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

Case 1:96-cv-00408-LAS

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THE COURT: We previously had been looking at no experienced management or employees, that's the record number 4. MS. FLOYD: THE COURT: Okay. 324A/4.

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BY MS. FLOYD: Go to the next chart relating to precarious

financial condition. I believe that's -A That is. Okay. Talk about that. THE COURT: That's number 5. THE WITNESS: Right. I think it would be useful to put that slide up that just shows the numbers from the three companies that I just alluded
to.

Q

MS. FLOYD: THE COURT: MS. FLOYD: THE COURT:

That's fine. And that's chart 5. Chart 5. So 324A/5. Just for a brief moment so we

THE WITNESS:

can get a sense of the -MS. FLOYD: I'm just trying to pass it two different ways at the same time. Just a second. BY MS. FLOYD: Okay. Can you discuss this particular Heritage Reporting Corporation (202) 628-4888

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i 2 3 4 chart? A Right. This is a chart I put together

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pulling information from the financial statements of Innovair and Basler Turbo Conversion and Basler Flight Service between September '89 and February '90. I think Basler's year-end is February when the other two is December. And that's a period of time where we have a picture of them about the same time. As the chart shows Innovair has current assets of some more than 500,000 with liabilities over 2 million and a capital deficit, a deficit of working capital, capital of no more than $91,000. So you've got a lot of liabilities and not much else. Similar Basler Turbo Conversion, 8 million assets, II million liabilities. Liabilities exceed assets. And they also have an accumulated deficit of $2.9 million. And finally, the Basler Flight Services shows that they had 7 million of assets, roughly 7 million of liabilities, and roughly a million one of capital. I'm cognizant, and I might say Plaintiff I'm cognizant of the fact that there were disagreements and questions about the accuracy of the Basler financial statements. And they related to charges Heritage Reporting Corporation (202) 628-4888

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between the Basler companies. And maybe if somebody sorted it out and sorted out the wrongdoing, if there was any, or I guess there was some, the Basler Turbo Conversion deficit might have been a little smaller. Basler Flight Services might have been a little less. THE COURT: Let me direct you to this box over here. If this box over here was actually owed by BTC to Basler would that be the kind of thing that would influence the financial picture? THE WITNESS: Well, the ii is -- my hand's not as steady as yours -- the II is the -THE COURT: Looks very Christmasy with both of us. THE WITNESS: Look at that steady hand. The II million is owed by Basler Turbo Conversion. Services -THE COURT: Yes. THE WITNESS: -- the financials might have been differently stated. But from the perspective of where we're looking at it now from the Innovair perspective, Mr. Carmichael and his company, although the numbers might jumble between the Baslers -THE COURT: Yes. THE WITNESS: -- it doesn't weaken the fact Heritage Reporting Corporation (202) 628-4888 And had it been owed by Basler Flight

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Whalen - Direct 1 2 3 4 5 6 7 8 9 I0 II 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the page. is. Q

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that the Innovair financial position at that time was weak. BY MS. FLOYD: Okay. Let's illustrate that in terms of

we're going to look at Mr. Cobb's report because this is the document that we'll go to first with respect to showing what Innovair's condition was. And that's PX9, page 9. You're all right? Okay. THE COURT: MS. FLOYD: That's PX-9? Nine, page 9.

THE WITNESS: Actually it's page 6 I think you want to direct me to. MS. FLOYD: It depends on which exhibit it It's the page that says "Innovair financial" -THE WITNESS: MS. FLOYD: THE WITNESS: Right, PX-9 -Slash 9. -- page 6 of the Cobb Report.

MS. FLOYD: Right. THE WITNESS: MS. FLOYD: this courtroom. THE COURT: Actually at the bottom the I apologize.

Yes. We have special numbers in

little number is 3 on the page? MS. FLOYD: No. The little number is 6 on So it's PX-9/9 -Heritage Reporting Corporation (202) 628-4888

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number.

THE COURT : MS. FLOYD :

Okay. -- of the actual trial exhibit

THE COURT: Right. It's not PX-9. It's 3 - or it's not 6. Okay, the slash 9 with the 6. Nine

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nine with the six. MS. FLOYD: Nine nine. BY MS. FLOYD: Q Okay. Mr. Whalen, can you illuminate us

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regarding this balance sheet of Innovair's balance sheets? A Yes. I just mentioned some of the numbers

in it and put them on the chart. But the simple point here is if you look at Innovair's balance sheet what's there? You have deposits. A little bit, what, $9,000 cash, deposits, trave! advances, and the technology license agreement. And there's nothing else there. There's no other assets there. And you hayer $91,000 of capital. So when you're looking at the issue of Innovair and its financial condition that's where it is. They have assets of less than -- when you take out the technology license agreement they don't have enough assets, liquid assets to cover their liabilities. And that's what I mean by thin, Heritage Reporting Corporation (202) 628-4888

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Whalen - Direct 1 2 3 4 precarious financial position. Q Okay.

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MS. FLOYD: Your Honor, we had requested an opportunity to introduce the underlying documents underlying this particular page. But we had intended to introduce the financial statements, the audit reports through Mr. Carmichael. But given that Mr. Carmichael didn't appear we were unable to do so. We'd like to have the witness at least look at Defendant's Exhibit 237 and show us where in that document this information can be found. And that's DX-237. (The document referred to was marked for identification as Defendant's Exhibit No. 237.) THE COURT: MS. FLOYD: THE COURT: MS. FLOYD: MS. FLOYD: it's DX-237/22. THE COURT: MS. FLOYD: THE COURT: Oh, it's slash 22? Twenty-two. After this trial we'l! know what Is it DX or PX did you say? DX. DX-237. Yes. And I think that's page 22. So

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kind of conversion systems for converting these rings Heritage Reporting Corporation (202) 628-4888

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Whalen - Direct I 2 324A. THE COURT: This is damage presentation failures? MS. FLOYD: Yes. Your Honor, this is a

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chart which I'm going to ask Mr. Whalen to give me some examples of where Plaintiff's damages presentation failed your three tests. THE COURT: MS. FLOYD: THE COURT: And that's DX-324/7? A7. A7, right.

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BY MS. FLOYD: Can you explain the first item, why there is

no foundation for the expected conversion kit sales? A Yes. What we're presenting here is I'm made

the statement that I am of the opinion there is no foundation under the damage claim and therefore it pure speculation. And these are a number of items that are a number of the reasons why I come to that opinion. And the first one I make a statement there is no foundation for expected conversion kit sales. I've heard discussion and we'll talk about al! the projections that everybody !ooked at, but I have heard or read nowhere where anybody has established that there is a market for aircraft conversion kits. Heritage Reporting Corporation (202) 628-4888

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There's been loads of discussion in testimony here at court and in all of the documentation about the airline industry and all the aircraft in the world and whether aircraft are competitive or not but there has been nothing presented to suggest that there is a market for a Basler-67 conversion kit. And I understand that the business of Innovair was selling conversion kits, not aircraft. The second tied right into that point. I indicated earlier that we had seen that Mr. Carmichael had not sold a kit. I have seen no evidence of anybody selling a conversion kit. So to me a foundation for a projection of a number of kit sales is first of all you've got to be able to show there's at least some kind of a market for it. And, two, you've got to be able to get over the hurdle of could they sell one kit? And I look at the information here and I say they don't come -- they don't address either of those two issues. I then go to the financial projections and say to myself there is -- and to you and the record, that there is no support for the sales, either units or dollars, presented in the damage claim, therefore there is no sales, therefore the projection and the calculations of 36 million or 50 or whatever Heritage Reporting Corporation (202) 628-4888

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it is fall on their face on just that one issue. So we have a series of others to go along in further support of that. That's critical to me. Q Let's talk about the second item. Is Cobb's

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model different from Innovair's business plan? A I believe it is. I've read, as I said, and

bear with me for repeating myself but a lot of this stuff crosses over. I've read all the documents, particularly Mr. Cobb. I've read all of the projections. As I recall, if you look at the business plans, business plans assuming, assumed that the Basler Turbo Conversions and Innovair would be working together, the Warwick Report assumed that Innovair was going to form its own Innovair Technology Company and separate itself from Basler. And the those, Mr. Cobb worked his models essentially off of those two as he goes ahead. Well, in reading the documents and reading Mr. Carmichael's deposition, listening to Mr. Wilson, Mr. Clark, and listening to the Plaintiff's case I get a sense that the real business model, what they planned to do, is different from the financial model used in the calculation of the losses. I mean more specifically I've heard them say we're not going to work with Basler. We're setting up our own operation Heritage Reporting Corporation (202) 628-4888

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important? Well, we have a stream of earnings that are supposed to come from some business and I don't see where the business as described by Plaintiff in its basic case in any way relates to, with reasonable degree of certainty, to the business model that Mr. Cobb has used in calculating his damages. And if there's a disconnect between the actual business model and the financial presentation then the financial presentation does not provide a good support for your damages. Q Okay. Let's go to the third item. Is

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Cobb's model based upon adequate speculative financial projections? And for this I think there is a chart, and that's chart 8 of Defendant's Exhibit 234A. Start with number 8. Can you talk about this particular chart in terms of the issue of the speculative financia! projections? A Right. I made a statement earlier that says

if you're relying on financial statements and projections in damage claims you need to be able to determine that they end up being useful in determining what actually happened. This exercise was explained as an opening. When you use projections what you're Heritage Reporting Corporation (202) 628-4888

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expertise, and anticipate growing from essentially nothing to $50 million in sales in 1990. Now that tells me, as I read it, that contemporaneously, Mr. Thompson, apparently a reasonable objective businessman says, this doesn't look like very much, where we don't have much resources, but we're going to all of sudden go to $50 million in sales. Q A What about on Defendant's Exhibit 268/3? Well, Exhibit /3 gives an understanding of

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the situation, the development stage of the companies, the lack of a track record, the minority nature of the interest. He goes on to point out -- and I'm not reading now; I'm recalling from recollection -- that he doesn't suggest evaluation should be done then, because it would have to be very conservative, based on equity values rather than market values. All of this, when you read through it, is pointing out the concerns he has with the situation. Q Can you explain what this letter is? I

think we probably haven't had testimony on this letter in any great detail. Defendant's Exhibit 268, what kind of letter is this from Mr. Thompson to Mr. Carmichael? A Yes, as indicated in the first paragraph, Heritage Reporting Corporation (202) 628-4888

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Whalen - Direct 1 2 3 4 5 6 7 8 9 i0 Ii 12 13 14 Mr. Thompson is pointing out that they had a

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successful get-together meeting, and this letter is setting forth his understanding of the situation and the services he will provide under that understanding. There are other things that I didn't mention. Q A Sure. I think in this letter, he makes reference

to the fact that he will take no responsibility for any assumptions. Equally important, and I forget exactly where states it -Q page four. A Yes, page four, the next to the last About the compiled projections -- that's on

paragraph, the compiled projection involves assembling projections based on management's assumptions and performing certain other procedures without evaluating the support or expressing any opinion on them. Q A Okay, That probably more of an answer than you

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wanted at this point. Q Okay, that's fine. THE COURT: Wait does it look like? This is a projection here. (Laughter.) THE COURT: What is a projection of a Heritage Reporting Corporation (202) 628-4888

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Whalen - Direct 1 2 3 4 5 6 7 8 9 i0 Ii 12 13 14 15 16 17 18 19 20 21 22 23. 24 25 While we know that didn't happen, we've

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heard testimony from the United Technology's people, Mr. Johnson, and I've read documents surrounding it, that say we tried hard but it didn't work. So if you have a financia! projection that assumes 66 percent of the sales, coming from a relationship that everybody knows did not work in fact, that's a major disconnect. You can't, therefore, assume you're going to have 66 percent of 90 or whatever sales come from an arrangement that did not happen. Q Okay, what do you mean, in terms of Chart

Number 7, "financial mode! dependent on BTC for technical support''~ A Well, this gets back to the disconnect

between the financial model and the apparent business model. The financial model assumes, as I read it, that Basler Turbo Conversions would have been working hand in glove with Innovair. But we've heard testimony that says that isn't the case. They were going to move away from Basler, and they were going to go their own way. So you've got a disconnect, using projections, one set of assumptions, that differ from the way the business was planned to work. Q Okay, what about the last item, ignores $5 Heritage Reporting Corporation (202) 628-4888

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million to $50 million in start-up costs? What do you conclude about Plaintiff's model? A Well, with respect to the start-up cost

issue, there's no where, they reflect it. We have some projections of sales, expenses, and income. No where have we taken into consideration that we need to invest money in thisbusiness to get it going. We need to cover operating expenses before we get the first sale. The $5 million to $I0 million number I have is rough. It comes from the Warwick report, or actually a letter related to the Warwick report, wherein Warwick is discussing with Carmichael the amounts of funds they are raising. In that letter, it lays out generally what the funds should be used for. So it gives me a suggestion, at least then, they thought that they needed $5 million to $I0 million to start with. Well, that's important. Because if you're running a series of income projections, and if you properly at some stage, discount it back, you might want to compare the present value with the results, with the amount of money you had to put in, to begin with, among other things. Q Okay, now are you aware that Mr. Arvai said Heritage Reporting Corporation (202) 628-4888

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Whalen - Direct 1 2 3 4 5 6 7 8 9 I0 Ii 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A -- I can estimate, hypothetically, what

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damage would be under the understanding that this is clearly hypothetical. There's been no basis that two or three conversion kit units could be sold per year. But if you get over that hurdle and you assume Mr. Cobb's numbers were reasonable, and you assume two or three units were sold and delivered, and $2,082,000 is the number I picked from Mr. Cobb's 90 unit projection, if the sales price of each unit was $2 million -- and let me pause here half a second. He has given projections. I think it's 130 units, 90 units, 50 units, 35 units, and there were sales prices that vary among the years. But they're all within the $2 million/S2.2 million range. So for purposes of my hypothetical example, I just picked the number off of the 1992/1993 year in his 90 unit projection. If we assume we have a $2 million sales price, and we assume that Cobb's profit margin of $777,000 per unit in that table in his report is reasonably accurate, and you assume his commission rate of i0 percent is accurate, then you get the following calculation. As I go by, however, the commission rate, I have to point out another problem that I have. Heritage Reporting Corporation (202) 628-4888

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Plaintiff's damage presentation assumes there would be a commission rate of I0 percent, which Mr. Cobb apparently picked out of a deposition of Mr. Thomas White. Mr. White indicated he had never sold a converted aircraft with more than a I0 percent commission. The Deloitte projections and the Warwick projections that Mr. Cobb is otherwise relying upon, cal! for commission rates of 12.5 percent. Were I on the other side of this case, I would have looked into why 12.5 percent, mostly likely because selling kits is a little more difficult than selling aircraft. But nevertheless, with all of that proviso of qualification, we'l! use Mr. Cobb's I0 percent commission rate, and then run the calculation. The two columns are -- if you assume two units, you have a gross margin of $1.5 million, which you reduce by the commission of I0 percent of 416; reduce that by $1.8 million of fixed costs, which would come off of his 90 unit projection. THE COURT: The 416 you get by doubling. It's I0 percent of $2 million. But the gross margin is a difference of 416. It's I0 percent of $2 million times two. THE WITNESS: Right. Heritage Reporting Corporation (202) 628-4888

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Whalen - Direct 1 2 3 4 5 6 7 8 9 i0 II 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: Or I0 percent of $2 million times three in the right hand column.

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THE WITNESS: That's correct, Your Honor. THE COURT: Okay. THE WITNESS: And fixed cost, let me just finish running through the calculation to explain where the fixed cost came from. MS. FLOYD: Sure. THE WITNESS: In the result of the calculation, you have a loss, in my view, if you are selling two units a year, of abJut $600,000, even after assuming the commission rate was right. If you sold three units a year, you would have a loss of about $93,000, or maybe you could break even. The fixed cost, just to finish the.record with this long answer, of $1.8 million is a rough estimate that I pulled from Mr. Cobb's report. His selling, general, and administrative expenses, other than commissions and depreciation, range around $1.8 million, $1.7 million, $1.9 million in all of his various projections. So one way of perhaps suggesting that, if we're selling two to three units a year, we're not making any money. We're not making any profit. THE COURT: I'm getting confused. Now are Heritage Reporting Corporation (202) 628-4888

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Whalen - Cross 1 2 3 4 5 6 7 right? A I've read that right? Right. MS. MOOG:

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Okay. If you look at Tab 13 of

this book? Unfortunately it's the very bottom. I'ii take it back and say Tab 12. THE COURT: This is Tab 12 of his book? MS. MOOG: Tab 12 of the book I recently handed up. THE COURT: Okay. The Whalen book. MS. MOOG: Yes, the Whalen book. The Whalen tome. Are you there, Mr. Whalen? THE WITNESS: BY MS. MOOG: Q All right. This is the July 3, 1991, letter I'm there.

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from UTC to Mr. Carmichael at Innovair. I believe you made reference to this letter during your testimony. It starts off by saying, as a follow-on from our recent successful negotiations of a DC-3 distributor agreement, United Technologies Corporation, Pratt & Whitney Group, is ready to make an initial deposit toward procurement of a DC-3 conversion kit. Did I read that right? A Q You did. Okay. So it seems to me that we have some

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hard evidence here that on July 3, 1991, there was a Heritage Reporting Corporation (202) 628-4888

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purchaser who was willing to put money down on a kit, right? A Well, do you mind if I read the rest of that

page to refresh my mind? Can you restate your question? Q My question is would you agree that this

July 3, 1991, letter from UTC to Innovair represents hard evidence that on this date in 1991 there was a purchaser out there who was interested in purchasing a kit, at least to the extent in making a deposit on one? A Well, it's good hard evidence that somebody

was kicking tires so to speak, but if you read through the whole letter some question as to where these negotiations were, particularly when later on on the page it talks about a need for completion of negotiations between United and its customers, et cetera, et cetera. Q Let's turn to Tab 8 now of this binder,

which is PX-37, the distributor agreement between Innovair and UTC. A Q Okay. Okay. This agreement is dated July 25,

1991, you'l! see on the top line there. I've got that right, right? Heritage Reporting Corporation (202) 628-4888

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(Nonverbal response.) I'm going to represent to you, and the

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record would reflect, that Mr. White actually testified that they typically pay five percent, and I0 percent was the highest rate they had ever paid. Do you recal! that? A Yes. He was talking about airplanes;

converters, aircraft, not kits. Q Okay. Right. And he's saying that five

percent is typical, and I0 percent is tops? A Q For aircraft. For aircraft. You yourself didn't make any

inquiry to determine whether that I0 percent, five percent differential, between the typical and outer limits would be less than what the commission would be on an aircraft kit sale? A Well, I pointed out we don't know what it

would have cost to do a kit, and my personal assumption unsupported is it would be greater than i0 percent because it's more difficult. What I was really pointing out among other things in this paragraph of the report is Mr. Cobb is relying upon Deloitte & Touche throughout. In this instance he decides to move to the Heritage Reporting Corporation (202) 628-4888

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i0 percent rate, and there's no explanation then provided as to why he thinks a kit could be sold at a I0 percent rate or any rate. MS. MOOG: Let's move ahead to page 15 of your report, which is DX-324/17. Tel! me.when you're there. THE COURT: MS. MOOG: THE COURT: MS. MOOG: This is DX-324/15? Slash 17, Your Honor. Which is 15, right? Which is 15. Right.

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BY MS. MOOG: You write in the second paragraph of the

page around the middle of the paragraph that Warwick estimated $5 million to $I0 million of financing means of which three to five were start up and operations related. A Q Do you see that? I do. Okay. Then a couple of lines down at the

bottom of the page you conclude, therefore, it seems to me that Innovair could have needed at least the Warwick minimum $5 million plus the first year's fixed expenses of 1.7. My first question about that sentence is that I'm correct in observing that while you first mention a $3 million to $5 million range you later choose the $5 million range. Is that right? Heritage Reporting Corporation (202) 628-4888

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A

That's correct in the report, and then if

you go into my testimony I said the more likely range is five to I0 upon relooking at the Warwick report. What we don't know and the whole point here is no provision has made in Mr. Cobb's work for these start up costs, so I'm roughly, as I say in the first sentence of this paragraph, trying to estimate what it would be. Q But the numbers that are used in the Warwick

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papers for whether it's the five to I0 or any of the subsidiary numbers, would you agree that that is Warwick's effort to set out the gross amount of money they are seeking to raise and what use they would put to it? Is that right? A That is correct to the extent that for this

purpose they're !ooking at what they're going to use the money for. As I read over the listing, and actually studying it in preparation for testimony, I began to think that my three to five number is probably too because of the various items that are on the record that Warwick refers to as planned use of the funds. I'm not sure how many of these would not have been required in the but for world that you have, and depending upon the number -- for example, working Heritage Reporting Corporation (202) 628-4888

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capital in the Warwick report assumes the first year or two you go from two units to four units. You need more working capital to cover I would assume more expenses as you go to 12 or 13 units, or indeed as Warwick planned to go from two to four up to a larger amount. So the whole issue, it's not a precise number, but my testimony of $5 million to $I0 million is what I'm most comfortable with. Q Well, did you take any steps to get from

this gross amount of money that the Warwick document is suggesting that the company would like to raise and distill that number into what Innovair must have had on hand? How did you get from what you want to what you need, in other words? A Well, first thing I did is I pointed out

that the kinds of things you're talking about your experts should have done. Q A I'm asking you what steps you've taken. And the second thing I'd do to complete the

answer is I'd take a look at the numbers presented and try to adjust, roughly estimate them, to give me a sense of what it might be. I don't have a burden of proof that I can see that there would in fact be $5 million to $I0 million. Could be more, could be a Heritage Reporting Corporation (202) 628-4888

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Whalen - Cross 1 2 3 4 5 6 7 8 9 I0 II 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q PX-9/53. Q BY MS. MOOG:

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I see. Just to be clear, you're looking on

page 50 of Mr. Cobb's report, Column 2, Year 2? Is that right? A Column 2, Year 2. THE COURT: MS. MOOG: Sorry. THE COURT: Okay. Because this is a rough I just see 52. Mr. Whalen moved up to page 50,

THE WITNESS:

estimate, on the same thing, you could go to page 52. Again, in this instance the second year column, 1992, 1993, is $1.6 million which you would deduct from $2.399 million of selling and that should be about $700, which you add to total GNA of about $I million, brings you back in the range of $1.7 million, $1.8 million, also. BY MS. MOOG: Okay. And in your testimony earlier today

Ms. Floyd and, well, you went through the elements on your Chart I0, which is your hypothetical calculation, right? A Q Right. And you used the figure $1.8 million there

for your fixed costs, right? Heritage Reporting Corporation (202) 628-4888

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Whalen - Cross 1 2 3 4 5 6 7 8 9 I0 II 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A Q Right. In the hypothetical. In the hypothetica!. Those costs

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essentially come from Mr. Cobb's report, these expenses on marketing and GNA, right? A They are intended to be a representative of

his amounts throughout -- I mean, he's given us three or four different possible calculations, so this is -Q It's a rough figure, it's not a precise. I

got you. I.got you. My question is this. If a company is only obtaining sales at a rate of two or three per year, these are pretty high fixed costs to absorb. Did you take any steps to investigate or consider whether these particular costs could be reduced if a company only needed to support this much smaller sales figure? A Well, I considered that issue very much also

in the context of Mr. Cobb's supplemental report. The question that you need to review is what is the business mode!? What were these people really want us to believe they were trying to do, and therefore, what were they gearing up to do, what were they attempting to do and what were they gath@ring the resources, and the inventories and the people to do? Mr. Cobb's report tells us they were aiming for 90 units. If you're aiming for 90 units, and you Heritage Reporting Corporation (202) 628-4888

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as a matter of fact, on their side of confusing the judge as to what's going on in the actual world, which was where this good will was written off. As opposed to the but-for world where it would have been maintained as an asset. Q So you think we better bring Judge Miller in

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here and set her straight? A it again. Q I said: Do you think we ought to bring Judge You said it a little too quick for me. Say

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Miller in here and set her straight then? A Q I wouldn't try that. Mr. Whalen, I have no further questions for

you right now. THE COURT: Okay, Ms. Moog, thank you. Ms. Floyd, do you want any redirect? MS. FLOYD: Just a couple of question, Your Honor. THE COURT: Okay. REDIRECT EXAMINATION BY MS. FLOYD: Q Now earlier this evening, Ms. Moog asked you

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to discuss the start-up costs of a company in light of the Warwick documentation that you reviewed in connection with your hypothetical situation. Heritage Reporting Corporation (202) 628-4888

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Whalen - Redirect 1 2 My question is: Would a company sell an

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ownership interest to raise money that it didn't need? If you can elaborate on your answer. A With a stockholder group, I'd say it's

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slightly different, sell equity interest in a company when they really didn't need it, and generally the answer would be: Heavens no because you're diluting the stock, all the interest, and you're raising money that costs you. be doing that. Q Well, in connection with the Warwick matter, If you don't need it, you should not

when the stockholders were interested in obtaining between $5 and $I0 million, can you conclude then that that's money that Innovair would have needed? A Q Well, absolutely. Do you have any understanding as to where

the Warwick numbers came from that were part of the money that Innovair was trying to raise? A My understanding is they came from

discussions with Mr. Cobb ultimately. Q A Q Okay. Yes, very definitely. All right. Now, in terms of the commission

rat@ that we've talking about this afternoon, if the price of an aircraft is say $3 million or more and Heritage Reporting Corporation (202) 628-4888

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marketplace and getting some attention, and was being supportive. So I see that the company is by many of its first start-up hurdles. I also understand that Mr. Carmichael and Mr. Wilson, which was touched briefly on towards the end of Mr. Whalen's testimony, had made cash infusions in the form of loans. And I understood that they both stood ready to continue to do that on behalf of Innovair, and stood ready to make substantial cash infusions. So the company certainly was not flush with cash, but the company certainly had resources in its founder shareholders to seek additional cash. So I find a company that had reasonable business prospects. And then I go and look at the concurrent time period, and I didn't find a single projection where someone said: This won't work. Or a single projection that said: Two to three units. What were people understanding at the time before there were changes in this business model? They were considering significant levels of sales. And making those considerations, I went and then !ooked backwards, and I found that Basler had achieved sales. I found that Basler achieved those sales without having the same -- first, without having Heritage Reporting Corporation (202) 628-4888

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Whalen - Redirect 1 2 I think provides a sound basis. I think it was

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important to be able to make reference to the thenconcurrent projections. I understand how the business was being looked at in that time frame as wel!. Q Mr. Cobb, Mr. Whalen said that you ignored

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the $5- to $I0 million of start-up costs. How do you plead? A Q A Not guilty. Explain? The start-up costs, as I analyzed it in the

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material available to me, in many ways had already been incurred. For example, there had been over $6 million, by my recollection, spent to develop the prototype. Money had been spent to file the STC and to achieve the STC. Money had been spent to develop the business plan, and to start to put that in place. I understand that there had been space taken in Hong Kong, for example, So the office was well on the way, and I think an office of some sort ultimately was opened, if I remember correctly. The marketing materials were in place. The contacts had been made, for example, with Lonhro in Africa to establish distributor networks. S~ there had been substantial efforts made, and undertaken, Heritage Reporting Corporation (202) 628-4888

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that I think had put the company past being a pure start-up, understanding that a significant number and amount of costs had already been incurred. Q Mr. Whalen stated that the projections, on

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which you relied, were not independently substantiated by the expert, meaning you. Any responses to that? A I didn't really know what he meant by that.

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I was not seeking to independently verify the business plan of Warwick and Deloitte & Touche. What I wanted to do was develop measures of expectancy value, including, in a fashion, that the judge could make his determinations overal!, year-toyear-to-year. So I did not set out to attempt to verify projections done in the past, starting, for example, in May of 1990. Q Mr. Whalen also stated that projections with

no foundation are not a reasonable basis for estimated losses. Did you rely upon projections with no foundation? A Q A No. Explain, please? First, I found a foundation in the

projections that existed in the time frame. There was a business plan developed. Somebody didn't just write down numbers. They went through, and thought through Heritage Reporting Corporation (202) 628-4888

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MS. FLOYD: No, I don't think so. I expect it to probably last 20 to 30 minutes, Your Honor. THE COURT: break now or? MS. FLOYD: I think that would be good. Okay. Do you want to take a

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That way I can make sure I have some kind of organization to the multitude of stickers I have on this table here. THE COURT: Okay. We'll take a break. We'll stand in recess. THE CLERK: All rise. (Whereupon, a short recess was taken.) THE COURT: Please be seated. Ms. Floyd, redirect. MS. FLOYD: Thank you, Your Honor. CROSS-EXAMINATION BY MS. FLOYD: Q I'd like to have you turn to -- make sure I

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get the document right -- Joint Exhibit Number 67. I think it might be in a binder up there. A I think that's right, yes. THE COURT: MS. FLOYD:

JX-57? Yes. All right.

THE WITNESS: BY MS. FLOYD:

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Whalen - Redirect 1 2 3 4 5 6 7 8 9 I0 Ii 12 13 14 15 16 17 18 19 20 21 22 23 24 25 has? A Q It changed by time from -Q And I'd like to, what is the plan that,

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what's the post -- what's the plan once the start-up is over for Innovair? What is Innovair's business plan? A Q What are they looking to do? Yeah. What is the conception that Innovair

And what was it at this period of time when

the 5-year business plan was prepared? A At this period of time they were making

broad considerations. They were contemplating a kit strategy, contemplating establishing, by my recollection without reading the documents, more elaborate sales networks and conversion facilities. So their plan -Q And where were the conversion facilities

going to be? A I don't recall that they had identified

specific locations. Q Were they going to be in the United States

or were they going to be inside and outside the United States? A States. Heritage Reporting Corporation (202) 628-4888 They were not going to be in the United

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So Innovair's own facilities were going to

be outside the United States? A I don't recall if Innovair was going to have

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facilities. Innovair was -Q Was Innovair going to have a distributor

under the business plan? A I haven't read this in a while. From

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discussions with Mr. Carmichael they were looking at having various distributors. So, for example, I think even before they had struck an agreement with UTC they had discussions with Dakota in Poland, they had plans to have discussions in Africa. I think they had plans or had identified a South American party as well. Q And what role was Basler Turbo Conversions

going to play? A Basler would have conducted conversions in

the United States. Those conversions could have been conversions directly on behalf of Basler, meaning sales in the United States. There could have been conversions for sales generated by Innovair as well. Q Now I'd like to have you turn to Defendant's

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Exhibit 268 which is one of the documents that was discussed with Mr. Whalen today. THE COURT: What number was that? MS. FLOYD: Two sixty-eight. Heritage Reporting Corporation (202) 628-4888

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we're talking about the Deloitte & Touch report what was Mr. Carmichael's conception of the future for Innovair? A Focusing on this paragraph it's my

understanding that Mr. Carmichael had had discussion of the range of scenarios with Mr. Thompson and/or other Deloitte & Touche representatives that included consideration of selling so that he would not be involved on an ongoing basis. But that was one of the alternatives discussed. Q And is there any other discussion of

alternative scenarios in here, isn't -A I haven't read this in a while but I don't

think there are. I think this is the only scenario that's dealt with in the words -Q So the Deloitte & Touche report is premised

on the fact that Innovair, at least Mr. Carmichael will sell his interest in Innovair and Basler Turbo Conversions; is that correct? A I don't know that it's premised on that in

terms of the economics. It certainly is an area that the letter indicates Deloitte & Touche understood. Q So that the future for Mr. Carmichael under

the Deloitte & Touche plan as discussed in this document is that Mr. Carmichael will not be involved Heritage Reporting Corporation (202) 628-4888

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Whalen - Redirect 1 2 at all; isn't that correct? A Q Their reading of what's written, yes. Okay. And I'd like to have you turn to

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Joint Exhibit Number 34, page 7. THE COURT: !ooking at my notes. MS. FLOYD: THE WITNESS: BY MS. FLOYD: Q And just to refresh our recollection, this Sure, Joint Exhibit 34/7. I'm there. We're at? I'm sorry, was

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March 5, 1991 document is a document I discussed with Mr. Fraker the other day, and this is the agreement between Innovair and the Warwick Group concerning the presentation-or the development of the confidential memorandum, the Warwick confidential memorandum; is that correct? A Q That's my understanding. Okay. The second full paragraph on JX-34/7

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it states what the premise is here. And this is a Warwick document saying "you have determined that it is your best interest to reorganize the ownership of BTC and IAL whereby you or members of your family will own al! of the outstanding shares of those companies prior to the infusion of any new capital. The acquisition of all of the outstanding shares will Heritage Reporting Corporation (202) 628-4888

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facilitate the obtaining of the additional capital required to ensure the successfu! production and delivery of the Turbo 67 aircraft." Isn't it correct that under the Warwick scenario Mr. Carmichael envisioned that he would be acquiring all of the interest of the shares in both Innovair and Basler Turbo Conversions; correct? A Q A Q Carmichael in conjunction with Mr. Wilson. Okay, the Carmichael Group? Yes. So what is the right plan, what is the plan?

Innovair had three different conceptions of the plan, the projections we've talked about already, what is Mr. Carmichael supposed to do, what is the Innovair plan? A Let's take the business. And the business

is to construct aircraft, and that's the business plan. So at an operational level we have that plan; that's what's in the projections. Then behind the operational level we have ownership. You and I may own it 50/50. You may decide you don't want to own it anymore and I own it. So at just a shareholder level, which is what these are talking about, who are the ownership entities, we have sets of projections that allow those owners to Heritage Reporting Corporation (202) 628-4888

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Whalen - Redirect 1 2 3 4 5 6 7 8 9 i0 ii 12 13 14 15 16 17 18 19 20 21 22 23 24 25 i0, paragraph 12. A Q All right. It states in paragraph 12, "The existing

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corporate separation of capital functional responsibilities and authority and the al!ocation of financial rewards creates disincentives for key individuals and entities rather than productive incentives to motivate the maximum financial exploitation of the developed-concepts. Did I read that correctly? A Q You did. How, if at all, did you incorporate this

into your analysis? A I was certainly aware that there were

existing separations, especially related to the responsibilities and authority. I had understood from Mr. Carmichael and then understood from Mr. Weigt's testimony that at an operating level there was a continuance of professional relationships and that that was expected and that the parties were working or would be expected to work in the future to resolve differences so that they could move ahead. As already touched on, there was identified an ability for Innovair to reduce its dependence upon Basler over time. Though I understood that it was the Heritage Reporting Corporation (202) 628-4888

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intention of the parties to continue to conduct their day to day business operations in a professional manner, respecting the economic incentives that were there, and to over time resolve or continue to learn to live with the allocations of responsibility and authority. Q Now, you've been the courtroom the whole

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time, you testified earlier today; right? A Q Yes. Were you present at the time that it was

introduced, and I forget whose testimony it was, that there was a lawsuit filed in the April/May time frame 1991 of Basler Turbo Conversions against Innovair and also Innovair against Basler Turbo Conversions -A Q A Q Yes. -- and the various principals? Yes. How has your model that you've proposed in

connection with this damages calculation taken into consideration that lawsuit? MR. BARTOLOMUCCI: I'm going to object to that as beyond the scope. I didn't ask him anything about that on rebuttal. MS. FLOYD: Your Honor, he just~answered my previous question saying that he anticipated the Heritage Reporting Corporation (202) 628-4888

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parties would continue to work together in a very professional manner. I think it's appropriate followup to ask how, if they were going to sue one another in court, litigate one another, model their behavior in the manner that he just described. THE COURT: Yes, I think it's within the scope. While it wasn't specifically about the lawsuit it certainly is about the working relationship which he was asked about. So I'll allow the question. THE WITNESS: Again I'd start with I understand that the day to day operations would have remained on a professional basis. Obviously there can be stresses and strains on relationships, both short term and long term, that cause litigation and also can result from litigation. But I understand that all litigation at least theoretically eventually ends. And there was anticipation that the litigation would help the parties to resolve the differences which were accounting, more accounting in nature rather than reflective of day to day operating differences. So I had understood the intent of the Wilson Carmichael side that they saw the litigation really as resolving disputes and giving them an ability to chart any future charges and accountings between the parties. Obviously I have concerns and I've had Heritage Reporting Corporation (202) 628-4888

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concerns because, as I'm sure you know, litigation often not only is the result of disruptions but causes its own world of disruptions. BY MS. FLOYD: Q The litigation that we just referred to what

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was the subject of the litigation was not only the dispute about how the various sales were allocated between Basler Turbo Conversions and Innovair and Carmichael and Basler, isn't that correct? A to mind. Q And what about the issue of the technology. It did have other issues. They don't come

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You were here for Mr. Weigt's testimony? A Q Yes, I was. Okay. And Mr. Weigt made fairly clear

during his testimony that in fact in the April/May 1991 time frame Basler Turbo Conversions refused to provide Innovair the technology that it was seeking; isn't that correct? A I don't remember using the word "refused"

but that's certainly what came across to me. Q Okay. So what was your understanding in

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terms of the technology license agreement as to whether or not Basler Turbo Conversions was obligated to provide the technology to Innovair? Heritage Reporting Corporation (202) 628-4888

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I understood that through the TLA Innovair

had access to the technology to support conversions. Q And do you have any evidence that in fact

Basler Turbo Conversions ever relented and agreed to give the technology to Innovair? A Q I don't. So as far as you know the technology that

Innovair was seeking was never turned over from Basler Turbo Conversions to Innovair? A Well, there were some real traumas in the

business but as far as I know that's true. Q How in your view could this plan that you've

identified to the Court through models for your damages have worked if Basler Turbo Conversions refused to turn over the technology to Innovair? A Short term I don't think it would have

worked well at all, if at all. Q And so how could the parties have continued

to get along if in fact Basler Turbo Conversions refused to turn the technology over to Innovair? A It's my understanding that there was a

belief and an understanding that Basler would act in an economically reasonable manner, that Basler would respect the TLA, and that Basler would have provided the information needed an on a reasonable time basis. Heritage Reporting Corporation (202) 628-4888

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