY).  EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER TRANSACTION DOCUMENTS BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.

     

    5.11           Marshalling; Payments Set Aside.  No
Lender shall be under any obligation to marshal any assets in favor of the
Company or any other person or against or in payment of any or all of the
obligations hereunder. To the extent that the Company makes a payment or
payments to the Lenders or Lenders enforce any security interests, and such
payment or payments or the proceeds of such enforcement or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside
and/or required to be repaid to a trustee, receiver or any other party under any
bankruptcy law, any other
state or federal law, common law or any equitable cause, then, to the extent of
such recovery, the obligation or part thereof originally intended to be
satisfied, and all Liens, rights and remedies therefor or related thereto, shall
be revived and continued in full force and effect as if such payment or payments
had not been made or such enforcement had not occurred.

     

    
      
        
           


        

        
          -20-

          
            

          

        

        
           


        

      

    

     

    5.12           Obligations Several; Independent Nature of Lenders’ Rights. The obligations of
the Lenders hereunder are several and no Lender shall be responsible for the
obligations or commitments of any other Lender hereunder.  Nothing
contained herein or in any other Transaction Document, and no action taken by
Lenders pursuant hereto or thereto, shall be deemed to constitute Lenders as a
partnership, an association, a joint venture or any other kind of
entity.  The amounts payable at any time hereunder to each Lender
shall be a separate and independent debt, and each Lender shall be entitled to
protect and enforce its rights arising out hereof and it shall not be necessary
for any other Lender to be joined as an additional party in any proceeding for
such purpose.

     

    [SIGNATURE
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          -21-

          
            

          

        

        
           


        

      

    

     

    IN WITNESS
WHEREOF, the undersigned have executed this NOTE PURCHASE AGREEMENT as of
the day and year first above written.

     

    


     

    
      	 	THE
      COMPANY:
	 	 
	 	GROEN BROTHERS AVIATION,
INC.
	 	 
	 	 
	 	 
	 	 
	 	By:  /s/ David
      Groen                                                       
       
	 	       
      Name:  David Groen 
	 	       
      Its:  President & CEO


    

     

    


    
      
        
           


        

        
          
          

          
            

          

        

        
           


        

      

    

     

    
      	 	LENDERS:
	 	 
	 	 
	 	WESTFORD
      SPECIAL SITUATIONS
	 	MASTER
      FUND, L.P.
	 	 
	 	By:  
      Westford Global Asset Management Ltd.
	 	Its:   
      General Partner
	 	 
	 	 
	 	By:  /s/ Steve G.
      Stevanovich                     
      
	 	Name:  Steve G.
      Stevanovich
	 	Title: 
      Director
	 	 
	 	 
	 	Address:
	 	Grand Rue 3, 6th
      Floor
	 	Montreaux, CH-1820,
      Switzerland fax:
	 	Facsimile:      
      +41 21 966 79 22
	 	 
	 	 
	 	EPSILON GLOBAL MASTER FUND
LP
	 	 
	 	By:  Epsilon
      Global Asset Management Ltd..
	 	Its:  General
      Partner
	 	 
	 	 
	 	
              By: 
      /s/ Steve G.
      Stevanovich                    
      

            
	 	Name:  Steve G.
      Stevanovich 
	 	Title: 
      Director
	 	 
	 	 
	 	
              Address:

            
	 	Grand Rue 3, 6th
      Floor
	 	Montreaux, CH-1820,
      Switzerland fax:
	 	Facsimile:      
      +41 21 966 79 22
	 	 
	 	 


    

     

    
      
        
           


        

        
          
          

          
            

          

        

        
           


        

      

    

     

    Exhibit
A

     

     Form
of Note

     

     

    


    
      
        
           


        

        
          
          

          
            

          

        

        
           


        

      

    

     

    
      Exhibit
B

      
Form
of Security Agreement

       

       

    

    
       

      
        
           


        

        
          
          

          
            

          

        

        
           


        

      

       

    

    Exhibit
C

     

    Form
of IP Security Agreement

     

     

     


    
      
        
           


        

        
          
          

          
            

          

        

        
           


        

      

    

     

    Exhibit
D

    


    Form
of Series B Stockholder Note

     

     

    


    
      
        
           


        

        
          
          

          
            

          

        

        
           


        

      

    

     

    Exhibit
E

    


    Form
of Amended and Restated Articles of Incorporation

     

     

    


    
      
        
           


        

        
          
          

          
            

          

        

        
           


        

      

    

     

    Schedule
3.1(h)

     

    


    
      	
               

               

              Holder
      of Series B Stock

            	
               

               

              Principal
      Amount

            
	
               

               

              Capital
      Strategies Fund, Ltd.

            	
               

               

              $9,611,350.00

            
	
               

               

              Westford
      Special Situations Master Fund,
      L.P.

            	
               

               

              $27,350,280.00