Free Post Trial Brief - District Court of Federal Claims - federal

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A l~eview and Outlook of International Cooperation on Civil Aviation Industry in China
Y== Deputy Chief Engineer of the Ministry of Aero-Space Industry P.R. Ghlna

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A Review and Outlook of International Cooperation On Civil Aviation Industry in China
The dvil'aviation industry features high teehn01ogy, large investment a.u.d high risk. To share cost and risk as well as market, some European countries began their international cooperation on the development of airplanes as early as.in 1960s. Their perennial practice has demonstrated the increasingly .obvious benefits of interna.tional cooperation. Nowadays, the international cooperation has become a general trend in the aviation industry of the world. In the fidd of dvil aviation industry China has been actively taking part in international cooperation since it adopted open-door policy. In the past decade remarkable progress has been made in its cooperation with the United States of America, the United Kingdom, France, Italy, Canada and the Federal Republic of Germany. From following long-term'considerations China has adopted its ac,. tire attitude towards international cooperation in civil aviation industry. China is a devdoping country. In order to achieve a considerable growth in its economy, top priority shquld be given to the development of transportation including dvil aviation. In addition, China is a country with vast area, complicated and manifold geography features and weather conditions and a very large population. These factors result in a poten-. tial demand for various types of dv~q airplane~ and helicopters in great number. But some considerations prohibit China from developing many different types of civil airplanes. Development of a civil airplane needs a development time of 5 to 8

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¯ years and men longer, and a large investment, hundreds ofmillions to billions- U.S. dollars. Among the airplanes needed for expandingour transportation system are some types which are only demanded in a moderate ~. uantity and, hence,, can not be produced ~conomically. Therefore, from the viewpoint of economies, they have to be purchased from foreign countries rather than to be developed and produced ourselves. Some other types of civil airplanes will not be available in the timeframe demanded by our urgent ne~Is because of their long development time, although their development can tie arranged. But the most important reason is that in the process of national tx:onomy growth, all the programs in the counters reconstruction neod investments and we van not put our limited resources on self-development of many types of civil airplanes without considering .cost--cffectiveness. HoWever, Chinese aviation industry has formed a ~ production .capability after all..I.e.aving this productivity unused and solely de., pending on importation of all necessary airplanes will not benefit us and, besides, will heavily burden us with payment of hard currency. Therefore, Chinese aviation indm.try has taken international cooperation as its long-term strategy. We have tied up the purchase of foreign airplanes with international cooperation and have explored a number of ways for doing so to meet the ever-increasing d~nands put forward by our national economy. At present .China owns only limited number and types of civil airplanes. A big gap still exists between our country and develotx:d countries in fleet size. China is ~wen in a backward position among the countries in the Pacific rim. This situation is not comparable with the growth of. economy .in China. China ~s a broad pot~tial market for civil airplan~ which is also a solid basis for the fine prospect of Chines~ avia. tion jndustiy. We are willing to promote various kinds of cooperative ventures with those of same trade all over the world, on the basis of mutn-

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al :Here it is of value to review the progress we have made so fro" in col. laborafion. In 1.be field of civil aviation industry, most of the work has been em-rJed out in the form of subcontract production, i.e manufacturing parts and components for foreign companies according to the supplied drawings and materials. Now some airliners flying in the world ha~¢ .in. corporated parts and components mad~ inC~dna. The Shanghai Aviation Industrial Corporation has be, n manufacturing some assemblies in. eluding landing gear doors for McDonn¢l Douglas MD-82 airliners and more than 500 sets of such doors haw been delivered. The Harbin Air. craft Factory h~s been manufactt~g aircraft doors for Shorts SD3 serie~ and morethan 120 sets have been delivered. The Xi'an Aircraft Company has bvem producing vertical f'ms for Boeing 737. Delivery began last y~a~ and since then the f'ms have been installed onto the airplanes. Ai present the order has been up to 200 sets. The Shenyang Engine Company is manufacturing parts and components for French SNECMA CFM56 and Atar 9K50 engine. There are still some other factories working on subcontract production of aer9 parts trod blanks such as aluminum and titanium forgings. In this area .China has a trenaendous productive potetitiality and the prospe, t is optimistic. The companies involved have good r~utation for their b~ng k~bcontract, high quality, timely delivery and reasonable price. Good technology foundation and managerial ability and ineXl~.,'p~sive labour cost of Chinese aviation industry.are attractive Preliminary achievement has also been obtained in .licence produc,. tion. The Xi'an Aero-engine Company su&xxxied in its tri .a~production of Spey engine in 1979 with the patentmanufactar~ng technology bought from Rolls-Royce of the United Kingdom. In 1980 the China National Aero-=Tvchnology Import trod Export Corp.(CATIC) signed a licence agreement for Dauphin-2 hellcopt~r with Aerospatiale .Of France. Pro-

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Good resuli has b~n obtained so far in a co-production project of a modern jet airliner. The Shanghai .Aviation Industrial Corporation, the China Aviation Suppfi~s Corporation (CASC) and McDonnel Douglas signed an contract on co-production of 25 MD-82 airliners in March 1985. This is the biggest cooperative venture so far in the field of dvil avi. - ation industry between ~ and U.S.. This contract covers extension of production certificate and transfer of mbly teclmiqu¢ of MD--82; maintenance, post--sale service and supply of spare parts; and air crew training, etc. Due to harmonic cooperation 9 MD--82s assembled in Shanghai have be, n delivered. Customers are satisfied with their good quality. By the way I would like to m~tion that I hold a position of president at the Shanghai Aviation Industxiai Corporation for more than 2 years. I feel very happy whenever the recall of good working rela.tionship established with experts of McDonnel DougLas comes to my mind. It is well known that the dvil aviation undertakings in China.has perienced a rapid development in the past decade. The average annual growth rate of Revenue Pa.ssang~ Kilometers during 1978-. 1988 was higher than 20 percent and it will remain 10 percent #us.till the end of this century. Under this circumstances it is forseeable that international cooperation in the field of civil aviation industry in China will fro-thor develop.In view of the relatively great d~'mand of domestic airlines for 150 180 seats airIiners the Ministry of Aerospace Industry, togethm" with CAAC, has been in contact with some foreign companies to choose a suitable airliner for co-production. In addition to the airframe., we ax~ m willing to seek opportunities for cooperation in nero--engine, airborne equipment and fligh.t simulator, Furthermore, CATIC and MBB are jointly working on the pre-development of .a new commuter airlinex, MPC-75; the Shanghai Aviation Industrial Corporation has sent its gine, rs to join McDonnel Douglas, Saab-Scania of Sweden and Acritalia

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IMPflOVEMENTS TO CEflTIFICAlION i ROCEDURES
by Jim TI-~." m
The Iiport into the pr~:~edu~el of ~ of Type (FCff) cerUfic~tlon by Mr Ron Yates b I;kely to bring rndical changes to the way" in wh;ch

ti1"~on and Its a~ssg:x:i~ed forgo his pos~on ar, d mtumecl to Ansett wh~Ist Mr Yatm can-

authorlt~s, mar~fa~z~'er~ and ¯ nurrber of openz~r~, re~m-

e~ ~ logic~ way ~o go by bot~ tJ'~ E~ope~ .nd North AJ'ner~ mcommencla~o~ to acce~ ~ ~tandan:ls d the otm~ ot man-

o~ zu'ziz'no~y agains~ the CAA and Its predece~sor~ in th~ regard, and in turn led to 1~e rnft~atJon by t~e CAA Boa~ of the

Spain, Sweden, Swttzertand

separate and unique s'tan~uds wa~ lachnlcal~/, hl~ and

¯ ~:~d opinion.

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(Rob

ties v~th a g~ate~ extent of hands-off checks. Much o~ this can, It is estimated by the CAA, be uitJmate~y dek~gatad out to already exist on a large number of ~Jmady appro~d local a~crait. This wo~d gmat~/recluse the sost of day to day a~worlh;" heSS operations, f tee up the AJrwor~ness Branch for mo~ relevant survei/lance lad analysis dulies lind reduce the t~rne taken to get such aircraft and roods approved for the AustraJian The Report aLso reveals that it was impossible to spec~caJly identify any tangible gains in safety achieved by the CAA as resufl of its FaT policies and pmc~ses, irrespective of ~e cost involved In obtaining initial FaT certification. The Report reveals thal lhe US FAA b requked by law to perfo~n cost/benefit analys~s of their proposed rule changes which are then checked by an independent government body. The FAA considers that good clis ¢~o~ine. Closer to home, the 1985 repo~ from 1he House of Representatwes Standing Cornmitlse on Expenditure slued lttat the then Depl of Aviation "... accord a high priority to Its staled aim of d~spensing wi/h or refining aJl operational requbernent~ where net safety ~nefit b not commensuf~e w~h the costs imposed

on either the ~w~,tJon commurdty or the Department". In a Ministerial re~oon~ (taJ:~d in ~ on I:)~>ember 8, 1987) to that recon~mendation, It was stated tl"~t: "1"hls task i~ a key ob~ctive of Ihe Department ss It will be for the intended C~I ~auiat/on Authodly'. The revk~ thus strongly recommended thz'. the CAA adopt a fir~ po/icy of requ~ng cost/benefit studi~s tc be made and checked/endorsed by an oxlernal Department, such ~s F~mce, of any proposed regutatory change along the lines Of ~ conducted by the FAA. New Zea land is so on to introduce a ~ policy w~le the JAA is also working towa~ls the Anoth~ area of' contenlion, primarily with the airline comrn~, is lhat of Amendment 62 to CAD 101.6 regarding acceierAusl~r~a inUoduced th~s conlrove~ial amendment In Jury 1979. Essent~lly, it factors in a 2 second maclJon period at Vt prior to brake ir~ti~tion in the event of a re~j~cted takeoff. This equ~s roughlyto 40Oft in a 747 and compares ~ the US and intemationa,y used reaction time of .3 of a second. Australia addttk)nally incorporates a line up requirement which eJso serves to shorten already margh~l strips and is particularly demanding when combined wJ~ the accelerate/stop requirements.

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the standams ol a 747 rather b,~m a .dight~ larger and exte¢~

teml:~ fo~ inco'poratlon into productk~ US 1900/1g00C =dr. craft'. ~ themselws t~'e so discouraged (and mentally dra~'~ W t~" traa~nent at the han~ of t~e CAA~ A~,wor~ ne~ BaU'K~ It~t they ger~ decked tha~ It ~dmr~ would not ~ffecte~ any of t~ 77 refused takeoff accidents of wodo'w~ 1959-88. the local regtster wh=e r, uch a "haled in t~e eand' a~l~ude I:~e- o~der, less ~ and potent~a~ less safe aJ~a/t due to

ff~esa aimraft, o~e~ 15,000,000 f'~ht hour~, It i~ ~ifficult to ~mtJfy Austr~ special requirements for SFAR41 ~rcndt. Co~ideroperator wt~n foroign registered ako'att of t~e same type operAs n typical examp~ Ansatt cfled t~he experience wffi~ their f~a ~ ~ ~d 737-~ ~m~ m~ ~.~ ~1 t~l~. e~:raft certificated in accordance with SFAR41C v, dtho~t mod'~ficaUon. What a fa~u~stlc victory lot ~an~ty I~ t~ face of yeara of cmta rn~nded bureaucmtsl The issue of SFAR41~ o~e area t~t thta ma~ has ergued yea~. AJ1 we have ever ~ is for It~'n to mjbstan1~e thor |each ye~, It must be orK;kJded that adof:d~ of SFAR41 ~an.

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February 14, 1991

TO:

Barry W. Wilson Harry Eastlick Tom Connors Steve Katz

FROM: Bryan Carmichael The attached .study of a restructuring of our Turbo-67 companies focuses primary .emphasis on identffy~ng problems that exist and strategies which may be adopted to solve these problems. This focus is w~rranted because the task at hand is to correct those aspects of the business which are not currently being correctly handled.
This emphasis on problem areas however should not be allowed to color . our v{ew of the future for the product. We have a product which has been accepted as excellent by those well qualified organizations which have studied it; the production process is developing well; there is a demonstrator a{rcraft available; there is no real directly competitive product; some strong associations within the industry have been established such as United Technologies, and the management and technical expertise which developed and certified the product remain available to Innovair.

There exists a great opportunity to correct the aspects of the business which have been identified as problems, and to develop a plan to capitalize on the considerable potential that exists for the product. "

Bryan FL Carmichael

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Study to Restructure ]]asler Turbo Converslons~ Inc.~ lnnova|r Aviation Limi ted _and portions nfBasler Fli~ht Services Inc.~_to establish a corporate structuref or structures~ which will b~ viable for the h=ture.

Page'# 1 3 Section A-1 A-2
Section B-1

CONTENTS Current status of the operations of BTC & Innovair Options which have been ¢ons[dered to address the existing impasse. Corrections required to current accounting records. The valuation of BFS conversion unit, BTC and lnnovair by a Madison Wise. Group (Ted GunPJe). Study to establish viability of Innovair as a standalone company. Program to restructure existing ¢~rporatlons so that each group of shareholders owns 100% of a separate entity. Study of method of financing lnnovair operations. Strategy related to United Technologies. Strategy for dealings with Valley Bank. Strategy for discussions with Pratt & Whitney, Canada. Income tax considerations.

B-2
10 15
17 19 21 22. 22 23

B-3 B-4
B-5 B-6 B-7 B-8 B-9

B-10 Establishing kit manufacturing facilities for lnnovalr. B-11 Sequential timing of steps to be taken (This is still under preparation). "

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~orrent status or the operations of~asler 'I~rl.~ Convcrs:mns & ~[nnovalr

All operations of BTC and Basler Flight Service (100% owned by Basler) fall under the management at Oshkosh as follows: K~t production Conversion installation Admlnistra[ion Selling domestio Selling international Finance and Banking

function of BTC function of BFS mixed function, mainly BFS employees function of BFS function of Innovair mixed function - BFS employees -

Innovair is basically dormant at the present time. Problems are caused by the following conditions. The management at Oshkosh is significantly influenced by the day to day presence of the. Baslers at the office. The staff at Oshkosh are mainly BFS employees. The manufacturing functions seem to be progressing well, but the performance of all other functions fall far short of what is needed. The controllership function is particularly weak, especially in the following areas: Accounting entries have been iden~ed by an accountant (brought in by Carmichael/Wilson) .tota..!ing $750,00? p.lu_s_,_whlc .h.are bi .ased to the benefit of BFS, and to me detrimem ot ~/~ ana innova~r. Entries are being prepared to properly charge this amount.

Management accounting reports are practically non-existent even in crucial dec{sion areas. Specific information requested by Carmichael/Wilson is not made available.
A budgeting system has not been put in place. The corporations are seriously undercapital'=ed, Apart.from the competence to imP.rove operations, the cash shortage Is a major limiting factor in doing so. A c~ordinated marketing program is basically non-ex~stanL The current b, usiness ph~osop.hy of the Oshkosh management ls one of a surv=val mode, to make do with our existing resources and gradually work our way out of our ¢~sh crunch. ]'he Turbq-6. 7 conversion.is aq excellent product withe.definite hitch.in |od~'s m.arket place.for ~iq .l'~m.ediunl ~ircraft ~ v_erieW of roles. The number of 0C3/C-47 aircraft in operation is, ,.,~ '..~decreasinq each year and we.must move expeditiously to realize the t,J ~" potential of t~e market that is there.

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-2With our existing corporate and manaqement structures this is not possible.

lOptions which hnve l~en c~nsldered to address the existin~ Impasse

Opgon I - The c~n~i~a;ti~n ~f~ll operations rel~ted to the Turbo-67 into one corporation owned 50/50 by the two shareholder groups. Bring in additional cap)tal by introducing serious long-term ' Investors to adequately capitalize the operations, and to .,,,,< eliminate the problems inherent in a 50/50 management control situation.
This option would be the best solution if it could be accomplished. Carmichael and Wilson have proposed thls on two " separate occa~ons, supposed .b~ the legal counsel to the corporations. Both times the subject was discussed thoroughly at . shareholder meetings and both times the Baslers agreed to proceed in this direction, only to reverse their decision on bo~h occasions, after a considerable waste of time, I_n [ight of this, despite the attra~ons of this course of action, Carmichael/Wilson Would only be prepared to readdress this strategy if the following conditions applied:

- An ironclad guarantee existing preventing the Baslers fro.m again pulling the rug out from under the program proposed in this option. - The surviving corporation to be 5b/50 owned by the two groups and the various operations to be comb{ned on a historical cost basis. ¯ A number of appropriately qualified new shareholders to be introduced. '~r,~._~ ~"1, _-. Warren and Pat Basler anqr H~be no Ionger involved with ~the.operations of the co_rpora'~'~ .. except in the role of War~en ancl Pat Basler as shareholders.

- A tie-breaker me~odolocjy to be devised by our legal counsel to 6perate until the new shareholders are intrbduced.

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-3_Option 2. The two arou~os of shareholclers aqree on a price at which either can buy the other out. The l~rst group to come up with the funcls buys the other group out. This proposal was made by Carmichael/Wilson at a share.hol.d.ers meeting in January 1991, No specific response was recewea trom the Basler side. Although it would definitely solve the existing problems, it would require the raising of a considerably greater L amount of funds to a) buy the other group out and b} to adequately,,~ fund the operations of the company. Ac¢ordlngly, th.e pos_si.b.ility_ ~',~,r/~, ..~-, of this approach being viable is probably not as great as uption :~. Option 3. The existin.q corporations to be restructured into two corporations each to be 100% owned by a sep~te ,qroup of shareholders, each being Jicensed for all'iights to thdSTC and the. techn.o!ogy 09 an '-.. exclusive geographic basis, or alternately each Doing ~fcensea all rights to the STO and the technology on a world-wide basis.
This option was introduced by Carmichael/Wilson at t.he shareh..olders meeting in January 1991. The response from the Baslers was that neither of the new corporations would be able to survive. "
¯

There are problems associated with this option, including making satisfactory arrangements with Valley Bank, perhaps some concerns on the part of United Technologies, and possible difficulties in devising a program that maintains the viabili~ of the restructured corporation owned by the Baslers. This option would require a transition period while new productign and technical personnel were trained for the Basler Corporation. An essential aspect of this option is that both corporations would need to be viable at point of separation,--N'~'vertheless, it is probably the most workable option and will be our primary focus in the first analysis, Option 4. The two .qroups of shaFeholders a.qree on a odce at which they \[ would both" be orepared to sell 100% of the equit~ in the .Turbo;67 _Onerations,. Both groups of shareholders indicated that this was a poss~le option, but the defin~on of the value of the BFS portion of the Turbo-67 operations may pose a slgnificant problem.,, ~ a'[I ,- " "Z~ Correct~nrls required to carrent accoun_tl_n~ records_ ~ A~I Items listed In my memo to Price Waterhouse. All altocat~on~ of .expenses including administration, Insurance, rental, ~lities, rates, Interest, etc. Clarification of shareholders loans. Clarification of all intercompany accounts as at December 31. 1990. Clarification of shareholders bank guarantees and c~llateralized

assets.

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-4-

Strateqy Harry Eastiick has already indicated to Tim Dempsey, Tom Weight and Price Waterhouse that while he does not yet have all the specifics, he has seen enough to be concerned that incorrect entries have been made involving substantial amounts of money. Our strategy will be to work through and cooperate with Price Waterhouse to amend their draft report rather than issue a separate report. Harry Estlick we! work in Phoenix during the week ending February i 5. to complete his study of the a.,bove listed items. He will obtain additional details from Oshkosh accounting ~ required by phone or faxed requests. He w~ll maintain a record of data requested anddat~ supplied. As segments. o! his study are completed Harry will fax drafts of the infor_mation he p~ans to provide to Price Waterhouse, to Barry W]lson's home, Carmichae/and Wilson v61l provide any comments by return fax or telephone. ¯ No further statements or indications about the posslble results of the study will be made to Price Waterhouse or others at Oshkosh until the study is complete. The study report should be detaBed and complete with reference source documents and should particularly h!ghlight any actions or trends which would indicate biased, or improper, approach by anyone involved with the accounting; Depending on the contents of the data to be presented to Price Waterhouse, and the possible need to obtain additional data, Harry l-_'astlich will return to Oshkosh on the weekend of Sunday, February i 8 or in the following week. A written modus operandi to complete the P.W. report shou.lc~ be agreed between Harry Eastlick and P. W. prior to Harry presenting his data to them. bl'he finalBasler Turbo Oonversion~, InnovaIr andthe account status etween report from P.W. mu~t defirtitely clarify Basler Flight Services as at Deoember 81, 1990. The ~luation oI'BFS co.nve~lon Wlscotlsin,Gr~up. Warren and Pat Basler stated categorically to BRC on Monday, February 11, .d. urlng d!scuss!ons we had to pav.e the way for Ham/East~ck's study, mat Bas=er Flight Service Inc. hao set up, and was paying for, the valuation by Ted Gunlde of Madison, Wise.

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-5This being the case, and particularly because the valuation study has been carried forward to this date without our participation, it would not appear appropriate that we should be involved in inputing basic assumptions for the study. We sh, ould however provide the latest financial statements available for Innova~r Aviation Limited. Harry Eastlick will work with RoseMarle Fasullo to prepare Innovair financial stateme-n--t~ ~s {~t D~cember 31, 1990, With appropfiat.e clarifying notes, and supply a copy to Tom Weigt for use by Ted Gunkle.
Stud,/to establish -dabilitv of lnnovair as a stand-alone company ~with tntal exclusive rights to Turbo.67 S.T.C. and TechnoloL~' for specified segments orthe world. Corporate Structure - parent company (IAL) currently incorporated i"~-Hong K0ng which has tax planning advan.tages.u.ntii 1.99.7. In.order to retain the tax advantages, 51% of ownership and control must ~e held by non-U.S, residents. Should we consider relocating to Switzerland, Monaco, Singapore, Channel Islands, etc,? A U.S. subsidiary, branch or separate corporate entity would be needed to handle kit manufacture in the U.S,

Tax Planninq ¯ Innovair business will be basically overseas except for kit manufacture, and the thrust should be to develop the business on pro-tax (or low tax) profits to the extent possible.
Manufactudnq -

Conversion kits - Our technical management are U.S. citizens and resi~r'~'mately 80 to 85% of the cost of kits is made up of parts and components m,anufactured by corporations in the U,S. Thelabor component in the kits Is relatively small. For these three reasons and because a PMA may be difficult to obtain for an overseas location, kit manufacture should be undertaken In the U.8., probably at.a west coast locate'on. Conversion [nstallatfons ¯ Estabr~h~ng and maintalnfng a con- _ version installation facility requires considerable up-front Investment and carrying costs: A much greater labor component is Involved than for kit .rm.anuf~cture. PracScally no rr~erlais purchasing Is Involved. For the aoove reasons we should, at least in,ally, .have conversion kit install. ation= carried out by a third party at a k:~"~n outside the U.S. ¯ . Jong range wing ta,r~, =n=a~lauon, metal control surfaces, and " as me .Optional Equlp.men, t: T'~. e.. m..anufact~u..re of op.'on .~! equipment such top cargo door are labor =ntenslve and preferably should be accomplished overseas. BFS owns the STC's for these three options and it would be preferable to negotiate license a~rangements with them, rather than develop new S.T.C.'s

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-6Market~nq - Basic marketing material will be developed by lnnovair for use throughout its territories. The main marketing tools w~l be brochures, comparative product data sheets, demonstration costs, airshows, v~deos, trade journal ads, mission profiles and mission ¢ostJngs. Marketing material wil be supplied in reasonable quantities to distributors at . Innovair's cost. Distribution - lnnovair's general policy will be to have selling._ . and dist~ied out by distributors for exclusive territories, l ne distributors will be responsible for marketing (using mated, el provided by Innovair at cost) selling (for which they receive a commiss=on} est.ablishing, or having established, a conversion facility, and product support (in cooperation With Innova!r). Product Suoport Warranty - Innovair will warrant the parts of the ¢onversio.n which are manufactured by it. The exposure on each aircraft at cost to Innovair for all kit parts manufactured by it, would be in the vicinityof $150,000 to $200,000. On top of this the installation cost of parts which need to be replaced under warranty, needs to be considered.. ~ - Innovair will provide pilot training for two pilots and . five mechanics tor each aircraft sold. Training will be free, with logistical costs for account of the customer. All other training w~i be charged at Innovair's cost. S~res - A spares inventory to back up distr.~utors w~l be carried by Innovair. Mark-up on spares will approximate industry average. Maintenance - Innovair will provide personnel to suppo_d, distributors maintenance activ~es and will charge for this service at Innovair s cost. ,New Product Development - lnnovair will invest in the development of new products from year two of its operations. For planning purposes we w~ll assume that expenditures on new product development w~l be restricted to amounts available from internally generated funds. . proprietary Property Riqhts ¯ InnovaJr will register a trade name and logo in mar.kets wher,e pr .oducts are sold. (Assume four markets year one - six year two and ten year mree,~. ¯

~

roduct Uabir~.lnsurance - As the I~censee of technol .ogy, manufacturer of it .p, arts and assembler of kits, lnnovalr will Incur potential product I~ab~Tdy. me moment, we have not quant~ed th~ liable,, or the c~st _of lnsur~'~ce.

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-7Personnel

Innovair curemtly has access to general management, manufacturing and technical personnel to man the separate organization, Financial and marketing management need to be Identified. Innovalr will need to raise funds to finance operations when it becomes a separate enti~michael and Wilson would be prepared to issue new shsres to the extent ~.! the corporation's capital for sale to new investor&
Business Plan I~1~-~//~P

In ~rder to present information to attract potential investors and to define the percentage of ¢ap~tal to be sold and at what price, a bus;hess plan needs to be developed based on the above parameters and realistic sales performance. This plan will be developed by February 28, 1991,
Program to res{r=~cture the existing cnrporafions so that each ~'oup of share. holders (i.e.~ Carmichael/Wilson and the Basters) owns 100% ol' the .eq~fitv a separate corporate entity.

The assets and iiabilites of Basler Turbo Conversions |no, would be transferred to the shareholders aad to Basler Flight Service and to Innovair, Payments to shareholders should be made in the follow~ng order: 1) Unmatched shareholder loans; 2) m~tched shareholder loans and 3) capital. BTO would be restructured to be a 50/50 company, its only asset being. the ownership of the $.T.O. All rights to the 8.T.O. would I~e I~censed to Innovair and B.F.S. [n perpetuity on an exctus~e geographio basis. BTO,~ould receive a royalty on sales from Innovair and B.F.8. calculated to be sufficient to cover its administration and legal expenses, and to pay down any remaining loans from shareholders over a three year period, Innovair would be restructured to be 100% owned by Carmichael/W~lson. innovair would be licensed.exclusively for all dghts to the $,T.C. and technology for Europe, Asia. Australtasla and the Pacific Islands and .~¢a. BF8 ('already 100% owned by Baslers) would be ex~usive!y licensed for all tights to the STC and technology for Alaska, Canada, Continental U.8., Mexico, Central America, the Caribbean ~d South America. Transltlorl period between exl~_n.q corporation.structure and the separated structures, .There, would ,need to be a transition peflod dufin9 wNch the e.xIstlng corporate ano operational structures are b'ansformed to the sepa'ated operations and corporate structure.

386

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-8During this period additional management and technical staff would need to be hired and trained to provide a management and technical capability to both on~olng corporations. Existing staff will be given the opportunity to elect which corporation they w!sh to continue with. A program will be undertaken to ensure that complete sets of drawings. manuals, j~gs, toolings, parts lists, vendor lists, etc., are available to corporations. Manufacturing will probably continue as is until conversions already underway are completed. The planning of the lransition period is extremely important and wili be the subiect of an in depth study.
_Study of method of financing Tn!~ovair o~eratlons.

Business Plan. Har~ Eastiick and Wa~ich will p~ together a proposal as to ~ ~ ~a~ ~nding to suppo~ innova~'s opera~ons ~uld be obtained. ~e first ~equlrement is to develop a draft business p~an. ~e plan developed with Deloi~e and Touche ~uld be used as a m~el. ~e ~lan should be developed jointly by H~ Ea~ick and B. R. Garmichael on a pfiori~ basis. ~o logistics of the preparatlon needs to be wo~ed ~ - Approximately 40% ef the equi~ of Innovair ~uld be issued as new slock and made available to new sh~eholders, ff 40% did not raise adquate funding, loans could be considered for p~ of ~e requirement. if pra~i~l, it mighl be p~de~ to r~se a small amounL ~ay $~,0~ to $~0,0~ to in~ate operations ~d a laler date, when ~e opera~ons were ~lished ~d preferab~ some orders in place. ~isting.shareholde~ com~b~loq - ~e e~s~ng Inno~r shareholders would ~n~ute ~e tec~ol~y license ~d a goi~ org~~, b~ ~uld not be In a p~lon to ~e ~h. Ne~Investom ~ Preferab~ ~ new share~Ide~ ~uld bring some~ing to ¯ e ~ble in add~on to c=h, su~ ~ busi~ ~n~, !~ e~nen~, business op~r~ons wh]~ ~Id supplement l~r ~es, =¢, ~vestors should h~ve Ion9 te~ l~ons (~t ye.re ~p~) ~d ~ I~erested in gr~ me business, ~ere ~ld ~ plu~s ~ one or ~re ~ ~e l~e~ors were trom overs~s, be~e ~ ~e ~ pl~ning a~ges.. ~orate ~re ¯ ~ ~e absen~ ~ good re~ons to ~ange, R Is intended to ~qt~in)nn0vair A~a~on Um~d (a Hong Kong co~ora~on) ~s ~e pare~ ~mpany. A suesi~=aw, br~ch or ~ted ~mpany, would be established ~ ~e U.S.A. to handle k~ man~a=ure ~ dprodu~ developmen~ ~e equ~ ~pa~on in ~ entities would be ~e s~e.

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-9Strutel~, related to limited technologies

We should not approach UTC regarding [he separation of the companies until a heads.of.agreement has been signed with the I~aslers. When we approach U.T.O. it should be at a relative.ly senior management such ~s Mr. Don Lang, and we should have a very well preparea presentation. We believe that the real focus of U.T,O. management on this project r~soive around offset programs and our strategies and presentations should reflect that. The following ~trategies should increas(; U,T.O,'s interest in the project: a} Include Eastern Europe and Turkey-in the distribution territories U.T.C. - several Eastern European countries, e.g., Poland, represent potential for offset programs. Turkey could possibly represent the largest offset potential for the Turbo-67 project. Both Eastern Europe and Turkey could benefit from a name like U.T.O. supporting the project. Additionally, considerable up-front expenditures .will be needed to put projects together in Eastern Europe and Turkey and U.T.C. has the capability to progress these projects more quickly than Innova[r. b) Make the Taiwan conversion facility the location of choice for all Innovalr conversions unless conversion in the country of sale is necessary (conditional on agreed cost of conversion.) c) G~ant the right of firstrefusal on new Innovair products for offset pro.grams worldwide. Also first consideration would be given to the use of P.. W. engines. As a quid-pro-quo for the above, we would want to eliminate the provision whereby UTO could acquire engines direct from P.W. Canada. Until the appropriate time to approach UTO management, BRC will keep in close contact.with the joint venture personnel to track the development of promotional material and market business plans, ¯ Regarding the negotiation of the distribution agreement~ d'~cussions may~l~ko place during the week commencing February 11, 1991. BFIO will not beln Oshkosh this week hence will not participate In the discussions, however noth{ng can be signed without BRG's _agreement and slgnature. It may in fact be preferable that BRO does n.ot pm'ticfpate because there will probably be some rough patches which ¢~n be ehmlnated when Innovalr approaches UTO management.

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-10-

Backclround - All dealings and arrangements with Vatley Bank have been made by BFS employees on behalf o,f BTC and BFS. In all cases, except where these deah'ngs required si~..natur~e by_Carm=chael and/or Wilson, neither the nature of these dealIngs nor wmten ~ocume~at-~ ~ ~m-~-de-d t-6-~'-h~-r Car--~q-#.h~l-orWilSOn. BRC has requested on numerous occasions from Basler, our legal counsel, Valley Bank and Price Waterhouse (in writing) a statement of what shareholders assets have been collateralized to support BTC loans, and for what amounts.these assets havo been collateralized, This information has not been provided to date. Onseveral occasions incompIete documentation was presented to BRC for signature, with the proviso that urgently needed funds could not be made available until BRC signed. A careful review of the revolving loan agreement and the 10/31/90 . promissory note for $3.5 million needs to be made. It should be noted that the only signatures on this fiote were Warren & Pat Basler. BRG did not receive a copy of this note until a visit to Oshkosh at the start of February when it was made available attached to a draft of a Price Waterhouse report,
A detailed picture of the status of ~rangements between BTC and Innovair and Valley Bank needs to be assembled and actions which Valley Bank may take assessed, as we must assume Valley Bank will side with the local party, l,e., Baslers. 9-8 Strate,~v for discussionswhh P &Whitney Canada

Immediately after discussions with UTO in Hartford, we should proceed to Montreal for discussions with Pratt & Whitney, Canada management to explain the new structure. We n0ed to establish an OEM pdce for Inn .ov~_',r. Also to oersuade PWC to combine [nnovair and BFS orders for 67R engines fo.r pricing purposes. We should discuss lnnovair's new project pr~jrarn and the possible use of P & W engines. B-9 ~[ncorne_Tax c~nstderations of total program [corporate & perso_naI) A s.tudy should be undertaken by tax speci~sts to determine the tax impl~cat=ons of the separation of the existing structure into two separate corporations and the most advantageous setup for Innovair after restructuring.

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¯ B-IO Establls.hing kit manufacturing facilities fnr ]nnovalr, The three key members of the production and technical staff at Oshkosh (all BFS employees} have approached management thrqugh the legal counsel (as he provides a 1oddge between the shareholder groups) and advised him that if there is a split between the two shareholder groups, they would not be prepared to continue working for any o.p.eration controlled by Warren Basler. Each Indicated that they would opt to join operation set up by Carmichael/~Nilson. Ti~ere is little doubt that ,m.ost, if not-~ ,l;-of.the rePr~nlng sup-e-tv~oryandkey-technical people wdl opt to go with them. Th.e availability of experienced manufacturing and technical personnel are key to the success of Turbo-67 type produ~on activ~Jes. A study ~s und.e,n^,ay by technlcal personnel to develop a physical and financiaJ plan .and time frame to establish (initially) kit manufacturing facilities for Innova~r. '

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March 5, 1991

~he following sets forth the basis upon which Warwick c~sul~Lng Group, Inc. ('~arwick") and US Holdings, a division of-united States ~ft corporation, ('~s Holdings") will be the financial adviscz~ and exclusively families investments in Innmmir Aviation Limited ("IAL") ard Basler Turbo Conversion, Inc. ("HI~') ard in the search for debt and equity cn terms and

Warwick ar~ US Holdings will:

as a newly ~ entity ('~eorganized Cu~any") resulting from the acquisition of the interest owned by Mr. and Mrs. Warren Basler ("Baslers") in IAL ard BTC.

3. Conte~-ane~sly with the preparation of the Confidential Mam~ra~m, we will ~ ~i~msskms with sever~l ~ of financing tm ~ the =ms~ likely and capable source.

and conditions that are acceptable t~ you, we will prepare a letter

of ~ outlining the terms of the agreement in principle.

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the purchmse of the Baslers' irfcerests in ~C and IAL. We will. continue to m~nitcr this delicate phase of the tr~on to m~ve

es expediti~ly ~ po~ible to a =l~ing.
Corduct ~ your behalf and with your involve~ant, the negotiations for tb~ payoff of the r~volving bank nc~e due Valley Bank.

with truly ~, qualified financing sources leading to an acceptable to you. After an agreement in principle ~s reached with the Financing Source, we Will develop a letter of intent identifying the basic terms and conditions of the pruposed fire.ricing t_bat are acceptable
9o

After signing of the letter of intent for the financing by all parties, we will work closely with your at~ and accountants in the prepa~nian ar~ si~ning ~f the definitive financing agreements of intent.

A monthly retainer of $4,000, payable monthly starting cn March 30, 1991 and thereafter =n 30th of each month, pltts c~t-of-

~ ~ ~ £~~ (3) =mt~ or~dl ~ fhmn~n~
purmmnt to the pmm~s~s ~ f~rth herein. If a letter of

~tc.) ~/~ mhall ~ u~m tb~ z~uti~ of th~ ~

A fee of $5,000 for preparation of the "C~nfidential Memoranfum" hz~dn to ~ paid ~ or bef~ 30 ~ a~er the ~i~ of ~ ~d~ it ~ ~.
C. A Financial Advisory Fee based .upon the folluwing c~:

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An ~ equal to five percent (5%) of the

~ bank debt ~ssumed) and 2% of the next $5,000,000 of funds (equity ~r~/cr de~ exc!udi~ ~ ~ del:~c ~sumed) l:~r~'£ded to the P..c~om~, bt~c in no ~erfc less ~ $Z50,000, to l~ l~id at the closing of the tm-ansau~,ion contemplated herein ;

55,000,000 fu~s (~uity a~d/or de~ e~c!=itng any

(2)

An axz~unt equ~l to ~ ~ (2%) of ar~ additi~al c~pit~ (ex~ I~ ~) pm~mvided t~m ~Ir ~-z-~ed by

us Hold~ and Warwick for the P~zed Cnmpany (or foll~ing th~ cl~ of the transaction by the Financing
Source, to be paid at funding.

any ot~r ~=viving ~ntity) within two (2) years

(3)

An a~ equal to one l~rc~z~t (1%) for any l~ank debt

arranged by Us Holdings and Warwick for Reorganized cnmp~! (or any other surviving entity) within tw~ (2)
years following the close of the transaction, to be

~he ~x~thly fee payn~_nts disc~ in lm~ragz-a~ A a~ ale to be de~ f~ the porTion of the Financial ~ufvisory Fee payable at closing as d~ri~ in paragraph C (I) and C (2) above.

us Holdings and Warwick agree to shar~ a portion of the financial advisory fee (C(1); C(2) or C(3)) with another investment banker r~sulting f~ the introduction of qualified investors by Carmichael an~ Wilson wh~ became
Financing ScUrUes. In n~ event can such a .sharing of the fee r~duce the US Holding/Warwick portion of the fee below c~r minimum of $150,000. Your right to cancel i%/tur~ monthly fees ard this agreement can be exercised after the initial 30 days, upon ten (I0) days notioe. If cancellation occurs prior to the payment of the fee for the Confidential Men~randum then payment of the fee for the C~nfidential ~ will be due and payable.

(refer to item (B) ~) and the Confidontial ~ has been prepare,

Our fees for services set forth in par~gral~s~ C(1) and C(2) above will still be due to Us Holdinqs a~ warwick in the event that a transaction ~s cunsummted within ~ (2) years with a prospect which we presented a~ with

It is agr~d and ~ Uhat the Reo~!an~ed Om1~ny, its predecessors
ard its s~%reh~iders shall seek the advice of their ow~ attorneys and Holdings cr Warwick for s~me. It is agreed and urderstccd that our ~vement in assis~ng .y~/ in

obtaining financing is on a ~ efforts" basis ard n~ guarantees ~r

warra~i~ of any kind ar~ being m~e by us for the success of same

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and Warwick. US Hold~ and Warwick shall make no ~present.aticn cr war~ as t~ the accuracy ~r c~mpletaness of sumh informal/on. Also, due to the suurce of the information and the many social an~ ~ variables affecting same, US Hmldings ar~ Warwick shall make no r~_pr~_ntaticn or warr~ as to the accuracy of any financial pr~ectic~s it ~may prepare. If you are in agreement with ~LI the above, and believe this correctly ~_fin~ the u~mmmn~h~ be~w~n ~s, p1~se sign and r~c~n an ~s=r~d copy of this letter agreement. We icok forward tc working with y~u ~n this ~ction.

us HOLDINGS

Harry V o East.lick President and ~%ief Executive Officer

, 1991.

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P~.~-n~ and E~c~:lve offi~r

, 1991.

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March 5, 1991
Genar-al Outline of Tentative S~:rucUn~

The following is a g~neral outline of the objectives for the tentative structure for financing of the r~ation of Basler Turbo Conversion struutuz~ .of the fina~ will ~ uR=n ~ the final agreement with Mr. & Mrs. Basler and the r~qu~ of the ultimate financing source..
Reor~nization of Ccmpardes Basler Turbo Conversion, Inc. (STC) a Wisccrsin corporation is owned ~s follow~:

Warren Basler Patricia Basler F~Isa Carmichael

Barry wilson

25 1/2% 25 1/2% 33%

16%

100%

follm~s:
War~_n Basler Bryan Carmlchael Geoffrey Wilson 49% 34% 17% 100%

Basler Flight Service, Inc. (~FS) a Wisconsin c~tion is wholly owned by warren Basler. BFS is the distributor of the Tu=bo-67 for the USA market and uperates the c~nversion kit in~tallation facility. B~S also uper~tes a

freight airline and a fix~ base ~i~n all in ~, Wisconsin.

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Additional backoruund and the business projection ar~ included in the five year business plan of BTC and IAL for ]990-1994, that has been provided t~

You have determimed that it is in y~ur best interest to r~or~!~e the owner~dp BTC and IAL whereby y~u or ~ of y~ f~mily will own all of the uutstarding shar~s of those crmpanies prior to the infusion of any new capital. '~ne acquisition of all of the uu~-tarding sbmr~s will facilitate t~e ~ of ~he additic~ml c~pital required to ensur~ the successful pr~k~Tion and delivery of the Turbo 67 Aimuraft. ~e outline of the pruposed financir~ is based on the asstm~ticn that negotiations with Mr. & Mrs. Basler for the acquisition of their ~ ar~ successful with terms and ccnditicms acceptable to y~u. !t is ur~erstcod that should the negotiations nut be suc=essful that other strategies that w~ have discussed for y~/ tm obtain c~ntrol of a signlf" ic~nt portion of the will most likely cause the a~munt ard f~m of the proposed financing to be revised.
We unde_~-tamd that your objective is to have a minimum of the following equity ownership after the infusion of additional equity capital ~nd t_he c~nversion of the new subordinated dobentu~s.

Carmichael ard Wilson
New Investors

60%
40%

As a part of the financing ard re~ticm each shareholder will reduce debt of the company to them in an amount up to $500,000 for a total equity

o~tributi~ ran~ing ~ $750,0~ to $i,000,000. process of the pr~x~d fi~ncing.

It is pr~xs~d ~!mt t~s ~ of obligations due the current shareholders w~uld beccme notes payable, of the recrg~%ized cc~mnies ar~ paid from the

B~ on info~ti~n r~_iv~ t~ date, the p~l~ financing structu~ for r~o~!anizati~n of T~bo 67 Curporation foll~ws:

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~r~!~ized~ $1,500,000 $ I,S00,O00 Ccnverti~leSubozrtinated Debt $3.500.000 $ 8,50Q,000 $5,000,000 $i0,000,000

The possible terms of the c~nvertible debt is expected to be as follows: Five year subordinated debentures with ~ only pa!rable quarterly at approximately 14%. Ac~litlonal pruvisions:

*Accr~l of a~litional interest equal to 10% of the c~sh flow from =p~ti~s to be defin~ ~ yield on 20% to 25% per armum. ~he definition of c~sh fluw from operations paid to the sha~_holders tm offset the shareholder's personal incu~ tax r~-ulting from the .~mpter S ele~_i~n of the co.any.

*Sinking furd ~ be established to retire the debentures with anmml contributions as £oli~: (or if debonUn~s have been
End of

converted ~ paid down. the r~maininq balance)

Year Year Year Year

1 2 3 4

Nc~e 15 20 25

*Currant sh~zholders wLU pl~ge as collateral sha~s ~f their common st~_k equal to 30% of the mnu~mrding stock as security for performance under the pruvisions of the loan agreement. Pledge of
*Debt w~uld have ~aximum ~ pruvisimns approximately as follows: First two years non c~llable Year 3 107% Year 4 103% Year 5 100%

It is ~ t~t the ~ii p~visi~ ~ give the ~ of his ~ return; therefore the call p~mi~ w~uld ~ve a provision for ~o%~i~ if certain

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*A p~rti~ of the Principal of the debt can be converted into newly issued cc=m~n st~-k. ~he new ~ acrgltr~d on exeruise of the conversion rights will r~present ap~tely 20% uf the
expil~ C~ December 31, 1993 a~d the prir~_ipal r~duction of the

~p t~ 12/~I/91
1992 ar~ 1993

$3,000,000 tm $3,500,000

the date the conversion privilege

The potential use of proceeds from cum,~n stock and subordinated, if the above structure ~ utilized, may ~e applied in the following manner. Acquisition of ~sler Shar~s and ~y=ent of their st~_khold~s
1,500,000 3,000,000

Kits c~.ior~ equip,,~mt
Product. support, ~, etc.

680,000 3oo,ooo
400,000

1,280,000 75o,ooo
750,000

-1,380,000

2,780,000 800,000
600,000

Miscellaneous workir~ capital and cost of acquiri.~ ~ Pay-off total Valley Bank loans

'700,000
600,000

500,000

500,000
2,000,000

Type Certificate

320,000 $5,000,000

320,000 $I0,000,000

~he company's Beard ~f Dire-trots may he allocated as folluws after the

financing arn r~=~gniza~n

Number of

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The subordinated debentur~ investmr %r~il,~ also be a%~ilable to enhanc~ the Company's credit with its banking institutions. It is anticipated that the investor's backing may allow:

*~e elimination of the current shareholders personal guarantees. *Increased b=ruwing c~p~ity of appr~xi~tely $2,000,000.
To ascertain the feasib~_lity of this enc!agement, w~ have, through Warwick, contacted six potential f~ sc~%r~es whm have expressed ~nterest in this pr~ect. 'lhe pruposed financial structure will be uur objective with the realization that its final form will =cst likely due to market

conditions an~ the r~uire~en~ of the ultimta financing sourue change.
In ~iition, any of the six potential ~ would bring expertise or contaC~ within the aviation industry that would provide additional depth to
investmrs, we will not limit our search for the investor tm those six investcr~ and accordingly, we will, i~ engaged, c~ntac~ several ot!%er potential invest=~ prior t~ making our final re~mmendations to you.
Ti~=table

The following is the tentative .schedule for the targeted o~mpletion of this

financing:

.Completion D~te
3-2~i

P~eive data base for r~wDrking the five year plan frum Br~-an Carmich~el. 3.

3-05-91

plan for ~C and ~

Complete r~visicn of the five year business

3-27-91 Cumpl~uutlineofs~ra~i~ ~ated~V~ Banknote. 6. Complete the preparation of the C~nfidential final. 4-08-91 3-27-91

7.

~ and tax review of the proposed transactions c=~let~ ~ Br~n c~=ichae~ anU ~rry Wilson legal and tax c~a~_Iors.

4-08-91

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8o

4-08-91 9.
i0.

Negotiations with Mr. and Mrs. Basle.r, Mr. Tim Dempsey ar~ Valley Bank.

4-10-91

si~ Ia~er of ~ b~tw~n F~

source ar~ the ~ed O:mpany f~r the
financing cn terms and cunditions acceptable 5-01-91

ii.

Complete the preparaticm of the definitive
5-30-91

outline of this stl'uctur~ was based c~ cur ger~eral kr~wledge of the

~Imnk you.
sin~y, US HOLDINGS

President ~ ~ ~ve Off~

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A0190A