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

Case 1:96-cv-00408-LAS

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Innovair Aviation, Ltd. v. United States Case No. 96-408C Exhibit 9

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS

Innov r Aviation Limited, ¯
Plaintiff,
VS.

Case No. 96-408C

United Stat~s of America, Defendant.

Report of Cobb & Associates, Ltd.

Cobb & Associates, Ltd., a professional corporation, has been retained by Hoga~ & Hartson L.L.P. to assist representation of Innovair Aviation Limited in the above matter. Arthur H. Cobb has had primary responsibility for this engagement and is.expected to offer testimony at

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TABLE OF CONTENTS Introduction ............................................................................................................................................... 2 4

: ................4 Opinions To Be Expressed and the Basis and Reasons Therefor .............................................
Background ......................................................................................................................................

4 Irmovair Aviation LimiteA .................................... ............................................................. ...~ , ......... Irmovair Einancial Statements ............................................................................ 6 Basler Turbo Conversions, Inc ............................................................................................... 8 : Basler Flight Service, Inc ......................................................................................................
:... 8 The Douglas DC-3/C-47 ............... : .................................................................................... DC-3/C-47 Turbo Cdnversions ....................................... ~ ................................................ :... 10~ . Conroy Aircraft .......................:~.: ................................... ~ .......................I0 Turbo Three Corporation ................................. L.: ................................... 10 10 United States Aircraft Corporation .........................................................

; 11 Aero Modificatio~ International.; ....................'. ................................... 12 lauowtir ...................................... ; ............................................................ Conver.~ion Technology ..... ......................................................... ~ .....................13. . : ....... Technology License Agreement. ............................................................................. : ' ...........14
Multiple Supplemental Type Certifiea~ ................................................................. .. ............ Air Columbia ............................................... .' ....... ...................... : ............... .. ......................... United States of America ........................................................................... .. ......................... Analysis ......................................................................................................................................... DC-3/C-47 Airframe AvailabiIity ......... L..i ....................... ~....'. ............................................. General Economy ................................................................................................................. 1991 ......... 2 ................................ : ..... ; .......... ~ ................. 2..: ................................. 1992 ........ : ........................................................................................................ 1993 ............................................................................ : ..................................... 1 15

16 16 18 18 19 19

1995 ....................................................... : .....~. ................... : ......: .............. .. .......... 20 20 1996...: ............................................................................................................. 1997 .............................. ; ...................... : ........................................................... 21 21 1998~ ................................................................................................................. 2 Inflation ...................................................................................................................... Aircraft Market ....... . ......................................................... : .................................................. 22 Passenger ................................................................ :.,.: ............................................... 22 23 Major Airlines ....................... : ........ ~ ................................................................. Commuter Air Carriers and Charter Services .......... :. ....................................... 23 o~.'er, Express and Parcel Services .......... :..~ .......................................................... 25 Federal Express Corporation .........: ................ ~ .............. : .................................. 25

25 United Parcel Service .......................... .......................... .....: ................. ~..... ,....:
DHL WorIdAirways...; ................... : ....................... ; ................................. .. ..... 26 EmerY Worldwide ............. ........:...: ......................................... ...........; .....26 :....~.., Airborne Freight Corporation ........................................................................... 27 Purolator Courier ..................................................................................... : ........ 27 Other Courier, Express and parcel Services .................. .. ................................ 27 Sdmmary ........................................................... :...:..~ ....................................... 27 ¯ Summary ............................... : ..................................... ; ................. ~ ............. .. .... 28

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CompetitiVe Aircraft ............................................................................................................ 29 : ¯ DC-3/C-47 Conversion Aircraft ............................................................ ....................29 Directly Competitive Aircraft .................................................................................... 30 Turbo-67 ...........................................................................................................31 ATR 42 and 72 .................................................................................................31 ATR42 .............................................................................................................31 ATR 72 ...........................: ...................................' ..............................................31 Casa CN-235 ..... ............................................................................................ ~... 31 Cessna Caravan 208 (Textron, Inc.) ................................................................ 32 ; 32 de Havilland Dash 8 100 and 200 (Bombardier, In¢.)....~ ................................. EMB-120 and EMB-120EK ............................................................................. 3 3 Fokker-Fairchild 27 50 and 60 ......................................................................... 3 3 SAAB SF-340 ........................................................................ .. .........................33 Shorts 360-300 (Bombardier, Inc.) ..................... .................: ..........................33 ... Other Turboprop Aircraft .......................................................................................... 34 , BAE ....................................................................................... ~ ..................... ..... 34 Casa 212-200 ....................... ~ ................................... ~ ........................................ 34 Cessna ........................................................................". ................ L..: ................ 34 Raytheon - Beech ...................~ ........................;....; ...........................:~ .............. 35 Convair .........................................................~ .................................................. 35 Fairchild Domier 228 and 328-I10 .................................................................. 36 36 de I-Iavilland DI-IC-6 Twin Otter (Bombardier, Ire.) ....................................... de Havilland Dash 7 (Bombardier, Inc.) ............... ; ..........................................36 Fairchild 227 Metro ............................................................. ............................ 36 ; _ Shorts 330 ..............J..~ ......................: ................................; ...............................36 Summary ............................. ............................................................ : ..........................37 . New Turboprop Aircraft o Skylander ......................................................................... 37 Distribution ........................................................................................... .........: .................... 38 : United Tedmologies Corporation .............................................................................. 38 Purchase and Distributor Agreements ....................................... ..........! .... -38 ; ......: ~ ¯ United Teetmologies Resources .........................~ ............................................39 Other Distributors and Sales Agents ........................ ; .................................................40 Summary ....................................................................................................................40 Reported DC-3/C-47 Conversion Sales ....... ............................................................ ..........41 .: Basler .........................................................................................................................41 Aero Modifieatidns !nternational ............................................................................... 42 ¯ Coiatemporaneous Projections ............................... : ............................................................43 ; Business. Plan .....................................................: .................., ..........................43 I3eloitte Projection ............................................................................................ 4~ Warwick Memorandum: ........................ ................................~ ......................... 44 ~ United Technologies Sales Potential ........ ~ .....................: .........................~.: .....45 Lost Expectancy Interest Value ............................................. ...........................................47 ~.. Damage Period .......................: .........J .........' ............................. ....................................48 " Lost Units ..................................................................................................... .............48 4 Sales ........................................................................................................................... 9 Lost Value ................................................................... ...............................................50 Sales Price 2 .....................................................................................................: ............ 53 Cost of Goods Sold .................................................................... ...............................54 ;

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56 S~lling and Marketing Expenses ................................................................................ Commissions .........: ............ : ................................... ~ ......................... ' ................ 56 Demonstra~on AirtaR ............................................... ~ ..................................... 56 56 Demonstration Flights ...................................................................................... 57 Air Shows ...................................................... 57 ¯ Marketing Manager and Assistant .............................. Advertising .................................................... S7 ~ ....................... Travel Costs .......................... : .................................. : ............................ ~...;S7 ........ 58 Distributor Costs .............................................. S8 General Inflation. ........................................... ~ ...... : ................................ Genrral and Administrative Expenses ............................................................. . ......... 58 President, Accountant, Assistant Accountant and Secretary .............. . ............. 58 Inventory Holding Costs ......................................................... ~ ............ .. ........... 59 Office ......................................................... 59 General Office and Business ............................................................................ 60 Product Liability Insurance..' ................................ , ..... ~ ............................ -. ...... ... 60 Legal and Audit ....................................... : .................... ' .................................... 60 Travel and Entertainment .................................................. ...- ............. ; ............. 60 General Inflation .................. : .................................. . ............................... .. ......... 60 6I Summary ........................... .. ............................................................................................................ Data or Other Information Considered .................................. ; ...................... . ................ : ..... ' .................... 62 Arthur H. Cobb .............................................................................................. : ............ 81 Listing of Cases in which Trial or Deposition Testimony was Provided Within the Preceding Four Years ..................................................... : ......................... ~ ................... 82 Compensation ......... : ......; ......... ; ........................................................................... :. .......................... : ..... ~. 86 Resume bfArthur H. Cobb ................................. ' ............................... " ..................................................... ; 87

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INTRODUCTION Innovair Aviation Limited (Innovair) and Basler Turbo Conversions, Inc. (Basler) entered into a Technology License Agreement.(TLA) on 3une 24, 1988 rogarding modernization and conversion of Douglas DC-3 and C-47 aircraft to turbo prop power. Under the TLA, Innovair had the exclusive right to use a Multiple Supplemental Type Certificate to manufacture,. distribute, install and market DC-3/C-47 conversion kits in all countries outside of the United States, with the exception of foreign sales negotiated through the United States government or its ¯ agencies. Irmovair retained the rights to sell directly to foreign governments. On approximately July 16, 1991, the. United States of America seized the .TLA from Innovair and transferred the TLA to Basler on November 14, 1991. Seizure and transfer of the TLA precluded Irmovair from conducting business and caused Innovair to discontinue operations. We have conducted-a preliminary analysis of the lost expectancy interest value of the TLA. The.preliminary analysis included identifying l) the availability of DC-3/C-47 airframes,. 2) analyzing the market for Turbo-67 aircraft and parts and spares (including the general economy, aircraft markets, aircraft industry, Turbo-67 distribution [including by United Technologies Corporation,]. DC-3/C-47 conversion competition ~md competitive aixcrafL) 3) marketing of the Turbo-67 (including Turbo-67 sales by. B~ler,) 4) establishing a damage period and 5) estimating lost sales, incremental expe.nses and 10st profits and, thereby, expectaUcy interest lost value.

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GENERAL ECONOMY The wodd economy generally experienced growth during the 1990s. Asian nations and formerly communist Central and East European nations developed, From appr0ximately 1992, the Uni~d States enjoyed econb-mic grb-wth. i99.___3.1 The world experienced slow economic growth in 1991, reflected in recessions in the United States, Great Britain and Canada. Western Europ.e's growtii sl~wed, although Germany experienced growth. Major debt teller.was arranged for Poland, Egypt and Nicaragua. The International Monetary Fund agreed to provide the Soviet Union economic policy advice and teclmical assistance and the seven economic summit niitions agreed in p .fineip~ to defer $3.6 billion of Soviet debt repayments in 1992. ..

Histo~cally significant events in 1991 included the, breakup of th~ Soviet Union December 25, 1991, the Persian Gulf War - January 17, 1991, and South Africa taking significant steps toward ending apartheid po.licies and returning to the world economic mainstream. (On April !5, 1991 the twelve.nation E .ur..opean community, and on July 10,.1991 the .United States, lifted eeononde sanctions against South Africa.) "Many of the formerly. communist Central and East European nations made progress in moving to demoeraey and capitalism. Yugoslavia experienced ethnic conflicts and civil war erupted on June'l, 1991, when ihe republics of Croatia ~nd Slovenia attempted to secede. On February 23, 1991, a military coup toppled the civilian government of ThailancL.

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1992 The economies of many industrialized naf!ons~ including the United States, Great Britain, Western Europe and Japan languished. Many of the new and emerging democracies from the former Soviet Union and Eastern Europe encountered economic decline as they transitioned to independence and to free-market reforms. Developing Asian nations, including China, Latin American nations, except for Brazil, and African nations enjoyed economic growth. China and India m0ved'toward more private enterprise. Japan, .Asia's strongest economy, continued industrial production dcciines. The Nikkci stock index dropped more than 60 per.cent from a 1989 high, before the ~apanese-govcrnmen~ promised to Stimulate the economy with new spending. 199~3 The United States ccortomy continued on a course of moderate growth with low inflation and low interest-rates. A number of other industrial nations (for cxamplc: Canada, European nations and Japan) experienced economic weakness. Recessions in some nations reduced their _ demand for imports. Japan experiencedlrecession, causing a change in government. The North American Free Trade Agreement (NAFTA) was entered, scheduled to go into effect on January 1, 1994. Asia engaged in an arms race during 1993 fueled by economic growth. China pure .has.ed military teetmology from P~ussia and from Israel and Indonesia purchased military technology from Germany. Malaysia and Taiwan purchased military aireraf~

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CONTEMPORANEOUS PROJECTIONS Projections p~epared prior to ffuly 16, 1991 and November 14, 1991 include the

following:
Basler Turbo Conversions, Inc. and Innovair Five Year Business " Plan 1990-1994, a May 16, 1990 Compilation Report of Deloitte & Touche, which presented Innovair sales projections of 174 units over the five year period of 1990 through 1994 (Exhibit 26),

3) 4).
Business Plm

a May 18, 1991 study conducted by Warwick Consulting Group, Inc. (Warwick), which projected 94 Innovair conversion kit sales over the five year period of 1991 through 1995 (Exhibit 28), and United Technologies and Pratt & Whitney "Sales Potential" of '129 Irmovair conversion kits. (Exhibit 50)

Basler Turbo Conversions, Inc. and Innovair Five Year Business Plan 1990-1994 (the Brininess Plan) was prepared to '~provide planning and financial data to prospective.investors...." The Business Plan included Iim0vair's unit sales and sales mad net income (in thousands of U.S.
dollars) as follows:
1990 Ur~t Sales 6 1991 32

1992 1993 45 47

1994 .44

Total 174

Sales $ 12,293 60,800 85,500 91,200 81,700 331,49~ Net Income 1,957 12,260 17,243 18,604 16,475 66,539"

The Business Plan also "mcluded-Basler Turbo Conversion unit sales, sales and net income.

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Deloitte Projection Deloitte & Touche (Deloitte) compiled projected balance sheets, statements o£ income
and cash flows of Innovair as of December 31, 1990, 1991, 1992, 1993 and 1994 (the Ddoitte Projection), based on the knowledge, belief, judgment and expectation of (Innova~r.") management as of May 16, 1990. The Deloitte Projection, dated May 16, !990, was "prepared to assist certain stockholders 'sell all or part of their interests in the Company." The Deloitte Projection included unit sales and net sales and net income (in thousan~ of U.S. dollars) as £ollow~: Projec~eA
1990 Unit Sales 6 1991 32 1992 45 1993 48 1994 43 Total 174

Net Sales $ 13,I86 Net Income 2,276

60,800 12,260

85,500 17,243

91,200 18,604

81,700 16,475

332,386 66,858

Piojected unit sales for 1990 were based on sales under negotiation including for sales to Taiwan/United Technol6gies. Deloitte Projection unit sales, net-sales and net income are sub~usntially similar to those in the Business Plan. Warwick Memorandum

The Warwick Memorandum, dated.May 18, 1991, was prepared 'k'o-inform interested
parties of the aircraft conversion industry ~ud how it relates to the business and potential of. Itmov~r Aviation Limited." The Warwick Memorandum included unit sales ~ud net sales and

net income (in thousands of U.& dollars) as follows:
1990 Unit Sales 2 Net Sales $ 2,792 265 Net Income 1991 4 8,000 489 1992 18 36,000 4,865 1993 20 40,000 5,926 1994 24 48,000 7,980 1995 28 56,000 10,196 Total 96 .190,792 29,721.

¯ 44

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The Wa~ick Memorandum estimate of unit sales considered potential customers, including: Air Aflanfique, a United Kingdom airline venture primarily with f~eight operations, which operated DC-3s, DC-Ss and a Convair C¥440. Air Aflantique visited Innovair in California and saw a demonstration of the Turbo-67. Air Atlantique acquired Lockheed ElectraI~ aircraft, four from 1994 to 1997 and three in the summer of 1998. ¯ Bangkok Air, which-operate~I ATR72 aircraft for charter and hauling cargo in southeast Asia. United Technologies Sales Potential United Technologies was Innovair's exclusive International Marketing Representative, primin~lyin Asia and Pacific Rim countries. United Technologies and Innovair.entered into a Distributor Agreement, dated July 25, 1991 with a seven year term, through June 23, 1998. The Distributor Agreement included minimum annual salesfor United Technologies of 5 kits and/or converted aircraft, or a total of 35 kits and/or converted aircraft over the seven year term. United Technologies devoted signi.fieant resources to market the DC-3/C-47 conversion. United Technologies invested approximately $400,000 for salaries, studies and brochures and videos advertising converted DC-3/C-47s. United Technologies established a new Taiwan U subsidiary, United Pacific Aerospace Corp., to market DC-3/C-47 conversions. nited Technologies contracted with Air Asia to perform DC-3/C .-47 conversions in Taiwa~ Innovair and United Technologies :initiated marketing and sales of the Turbo-67. Prospective customers were identified and contacted, b~oeh.ures and promotional materials were. developed and distributed and a demonstration tour was undertaken. Itmovair entered negotiations for sales.

I
~t Lockheed built 170 Lockheed Eleetras, a four engine ttirboprop aircra~ from 1957 through 1961.

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Inuovair and United Technologies undertook a demonstration tour using the demomtrator. .Turbo-67 that United Technologies had purchased. The tour itinerary included the following locations:
E~t HattfofdiCo~iectictit~Uitit~d-Techn~ologios~hoadquarters ........ Montreal, Canada - Pratt & Whitney's main manufacturing facility Coventry, England - Air Atlantique and 'Tlight International" Switzerland Turkey Pakistan India Thailand 'Hong Kong " Taiwan

Prior to seizure and transfer of the TLA, Innovair planned to continue marketing and~ sales efforts. Innovai~'s marketing and sales efforts would be expected to-result in sales of Turbo-67 conversions. United Technologies expected to do "at least 50 conversions over 4 years", an average of 12.5 .per year (50 + 4), in the Pacific Rim (Exhibit 49), or ma.thematically..approximately 87 conversions over 7 years (12.5 x 7 years.), united Technologies identified a "Sales Potential" of 129 Turbo-67s (Exhibit 50). United Technology minimum sales during the seven year term of .the Distributor Agreement are estimated.to range from 35 to 129 ~mits, summarized as follows: ¯. Agreement Minimum Potential
Expected

35 129 50/87

¯ United Technologies expected to achieve approximately 50/87 international sales-with ¯ sales potential, of 129 international sales, based on the sophistication and resources of United Technologies and on focused marketing of Turbo:67 alrcrafL

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LOST EXPECTANCY INTEREST VALUE The seizure of the TLA by the United States of America On luly 16, 1991 and transfer of theTLA to Basler on November i4, ¯1991 precluded Irmovair from conducting business, including business with United Technologies, and caused Innovair to discontinue operations resulting in Irmovair losing expectancy interest value in the TL~. Lost expectancy interest value is measured by lost profits. Lost profits are generally estimated as lost sales, ¯less incremental variable costs. Because Innovair was forced to discontinue operation, 10st profits are estimated aslost sales (lost units and price per unit), less cost of gopds .sold, selling and marketing expenses and general and administrative expenses. In addition .to distribution and sales of DC-3/C-47 conversion kits, Innovair expected to offer optional equipment for specific operating functions including, for example, enlarged cargo doom and oxygen systems. Inaddition, hmovair expected to participate in sales-of Turbo-67

, spare parts and addition~ engines.
Innovair had the prospedt of expanding operations to modernize and convert other aircraft after establishing the DC-3/C-47 operations. The estimates of lostexpectancy interest value do no~ ~nclude sales or profits related to conversion and modernization of Other dremft. Altemativecstimates of Innovair'slost ~ales, costs of.good~ sold, selling and marketing ¯ expenses and general and administrative expenses were calculated and considered.

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Damage Period The TLA was for a term of ten years, through appr0ximatcly June ¯23, I998, with automatic renewal for an additional five years, through appro .ximat¢ly June 23, 2003, unless either party gave a s~ months written notice prior to the expiration of the initial term. The Innovair and United Technologies Distribution .Agreement had a seven year .term, through approximately ~unc.23, 1998. Directly competitive aircraft enjoyed production and sales runs of tern years and greater. Innovair eXl~Cted to partlclpatc in continuing sales of Turbo-67 Spare p~ts and additional engines. Innovalr had the prospect Of expanding operations to m0dcmiz¢ and convert other aircraft after establishing DC-3/C-47 operations. Innovair expected to conduct long-term operations. Damages have been estimated through ~he approximate term of the Distribution Agreement, without renewal.. Lost Units Lost units, ~nv~rsion kits, have been estimated with consideration ~f 1) the a~ailability of DC-31C-47 airframes, 2)¯ the general economy, and 3) the aircraft-market, customers, competitive aircraft, distribufion~ marketing and reported sales. Iv.nov/fir's initial and primary.Product was DC-3/C-47 conversion ld~s. Tom Weigt,. president of Basler, stated in December 2003 that "Th~ are plenty Of them (DC-3/C-47 airframes) out there., There's .dasily 500 to 1,000 left to convert. Even if we doubled o~ tripled our rate of production, it'll b¢ s.omebody else's lifetimebefore we have to worry about that (DC-: " 3/C-47 airframe availability)." Basler set forth that, as ofapproximately November 6, 20~6 "we believe there are more than 500 good candidate air frames in existence."

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Lost units are estimated to total 90 units, and to range from a minimmn of 50 units to approximately 130 units, through approximately ~[une 23, 1998, based on factors including the following:
Irmovair had established the. foundation of its distribution network. Turboprop passenger, cargo and utility aircraf~ were purchased and operated by commercial and military organizations.

¯ .Directly competitive-aircraft generated sales, including international sales, during the 1990s. (For example, ainong others: the Casa CN-235 entered commercial service in March 1988 and as of approximately 1998, 230 Casa CN-235s had been ordered andSAAB took orders for 271 SF-340s and SF340 Plus aircraft between 1989 and 1998.). ¯ The Turbo-67 was Competitive based on size, speed: range, capacity, handling characteristics and price. .. ¯ United Technologies devoted signifieant resources to market DC-3/C-47 conversions, undertook marketing mad sales-efforts and contraeted for conversions to be performed .in Taiwan. Contemporaneous projections include sales 0fup to 174 units. The United Teehnologies Distributor Agreement included minimum annual sales of 5Idts and/or converted airera~ or a total of 35 kits and/oraircraft over the seven year term. United Technologies expected to do "at least 50 conversions over 4 years" in the Pacific Rim, or mathematically approximately 87 conversions over 7 yea~." United Technologies identified a "Sales Potential" of 129 converted aircraft. Sale.__~s " Sales of 90 units are consistent with the sales expectation of United Technologies of approximately 87 units over 7 years, the Warwick Memo .rmadum:projection of 96 uaits through

I I I I

1995 and sales of other turboprop aircraft. Sales of 130 uniis are consistent with "Sales Potential" identified by United Tee.hnolbgies of 129 units,-with the Deloitte Projection of 174 units through 1994and with sales of other turboprop airera~ Sales of a minimumof 50 units are consistent with United Technologies expectation of "at least 50 conversions over (only) 4 years" (the UTC Distributor Agreement included minimum sales requirement, o~ 35 units) and with international sales generated by Basler. 49

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Lost Value l~epmsentative estimates of b3novair's lost value, based on sales of 90 units and, alternatively, a potential of 130units and a minimum of 50 units (in thousands of U.S. dollars) are summarized as follows:
90 Uuit~

VTC Un~s 3ale~ Price U~ ~ale~ Prla¢

l.lJJ 7 2,02.5 16.441

9 2~0~2 18,738

9" 2.1o9 18..081

9 2.141 1.o.269

" "9. 2.1Sd 19,404.

9 2.187 19,683

2.20.~ 19.827

UTC Cost of Goods
~ Gross Margin 3 6.07,$ $,744 2.33J 12 $ 22,516 9,040 2.252 2~ 200 75 218 150 86 30 3,211 333 63 38 135 45 50 35 4 Sf144 . 8,592 5,230 $,114 13 27,082 10,107 2,708 200 219 ~2 238 75 94 33 .3,649 3~1. 69 42 "42 142 60 49 271 53 38 4 4 " 8,852. ~,396 D 25,121 10.389 2,812 200 2~6 96 279 88 111 38 3,881 427 "81 49 49 148 72 58 2~1 "64 45 4 9.116 ~,600 1328,520 10,593" 2,852 200 279 l~ 304 "96¯ 120 42 3,997 464 ¯ 88 53 "53 150 "72 63 "2~5 70. 49 4 9,3.02 $.752 13 ~,O'/f 10,745 2,908)" 200 295 111 ". 322 101 128 44 4,109 492¯ 93 " 56 153 ~ 74 52 4 9,672 3,968 13 29,499 10,961 2,950 200 - 312 117 340 107 135 47 4,208' . 520 "98 .. . 70 78 55 9O 27

3.264 13 27,573" .10,257 ~,757. .200 237 ~9 259 81 102 36 3361 ~ 75 45 "43 , 144 60 53 276 59 42

5O

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130 Uults

Yetrl 19_._91o1992
2

" Y~ar2 . 199"2-199~ o 13 27,066. I~965 10,101'

Year3

Year4

Year5

Year6

Year7

-

1,133 I1 24,541 ~4,7~4 9,817

13 27,417.. 17316 10,101 ~

13 27,833 10,101

13 28,028. 17927 10o101

13 28,431 18,350 10,I01

13 28,639 18538 10,I01

91

lO, m
Other Cost of Ooodr
3,885 To~al Unit To~ $*les Total Cost of Goods Bold Total Gross Margin Commissio,,, Demomm~on Demonstration Flight~ Air Travel Costs Dis~rlbutor Tolal lg $ 34,666

2025

1o..,3o o.7,m ,.=s
&905 18 "37,496 4,~0 18 38,15714,18"1 3,816 200 237 89 259 gl 153 54 4,889 395 75 45 45 216 60 . 53 382 59" 63 5,~4 19 41,~11

2,086

2,148

2,213

1 , 74 .
5, 4~ 19 41,702

2,279

1,2,348s .o
J,628 19

2,418

$,9J2 . 19 .130

~

z~490 ~
14,0~6 3,756 200. 219 82 238" 75 141 50 4,754 364 69 42 42 213 60 49 375 55 57

25,9~6
15,195 4,I11 200 256 96 279 $8 167 $7 5,7.55 427 $1 49 49 222 72 58 411 -64 68

26,20~
15'501 4,170 200 279 105 304 96 130 63 5,396 464 88 53 53 225 72 63 417 .. 70 74

42,519 . 43,147

26,79o ~
15,~9 4,252 200 295 111 322 101 192 66 5,539 492 93 56 56 230 72 66 425 74 78

13,702 3A67 200 200 75 218 150 129 45 4.484 533 63 38 38 203 85 45 347 50" 53

16,0D 4,315 200 312 117 340 107 203 7_._._~1 5,666 520 98 233 72 70 ~31 78 83

I

$ 7fl64

7,~27

7,~99

g,440

g,.527

8.547

8,6,.~.. 8383 $ ~ "

I I
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Yearl Year2 Year3 Year4 Year5 Year6 Year7 1991-1992 _1992-1993 1993-1994 1994-1995 |99~-1996 1996.1997 199%1998
¯ ,_%des PHce 8ale~ Price 2 1,133 3

To~

5

5

5

2,o~

zos2

2,~___~£~4z

~ ~" 2,~.___.~

.5

5

35

Other Distributors a~d Agm~ Urd~s ~ Prlc~ Other ~al~ Other ~xrt of Goo~s Od~i" Gro~ Margin To~ Unit
Total S~le~ Total Cost of Oo~d~ Sold Total Oros~ Margin Selling and Commissions I:k:monstn~on ~ DemonSlrafion Frights Air Shows Marketing Manager and A.~is~ant Adverthing Travel Costs Di,~ibutor Total Selling aad Marketing

2 2,025 4,050

2 2,086 4,172 1,562 7 14,592 ~9135 ~,447 1.458 200 219 g2 238 75 94 2399 364 69 " 42 42 142 60 .49 146 55 38

2 2,148 4,296 L632 ¯7 14,841

2 2.213 4.42~ L698 7 15.131

2 ~.279 ~,558 LS~ "7 15,33S

2 2..~48 " ~,696 l.~6 7 15fl31

$ 2,#18 7,254 ~976 " 8 18,269 5O

LSS4 7 $ 12,391 '7,236 5.155 1,239 200 200 75 218 150 86 2,199 ¯ 333 63 38 38 135 85 45 124 50 35

9.324 ~ ~ s,s~. s,6ss s,m?
1,484 200 237 89 259 81 102 2,488 395 75 45 45 '144 60 53 -. "145 59 42 1~13 200 256 96 279 88 I 11 2,582 ¯ 427 81 49 " 49 148 .72 58 151 ¯64 45 - " 20O 279 105 3O4 96 120 42 2,679 464 88 53 53 72 63153 .. 70" 49

~mo. . sam
200 295 . Ill " 322 101 128 "44 2,76.5 492 93 153 72 66 " 156 74

6.~
200 312 117 340 107 135 47" 3,085' 520 98 155 72 70 18~ " 78

O~neral/.~Aminist~'~ Ires/dent A~istant Accountant O~ce General Office and Bustue~. Legal and Audit Fee~ Travel and ~erminment To~I OcneraPA~

52

A0785

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Document 158-24

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Page 19 of 54

Unit Sales are estimated as follows:
Year 1 Expectui Units - 90 UTC Other Distributors and Agents Total Unit Sales 9 3 12 Year 2 9 4 13 Year 3 9 4 13 Year 4 9 4 13 Year 5 9 4 13 Year 6 9 4 13 Year 7 9 4 13 Total 63 27 90

Potential.Unlts- ! 30 LrrC Othe~ Distributors ~nd Agenls ToM Unit Sales

13 ¯ 5 18

13 5 18 .~ 2 7 7

13 5 18 5 2 7

13 6 19" 5 2 '7"

13 6 19 ~. 2 7 8

13 6 19 ~ 2 50

13 6 19 5 .3

91 39 130 35 15

Minimdm Units - 50 b'fC 5 Other Dism'butors and A~ts 2 ~ Total Unit Sales

7

.. Sales..through United Technologies are estimated to total 70 percent and sales through other distributors and agents are estimated to total 30 percent of total unit sales. Estimated sa~es
are based on sales of conversion kits and do not include sales of converted aircrafL Sales Price

Estimated sales pfic~s for sales through United Technologies are estimated based on.the United Technologies Distributor Agreement (the UTC Agreement.) The UTC Agreement sets forth that the first two conversion kits purchased by United Technologies would be purchased without engines at a price of $1,133,000 and additional conve.rsion kits would be pur.chased with tw~ turboprop engines at a price of $2,025,0.00. (United Technologies is the parent company 0f Pratt & Whitney, manufacturer of the PT6A-67 turboprop engines.) The UTC Agreement indicated that cost inflation would be offset with c0rrcsponding increases in sales prices. Estimated sales prices fo~ sales through other distributors and agents are based on the purchaseprice for conversion ki~s, including two turboprop engines, of $2,025,000 for year- l, as sot forth in the LFI'C Agreement, increased three percent per year.

53

A0786

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Document 158-24

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Page 20 of 54

Cost of Goods Sold Cost of goods sold are based on purchase of conversion kits from Basler, and purchase of engines and propellers directly from vendors. Innovair was not obligated to purchase conversion kits from Basler and may have been able to assemble or purchase conversion kits at a lower cost fromother vendors. Cost Of goods sold for one conversion kit, based on. the Business Plan, the Deloitte Projection and United Technologies engine invoices, are estimated as follows:
Enghe~ Propellm Year I $ 750,000 36,000 Year 2 "/86.0~0 37,000 Year 3 800,~0 38,000 . . Year 4 821,000 39,000 'Ye~ 5 833,000 39,000

Year6 Year7 849,000 857,000
40,000 41,000

482,000 498,1)00 To~ ~. I~,000 519,000

494,000 532,000 I~Z000 ~

504,000 543,000

507,000 546,000 1~79,000 ~

- 521,000 561,000

528,000 569,000 1,426,000

Engine costs for year. 1 are estimated to to~al $750,000, or $375,000 per engine. United
Technologies invoices indicate the cost of one engine in the rage Of $365,547 to $374,289. The Business Plan and the Deloitte Projection included $724,000, or $362,000 for each engine. ¯ Conversion kit costs.include a Basler 20 P.ereent Markup. Cost of g~ods sold have been increased for inflation estimated as followsi.
Year[to Year.2 Year 2 to Year 3 Year 3 to Year 4 Year 4 to ' "Year.5 to Year 6 to Year 7" "Year 5 "Year 6

Engines Propellers Convei'sion Kits

4.83% 3.82 "4.34

1.70 2.48 2.48

2.63 2.11 2.1t

1.47 0.77 0.46

1.90 0.53 2.81

1.05 3.24 1.33

Source: U.S. Department of Labor Bureau of Labor Statistics

54

A0787

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Document 158-24

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cost of goods sold are estimated as follows:
Yearl Expected Units - 90 ~ UTC Othet:Distn'but~rs and Agents .T~tal Cost of Goods Sold p~otential Units- 130 UTC ¯ Other Distributors and Agents Total Cost of Goods Sold Minimum Units - 50 UTC Other Di~butors and Agents Total Cost o f C_mods Sold $ 9,732 3,744 ~
14,724 6,240 ~

Year2 11,745 5_~230 16,97....~5

Year3 11,988 " 5,328 17,316

Ye,~4

Year5

Ye.ar 6

Ye, ar 7

12,411 12,690 I2,834 12,276 5,516 5,64_.__.~0 5,704 5,45.____~6 1g~38 17,73~2 17,92=_._~7 ~
17,732 8,184 25,916 17,927 8~74 26,201 "18,330 8,46~0 26,790 18,538 8,556 27,094

16,965 6_z525 23,490

1~,316 6,660 23,976

4,740
2,496 ~

6,525'
2,610 9,135

6,660 - 2,66~4 9,324

6,820 6~895 2,728 .." ~758 9,548 9,653

7,05.0. 2,820 9,870

7,130. 4,278 11,408

¯ Cost Of goods sold for year 1 related to sales tlxo. Ugh United Technologies for 1) the first.
¯ two unit (propellers and conversion kits, without engines) are estimated to total $498,000 and 2) the remaining units (engines, propellers and conversion kits) are estimated to total $1,248,000

I I I

per unit. Cost of goods sold for year 1 related to sales through other distributors and agents (for conversion kits) are estimated to total $1,248,000 per unit.

I I I I

55

A0788

Case 1:96-cv-00408-LAS

Document 158-24

Filed 03/03/2008

Page 22 of 54

Selling and Marketing Expenses Innovair undertook sales and marketing efforts for the Turbo-67 aircraft and planned to continu~ sal~s and marketing efforts. Cvrtain ~stimated selling and m~k~ting exp~nses would b~ reduced, if fewer units were sold, for exam. Pie a m" .mimum of 50 units. Commissions Commission expense is estimated to be t~n percent of sales, based on the commission rate set forth in the United T~chnologies Distributor Agreement~ Thomas Weigh, President of Basler, testified in a July 15, 1997 deposition that Basler had never paid morn than a ten p~rcent c~mmission in any transaction. Demonstration Aircraft .Innovair expected to acquire a Turbo-57 as a demonstration aircra~ during 1991. The acquisition is estimated to be financed through a loan or le.ase: .with annual n~t payments of approximately $200,000. (The Deloitte Projection included d~preciation expense of $200,000 per year.) Demonstration Fli ~h~_ Innovair plannexl to fly approximately six demonstration flights per month. Innovair's marketing manager .would pilot the demonstration plan~.. Costs of mPkirs, and maint¢~ance,:':

.¯

insurance, storage, flying the customer to the flight site and r~lat~d expenses was estimated to total $2,500 per flight,or.a totalof $180,000per year ($2,500 x 5 flights.X 12 months) based on. the.Business Plan and the Deloitte Projection.

I I

Costs associat~l with demonstration flights ar~ estimated to total $200,000 in year one and to increase with g~ne.ral inflation thereafter.

A0789

Case 1:96-cv-00408-LAS

Document 158-24

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Page 23 of 54

Air Shows Innovair planned to attend air sl~ows to market and promote Turbo-67 conversion. Costs of attending air shows are estimatsd to total $75,000 in year one, based on the Business Plan and the Deloitts Projection, and to increase -with geneial inflation therra_O~r. Marketing Manager and Assistant Compensation for Innovair's Marketing Manager and Assis~nt Marketing Manager has bern ~stimate~d at $120,000 and $30,000 resp¢otively~ ba~¢d on the Buslnrss" Plan and Deloitte Proj~tion. In addition, Innovair anticipated paying the Marketing Manager an annual housing allowance of $30,000. The Deloitte Projection includes estimates of other allowances and benefits for the Marketing Manager and Assistant.Marketing Manager of 15 percent salaries. Other aJlowances and benefits are estimated to be 25 percent of salaries. Marketing Manager ex]~nses are estirnat~l to total $1~0,000 (($120,000 x 1.25) $30,000) and Assistant Marketing Manager expenses are estimated to. to~l $37,500 ($30,000 x. 1.25) in year one and to incre,~se with gene .ral inflation thdreaf-~r. Ad~ertisin~ Innovair and United Technologies planned to advertise the Turbo-67 to promot~ salss. -Advertising, design and production of markoting broch~es, an in-flight video p.r~senmtion and other materials, are estimatdd to cos~ $1~0,000 in. year ono. Advertising is estimated to cost $75°000 in year two, based on the Deloitte Proj~tion, and m incre~e with general inflation. Travel Costs

i
I

Innov~dr planned that the Marketing Manager would travel to l~romot~ the Turbo-67. The Deloitm Projection set forth that Innovair's Marketing Manager would h--avel twel.v.~ days a month with daily costs of $350 for hotel, ground Iransporta~on, per di~n costs, and

I
i
57

A0790

Case 1:96-cv-00408-LAS

Document 158-24

Filed 03/03/2008

Page 24 of 54

entertainment. The twelve travel days were estimated to represent three trips a month with airfare costs of $1,000.per trip. Travel costs for the marketing manager are estimated to.t0tal. $7,200 per month (($350 x 12 days).+ $3,000), or $86,400 for year one and to increase v~th general inflation. Travel costs are estimated to increase for annual sales over 13 units. Distributor Costs Innovair planned to provide assistance, including training, to distributors, Distribu.to~ costs are estimated to be $30,000 in year one, .based on the Deloitte Projection, and .to increase with general inflation. Distributor costs are estimated to increase for sales o~er 13 units. General Inflation Selling and Marketing Exp~nse general inflation is estimated as foIl6ws:
¯' Yearl to ~ear2to Year3to Year4to YearSto Year6to Year 2 Year 3 " Year 4 Year 5 .' Year 6 Year 7
General Inflation 9.3 0%

8.50

8.10

8.70

6.00

5.70

General and Administrative Expenses Innovair planned and initiated gen.eral and administrative functions. Certain estimated General and Administrative expenses would be reduced, if fewer units were sold, for example a minimum of 50 units.

I

Preside[it, Accountant, As.~istant Accountant and Secretary. Salaries, bonuses, housing allowance and benefits for Innovair's-President,Acc~untant, Assistant Accountant and. Secretary are estimated based on informationin .the Deloitte Projection. Benefits are estimated to total 25 percent of salaries..(The Deloitte Projection includes estimates of other allowances and .benefits for management and adminisWafiVe personnel of 15 percent of salaries.) : ..

A0791

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Estimated managementand administrative salaries and benefits for year one are summarized as follows:
President 230,000 57,500 45~000 332,500 Accountant 50,000 12,500 62,500 Assistant, Accountant 30,000 7,500 37,500 Secretary 30,000 7,500 " 37,500

'S~lary and Bonus Benefits Housing Allowance Total

Management and administrative salaries and benefits have been increased for inflation. Inventory .Holding COsts Pratt & Whitney required Innovair to place orders for engines at the end of each.calendar year for engines.to be delivered in the following year. Pratt & Whitney required payment of an. 18.0 percent annual holding cost on the cost of the engines ordered but not taken by Innovair. Inventory Holding Costsare esthnated to total $135,000 ($375,000 x 2 x 13.0 percent) in year one, based on orders for two more engines than required to. support annual sales .to ensure availability, and to increase wi .th-aircra~ engine and parts inflation. Inventory Holding Costs are estimated to increase for annual sales over 13 units. Office kmovair is a I-Iong Kong corporation and planned to maintain offices in H0ng Kong. Office start-up and moving expenses are estimated to total $25,000 in year one. (The Del0itte Projection set forth estimated costs of establishing the Hong Kong office of $10,000.) lmaovair's office rent is estimated to total $5,000 per month or $60,000 per year for years one, two and three, based on the Deloitte Projection, and to increase to $6,000 per month or $72,000 per year for years four, five, ~'.m and seven.

59

A0792

Case 1:96-cv-00408-LAS

Document 158-24

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Page 26 of 54

General Office and Business General office and business expenses are esthnated to be $4.5,000 for year one and to increase with general inflation thereafter. (The Deloitte P~ojection set forth general office and business expenses of $43,000 per year.) Product Liability Insurance Product liability insurance expense is estimated to be One percent of sales~ based on Innovair's preliminary discussions with its insurance agent:.. Legal and Audit Inn0vair's legal and audit fees are estimated to total $50,000 in year one and to increase with general inflation thereafter.. (The Deloitte Projection set forth legal and~uditfees of $34,000 per year.) Travel and Entertainment Innovair planned that admhaistmtive personnel would incur travel and entertainment expenses estimated to total $35,000 in year one, based on the Deloitte P.rojection, and to inereuse with general inflation thereafter. Travel and Entertainment costs are estimated to increase for annual sales Over 13.units. Genera/Inflation -:.

..

General and Administrative Expe~e general inflation is estimatedas follows:
Yca~.lto Year2 General Inflation 9.30% Year2to Y~ar3 8_50. Year3to .Year 4 8.10 . Y~r4to Yearsta " Year6to Year5 Year 6 Y~ar7 g.70 6.00 5.70

60

A0793

Case 1:96-cv-00408-LAS

Document 158-24

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Page 27 of 54

SUMMARY
The seizureand transfer of the TLA by the United .States precluded Innovair from ¯conducting business, including business with United Technologies, and caused Innovair ~o discontinue operations. The-lost expectancy interest value of the TLA.through approximately June 1998, not ' including pre-judgment interest, ba~ed on lost sales and lost-profits on 90 units, is estimated to total approximately $35,000,000. Sales of 90 units are consistent with the sties expectation of United. . Technologies of approximately 87 units, over 7 years, the Warwick Memorandum projection ..of 96 units through 1995 and sales of other turboprop aircraft. Potential lost expectancy interest value, based on prospective sales of 130 units, is estimated to total approximately $57,000,000. Sales of 130 units are consistent with "Sales Potential" identified ¯ by United Technologies of 129 units, with the D,loitte Projection of 174 units through 1994 and with sales of other turboprop alrcnd~ z2

The United Technologies Distributor Agreement included minimum annual sales of 5 kits and/or converted aircraR, or a total of 35 kits and/or aircraR over a seven year term. United Technologies expected to do "at least 50 ~onversions dyer 4 years" in the Pacific Rim, or mathematically approxima~ly'87 conversions owr 7 years. United Technologies identified a "Sales Potential" of 129 converted aircraft_

51

A0794

Case 1:96-cv-00408-LAS

Document 158-24

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Page 28 of 54

Innovair Aviation, Ltd. v. United States Case No. 96-408C
Exhibit 37

A0795

Case 1:96-cv-00408-LAS

Document 158-24

Filed 03/03/2008

Page 29 of 54

DISTRIBUTOR AGREEMENT

An Agreement, made as of the 25th day of Julyj 1991, by and between Innovair Aviation Limited, a Hong Kong co~oration located at Hong Kong (referred to in this Agreement as "Seller"), and United Technologies Corporation (acting throug~ Pratt & Whitney Group), a Delaware Corporation having a place of business at 400 Main Street, East Hartford, Connecticut, 06~08 (referred to in this Agreement as "United" and "Distributor"~, WITNESSETH THAT: WHEREAS, Basler Turbo Conversions, Inc. (BTC) , holder of Supplemental Type Certificate No. SA48440NM (STC) =for the conversion of DC-3 and C-47 aircraft to turboprop power (hereinafter Converted Aircraft, as defined below) , has granted SELLER the exclusive right and license to purchase and sell for resale in its territory (generally, a!l countries ~xcept the United States) Licensed Products, including Converted Aircraft, componentry and conversion kits; to lease and sell Licensed Products in its territory; to manufacture or have ~manufactured Licensed Products in its territory; and to grant s-ales, distribution and conversion rights to third pattie s; and, WHEREAS, Seller has granted United under N96B-~ aircraft Purchase Agreement ("PA"), dated July 13, 1990, ex~clusive International Marketing Representative (IMR) right--s, in the countries listed in Attachment C to the PA. Such rights include International Business Transactions (IBTs) as set forth in PA paragraph If. B; and, WHEREAS, Seller and Distributor agreed to negotiate in good faith IM~ Distribution Agreements as set forth in PA paragraph III. A. i; and, WHEREAS, Seller will use its best efforts obtain a Supplemental Type Certificate to certain Converte~ Aircraft options described herein; and, WHEREAS, Seller is proceeding to obtain a Pa~---ts Manufacture Approval from the Federal Aviation Administration pursuant to Federal Aviation Regulation part 121 to permit Se~--ler to sell conversion kits and parts therefor. NOW THEREFORE:

C004411

A0796

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Page 30 of 54

In consideration of the mutual agreements, promises and acknowledgements set forth below, Seller and Distributor agree as follows:
i. Purpose. The purpose of this Agreement is to describe the business terms which will exist between Seller and Distributor, with respect to Distributor exercising the Grant in the Territory (as defined below), and to describe the obligations and responsibilities of Distributor and Seller.

2. Definitions. 2.1 International Business Transactions ("IBTs") - The sale of products and related services as set forth in PA paragraph II. B., and described in paragraph 4.1.2 below. 2.2 Converted Aircraft - A turbine engine conversion of Douglas DC-3 or C-47 aircraft (the "Aircraft") including options. The basic conversion involves the installation of a 40-inch fuselage extension, Pratt & Whitney PT6A-67R turbo engines and other modifications described in U.S. Federal Aviation Administration Supplement Type Certificate No. SA48440NM (the "STC") and described in Exhibit "A" attached. Optional equipment ("options") which Seller will provide (or in the case of options where Seller is attempting to obtain a STC, will use its best efforts to provide) at the request of Distributor are described in Exhibit "B" attached. 2.2.1 Options not included in BTC's STC for which Seller will use its best efforts to obtain a STC will be provided as set forth in 5.4.1(b). (See also paragraph 5.17) 2.2.2 Conversion Kits - The components, including engines (unless expressly stated to exclude engines), required to perform the basic conversion of DC-3 aircraft under the STC. 2.3 Territory - The countries listed in Attachment C to the PA and Exhibit "C" of this Agreement in which Distributor may exercise exclusive IMRrights, as described in paragraph 4 below. 2.4 Products - The products and services related to the conversion, sale and operation of DC-3/C-47 Converted Aircraft as described in paragraph 4.1.2.1 below.

C004412

A0797

Case 1:96-cv-00408-LAS

Document 158-24
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2.5 Technical Data - Drawings, instructions, manuals, directives, bulletins, and documentation necessary to overhaul and convert "Aircraft".

3. Effective Date; Term of Aqreement. The Effective Date of this Agreement. is the date first set forth above. The term of this Agreement shall continue until June 23, 1998. Distributor shall have two (2) consecutive renewal options, each limited to five (5) year terms. The terms and conditions of __ renewal shall be the same as for this Agreement, except that Distributor shall also pay Seller a royalty equivalent to two and one half percent (2.5%) on the net selling price of all conversion kits sold by Distributor after the expiration of the initial term. Distributor may exercise each option by giving Seller written notice of its intent to exercise delivered at least seven (7) months prior to expiration of the initial term or the applicable renewal term. Thereafter, the Distributor Agreement may be renewed, extended or otherwise continued as the parties may agree in writing, or as may be provided otherwise by applicable law, but may not be terminated by Seller except pursuant to Section 13. 4. The Grant. Pursuant to N96BF Aircraft Purchase Agreement ("PA!') dated July 13, 1990, Distributor has certain Exclusive Rights within the countries listed in Exhibit "C" attached (the "Territory"). 4.1 The Exclusive Rights granted Distributor include the sole right to the following within the Territory: 4.1.1 Convert or have converted DC-3 and/or C-47 aircraft under the STC and BTC proprietary data, including establishing and overseeing the operation of certified conversion facilities within the Territory; and, 4.1.2 Conduct the transactions set forth in 4.1.2.1 regarding conversion kits, Converted Aircraft and related products and services (collectively referred to herein as "International Business Transactions" or "IBTs"). 4.1.2.1 Selling or leasing the following products or services (the "Products"): basic conversion kits (authorized pursuant to BTC's Supplemental Type Certificate No. SA48440NM for conversion of DC-3 and C-47 aircraft) and optional equipment; DCI3 and C-47 airframes; Converted Aircraft; conversion kit tools and equipment; Converted Aircraft spare parts (as further described herein) and non-proprietary technical manuals; Converted Aircraft maintenance, training, cargo and passenger operations; and follow-on business C004413

A0798

Case 1:96-cv-00408-LAS

Document 158-24

Filed 03/03/2008

Page 32 of 54

- 4 -

transactions involving the commercial or military use of Converted Aircraft purchased for substantial use in the Territory. Any IBT lease or sale shall only be for substantial use in the Territory. 4.1.3 Notwithstanding any other provisions in Section 4, united's Exclusive Rights shall not include any sales negotiated with the U.S. Government and its agencies. Conversely, any sales negotiated by a Territory government, shall be considered subject to United's Exclusive Rights under Section 4.

4.2 Release of IBT Riqhts. The following release provisions are intended to apply to those situations where Distributor is unable to consummate a sale with a customer and the sale would be lost unless Seller is given the opportunity to consummate it. 4.2.1 If both parties mutually agree that a sale to a prospective customer of Distributor in the Territory cannot be consummated by Distributor and will be lost unless Distributor releases its exclusive rights to such sale to Seller, Distributor will grant such release upon mutually acceptable terms providing for appropriate compensation to Distributor.
5. Obliqations of Seller. During the term of this Agreement, Seller shall assume responsibility for the following as set forth below:

5.1 Notice of Inquiries. Seller shall promptly advise Distributor of substantive inquiries, by potential customers in the Territory for products of Seller. 5.2 pr~ciDq of KSts - Principles. Since Seller has not yet established prices with other distributors for :its Products, the Conversion Kits will be sold on a fixed priced basis (adjusted for inflation) as set forth in paragraph 5.2.1 below until Seller establishes a bona fides selling price with at least three distributors, each of whom has demonstrated reasonable capability and financial resources to convert (or have converted) and sell Converted Aircraft. 5.2.1 Conversio~ Kit Fixed prices. Prior to establishing Most Favored Customer prices (as provided under 5.2), Seller will sell Conversion Kits to Distributor at the following fixed prices:
(a) 1991 price

list price with engines in kit:
C004414

A0799

Case 1:96-cv-00408-LAS

Document 158-24

Filed 03/03/2008

Page 33 of 54

- 5 -

$2,025,000.00 (This price'is subject to reduction for the Distributor's commission of 10%).

o'list price with engines procured separately by Distributor (to be mutually agreed, but intended to apply only to first 2 kits): $i,133,000.00 (This price is subject to reduction for the Distributor's commission of 10%).
(b) Adjustment - Future Year Prices:

(i) The fixed prices for 1991 shall be adjusted for subsequent calendar years {based on time of order by Distributor) in accordance with the following adjustment procedure: (a) Adjustment Dates. The future calendar year adjustments shall be made on Janauary l, and if the percent Primary Cost Component ("Pcc") increase described below is greater than 2% as of July i, a second adjustment shall be made on July i. (b) Primary Cost Components. The Primary Cost Components for the conversion kits are: Engines, propellers, nacelles, cowlings and labor. (c) Percent PCC Increase. The Percent PCC Increase shall be determined by the ratio, converted to percent, of the sum of all increases of the Primary Cost Components in (b) to the sum of the costs of all items in the PCC categories as of the previous pricing date. (d) Conversion Kit Price Adjustment. The conversion kit price adjustment shall be the Percent PCC Increase from (c) above times the current kit price. (e) Support for Adjustments. Seller shall provide Distributor C004415

A0800

Case 1:96-cv-00408-LAS

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- 6 -

with reasonable support for proposed adjustments pursuant to this section 5.2.1(b). At Distributor's request, Seller agrees to allow an independent auditor examine Seller's books and records to verify all proposed adjustments.

5.2.2 Most Favored Customer [MFC) Provisions. After Seller has established a bona rides selling price with at least three distributors as set forth under 5.2, Seller warrants that the unit prices charged Distributor and the rebates (if any) granted Distributor for its conversion kits and Converted Aircraft under the agreements described in paragraph III.A.I of the N96BF Aircraft Purchase Agreement, dated July 13, 1990, will be at least as favorable as those granted by Seller to any other entity in a particular calendar year for the same total quantity or any lesser quantity order of kits and/or Converted Aircraft. (a) Determination of MFC Unit Price. The unit price assessment will be based on total quantity purchases of conversion kits and/or Converted Aircraft by Distributor in such calendar year, as determined at the time of purchase. (b) Examples. For example, if Distributor purchases 2 conversion kits, it will receive at least as favorable unit kit prices as those granted by Seller to any other customer who purchased a total quantity of 1 or 2 kits or 1 kit plus 1 aircraft in that calendar year up to the time of Distributor's purchase. If Distributor thereafter purchases another 3 kits within the same calendar year, it will receive at least as favorable unit kit prices as those granted by Seller to any other customer who has purchased any total quantity of kits and aircraft of 5 or less. In the foregoing example, the price of the first 2 kits remains unchanged. (c) Disclosure. Upon request Seller will disclose to Distributor the terms of its most favorable prices and rebates. At Distributor's request, Seller agrees to allow an independent auditor examine Seller's books C004416

A0801

Case 1:96-cv-00408-LAS

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Page 35 of 54

and records to verify all proposed adjustments. 5.3 Late Deliveries. Seller recognizes that its failure to furnish sufficient products on schedule in support of IBT agreements may jeopardize Distributor's investments in the foreign country and its ability to obtain offset credits. Seller will pay Distributor liquidated damages of $250 per da~ for each day of delay not covered by the force ma]eure provisions of section 14) over forty (40) in delivery of conversion kits under its purchase orders to fulfill IBTs with Distributor's or Assignees, not to exceed 50% of the total price of the delayed products. Such liquidated damages are intended to cover Distributor's investment cost of money losses only and shall not constitute a release or waiver of any other losses or damages suffered. 5.4 provision for Reasonable Assurances. Seller will provide Distributor with reasonable assurance of the adequacy of its capitalization, its ability to obtain Conversion Kits and Technical Data, and its capability to provide technical services (including product support) to support conversions and Converted Aircraft. 5.4.1 Seller's Written Plans. Exhibit "D" contains Seller's list of conversion items which are sole sourced. It is impractical to establish alternate sources for engines,.propellers and the de-ice system. For the remaining items, Seller will study the cost of FAA certification of alternate sources. Where an alternate sources is not economically feasible,Seller will adjust its inventory levels of such items to reduce the risk of outages to an acceptable level. Seller will provide Distributor within the number of months stated below (following execution of this Distributor Agreement) its written plans for: (a) establishing alternate sources for critical and long lead items where economically feasible, and adjusting inventory levels for the remaining items: to be provided within six (6) months, (b) obtaining an STC to those options requiring an STC by Seller (See sections 2.2.1 and 5.17): to be provided within approximately two (2) months, and (c) assuring adequate cash flow: to be provided within approximately two (2) months.

A0802

Case 1:96-cv-00408-LAS

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5.5 Toolinq and Conversion Equipment. Seller shall sell tooling and conversion equipment and instructions to Distributor necessary to enable Distributor to convert Aircraft in accordance with the STC. Seller agrees to provide such tooling, conversion equipment and instructions to Seller as necessary for Seller to meet the foregoing requirements. 5.6 Seller's Warranty. Seller warrant to Distributor, and to the first user of Products purchased from Distributor, all Products in accordance with the standard new Product warranty of Seller, including all limitations or conditions to such warranty established from time to