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

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UNITED STATES COURT OF FEDERAL CLAIMS

INNOVAIR AVIATION, LTD.,

Plaintiff,

UNITED STATES,

Defendant.

) ) ) ) ) ) ) ) )

Docket No.:

96-408C

Pages: Place: Date:

1292 through 1623 Washington, D.C. October 26, 2007

HERITAGE REPORTING CORPORATION Official Reporters 1220 L Street, N.W., Suite 600 Washington, D.C. 20005-4018 (202) 628-4888 [email protected]

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Kaplan - Direct ( Resumed ) 1 2 summarize, that's fine.

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THE COURT: Well, I think it can be done by counsel as just summarizing where we were. Not Friday, it was Wednesday. MS. FLOYD: Yeah, just a day rest. THE COURT: Hard to tell with the schedule. I will allow Ms. F!oyd to go on. MS. FLOYD: Thank you, Your Honor. DIRECT EXAMINATION (RESUMED) BY MS. FLOYD: Q We talked about the UTC experience. And my

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next question is how could the actions of the Basler Group impact the value of the technology license agreement? A The technology license agreement, the value

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generated from it which is basically the revenues minus the cost of providing the service, the product the technology license agreement gave the licensee the right to produce and to market, really in this case relied in a number of important ways on BTC and BFS. So it wa shot a license whereby they could just go out and produce a product. But in a number of important ways they really relied, certainly in the early years on BFS and BTC. And that was in two particular ways and one related way. Heritage Reporting Corporation (202) 628-4888

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Kaplan - Direct ( Resumed ) 1 2 3 4 The first one which we, which Mr. Arvai talked about were the options. And I think the

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testimony of a number of witnesses here is that the basic STC-4840 did not provide the kind of equipment and did not allow to provide the services that people who were likely to purchase this aircraft would want, and so that they would need additional options, some of which had STCs that BFS had either acquired or developed on its own. And thus Innovair would have likely had to license these options from BFS. Or, alternatively, it could have developed them on their own, but that would be costly and take additional time in order to achieve that. Q I'd like to have you turn to the Plaintiff's

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Exhibit 37 which is the distributor agreement and ask you to talk about the role of the options in terms of the UTC agreement. A Q This is the joint exhibit; right? Yeah. It's in Plaintiff's binder. MS. FLOYD: I believe it's in the first binder of Plaintiff's exhibits. BY MS. FLOYD: Q And I'd like to have you turn to PX-37/II.

And if you could talk about the role of the options in terms of the distributor agreement regarding UTC? Heritage Reporting Corporation (202) 628-4888

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Kaplan - Direct ( Resumed ) 1 2 3 4

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services that the aircraft could provide. And so on the marketing side, and especially given some of the unique and specialized features of the aircraft, the Basler knowledge of how the aircraft could be used and what gets done with it would probably -- would have certainly have been valuable in helping the sale of the product. BY MS. FLOYD: Q Now how was the value of the TLA impacted by

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the fact that the Basler Group and the Carmichael Group had different ideas about how to conduct business? A Well, there's two, there's two essential

issues that we're dealing with here. The first issue is that the Basler, BTC and BFS had resources that Innovair clearly needed. I mean in some cases they might get those resources elsewhere but that would have been expensive. And the Basler companies were probably the logical way for them to acquire those resources. But nevertheless, the prices at which those resources would be provided and the way and responsiveness of the Basler Group to the Innovair requirements were never really specified, at least as I understand the contract and really made, really Heritage Reporting Corporation (202) 628-4888

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Kaplan - Direct ( Resumed )

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affected the profitability of Innovair's operations under the TLA because it really could not know its costs it would have for a number of fee aspects and the availability of the number of fee aspects of producing its product. Q What about the difference between the kit

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strategy and the aircraft strategy of the two groups, how did that impact the value of the TLA? A In very much the way that we, I was just, I

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was just speaking. The two companies had very different incentives. And the fact that they were essentially producing the same product in a market where the access, the product being produced is mobile they were very, each was concerned about what the other was doing. And what's more, because of the relationship between Basler and BFS where it had a financial interest in it, which the Carmichael Wilson Group did not, it would have an incentive to produce products at its facilities rather than have Innovair produce them as well. But more fundamentally I think that the Basler people as explained by Tom White really believed that the kit strategy was not really a viable way of selling this aircraft. I think they believed that they're really buying a durable product and as a Heritage Reporting Corporation (202) 628-4888

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Kaplan - Direct ( Resumed )

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durable product you're looking for service before the sale and after the sale and parts and services, and you want that all to be provided by a single entity that you have confidence that wil! be there for the long term. Q But didn't Mr. Basler own a piece of

Innovair so didn't Mr. Basler want Innovair to succeed despite the tension between the kit strategy and the aircraft strategy? A Wel!, there's success and there's success.

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I don't think that -MR. BARTOLOMUCCI: Objection on grounds of speculation. THE COURT: Don't try to interrupt during the question but after the question is asked. I'll allow the answer. I mean he's an expert and experts give opinions. THE WITNESS: Well, I mean success, there's two ways of measuring success. Success is a continuum so a company can be successful by making lots and lots of money, and a company can be successful by just basically breaking even. And so the question that has to be asked is if by the prices and services it charges that Basler, the Basler Companies could earn more money at BFS and less money at Innovair that Heritage Reporting Corporation (202) 628-4888

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Kaplan - Direct ( Resumed ) 1 2 3 4 would clearly be in its financial self interest

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because it owned I00 percent of Innovair and only 50 percent -- excuse me, i00 percent of BFS and only 50 percent of Innovair. So anything it can do to move a dollar's worth of profit to BFS would clearly benefit relative to the dollar versus profit at Innovair. And I believe that was one of the grounds for the suit that the Carmichael Wilson Group had against the Baslers sometime in 1991. BY MS. FLOYD: Q this? A Well, the conclusions I draw from this are So what conclusions can you draw from all of

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that from an independent party the TLA had very limited profit potentia!. One, you're dealing with an aircraft that did not meet, the sales of the aircraft did not meet the expectations that were formed at the time the whole project was put together. With respect to the TLA, and Innovair in particular, you had a situation where you had a company which was very much dependent on another company which it did not control. And that company not only provided important options, it also provided important information about the production and the manufacture of the products at issue. And in Heritage Reporting Corporation (202) 628-4888

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Kaplan - Direct ( Resumed )

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addition, it provided important marketing support. So there was certain, there was even if given the reduced sales there was added uncertainty about what the costs of operating under this arrangement would be because you, the relationship between Innovair and Basler was not well defined. Now, there's also a second related issue that also affected the fact, the TLA, and that is that the parties were really had a fundamental disagreement about how to proceed and there were concerns, for example, by Innovair about whether Basler and the Basler Group were living by the terms of the TLA. And by the same token there were concerns by the Basler Group about whether Innovair was in the process of trying to stea! its intellectual property. And so that imposed costs in terms of litigation and legal costs and taking up management time. And those were other costs that someone who was investing in terms of establishing a value of the TLA would also have to take into consideration. Q Did the TLA itself mention the issue of

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concerned about intellectual property? A about that. Q I'd like to have you turn to Joint Exhibit 1 Heritage Reporting Corporation (202) 628-4888 It does. The TLA has particular mention

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Kaplan - Direct ( Resumed ) 1 2

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that the Baslers might pay -- play in influencing the profitability and future behavior of that. The only parties where that really isn't an issue is the Baslers. The Baslers have controlled the complementary technologies. There's not the question of lack of trust or different incentives among the various parties. So I think that the Basler Group is the only independent group that really would be able to attach much value to the use of the TLA and it would allow them not only to use the facility more fully, it would allow them to use their technology more fully and their knowledge base more fully. And by allowing them to expand into another part of the world. Q What about outside investors, were they

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interested in that? A I think outside investors would recognize.

that they were really buying a part of a joint venture where the other party to the joint venture had substantial leverage in terms of the economic services that were being provided and that that would make it a very risky and uncertain venture. And that even taking account the uncertainty and the riskiness of this whole enterprise of producing this, the reconverted aircraft, the re-engineered aircraft. Heritage Reporting Corporation (202) 628-4888

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Kaplan - Direct ( Resumed )

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Q

Was Innovair willing to post a bond to

secure the release of the technology license agreement? MR. BARTOLOMUCCI: Objection. Inability to say what Innovair was or was not willing to do. THE COURT: Unless you mean did Innovair, I think "willing" is a mental conclusion of intent of Innovair. didn't? MS. FLOYD: question, Your Honor. THE COURT: What? I'd be happy to change the If you want to ask him whether they did or

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BY MS. FLOYD: Q Did Innovair -- sorry, did Innovair post a

bond to secure the release of the TLA? A Innovair did not post a bond. And the

resolution of the posting of the bond was several months after the seizure of the TLA. And I might also add that the seizure of the TLA I believe took place after the distribution agreement between Innovair and UTC so that to the extent that Innovair believed that it had a bright future ahead of it the seizure took place after that bright future had presumably been secured. Q What value do you place on the TLA at the Heritage Reporting Corporation (202) 628-4888

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Kaplan - Direct ( Resumed ) 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 time of the seizure? A Well, the Baslers posted a bond of 1.375

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million. And I think that seems to represent a reasonable approximation of what the fair market value would have been, especially given the apparent reluctance of other parties to come forward in the intervening time to post a similar bond. MR. BARTOLOMUCCI: Same objection as to reluctance that we went over with willingness. THE COURT: Okay. Well, that seems again a fair objection. BY MS. FLOYD: Do you understand the nature of the

objection? They don't want psychological terms being used to describe the events. A Q A Q Didn't. Okay. No one came forward to post a bond. Do you believe that events subsequent to

this corroborate your estimates about the value of the TLA being 1.375 million? A Yes. What we've talked about thus far as

contemporaneous actions that were taking place with respect to the BT-67. The estimates that were presented in the Warwick report and the Deloitte and Heritage Reporting Corporation (202) 628-4888

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Kaplan - Direct ( Resumed ) 1 2 3 4

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Touche report and various other places suggest that this would have been a very, very profitable endeavor. And in the 17 years that have passed since the seizures, or in the 16, in the 16 years that have passed since the seizure if in fact there were these great profit opportunities to have been realized one would have expected resources to have entered this industry and to provide the services that were presumably being prevented from being provide by the seizure of the TLA. For example, there's nothing, as I understand it, to stop someone form developing a technology, a similar technology or perhaps even a better techno!ogy that underlies the STC-4840 as well as the various other techno!ogies that Basler had put together in terms of to provide the BT-67 services. And there are, there's still presumably facilities around the world where aircraft can be renovated and shift installed. And if there were these substantia! profit opportunities to do that one would expect to see resources moving in to do that. My understanding is is that no one has gotten an STC to do a turbo -- a reengined DC-3. And my understanding also is that, as Mr. Arvai testified the other day, that in terms of the other aircraft Heritage Reporting Corporation (202) 628-4888

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Kaplan - Direct ( Resumed ) 1 2 3 4

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that the Carmichael Wilson Group believed could be reengined there has not been much success, if any success in doing the reengining of those aircraft, which really goes to the fundamental question about what the real potential of this particular enterprise

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ultimately was regardless of the high expectations and rational reasons to believe that it would be a success. Q Now, didn't Mr. Arthur Cobb come up with a

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different value for the technology license agreement? And what's your reaction to that? A He did come up with a different, a different

answer. And my major problem with his analysis is that I don't think that he has much support for his sales projections. The sales projections are -- they just don't seem to be justified by what's happened in the marketplace. And this aircraft has been on the market for 17 years. And I just don't think that there is really any basis to support what projections he used for the sale of those aircraft. I might also note that I don't think he really incorporates fully some of the costs that we've spoken about today that very much would have affected the financial viability of Innovair going forward. Q What kind of costs are you talking about? Heritage Reporting Corporation (202) 628-4888

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Kaplan - Direct ( Resumed ) 1 2 A

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There's the cost of the optimal equipment

and the cost dealing with the enforcement and monitoring the agreements given the different opinions of the two parties to the venture. Q And what about his method of calculation,

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the expectancy interest value, do you have any reaction to that? A Well, the expectancy interest value seems to

be an attempt to come close to some kind of profit stream that would be generated by the TLA to the Carmichael Wilson Group which may have some bearing on a fair market value. It's probably, as I talked about before, a relatively optimistic view and therefore it might not really reflect the price that the license would actually garner in the marketplace. But more fundamentally, his calculation of expectancy interest is not discounted. And he, to compute the fair market value at the time of the taking you would have to discount that future stream of earnings that would likely have been engaged. I was here for Mr. Cobb's testimony and he said, wel!, it wasn't really necessary to discount it because if an award was made and prejudgment interest was awarded then you could, you could just apply that interest payment to the values he calculated in each Heritage Reporting Corporation (202) 628-4888

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Kaplan - Direct ( Resumed )

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individual year and sum up those values so there would be losses in '97 and you would apply the appropriate interest rate to it to bring it up to the time of the judgment. And he said that it wouldn't make any difference if you did that or if you took it back to the time of the taking or the seizure and then projected it out to the time of the judgment. But that would only be true if you used the same interest rate to discount back to the time of the taking that you used for calculating prejudgment interest. And I think the testimony here has been pretty clear that this in everybody's view was a very, very risky enterprise. MR. BARTOLOMUCCI: I will object to that. That's not an accurate statement of everybody's view. THE WITNESS: Risk, I'm using "risk" in terms of the technical term of risk which is a measure of the expected profits around some central tendency, centra! measure. The risk is really just dealing with that whatever profits were going to be there, there was a high likelihood that the profits would differ substantially from what the estimate was at any given time. MR. BARTOLOMUCCI: My objection was to his statement that everybody viewed this as risky. Heritage Reporting Corporation (202) 628-4888

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THE COURT: Well, you can cross-examine him. There's no rule of evidence that says you have to be right. The rules of evidence you can cross-examine him if you don't think that's a true statement. But the Court will accept that as his testimony. If you find someone, to ask him about that. MR. BARTOLOMUCCI: Well, my original objection was tied to the fact that he said everyone has testified, which wasn't true. THE COURT: Well, same thing. I mean that's a fact he's relating. If it's wrong you can crossexamine him but it's not a basis for a rule of objection. Wait till the end of the answer though to object, the end of the answer, the end of the question for objections. THE WITNESS: Let me clarify. Everyone who has spoken about the riskiness of this enterprise has identified it as risky. BY MS. FLOYD: Q A Are you talking about Mr. Arthur Cobb also? I think Mr. Cobb recognized that it was a

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risky endeavor. And Mr. Fraker in particular talked about the high discount rates that would be necessary, which is the appropriate measure of what you would use to discount back the future profits. And I think what Heritage Reporting Corporation (202) 628-4888

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Mr. Fraker testified was that there would be a high discount rate associated. THE COURT: to 40 percent. THE WITNESS: Yes. Right. The Court seems to remember 25

And I guess the point that I want to stress to the Court is that if you do believe that there are damages and you are going to discount the future stream back to get a fair market value at the time of the taking, you should use the relatively high discount rates that Mr. Fraker talked about which reflect the inherent riskiness of this endeavor. And that to the extent that there are damages the prejudgment interest rate it would be, I don't believe it would be appropriate to apply such a high discount rate or high interest rate in calculating what the prejudgment interest would be. So there's not a symmetry between the discounting back and the interest that would be awarded as part of prejudgment interest. BY MS. FLOYD: Q Now, you testified that you believe that the

estimates that Mr. Cobb relied upon were not reliable themselves. Could Mr. Cobb have done anything to have gotten reliable estimates in your opinion? A Wel!, I think if he had based his sales Heritage Reporting Corporation (202) 628-4888

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estimate more directly on what BTC had actually sold that would be a more realistic basis because that seemed to reflect the underlying demand in the marketplace. Q So if you could just wrap up with your

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general conclusions then in terms of the value of the technology license agreement? A I think there really was only one realistic

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purchaser of the TLA and that was the Basler Group.I think that that was the fact because the market was limited and thus the ability to spread production all around the world was limited as well. I think that the relationship between the Innovair and BTC and BFS was in such a way that the owner of the TLA would really have to rely on the Basler Companies and the Basler Companies' incentives and financial interests were not really aligned that well necessarily with Innovair and the owner of the TLA's interests. And more and complicating this further was a certain distrust among the parties. And anyone who was purchasing the TLA would also have to recognize that the Baslers, who had an important -- would have an important role in determining how this company, the company you were -- the license you were purchasing also had very definitive ideas about how the operation Heritage Reporting Corporation (202) 628-4888

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Kaplan - Cross 1 2 3 4 should be run.

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So for all those reasons I believe that the TLA was not worth very much and certainly not worth much more than the $1.375 million that was posted. And I think that events subsequent to the taking, the fact that there has not really been much entry -there has been no entry into this marketplace, the kit strategy has not appeared to be used, suggests that that estimate is probably an accurate one, a reasonable one. MS. FLOYD: I have no further questions at this time. THE COURT: Hold on a moment. Okay, we have gotten to the point of cross. Do you want to break or do you want to go? We've been going I guess about 45 minutes. MR. BARTOLOMUCCI: I would go with whatever the Court would like to do. I'm prepared to start, at the Court's wish. THE COURT: Okay, why don't we start, then we can pick a time when you want to take a break. CROSS-EXAMINATION BY MR. BARTOLOMUCCI: Q A Good morning, Mr. Kaplan. Good morning. Heritage Reporting Corporation (202) 628-4888

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Kaplan - Cross 1 2 3 4 Q THE WITNESS: I'm sorry. BY MR. BARTOLOMUCCI:

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With reference to the first approach that

you described in your report in paragraph 52 is it fair to say that the approach that the Art Cobb report takes apart from the discounting aspect is your first approach? A yes. Q And the second approach you described, we're It would seem to be close to that approach,

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still here in paragraph 52, you say, "Another approach involved analyzing contemporaneous information on the prices of comparable assets." Is that correct? A Q That is ~orrect. And this is sometimes called the comparable

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sales method; is that right? A Q Yes. But you didn't use the comparable sales

method because you could not find comparable sales and comparable assets; correct? A Right. But I did look at the demand for the

license itself, the prices for the license itself which is in some sense a subset of that, that approach.

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But it is true that you could not find Heritage Reporting Corporation (202) 628-4888

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Kaplan - 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 comparable sales and comparable assets? A Q It is a unique asset.

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And staying with paragraph 52 of your report

you write, "A third method would estimate the replacement cost of the asset." Is that correct? A Q That is correct. Is it fair to say that the replacement cost

approach assumes that the assets can in fact be replaced? A Q It does. If you are valuing property and there is no

available replacement then the replacement cost method would not shed any light on the value; is that correct? A Q That is correct. And you've testified that the TLA was a

unique asset; right? A Q A It was a unique asset. The TLA gave Innovair the exclusive -I think, if I can elaborate a little bit, I

think you might be able to get information from various different ways to get some order, some insight as to what the relevant range of the value of the asset might be even though you might not be able to pin down the amount exactly. I mean this is not quite Heritage Reporting Corporation (202) 628-4888

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Kaplan - Cross 1 2 3 4 5 6 the same thing as the Mona Lisa. Q Few things are quite like the Mona Lisa,

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wouldn't you agree? A Q I would agree. Now, you've testified that the TLA gave

Innovair the exclusive rights to sel! the aircraft outside the United States to purchasers not receiving U.S. Government financing. If Innovair had obtained a new FTC similar to FTC-4840 would that FTC have granted Innovair such exclusive rights? A Q I'm not sure I understand the question. Well, you've testified that one of the

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things that Innovair obtained under the TLA was the exclusive rights as against BTC to sell the aircraft overseas; is that right? A Q That is correct. Now, after the TLA was taken and Innovair

was deprived of it, if they had gone out and.somehow were able to obtain a new FTC that would have permitted them to do similar conversions, if they had obtained such an FTC that new FTC would not have given them any exclusive rights as against BTC; is that correct? A Q That is correct. And in fact in your report -Heritage Reporting Corporation (202) 628-4888

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Kaplan - Cross 1 2 3 4 Q BY MR. BARTOLOMUCCI:

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Now there was cross-ownership of Innovair

and BTC with respect to the Carmichael Group and the Basler Group; is that right? A Q Yes. So as you point out in your report, and this

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is page DX-323/5, in paragraph 5 you write, "Basler and his wife owned 51 percent of the stock of BTC with Carmichael's wife and Wilson owner the remainder." That's right, isn't it? A I believe that that's right. I haven't

checked the cite exactly. Q And on the next page of your report DX-323/6

you write, "The Carmichael Group owned 51 percent of Innovair with the Basler Group owning the remainder." That's also correct? A Q That is my understanding, yes. And it's okay if I refer to this dynamic as

the cross-ownership? You understand what I mean? A Q I believe I do. Because of this cross-ownership the Basler

Group would profit from sales made by Innovair and the Carmichael Group would profit from sales made by BTC; correct? A That is correct. Heritage Reporting Corporation (202) 628-4888

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Kaplan - Cross

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Q

Would you agree with me, sir, that Basler

would not have any economic interest in pricing the option so high that it could frustrate a lot of Innovair sales to customers? A There's two games that could be being played

here. One game is to maximize Basler's profits in the short run, in which case I agree with what you just said, they would not want to price it so high as to prevent Innovair from making sales, but they would like to shift the profits from Innovair sales from Innovair to BFS because Basler owned I00 percent of BFS and only 50 percent of Innovair, or 49. The other game which is trying to get -which I haven't even talked about and addressed in this is basically forcing Innovair to sell back the license. And so they could have presumably starved Innovair in part of a longish strategic game which I haven't even touched and wouldn't even quite know how to model. So let me just leave that as a possibility that why they might want to starve Innovair. But in my analysis I assumed that they did not want to starve Innovair, that they would have their short run incentive would be to not prevent Innovair from making sales but to -- or not -- to allow Innovair to make sales but for them to profit, have a disproportionate Heritage Reporting Corporation (202) 628-4888

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Kaplan - 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 amount of the profit from those sales.

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THE COURT: That would be the equivalent of predatory pricing where you price your product so low that it drives your competitor out of business so then you can raise them back up high even though they're lower -THE WITNESS: Well, that's a fair analysis. But you'd be pricing, in this case you'd be pricing the options so high that Innovair would basically be forced out of business and so you could buy Innovair's, that asset cheap. That is the analogy which I haven't gone that way, but it's conceivable that these parties, I mean -THE COURT: Sort of like an economic expense for a long-term presumable gain? THE WITNESS: Right. Right. BY MR. BARTOLOMUCCI: Can I have you go back to your deposition

transcript again? Do you have that? A Again, for the analysis I did in this, for

this and what I've talked about in my testimony, what you just said is what I believe to be the truth. But the way, the analysis I applied to it. And so that's my testimony, it's just apropos that there would be another story that one could tell but that's not the Heritage Reporting Corporation (202) 628-4888

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Now, if BTC had thought that TLA was worth,

oh, let's say $12 million, at the time of the res bond would it have been willing to pay 1.375 million? A That's not how prices get set in

marketplaces. The person who values something most highly doesn't have to pay the amount that it values. Basically prices get established in marketplaces by the price that the second highest person values that, you know -Q I don't think you've answered the question

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that I asked you. If BTC thought that the TLA was worth $12 million would it have been willing to pay $1.3 million -- $1.375 million? A I mean it would have been willing to pay the

lowest price it had to to get the asset up to $12 million if that was its reservation price, is the economic term that you're -- the economic term for what you're describing. Q So it's entirely possible that BTC could

have thought that the TLA was worth more than 1.375 million? A BTC could have thought it was worth more,

could have thought it was worth less. Q If it thought it was worth less than 1.375

million would it have made rational sense to pay 1.375 Heritage Reporting Corporation (202) 628-4888

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million? A
Again we have to define what worth is. I

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mean worth is what the fair market value for the asset is. And it might have been faced with this take it or leave it situation as opposed to what would have happened if there was an open and free auction, as it were, for the asset. I mean what we know is is that they viewed it was worth, it was worth more than -- it was presumably worth more to them than 14375 million. But the next person that would have bought it, the next highest entity that would have valued it at independent arm's length transaction I think would have valued it for substantially less, c!ose to zero. Q Let's talk -MR. BARTOLOMUCCI: Sorry, Your Honor. Please continue. THE COURT: I was going to say what's your estimate of how long? MR. BARTOLOMUCCI: Maybe this would be a good time to take a break because I think I probably have another half hour or so. THE COURT: Okay. Why don't we take a 15 minute break and we will reconvene. MR. BARTOLOMUCCI: Thank you, Your Honor. THE CLERK: All rise. Heritage Reporting Corporation (202) 628-4888

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So every time a Turbo 67 is sold that inures

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to the bottom line of Pratt & Whitney; right? A Q Yes. Even if UTC or Pratt & Whitney is not the

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seller of the claim -A

Yes. -- they profit because they make the

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engines? A Q

That is correct. I believe you testified that one of the

problems that you saw in Arthur Cobb's analysis relates to the actual sales by BTC over the last 17 years? A The problem that I identified with Mr.

Cobb~s report was his sales estimate. I proposed that the BTC actual experience might be a more realistic representationof what would have occurred. Q Now, Innovair has not had the technology

license agreement since 1991; correct? A That is my understanding. So effectively it was out of business since

Well, Innovair I think Innovair was still in Innovair could have done lots of things. Heritage Reporting Corporation (202) 628-4888

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relate them to 324. Why don't we say DX-324A? MS. FLOYD: THE COURT: MS. FLOYD: THE COURT: That would be fine, Your Honor. And then this is chart 3. Three of 324A. Previously on the record we were

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talking about chart 2. And before lunch we were talking about chart I, the list of Mr. Whalen's past trials that he testified at. So that will make it clear for the record. (The documents referred to were marked for identification as Defendant's Exhibit No. 324A.) MS. FLOYD: Thank you. THE COURT: Proceed. BY MS. FLOYD: Q Okay. So this is a follow-up on the first

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opinion that we talked about in a previous chart number 2 of DX-324A, and this is chart number 3 of DX324A. Basically if you can explain what you mean when you say that the Plaintiff's business has no substance? A This chart just there's a number of items

you consider when you come to the opinion that there's no substance. First, there's no experienced Heritage Reporting Corporation (202) 628-4888

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management or employees other than Mr. Carmichael. Precarious financial position, which we'll talk about in a few minutes. They have no real resources like warehouse, equipment or any eleient of parts inventory. They were dependent upon Basler Turbo for technical support. They were dependent upon United Technologies for helping in setting up distribution centers for sales. And they don't have a lot of that, which we'll get into in detail, so therefore there are no resources. And the conclusion is that other than Mr. Carmichael and his plan there is no substance to this business. Q Okay. So let's go into the first issue, no

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experienced management or employees. Put that chart, and this is chart number 4. A Q I have read the -- oh, excuse me. I'm sorry. Can you explain why in your

opinion there were no experienced management or employees? A Yes. As I indicated earlier, I read al! of

the documents or most al! of the documents, looked at the projections. I've listened to the testimony. I've read particularly Mr. Carmichael's testimony. And based on reviewing all of that I can say among Heritage Reporting Corporation (202) 628-4888

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other things we really don't have any management or employees in Innovair at the time of the what I will refer to as the wrongdoing other than Mr. Carmichael and a little bit of Mr. Wilson's time. Mr. Carmichael and Mr. Wilson were both

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pharmaceutical company executives, excellent track records apparently, managing 7 and 8 hundred people with no previous experience in the aircraft or aircraft conversion business. We have to stop and think and say, wait a minute, running a major pharmaceutical institution takes a little different talent than essentially going door to door trying to sell aircraft conversions. And, well, the point there is there's a major difference between running a drug company and selling aircraft or converted aircraft. Plus, I focused on the fact that Mr. Carmichael never sold a conversion kit. He started the business in, what, 1988 and was working unencumbered through 1991, as all the testimony has shown, but never was a conversion kit actually sold. Q But there was a downpayment paid on a

conversion kit, wasn't there, by UTC? A Well, I mean you're talking about the

$80,000 United Technologies -Q Yes. Heritage Reporting Corporation (202) 628-4888

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-- downpayment which, sure, downpayment on a

potential sale. They were looking to purchase. There were a lot of strings on that. I mean if you look at the deposit there were a lot of strings and there was no delivery ever made on any kit sale in that instance. Further going down the chart as I read it, particularly the commentary of the Deloitte personnel, it appears that at the time that these projections were put together at least Mr. Carmichael had a strong interest if not an overriding interest to sell out, get his money back. It's what he's doing with the business plan. And finally, in this subject Mr. Clark has talked about the fact that he may have joined, Carmichael wanted him to come apparently. Mr. Clark indicated he wasn't anxious about moving out of Wisconsin. Probably might have moved to Canada. Might have, could have gone to California. But nobody ever went anywhere. And there was discussions in the transcript of the Arizona trial and in the various depositions in addition to Mr. Clark's testimony here at trial of relative not discussions as much as references to additional people who were Basler employees who would have come over to Innovair at some Heritage Reporting Corporation (202) 628-4888

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point. But nothing was ever finalized and nothing -in most instances they never had any discussions, it was more concept than anything else. So from that perspective I look at, I stand back and look at this case and I see Mr. Carmichael and some promises and some hope back in the 1990, '91, '92 period of time. Absent the taking of the TLA we still have to dea! with the question of what we had then was Mr. Carmichael. Q Okay. Now, this was the first item under

Innovair's business. So I'd like to just return to chart 3, we're going to the second item, in terms of precarious financial condition. Let's have you explain that? A Well, basically as I look at the company,

Innovair itself has no substance and is in precarious financial condition. The Basler Turbo Conversion financial statements indicate that they were not in the best of condition. Basler Financial Services was a little stronger. But therefore the particular point is that Innovair had no particular substance. Q A Q Okay. Financially. Let's look at chart number 4 -- I'm sorry,

chart number -Heritage Reporting Corporation (202) 628-4888

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