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:

702 through 945 Washington, D.C. October 22, 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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COBB - CROSS 1 2 A Q They are.

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Do you have any way of explaining why those

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projections are different? A If I remember correctly, there are some

Warwick documents that I've understood to have been produced related to the Arizona trial that are internal memorandums, I think there's some correspondence as well, that talk about having an element of conservatism in the projections. Q So that's how you account for the

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differences between the Deloitte & Touche and the Warwick approaches? A that, yes. Your position in your analysis with respect Q to damages is an expectations-based approach? A Expectancy interest. THE COURT: What was that? I didn't hear your last answer. THE WITNESS: BY MS. FLOYD: Q And would you call that an expectationsExpectancy interest. To the extent that I sought to account for

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based approach? A No, but I wouldn't argue with somebody

calling it that. Heritage Reporting Corporation (202) 628-4888

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COBB - CROSS

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Q

So it's not inconsistent? I don't think it is. Now you didn't calculate the fair market

value of the technology license agreement, is that correct? A I did not. I may have made considerations

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around that, but I've not made a calculation of that. Q In your lost expectancy calculation,

expectancy really means the value of the technology license agreement in Innovair's possession, isn't that correct? A Q sales? A Not in my report, no. And have you done a mental calculation of Yes. Yes, it does. Did you present an analysis of spare parts

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Q
A Q A

what these spare parts sales are? At least generally in the past, yes. What are the holding costs of spare parts? I don't have that in mind. In the report,

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there are holding costs that are included, but I don't recall the specific considerations of holding costs when I was looking at the issue of revenues and expenses related to spares. The holding costs that are included, on page 59 of my report, there is an Heritage Reporting Corporation (202) 628-4888

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COBB - 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

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period to allow for the parties to fight about exactly when that starts. But under either scenario, the TLA lapses in June of 1998. THE COURT: Okay. Thank you. BY MS. FLOYD: When you talked about how investors would

view Innovair, you said that there were a variety of risks that the investor would look at, is that correct? A Q Very much so. Okay. And one of the risks that you talked

about was the risk associated with being in the aircraft industry, correct? A Q Yes. There are risks associated with Innovair

itself, including the fact that it is like a startup company also, correct? A Yes, and it does have characters. Even into

1991, it does have at least some of the characteristics of a startup. So there are companyspecific risks. Q And another risk that an investor might consider is the depth of management, is that correct?
A

Yes. Isn't it correct that Mr. Carmichael was the Heritage Reporting Corporation (202) 628-4888

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COBB - CROSS 1 2 3 4 only employee of Innovair in 1991? A right. Q Now another risk that an investor might I think as a technical matter, that was

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consider is the operating history of a company, isn't
that correct?

A Q

Yes. Wouldn't you agree that Innovair's operating

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history was very limited in 1991? A Q Of course. And you yourself identified numerous

competitors with the BT-67, is that correct? A Q Competitive aircraft, yes. Wouldn't you consider that to be another

risk that an investor might consider? A Of course, competition is always a risk in

the marketplace. Q Wouldn't you agree that another factor that

investors might consider is the fact that a portion of Innovair's expected customer base is located in underdeveloped countries? A Q Yes. Let's talk about expenses. I'd like to have

you turn to PX-9/53, and that's Tab 1 of your binder. A And what page? 'Heritage Reporting Corporation (202) 628-4888

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COBB - CROSS

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turn there. A By alternative, do you mean alternatives

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within Tab I? Q No, I'm sorry, Tab 2. That's al! right. Right. I'm there. This alternative approach is based upon the UTC distributor agreement, is that correct? A It is, as are the others. But this one

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focuses only on the UTC distributor agreement. Q And it wasn't your idea to create this 35-

unit sales scenario to calculate your damages in this case, isn't that correct? A As a stand-alone calculation, that's

correct. I had used the 35 underlying other calculations. But in terms of the 35 that's included in the supplemental report, that was not my idea. Q Okay. And again, I know I have identified

this as Tab 2, but for future reference, it's also PX305, correct? A PX-305. Q Right. And in fact, I think you just Yes, it is. The copy that I have is marked

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testified that it was Innovair's counsel's office that Heritage Reporting Corporation (202) 628-4888

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COBB - CROSS

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asked you to create this 35-unit scenario. A I don't think I testified about that, but

that is a true statement. I was requested to prepare this scenario by Hogan & Hartson. Q And you don't believe that this 35-unit

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sales scenario was consistent with Innovair's business plan, do you? A It's not. Innovair did not plan on just

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supporting and watching UTC sales. Innovair planned on generating sales, conducting their business in other locations, and they had also planned and understood that UTC would be able to generate sales exceeding 35. Q A Q A Q Let's turn to PX-305, page 9. All right. Now looking at the GNA expenses -All right. -- which is halfway down the page, you would

agree that this scenario assumes that there are no warranty claims for the entire seven-year period of the distribution agreement, isn't that correct? A Q Yes, it does. In terms of product liability, you've

excluded product liability insurance from this scenario also, haven't you? Heritage Reporting Corporation (202) 628-4888

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FP~AKER - DIRECT
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A

Harry was a friend of a now-deceased

attorney in Phoenix, John Lansey. John had referred Harry to Warwick and Company, and I was the one that went to meet with Harry. Q So what was your understanding of the

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project that's described in Joint Exhibit 24? A Well, Harry basically brought the

transaction with some invested interest in the whole conversion area. At the time, other than knowing that, I didn't know much. In fact, he in some ways could be considered brokering the deal to us. Q Okay. I'd like to have you turn to page

four of Joint Exhibit 24. Towards the bottom of that, actually, the last set of discussion is under "Comment s" . A Q Right. It says, "The projections were prepared by

Deloitte Haskins, but obviously were prepared based on numbers given them by the principals of the respective companies. We would have to go into detail as to the validity of these projections." Did y~u look into the validity of these projections; and if so, what did you do? A No, we did not. Obviously, at the time,

Deloitte was one of the Big Eight firms. So we Heritage Reporting Corporation (202) 628-4888

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FRAKER - DIRECT 1 2 3 4 5 6 7

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assumed that the putting together of that by Deloitte was done well. Q Did you actually look at the Deloitte &

Touche audit report, or the report that was presented by Deloitte & Touche? A Q Yes, we did. Did you go to outside sources to verify the

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basis of the projections? A Q No. Did you go to Mr. Carmichael to verify the

projections? A Q Yes. What kinds of discussions did you have with

Mr. Carmichael? A Wel!, they were, I mean, obviously lengthy,

because the projections were based on the ability to market the aircraft throughout the world, throughout the country. Those were all things that we relied on him to provide information on. Q I'd like to have you turn to Joint Exhibit

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34, which should also be in that binder. Joint Exhibit 34 is dated March 5, 1991. The first five pages of Joint Exhibit 34, what are they? A They are pretty much a relatively standard

agreement that we would have used at the time to Heritage Reporting Corporation (202) 628-4888

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FRAKER - DIRECT
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engage somebody, or for us to be engaged by someone who is looking for capital. Q What about the next five pages, Joint

Exhibit 34/6 through Joint Exhibit 34/11? How would you characterize those pages? A They would have been characterized as

something that we would have discussed with Harry and Carmichael and Wilson in regards to what their desires were, to have a fina! transaction structured in that manner. Q Was this basically your engagement

agreement, these pages? A Q The first part was, yes. Okay. And was the second part of it, the

one that you just described, was that considered to be attached to the engagement agreement? A Q Yes. Would you call this, the transaction that's

described in these pages, an esoteric transaction? A Q A Yes. Can you explain what you mean by that? Well, it's just the fact that you had a

relatively new type of conversion-type of manufacturing, et cetera. There are not many people that could either relate to it. or identify with it, Heritage Reporting Corporation (202) 628-4888

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FRAKER - DIRECT
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749

or have much knowledge of a past history. So with all that uncertainty and that basic potential, not a lot of people would be available that would necessarily initially have an interest in it. Q Did you prepare the pages that are Joint

Exhibit 34, 6 through Ii, of this document? A Q Yes. Now what was the purpose of this engagement,

from Warwick's point of view? A Well, the main purpose was to find capital

for this transaction. Intertwined with that was being involved in a negotiation of the buy-out of Basler, and also talking to the bank in regards to restructuring the debt or finding another bank to do the debt financing. Q So your understanding was that the purpose

of the engagement was to obtain an investor and for Mr. Carmichael and his colleague, Mr. Wilson, to buy out the Baslers? Is that your understanding? A Q Yes. Okay. I'd like to have you turn to page JX-

34/7. And I'm going to have you look to the last large entry on this page, the paragraph that begins "U.S. Holdings"? A Yes. Heritage Reporting Corporation (202) 628-4888

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FRAKER - DIRECT 1 2 Q Is that what you did in this case? Yes.

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This value the $I0 million to $13 million, does that represent the combined value of the two companies: Innovair and Basler Turbo Conversions? A Q Yes. Was there any way to allocate the value

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between Innovair and Basler Turbo Conversions? A I believe the only way we did that was the

fact it was basically a 50 percent ownership in those respective entities. Q Okay. I'd like to have you turn to JX-34/8.

I'm going to read some passages into the record, and I'd like to have you explain them. A Q Okay. I'm reading from the paragraph that begins:

The possible terms, and that's maybe a fifth of the way down the page. It says: The possible terms of the convertible debt is expected to be as follows --

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A
Q A Q

I'm sorry. Okay.. I'm fine. Go ahead. Did you find it? Yes. Okay. Five year subordinated deminatures

with interest only, payable quarterly at approximately 14 percent. Additional provisions: Accrua! of Heritage Reporting Corporation (202) 628-4888

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FRAKER - DIRECT 1 2 3 4

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additional interest equal to I0 percent of the cash flow from the operations to be defined unti! yield on subordinated debt equals 20 percent to 25 percent per annum. And I'll stop here. Can you explain what that means? A Yes. Basically, what we had to do in this

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type of investment is: To create a tier type of investment opportunities. So, for the first one, it was a subordinated debenture, subordinated to the bank. It had to have a relatively high interest rate because of the risk. In addition to that, it was more like a participating subordinated debenture that you participate in the ups of the cash flow, and then convert it at some time in the future, so that -Q A Feel free to take a drink of water. I did. THE COURT: After taking another drink of water, if you could go over that again. I wasn't I00 percent sure that I understood. THE WITNESS: In layman's terms, Your Honor? THE COURT: Yes, layman's terms, or English. THE WITNESS: Most fixed rate instruments carry a fixed rate only. That rate is obviously higher or lower depending on the risk. Heritage Reporting Corporation (202) 628-4888

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FRAKER - DIRECT 1 2 3 4

753

In addition to this, what was put into it was a chance to participate in the additional cash flow based on the projections, which would increase your rate up. So you had a guaranteed 14 percent, but, as cash flow came in, that rate was enhanced by that. THE COURT: Okay. Thank you. MS. FLOYD: Thank you. BY MS. FLOYD: Q Can you draw any conclusions about this rate

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of return for potential investors? A I honestly don't remember what the rates

were at the time. But anything in the double digit number would have been very high, and obviously would denote some risk in the investment. The addition of having it attached to cash flow would also be an indication of that. Q Why would an investor expect to get this

kind of return, 14 percent with a ceiling of up to 25 percent? A Well, al! this really equates to that 35 to

50 percent return that you would have to do as a net present value. It's because it was more esoteric, more unusual than what would be commonplace in the marketplace. Heritage Reporting Corporation (202) 628-4888

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FRAKER - DIRECT 1 2 3 Q

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I'd like to have you return to page JX-34/7.

When we were talking about the range of $i0 million to $13 million for Innovair and Basler Turbo Conversions, that's I00 percent of the common stock for both companies, isn't that correct? A Q Right. Okay. Now, let me go forward in this

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document. Let's go to the page showing Exhibit 9. It's Joint Exhibit 34/9, sorry to confuse you, but it's the same document. I'm looking at the middle of the page. First of all, it says: The potential use of proceeds from common stock and subordinated, if the above structure is utilized, it may be applied in the following manner. How is the use of the proceeds developed? A I think you really go kind of backwards

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because you had to identify what was needed to operate the company, what the bank had to be paid off, what any other loans were outstanding, and then what would be paid off to Basler for his shares. Q A Q A Did you prepare this document? I prepared the document. As part of it? I prepared the document. But all the Heritage Reporting Corporation (202) 628-4888

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FRAKER - DIRECT 1 2 3 4

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information: the kit cost, inventory, those types of things would have come from Carmichael. Q What is the product development line mean

under high? A I honestly don't remember. I would assume

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that it was: If an investor came in and we could obtain extra money, there could be additional products that could be developed around a conversion of the airplane. Q So, the bottom line, the $5 million to $I0

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million, what does that represent? A It represents the potential of getting

capital of $5 to $I0 million. Q Can we conclude from that that's what

Carmichael and Wilson were looking for, the bringing in $5 to $I0 million? A Yes. MR. BARTOLOMUCCI: Objection, Your Honor, speculation. BY MS. FLOYD: Q Do you have any reason to know whether

that's what Mr. Carmichael and Mr. Wilson were interested in bringing into the business? A Q Yes. Can you explain that? Heritage Reporting Corporation (202) 628-4888

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FRAKER - DIRECT 1 2 3 4 A

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Well, just that you wouldn't have prepared

the whole document if it hadn't gone past them to look at'to determine if that was a structure and a price, and cash that they would have an interest in. THE COURT: and answer. MS. FLOYD: Thank you. BY MS. FLOYD: Q If Mr. Carmichael and Mr. Wilson had been Okay. I'll allow the question

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successful in finding an outside investor, what proportion of the business would the new entity own, that is the outside investor? A Q Forty percent. Okay. Can we turn to the document. I think

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it's JX-34/7. Is that identified here in the middle of the document? A Q Yes. I'd like to have you turn to another

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document, but let me just make sure I make this point. The document was signed by Mr. Eastlick, correct? A Q Yes. And the engagement agreement was signed by

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Mr. Wilson and Mr. Carmichael, is that correct? A Q Yes. The next document is: Defendant's Exhibit Heritage Reporting Corporation (202) 628-4888

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FRAKER - DIRECT 1 2 THE COURT:. Okay. BY MS. FLOYD: Q

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It says, "Bob Binder introduced our group,

and their group was then introduced. Bob started discussions with an outline of our offer, which was reviewed (see copy), and Tom Fraker reviewed his experience and presented the dollar amount of the offer, which was, it says, Cache of clothes, $2 million; Deferred Payment, $3 million; and Tota! Payment, $5 million." What did this $5 million represent? A It represented -- I'm not sure of your

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question, but it was basically to acquire the interest of Basler. Q Okay. So Mr. Carmichael and Mr. Wilson were

they interested in acquiring the interest of Mr. Basler in both Innovair and Basler Turbo Conversions? A Yes. Did the $5 million include Basler Flight Service? A Q
NO.

I'd like to have you turn back to that Joint

Exhibit Binder, which was the binder you were using earlier, and turn to Joint Exhibit 41, which is the very thick document in there, so it shouldn't be too Heritage Reporting Corporation (202) 628-4888

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FRAKER - DIRECT
1 2 hard to find. A Yes. Can you identify this document?

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Q
A Innovair.

The document that Warwick has prepared for

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Q
A Q

Did you play a significant role in the

preparation of this document? Yes. I'd like to have you turn to page 6, Joint

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Exhibit 41/6. On this page, there are some disclaimers. At the top of the page, it says: The information contained in this confidentia! memorandum, including, but not limited to, the business description: corporate history, operating procedures, facilities and projected financial statements, which Warwick Consulting Group, Inc. (Warwick obtained) is, to the best of Warwick's knowledge, accurate and complete. Warwick has not audited, or otherwise confirmed, and only to a limited extent has it reviewed this information. Is this one of the disclaimers that you have as part of this confidential memorandum? A Yes. I'd like to have you also turn to the fourth Heritage Reporting Corporation (202) 628-4888

Q

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FRAKER - DIRECT 1 2 3 4

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paragraph here, the one that begins: This confidential memorandum. I am going to read a significant portion of that into the record: This confidential memorandum does not contain all material information, which must be carefully considered by any party desiring to invest in any securities of the companies; and, therefore, no reliance should be placed on the contents of this memorandum for such an investment purpose. The opinions and beliefs expressed in this confidential memorandum are solely those of Bryon Carmichael and Barry Wilson, and have not been independently investigated or verified for accuracy, adequacy or completeness. Was this also part of your disclaimer contained? A Q (Nonverbal response.) I'm going to take a chunk of pages together,

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and that's starting with Joint Exhibit 41/8 through 31, and that's the section called: Executive Summary. A Q What was the range of pages? The range of pages was: Joint Exhibit 41/8

through Joint Exhibit 41/ -- actually, it goes to 32. The information in the Executive Summary, Heritage Reporting Corporation (202) 628-4888

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FRAKER - DIRECT

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Yes. Would you have had to rely on information

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provided by Messrs. Carmichael and Wilson for this information? A Q Yes. Did you independently verify any of this

information contained on pages 34, 35 and 36 of Joint Exhibit 41? A Q No. I'd like to have you turn to Joint Exhibit

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41/48. This page is entitled: Management/Organization, and it identifies individuals, including Mr. Bryon Carmichael, Mr. Barry Wilson, Mr. Robert W. Clark, Mr. Mark Backus, and Mr. Terry Leim. Did you know whether these individuals, all of these individuals, were employed by Innovair at this time? A Q No. Is there any way of telling whether these

individuals, Mr. Clark, Mr. Backus and Mr. Leim, were employed by Basler Turbo Conversions at this time? A Q I'm sorry, was there a way? Is there any way that you can tell from this

document that they were employed by Basler Turbo Conversions at this time? Heritage Reporting Corporation (202) 628-4888

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FRAKER - DIRECT

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investor to have invested in this kind of business? A Q Most certainly, yes. Would you have expected a potential investor

to have undertaken due diligence in connection with this confidential memorandum? A Yes. (The document referred to was marked for identification as Defendant's Exhibit No. 173.) BY MS. FLOYD: Q I'd like to have you turn to another

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document, and that's Defendant's Exhibit 173. I'm not quite sure if it's in the binder. It's not going to be in that binder, the Joint Exhibit Binder. It would be in a separate binder, and what I'm not sure of is the range of the next binder. A Q Not this binder. Okay. Go onto another binder then. Joint Exhibit 173 is a memorandum dated June 13, 1991 from Thomas A. Fraker to Bryon Carmichael. Did you prepare this document? A Yes. MR. BARTOLOMUCCI: This is DX-173, right, just for the record? MS. FLOYD: Yes, DX-173. Heritage Reporting Corporation (202) 628-4888

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FRAKER - DIRECT 1 2 3 4 Q MR. BARTOLOMUCCI: I think you said JX. MS. FLOYD: I apologize, DX-173. BY MS. FLOYD: I think~my question was, did you prepare

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this memorandum? A Yes. MS. FLOYD: Your Honor, I move the admission of this exhibit into the record. It's Defendant's Exhibit 173. THE COURT: Any objection? MR. BARTOLOMUCCI: No objection. THE COURT: Okay. Admitted. (The document referred to, previously identified as Defendant's Exhibit No. 173, was received in evidence.) BY MS. FLOYD: Q There's handwriting on the front page,

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that's the first page of Defendant's Exhibit 173. Is that your handwriting? A Q Yes. What about the second page of Defendant's

Exhibit 173, is that also your handwriting? A Q Yes. Let's go to the second page of the exhibit, Heritage Reporting Corporation (202) 628-4888

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half-way down the page, it states here: I have sent out letters to approximately 39 venture funds. I am awaiting the response of approximately nine of these venture funds. The rest have declined for reasons such as: too small, wrong location, and not type of project they are presently looking for. Did you do any follow-up with respect to any of these venture funds, in terms of contacting them? A The follow-up, at this point, was only to

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the nine that we were waiting response. So, once they declined it, no, I didn't follow-up. Q Did any of these venture funds express an

interest in investing in the Carmichael-Wilson project, that's the Warwick Consulting project? A Q No. The next item states, and this is still on

Defendant's Exhibit 173, page 2: I have also sent out approximately 43 letters to selected industry potential partners. That letter went out seven days ago, and I will start on Thursday and Friday to follow-up with these people. Did you follow-up with the 43 selected industry potential partners? A Well, I don't recall all of them, but I mean

I'm pretty pragmatic about that, so I'm assuming I Heritage Reporting Corporation (202) 628-4888

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FRAKER - DIRECT
1 2 3 4 did, yes. Q Did any of them express interest in

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investing in Innovair Aviation Limited's effort to buy out the Baslers? A Q No. Were you able to attract any investors in

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connection with your confidential memorandum, that's Joint Exhibit 41? A Q No. To what do you attribute the lack of success

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in attracting :investors? A Again, just the fact that it was a very

unique, unusual, more esoteric transaction. MR. BARTOLOMUCCI: I object to the previous question. It calls for speculation. THE COURT: It's calling for this individual's expertise, that's within his common background I guess as a worker in the venture capital area, so I'll allow the question. BY MS. FLOYD: Q A Can you repeat your answer for the record? I think so. It was a unique, unusual, more

esoteric type of investment. Q Okay. Again, the unique and esoteric nature

of the investment, can you elaborate on why you would Heritage Reporting Corporation (202) 628-4888

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FRAKER - DIRECT 1 2 3 4 have expected a problem with attracting investors? A Well, I mean, there wasn't a huge track

768

record prior to us taking on the transaction. So there's not a proven record of sales. Many of the sales, and I don't know what percentage, but a substantia! number were brought, which, at the time, obviously had some economic uncertainty. And when you bring a lot of people together, some of which had expertise in it, and others didn't, so all that for an investor raises some concern, and thus the higher yield, and the more esoteric nature of it. Q The memorandum is dated June 13, 1991. Did

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you continue to look into the possibility of finding investors for this project? A Well, I mean I don't remember the days

after that, but I just, in a more generic sense, we were paid a retainer and a transaction fees. So if we had unearthed anybody who had any interest, or was not followed up on, we would have continued to follow-up on them thereafter. Q And your reference to a retainer, that

indicates that you would be -- and also a reference fee you said? A No, a transaction fee. Heritage Reporting Corporation (202) 628-4888

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FRAKER - DIRECT 1 2

771

Exhibit 254. That may be in another binder, I'm not sure. MS. FLOYD: Your Honor, for the purpose of this examination, I'm only going to be addressing two pages out of the document. So what I would like to propose is that the rest of it be eliminated unless the Plaintiff has cross-examination on it. But I'm only going to be asking the witness about Defendant's Exhibit 254, pages 3 and 4, THE COURT: Okay. MR. BARTOLOMUCCI: Could we pause a minute while we locate the document? MS. FLOYD: Sure. (Pause.) THE COURT: After Plaintiff's cross, we wil! decide how much of it goes into it. MS. FLOYD: That's fine. MR. BARTOLOMUCCI: And pages 3 and 4. MS. FLOYD: Thank you. BY MS. FLOYD: Q Can you identify the handwriting on these

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two pages in Defendant's Exhibit 254, pages 3 and 4? A Q A It's mine. Okay. Why did you prepare these two pages? I think it was my notes that I was taking or Heritage Reporting Corporation (202) 628-4888

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FRAKER - 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

772

trying to develop that present value, which again is the discount rate associated with the risk of the investor that you'd have to discount the cash flow back to determine the pricing on the transaction. Q What did you conclude an investor would want

out of this investment? A Q A range from 35 to 45, 50 percent. Okay. In developing a value for the entity,

what range of return did you use? A Q The same. How did you prepare this calculation, if you

can just describe it? A I mean, obviously, it's based on the cash

flow that was generated by the projections that were provided by Mr. Carmichael to the offering document, and to the transaction. Q So they were based on the projections that

were provided to you Innovair, is that correct? A Yes. MS. FLOYD: Your Honor, I'd like to move the Defendant's Exhibit 254, pages 3 and 4. MR. BARTOLOMUCCI: I have no objection, subject to designating additional pages for ii and 12. THE COURT: Okay. Three and 4 will be admitted with the understanding that there may be Heritage Reporting Corporation (202) 628-4888

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FRAKER - DIRECT
1 2 3 4 more.

773

(The document referred to was marked for identification as Defendant's Exhibit No. 262.) BY MS. FLOYD: Q I'd like to have you turn to Defendant's

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Exhibit 262, please. THE COURT: MS. FLOYD: THE COURT: it? 264? MS. FLOYD: THE COURT: 262. Thank you, okay. Another notebook yet. Yet another binder. I was afraid of that. What is

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BY MS. FLOYD: Q record? A Yes, I believe it's an Excel spreadsheet Can you identify this document for the

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that was used to develop different scenarios on the transaction. Q Okay. Who prepared this, you did, okay.

What rates of return were you evaluating in this Excel spreadsheet? A It was the same 35 to -- well, actually, it

went as low as 20 up to 40-45 percent. Q And that you see from page 2 of Defendant's Heritage Reporting Corporation (202) 628-4888

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FRAKER - 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
Exhibit 262? A Q Right. So, as part of your evaluation, would you

774

have evaluated the value of the business based on a lower level of sales? A Yes, it's what they would call: sensitivity

analysis where you reduce the forecast by even, as you see in the middle of the page, by 50 percent to determine another way to determine if the yield would be obtained, if the projections were not accurate. Q Okay. I have a short-term memory problem.

I'm not sure if I moved Defendant's Exhibit 262 into evidence. But I'd like to move Defendant's Exhibit

262 into evidence. MR. BARTOLOMUCCI: No objection. THE COURT: Okay. 262 is admitted. (The document referred to, previously identified as Defendant's Exhibit No. 262, was received in evidence.) MS. FLOYD: I have no further questions of the witness at this time. THE COURT: Okay. Thank you, Ms. Floyd. MS. FLOYD: Thank you. MR. BARTOLOMUCCI: Your Honor, I think it Heritage Reporting Corporation (202) 628-4888

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FRAKER - REDIRECT 1 2 3 4 Q BY MR. BARTOLOMUCCI: At this meeting, what did the government

819

tell you about the lawsuit? A Actually very little. I don't know what the

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basis is other than something to do with th4 license and that's all. I haven't asked the questions and they haven't provided any information about it. Q And you saw no reason to contact your former

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client to give them a heads up about this meeting? A You asked that before and I said no. MR. BARTOLOMUCCI: That's all I have. Thank you very much. THE COURT: Mr. Bartolomucci, thank you. Let me just make one note here. (Pause.) THE COURT: Ms. Floyd, do you want to do Redirect? MS. FLOYD: Yes I do, Your Honor. REDIRECT EXAMINATION BY MS. FLOYD: Q I think when we initially started we had

shown you a document that was Joint Exhibit 24. I think the binders are behind Mr. Fraker. (Pause.)

Q

Joint Exhibit 24, that's dated September I0, Heritage Reporting Corporation (202) 628-4888

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FRAKER - REDIRECT 1 2 1990, is that correct? A Q Yes. Did you first start contacting potential

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investors in this timeframe, September i0, 1990? A Q Yes. Counsel for Innovair identified a document

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in the first tab, Defendant's Exhibit 97, that's probably also in front of you maybe in a black binder. (Pause.) THE COURT: DX-97, which I guess is Tab I. MS. FLOYD: It is Tab I. BY MS. FLOYD: Q I'd like to have you refer further on down

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the page. It says further on down that, and I'm going to refer you to the last sentence of the second paragraph -A Q I'm sorry, what document? It's, again, Defendant's Exhibit 97, page

two. It says, and I'll read the second to the last sentence. "We felt it was imperative for all parties involved to have a feeling relative to the interest of our investors. The result, great interest but fading." Did you have trouble getting information from Mr. Eastlick and Mr. Carmichael in preparation Heritage Reporting Corporation (202) 628-4888

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FRAKER - REDIRECT 1 2 3 4 this is beyond the scope of the Cross-Examination. THE COURT: I don't know where this comes in, why this is within the scope of Cross.

823

MS. FLOYD: It's within the scope of Cross, Your Honor, because he suggested in his Direct examination that Warwick was an enthusiastic supporter of Innovair and had always provided g!owing reports. In this Cross-Examination I'm showing that Warwick in fact had difficulty with obtaining information and keeping enthusiasm with respect to potential investors as a result of delays on their part providing them information. THE COURT: But the question was whether he had trouble getting paid. Maybe the people were enthusiastic and he was enthusiastic and the project was enthusiastic and Carmichael and Wilson just didn't have any money to pay him. Or enough money to pay him at the time, or their cash flow was bad. So that doesn't necessarily lead to an inference there was any problems with the substance of the deal. Maybe they just didn't have enough money to pay him. I'll sustain the objection] MS. FLOYD: Thank you, Your Honor. BY MS. FLOYD: Q I'd like to have you turn back to the Heritage Reporting Corporation (202) 628-4888

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FRAKER - REDIRECT 1 2 confidential memorandum. That is JX-41, Tab 8.

824

Mr. Bartolomucci read into the record, and I'd ask you to turn to page six of JX-41. He had you read into the record the first sentence of that document. I'd like to read into the record the last sentence of the first paragraph of that document, that page, JX-41/6. It says, "Warwick has not audited or otherwise confirmed and only to a limited extent has it reviewed this information." Does that state the efforts that Warwick went through in order to, in its examination of the various activities that are talked about previously in that paragraph? A Q Yes. So in fact Warwick did not audit or

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otherwise confirm, and only to a limited extent did it review the business description, [he corporate history, the operating procedures, the facilities and projected financial statements provided by Innovair, is that correct? A Q Yes. I'd like to have you turn to the pages that

Mr. Bartolomucci identified. Let's start with pages 33 to 46. Heritage Reporting Corporation (202) 628-4888

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FRAKER - REDIRECT 1 2 3 4 You did not independently verify the

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projected sales in these pages that appear on pages JX-41/34, JX-41/35 or JX-41/36, is that correct? A Q That's correct. Returning to earlier in the text, pages JX-

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41/16 through 41/32, these pages contain potential purchasers on pages 29, 30 and 31. You did not independently verify whether these countries were interested in purchasing the airplane that's being discussed in the confidential memorandum. MR. BARTOLOMUCCI: Your Honor, I'm going to have to lodge another objection, on two grounds. Number one, these are all questions that were previously asked on Direct. Number two, we didn't contend that the witness had independently verified any of the information in the pages being referred to. THE COURT: I do remember him being asked that on Direct. We don't need to go over that one again. MS. FLOYD: Okay. Thank you, Your Honor. BY MS. FLOYD: Q Turning to Defendant's Exhibit 126, and

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that's in the binder in front of you. (Pause.) You had reviewed that with Mr. Bartolomucci. Heritage Reporting Corporation (202) 628-4888

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FRAKER - 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 Q questions. THE COURT: Okay. I was going to say we could take a break. Joint Exhibit 35. THE WITNESS: What page? MS. FLOYD: Page three. BY MS. FLOYD: It says under item ten, "Financial Q

827

Joint Exhibit 34, page two. It's in Tab 5. Okay. Mr. Bartolomucci read into the record the

fee of $5,000 for the preparation of the confidential memorandum. Was $5,000 enough for Warwick to do due diligence in addition to preparing the confidential memorandum? A Q No. Let's turn to Tab 7, Joint Exhibit 35. ~'d

like to have you turn to page 3 of the document. THE COURT: MS. FLOYD: THE COURT: What was the exhibit number? Joint Exhibit 35. Let me just ask you this point,

we're about an hour in. MS. FLOYD: I have about three more

projections, BC" I presume that's Brian Carmichael, Heritage Reporting Corporation (202) 628-4888

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FRAKER - REDIRECT 1 2

828

"and Harry," Harry Eastlick, that's my addition, "have decided to reduce the sales projections down by approximately one-third to be more conservative." Do you know what the basis was upon which they allegedly cut the sales by one-third?

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No. Thank you. I'd like to have you turn back again to the

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Joint Exhibit 41, the confidential memorandum. Turn to page 34. (Pause.) THE COURT: What was the exhibit number

again?
MS. FLOYD: Joint Exhibit 31, page 34. BY MS. FLOYD: Looking at the second paragraph up from the

bottom, Mr. Bartolomucci asked you if you had known whether a plane had been delivered yet. Does this document, and I'm going to read into the record a sentence, "One Turbo-67 has been delivered to United Technologies Corporation (UTC) for use by it as a demonstration aircraft." Does this show that Warwick did know that UTC had bought an airplane as of the time the confidential memorandum was issued? Heritage Reporting Corporation (202) 628-4888

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FRAKER - REDIRECT 1 2 3 4
A

829

Yes. I'd like to have you turn to page 37 of

Joint Exhibit 41. Mr. Bartolomucci asked you if you knew at the time that the confidentia! memorandum was issued whether Warwick knew that UTC had a marketing agreement, that there was a marketing agreement between UTC and Innovair. I'd like to have you look at the first sentence under Asia/Pacific Rim countries. I'm going to read that into the record. "The companies have signed an agreement with United Technologies Corporation to handle distribution of the Turbo-67 in Asian markets including mainland China." Does this indicate that in fact Warwick knew that the UTC agreement was in place between Innovair and UTC with respect to UTC's marketing of the Turbo67 in the Pacific Rim countries? MR. BARTOLOMUCCI: I need to object, Your Honor, because my question was about the purchase agreement which was after this report, and this is a reference to the purchase agreement which was prior, and I was talking about the distributor agreement which was subsequent to the report. Two different reports, two different times. Heritage Reporting Corporation (202) 628-4888

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FRAKER - REDIRECT 1 2 3 4 MS. FLOYD: However, the document itself refers to a distribution agreement and in fact the

830

purchase agreement is a distribution agreement. It's just not as specific as the final one that was signed on July 25, 1991. MR. BARTOLOMUCCI: It was only the distribution agreement, the subsequent agreement that contained the exclusive sales relationship plus the minimum of 35. THE COURT: Whatever the document says seems to be, it may be a matter for argument about this, but I got the impression from the witness' testimony before he didn't have a specific memory of any of this. Is that correct? Mr. Fraker, you didn't remember whether there was a purchase agreement or a distribution agreement in place at the time of this report. Is my understanding correct? THE WITNESS:

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That might be, but in the

memorandum here -- Yes. But in the memorandum it states, so that must have been the case at the time, but I don't remember it. THE COURT: Okay. Thank you. As far as the witness' testimony, we have it all out,-whether it was a distribution agreement or a Heritage Reporting Corporation (202) 628-4888

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purchase agreement they're referring to, you obviously have to rely on the document, not the witness. MS. FLOYD: Thank you, Your Honor. I have no further questions. THE COURT: Okay. And, Mr. Bartolomucci? Any Recross? MR. BARTOLOMUCCI: Just one. moment, Your Honor? (Pause.) MR. BARTOLOMUCCI: Your Honor, just one matter. Ms. Floyd introduced on Direct a portion of Defense Exhibit 254 and we did not object subject, or thinking about whether we'd like to have the whole document come in, and we think that since it is a defense exhibit and under the principle of completion, that the whole exhibit should come in rather than just a few pages of it that she used. THE COURT: You used some and she used some? MR. BARTOLOMUCCI: I didn't make use of the exhibit, Ms. Floyd did. We just believe that for purposes of completeness that the entire exhibit ought to come in rather than a snippet of it. MS. FLOYD: I have no objection, Your Honor. THE COURT: Okay. I'll admit the whole document. Heritage Reporting Corporation (202) 628-4888 May we have a

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WEIGT - DIRECT

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Q

Okay. Are there any other sales that are

not represented on the map? Have you had any recent sales that might not be represented here? THE COURT: was prepared? THE WITNESS: It started presentation some Did we establish when this map

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years ago, maybe seven or eight years ago, but we update it periodically, and this particular copy, I'm not sure, but I do see that our most recent contract is not included on here, which is Bell Geospace out of Houston, Texas. THE COURT: So this would be within the last couple of years. THE WITNESS: The last year, I would say. THE COURT: Okay. BY MS. FLOYD: Q Okay. I think I had a question. Let me

repeat the question. What is the best use of the Basler Turbo 67, or "BT-67," as I'm going to be calling it? A Generally, its best uses are special

missions. "Special missions" means special missions by the client or special areas of the world because of its ability to fly in remote areas and have a really strong performance out of high-temperature areas, Heritage Reporting Corporation (202) 628-4888

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842

high-altitude areas. mission.

So it's any kind of special

"Special mission," on the applications side, means cloud-seeding functions, firefighting, geophysical survey, maritime patrol, gunships, Antarctic-type operations. So it's just a wide range, but it's not what we normally think of as a standard passenger-type application. Q Would you call the market for this plane a

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"niche market"? A Q I would, yes. Now, as president of BTC, you're familiar

with efforts to sell the airplane. Is that correct? A Q Yes. Since 1991, in the period of time from 1991

to 1998, did you try to get into the mainstream cargo market? A Before I answer that, if I could, I would

like to make another correction on this map. Q A It's JX-71/2. Right, 71/2, yes. The U.S. Air Force, at

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Hurlburt Field; that was a leased aircraft, and that's since been returned and resold. So that one should no longer be on the sheet. I mean, it changes regularly, so just to make that clarification. Please repeat Heritage Reporting Corporation (202) 628-4888

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WEIGT - DIRECT 1 2 3 4 that last question. Q

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Sure. Did you, in the period of time from

1991 to 1998, try to getthe Basler turbo-conversion plane, the BT-67, sold into the mainstream cargo market? A Q A Q Anywhere? Yes, anywhere. Sure. Yes, we did. First of all, explain to me what the

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mainstream cargo market is. A A good example of that was the feeder market

for the major small package carriers, UPS, FedEx, DHL, any of that type of business. There also were companies who operated large fleets of the smaller cargo aircraft. I visited one out in California. The name escapes me, but it's something like Amerifleet, or an airline like that. We made several attempts at trying to get those people interested in using the BT67 for their daily cargo runs. Q A Q Were you successfu!? No. To what do you attribute the lack of success

of being able to use the BT-67 or sell it into the mainstream cargo market? A There probably are a couple of factors, as Heritage Reporting Corporation (202) 628-4888

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normally the case in business. One is that virtually all of the feeder operations were using aircraft that could be flown by one pilot, and so we required two pilots. We were a higher-cost, higher-operating-cost type of aircraft. Another factor, I think, the market is often served by used aircraft, which are a lot less initial capita! costs than we would charge, and we didn't have a used fleet. So we couldn't compete on price, on acquisition price. In the case of FedEx, at the time we were trying to penetrate that market, they had actually committed to take aircraft from a developer, who was building an aircraft that was a FedEx special design aircraft, designed uniquely for their needs in terms of container capacities and like that. Q A Was that enterprise successful? No. THE COURT: Which enterprise? The FedEx development of their own aircraft? THE WITNESS: Yes. MS. FLOYD: Right. THE COURT: So they eventually did not develop their own craft. THE WITNESS: They did not do it. Heritage Reporting Corporation (202) 628-4888

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BY MS. FLOYD: So what did FedEx end up buying in terms of

its cargo market in the mainstream cargo market area? A They continued to use and expand their fleet

of operators that operate Caravans, Grand Caravans, and they fly them today, same aircraft. Q 67's? A They're single-engine, single-pilot, lower How are the Caravans different from the BT-

initial costs, lower operating costs, lower capacity, but apparently the capacity is the right capacity. It seems like it is because they continue to use them. If I could just add to that point? Q A Sure. These are all independent operators too. I

mean, this isn't FedEx buying aircraft. These are independent operators of aircraft, and they serve the hubs that then become the connection point to the FedEx hub in Memphis, so this is kind of the first tier of that cargo market. Q A Q A Is that the feeder end of the market? That's the feeder end. Okay. Yes, that's correct. And the rest of the

market is all jets, so they're higher capacity, Heritage Reporting Corporation (202) 628-4888

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faster, longer range, et cetera. THE COURT: So am I understanding that FedEx would then send their cargo via big plane to different hub cities, and then the feeder lines which would have maybe FedEx logos would be owned by different smaller contractors? THE WITNESS: That's right. THE COURT: Thank you. BY MS. FLOYD: Q Have you had any success in selling the

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BT-67 in the larger cargo market area? A Q No. No, we haven't. And can you explain what efforts you've made

to try to sel! the BT-67 into that larger cargo market? A By larger I assume that -- maybe you can

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qualify that a little bit. Q Sure. Well, first of all, let's identify

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what the larger cargo market is. What's your understanding of the larger cargo market? A It would be payloads of 50,000, 60,000,

70,000 pounds and distances required for maybe up to 1,500 or 2,000 nautical miles, international type operations. That's what I identify as the larger markets. Heritage Reporting Corporation (202) 628-4888

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WEIGT - DIRECT 1 2 3 4 Q Now, is the BT-67 competitive with that

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payload and range of flights? A No, we're not. Okay. What is the payload capacity of the BT-67? A Our maximum payload capacity now is ii,000

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pounds, and for II,000 pounds you could carry it for roughly 400 nautical miles. Q So have you ever even competed in the larger

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cargo market? A Q No, we haven't. No. What about the BT-67? Have you been

able to sell it in the commercial passenger market? A Q No. Okay. And to what do you attribute the lack

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of success of selling the BT-67 in the commercial passenger market? A The principal disadvantage that we have is

that we're not pressurized, and the passenger markets seem to go through a period of time maybe in the late '80s, mid to late '80s, where that was an acceptable configuration, but I think it evaporated pretty rapidly, and the passengers -- passengers and frankly the flight crews -- just weren't tolerant of an aircraft that wasn't pressurized so that was one Heritage Reporting Corporation (202) 628-4888

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disadvantage. Another was we don't have a good baggage accontmodation. All of the baggage has to be stored fairly deep into the tail area and so it's not very convenient for loading and unloading, and the capacity is small because it interferes. The baggage capacity actually interferes with the lab area in the back, so the configuration of the airplane isn't very good. The third thing is that we are conventional landing gear airplanes so the airplane sits on the tail and passengers just aren't accustomed to that. I mean, the airplane is sitting like this so when they get on board they have to walk uphill. Q When you say like this, are you talking

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about at an angle? A At an angle of probably 25 degrees. I don't

know exactly what it is, but it's in that range and so it's an unusual configuration and I believe personally it has an image of being old. I mean, airplanes sat on their tail in the '40s, but the newer ones of course don't. I guess there's a fourth factor there that there's again a lot of used small passenger aircraft on the market, a type of Beech 1900s, for example, Saab 340s, that could be acquired for less money than Heritage Reporting Corporation (202) 628-4888

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WEIGT - DIRECT 1 2 what we thought. Q Okay.

849

Have you had any success in selling

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the BT-67 for commercial use? A Q Yes. Okay. And what are the applications for

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which you've sold the BT-67 for commercial use? A There again there are specialty

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applications. One, and a predominant one, is geophysical survey, and a second one is polar logistics because we have a ski configuration so we can land on snow and ice in really out-of-the-way places. And a third is the aerocontractor folks in Smithville, North Carolina, that use the aircraft for paratroop training so the airplane is set up to be a jump airplane and they use it for that. Q Okay. What about for government use? Have

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you had any success in selling the BT-67 for government use? A Q Yes. And can you identify what specia! uses

you've made or have been made of the BT-67 for government use? A Q Just going around the map here -You're looking at JX-71/27 Heritage Reporting Corporation (202) 628-4888

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WEIGT - DIRECT 1 2
A

85O

Page 2, yes. Okay. The Forest Service uses it as a smoke jump

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airplane for firefighting. Guatemalan Air Force is transport, general transport. E1 Salvador is general transport. Bolivia was transport also. That airplane was damaged actually and it's now out of service. U.S. Air Force up until nine months ago or I0 months ago I guess used that for training, and they were actually training for paratroop and short field operations for our clients, for our government clients, and so they had the mission of helping to train foreign governments, foreign interna! defense programs. Co!ombian Air Force is gunship operations, counternarcotics. Co!ombian National Police is also counternarcotics, but it's troop and cargo transport, fuel ferry type operations. Alfred Wagner Institute in Germany is environmental research so it has a lot of sensors that are used for all different types of atmospheric probes and ice penetrating radars and that sort of thing. Q A Is that a government use? The Alfred Wagner Institute is a branch of

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the German Government. Heritage Reporting C6rporation (202) 628-4888

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WEIGT - DIRECT 1 2 3 4 Q A Okay.

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I'm not sure of the exact structure, but it

was a government contract. Q Okay. Are there any other government uses

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of the BT-67? A Mauritanian Air Force is a transport

application. Q A Q A What kind of transport? Just general troop and cargo transport. Any other government uses? Mali Air Force is the same, troop and cargo

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transport. It is an Air Force operation, so that's why I use the term troop. Also the Mali Air Force uses the airplanes for insect spraying. There's major locust problems in Africa and throughout that region actually and so they use the airplanes with a special spray system that we built for them. Then the Royal Thai Air Force uses the airplane for cloud seeding. We call it rain making. Q Okay. I'd like to talk about a number of

aircraft, and we're going to be looking in the timeframe again of 1991 to 1998. I'm going to identify potential competitors of the BT-67 and ask you, first of all, if they were competitors and ask Heritage Reporting Corporation (202) 628-4888

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WEIGT - DIRECT 1 2 competition. THE COURT: competition? MS. FLOYD: And lost the sale. Okay. So you won the

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THE WITNESS: Technically. It was a moral victory if nothing else, I guess. THE COURT: A technical victory, I guess.

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BY MS. FLOYD:
But neither of you got any sales as a result Is that what you're saying? We didn't. I don't think they did. Okay. To your knowledge, is there any

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particular geographic market in which the age of the airplane is a factor? The BT-67 that is. A By that do you mean the fact that it's an

old airframe? Q 1930s. A Q A We manufacture it. Right. Well, I think in general in the Asian Right. It's old and it dates back to the

market, I think we received more resistance on the basis of an older product, and this is just comments that you hear as you're there. In Africa that was not such a factor. In Heritage Reporting Corporation (202) 628-4888

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WEIGT - DIRECT 1 2 3 4 South America it was not such a factor because in

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South America there's still a lot of DC-3s flying in commercial operations, and I think without question in the U.S. market. Q It's a factor? The age of the plane is a

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factor in the U.S. market?
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I think it was during that period of time,

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sure.

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1991 to 1998? I think so Okay. Have you had any success in selling

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the plane in China? No. Have you tried to make sales in the Far East By that I mean the Philippines, Taiwan,

Bangladesh, Thailand, Vietnam, Indonesia? A Yes. We've either made trips,

demonstrations or other contacts I guess. In many of the markets -- do you want me to list them? Q A Sure. In China we made a proposal for an airline

operation in the remote areas of Mongolia, and I guess I don't know that that's technically part of the PRC. I think it is, but I'm not sure. It was a real remote, high altitude region Heritage Reporting Corporation (202) 628-4888

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WEIGT - DIRECT 1 2 3 4 there. We made a proposal for them for an airline operation actually. We demonstrated in the Philippines. Q Mongolia? A Q A It just never was accepted. What about in the Philippines? What happened in terms of your effort in

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There were other efforts in China as wel!.

I mean, on three different programs we tried to sell in China, but nothing came of it. THE COURT: Can I ask a question on the high altitude? If it's unpressurized, how can it go at altitudes-of 20,000 feet? THE WITNESS: Wel!, that's a good question. High altitude in that case would mean 8,000 or 9,000 or I0,000 feet, like Colombia, for example. Bogota, Colombia, is 8,200 foot altitude, and what happens at those altitudes is the aircraft have to restrict their takeoff performance, and often they restrict their payloads because of that because they just don't perform as well. We happened to have good high altitude performance, and in the case of Mongolia there was a start-up airlines. It was actually Mongolian Eastern Airlines I think was the name of the company. I don't Heritage Reporting Corporation (202) 628-4888

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