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IN THE UNITED STATES COURT OF FEDERAL CLAIMS

iNNOVAIR AVIATION, LTD., Plaintiff
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THE UNYYED STATES- OF.AMERICA, Defendant

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REPORT OF DANIEL P. KAPLAN, Ph.D.

¯ . July9,2007

1725 Eye Street, NW, Suite 800, Washington, DC 20006 main 202.466.4422 fax 202.46~.4487 www.lecg.com

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Table of Contents

I. II.

QUALIFICATIONS

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"

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' 1

A. B. C.
go

Implementing a Kit Strategy .......................................................... , .......... 11 The End of Cooperative Behavior ............................ i ...............................15 Innovair's Relationship with UTC '" " 19

VALUING THE TLA ........................................................................................ 26 . A. Difficulties with Several Approaches ............. .................................26 '.: ........ B. - Proper Valuation Methods ............................................................. : .....;... 29 , The Value of the TLA to Basler ...................... ........:...... ...............:..2 .....32 i.~

VL

CONCLUSION ...................................... ~ ............................................................ 34

Appendix A ...................................................................................................................... 37 Appendix B ...................................................................................................................... 44

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REPORT OF DANIEL P. KAPLAN Innovair Aviation, Ltd. v. The United States

Case No. 96-408C In the United States Court of Claims¯

QUALIFICATIONS I am a Director ofLECG, LLC (formerly, The.Law & Economics Consulting Group). LECG provides expert.analysis and management consulting in . economics, ~;ccoun~ing, and finance. My business, address is 1725 Eye Street, N.W., Suite 800, Washington, D.C. I have over 30 years of experience at LECG, Glassman-Oliver Economic Consultants, Inc., and several government agencies dealing with issues involving economics and finance in a variety of industries including both passenger.and cargo airlines. I have eonsuited on a var_i. "ety of projects for both U.S. and non-U.S, clientson matters-relating to m~g~rs; (ompetitive practices and damages. I have also testified in proce6dings in which flae Department of Transportation selected the earrier~ that would provide the ¯ greategt value in serving specified international markets.

I received a Ph.D. in economics in 1974 from the University of Michigan where I specialized in.industrial organization. I have authored a number of articl6.s and reports on the airline industry as well as a book (with two cq-authors) published by the MIT Press. I directed and prepared comprehensive analyses of the economic performance of the airline industry, including a Congressionally-

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mandated study on the impact of deregulation. I was the chief economist at the ¯ ~ivil Aeronautics Board, where I managed a team of economists, accountants and financial analysts that among other things made recommendations to the Board on a variety of regulatory issues, including mergers and airline subsidies. I have also ¯ performed economic analyses atthe Federal Trade Commission and the Congressional Budget Office. I have testified on matters before courts and federal administrative agencies, as well as in legislative bodies both in the United States and Car~da. I have a B.S. froht the Wharton School o.~the University of Pennsylvania. I have taught at both American University and George washington U~versity. A copy of my curriculum vitae is provided as Appendix-A.

II.

"BA~KGROUNI) AND ASSISGNMENT

o

Though they had no.background in themanufacture and.sale of aircraft~ Bryan Carmichaeland Barry-Wilson became interested in retrofitting refurb.ish6d DC-3 ¯ aircraft with turboprop engines during.the 1980s. The operation and sale of the retrofitted air.craft .in the United States-required a Supplemental. Type Certificate ~"STc") issued.by the Federal Aviation Administration ("FAA"). Because of reciproclty with foreign governments, the issuance of an STC by the FAA generally allows the aircraft so modified to be operated around the world.

~ Both had backgrounds in international business through their experiences in the pharmaceutical industry. They did not have any experience in the aircraft or aviation industry. Deposition of Bryan Carmichael, November 15, 2005, pp. 13-17.

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4.. Carmichael and Wilson identified a technology developed by U.S. Aircraft Co.iporation ("USAC") that had been used to reengine a single DC-3. Carmichael ' and Wilson hoped to modify the USAC technology and obtain a multiple STC so Conversions could be performed on a greater s~ale, and the aircraft could be broadly marketed.= To assist in their efforts, they entered into a cooperative .reldtionship with Warren Basler, who had also dealt with USAC. Through his flight station, Basler Flight Services ("BFS"), Basler Owned and operated a fleet of)3C-3S and also had substantial engineering experience working With the

5J To manufacture and market the reengined DC-3 aircra~ two corporations were .formed: One corporation, Basler Turbo Conversions ("BTC;'),-was to own the STC and have the right to sell the aircraft-modified in accordance with the STC ¯(and the necessary parts) to domestic purchasers as well as to foreign purchases ¯ financed by an agency of the United States govemment~ B~ler and his wife owned 51 percent of the stock of BTC with Carmichael's wife and Wilson Owning the remainder. (Throughout tb4.'s report, the :'Basler group" refers to

Basler and his wife, and the "Carmichael group" refers to Carmichael, Wilson and their family members?)

2 Deposition of Harry V. Eastlick, November 7, 1991, pages 36-7. 3 See "New Life for the DC-3," Private Pilot Magazine, December 29, 1990: 'q3asler has operated piston DC-3s for more than 100,000 hours since 1961 and has overhauled and modified more than 85 unit~ since that time. blow it is an accepted procedure for McDonnell Douglas Aircraft to refer technical questions " about the DC-3 to Basler.?' 4 For ownership shares of the companies, see fax from Harry Eastliek to Bryan Carmichael, October 19, 1990, Carmichael Exhibit 31~ (Unless otherwise noted, all Carmichael Exhibits are from Carmichael's

deposition on November 15 to 17, 2005.)

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The dther corporation, Innovair, had a license from BTC granting it the technology underlying the STC as well as the exclusive right to sell the modified aircraft and applicable parts to purchasers outside the United States not financed by an agency of the U.S. government,s That license, whicli is the.Technology License Agreement ('"£LA"), also gave Irmovair th.e right .to: purchase aircraft and parts from BTC. The TLA was signed on June 24, 1988 and had a 10year term? The Carmichael group owned 51 percent of Innovair, with the.Basl.er gXoup owning the remainder. Th.e present proceeding concerns the value of the TLA~. -

The FAA issued STC SA4840NM to Basler for the "Installation of Pratt & Whitney P-T6A~-67R Engines on a McDonnell Douglas Corp DC3C': 6n February 27, 1990 ("STC 4840"). In additior~ {o the installation of theengines, the STC covered the propellers, reyised electrical system and forward fuselage extension.7

OnJuly 16,. 1991, the U.S. government seized the TLA bfcaiase funds Innovair had used to purchase it could be traced to the illegal drug trade.. App~.oximately five months after the seizure, Basler posted a substitute res bond in the amount of ;1.375 million and received temporary use of the TLA. OnMay 21,. 1992 the United States Dislrict Court approved the substitute res bond, and BTC obtained

5 Specifically, the Technology License Agreement defined the licensed product to be the DC-3s donverted in accordance with the Multiple Supplemental Type Certificate "...including co~ponentry which may comprise kits sufficient to make conversions of such ~ircratL" (Section 3~021). See Technology License Agreement, June 24, 1988, Carmichael Exhibit 2. 6 The TLA alsogranted Innovair the right to "purchas~ from Basl~r, if~easonably available, Licensed Products at the full cost to Basler of the Licensed Products, including applicable general and administrative costs, plus twenty percent (20%)," (TLA, Section 3.06).

7 Carmiehael Exhibit 3.

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the TLA.s It is my understanding, therefore, that May 21, 1992 is the date of taking.

As aresult of the September 1993 settlement of litigation between, on ihe one ha~d, the Basler group and, on the o.ther hand, the Carmichael group.and-Harry Easflick, the Carmichael group became the sole owners ofInnovair. Innovair, "lmweve~, forfeited its interest in the TLA to BTC. Likewi§e, the.Basler group became.the s01e owners of both BTC as wall as the TLA. 9 -Though it no longer owned the TLA, Innovair retained the fights to recover the value of the substitute ¯ res bond. Innovair was subsequently.determined to have been an innocent owner of the TLA~. The current proceeding is to determine the extent, if any., the value of the TEA exceeded the amount of the substitute res bond.~°

10. I hax)e beer~.asked by the Department of Justice to value the TLA as of the date of -the taking. In performing.my analysis, I consulted decisions, pleadings, trial and i:leposition.~testimony and exhibits l~0m prexd.'ous litigation involving the TLA and related issues as Well as reports fi-om both the plaintiff's and defendant's, experts: I had discussions with. other DOJ experts and interviewed the President df Basler

Turbo Conversions. A complete list of the documents I relied ui6on is contained in Appendix B. My professional fee for this matter is $400 per hour.

s Case No. CIV 90-1827 Pi-IX RCB, United States of America vs. Basler TurbO)-67 Conversion DC-3 Aircraft; et al. ORDER. Between the time BTC posted the substitute res bond and the time of the f'mal order, BTC obtained "Interim Use Rights" to the TLA. 9 Settlement Agreement of the State of Wisconsin litigation, September 22, 1993.

,0 Opinion and 0rder,.Innovair Aviation, Ltd. v. The United States, August 31,2006.

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HI. OVERVIEW-AND SUMMARY

11. This section summarizes the analysis and the principle conclusions of the report. The next section (Section !V) reviews Innovair's business plan and demon.strates the small role the taking played in its lack of success. Section V discusses the methods of valuing the TLA and explains that the value of the TLA at the time of the taking is not only. substantially less.th ,an the estimate of the plaintiff's expert, it is probably also. less than the amount of the substitute res bond of $1.375 million posted by BTC. Section VI is the conclusion.

12:.~ks originally envisioned, hhere were to be two separate stages to the pr.odu~tion of the Turb0-67,the name of the reengined.DC-3:lr The firs~stage consisted ofassembling the parts necessary to perform a conversion. I~ total there were approximately 3,500 such parts, of which 1,500 were unique to the Turbo-67 and had to be manufactured,t2 This collection of parts was refer~ed tO as a "kit." In the second stage, an entity separate from the kit assembler would install the kit

..and, in so doing, convert a DC-3 into a- Turbo-67. In the United States, BTC was
to produce the kits. and Basler Flight Services ("BFS") was to do the conversions.

(BFS was a separate entity owned entirely by the Basler group.) Internationally,
Innovair would either purchase kits frdm BTC or manufacture them itself.

n As discussed subsequently, manufacturing a Turbo-67 also required an overhaul of the airframe and the installation of avionics and other optional equipment.

~2 1990 Basler Turbo Conversions, Inc. and Irmovair Aviation Ltd. Five Year Business Plan, 1990- 1994. (Carmichael Exhibit 25.)

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Innovair pianned to sell kits to a number of selected aircraft facilities around the world, and these facilities would perform the conversions.

13. Rather,thanthe strong demand envisioned for the Turbo-67, the market response t6 the aircraft provedto be tepid.~3 Thislack of customer demand ~ettainly affected the value of the TLA, but other factors also diminished its x;alue.- First, the TLA.only covered the technology in theSTC 4840. Virtually all the Turbo67s manufactured and sold by Basler contained other technologies, either developed or acquired by Basler and-covered by other STCs. The most notable of these were the long-range fuel tanks and metal control surfaces. To market the reengined DC-3 with the features aircraft operators wan~ed, Itmoi~air would have had to obtain the necessary, technologies from ~ither Basler 0r.elsewhere.

14. Innovair would have also needed the cooperation of BTC and BFS in a varieBj of otherdimensions. Basler had substantialexperience in working with DC-3S. ¯ including performing a number of conversions. Indeed, ttie.TLA required Basler to work e.ooperatively with Innovair by, most notably~ requiring BFS tO help train .personnel. ~4 Coordination between the Basler companies and.Innovairw0uld have.been b~nefieial in areas such as sales, marketing a~d after sales support.

13 "Bas!er DC-3 Turbo Business Enterprises: Analysis and Valuafi6n," ("Basler Assumptions," p. 2) prepared byMadison Valuation Associates, January 1, 1991; Deposition 0fThomas Weigt, July 15, 1997, Rage 55. Mr. Weigt is the President of Basler Turbo Conversions. See TLA, Section 3.07. Innovair also had the right to request that BTC send personnel to t~acilities

overseas performing conversions.

"

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15. Despite the demonstrable benefit from working together, the Carmichael.grdup and.the Basler group had disagreements over a nui'nber of issues. They not only ¯ had different management s~yles, but they also could not agree on whether their primary business was selling kits or selling completed aircraft: They were unable eveia to devise a method by which th.ey could separate amicably. The deterioration in their relationship led tb legal proceedings in Wisconsin state court in.the spring of 1991 even before the TLA had been"seized.

16.-The TLA was .seizedby the United States in July 199 t and the taking occurred in May 1992. As is .discussed more fully below; contemporaneous evidence d~m0nstrates .the value ofthe.TLA at .th~ time of the taking w.as quite smell. For ex .ampl.e,.pn.'0r to .the s.~izure of the TLA in Ju!y 1991, Carmichael was unable to rai~e funds for the venture despite numerous attempts.and the hhSng .of-Deloitte & T~uche and Warwick Consultants to assist in theseefforts. While Innovair did enter into a Distributor Agreement, with th.e united Technologies Corporation ¯ ~"UTC"), UTC could not secure investors for a proposed conversion facility in ¯ Taiwan nor could it detect much customer interest forthe airckaft~

17. Subsequent events confirm that the TLA had limited value at the time of the taking. In the 15 years since the TLA was seized, Basler companies' sales in Innovair's territory have been only a fraction.of what Innovair had forecast it would sell in its first five years of operation. In addition, there is no evidence of anyone else attempting to sell a reengined DC-3 or to obtain an STC similar to

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8TC 4840 in the years following the TLA's takflag. Thislack of entry coupled with the exit of two other finns involved in similar efforts (UsAc and AMI) indicates demand was insufficient to support more than one producer ofreengined DC-3s.15

18. Tiffs report shows that neither Innovair nor any other independent firm could have
¯ reasonably expected to generate profits from the TLA. The TLA, ho.wever,. did ¯ hav~ value to the Basl~r group. The TEA granted exclusiveaccess, for a limited time, to (he technology underlying STC 4840 foi: sales made outsideofth6 United .S~ates and its territories to purchasers not financed by a.U.S, government agency. Though the number of such potential sales was small: they,.ne',~erthel~ss,: -r.epres~nted a significant proposition of the potential purchases.of the. Turbo-67.. Thus, the TLA precluded the Basler companies'(BFS :and BTC) from serving a : substantial.po~don of a limited market. The Basler companies co~tr011ed .complementary technologies and had the facilities and personnelto pr.od~ee both the necessary parts and the finished aircraft. By expanding its geographic reach, ¯ the. TLA.w0uld have ¯enabled the Basler companies to.use their existing physicaI and human eapital'more productively. '

19. Because the TLA Would be worth very little to anyone but Basler, B.asler would. have had to pay only a small amount to obtain the TLA. The Basler companies' limited financial resources at the time of the taking would have also limited the.

15 USAC and AMI had exited prior to the taking:

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amount they would have paid. Indeed, the value of the TLA is certainly substantially less than the amount estimated by the plaintiff's expert, and it probably did not exceed the amount of the substitute res bond. Innovair had obtained the right to recover the substitute res bond in settlement of private ¯litigation.

IV.

INNOVAIR'S BUSINESS PLAN

20. The TLA established a contractual relationship between Innovair and BTC, and the Carmichael and Basler groups had nearly-equal ownership shares in each of the companies. Central to the operations of thevarious businesses was the construction and sale of kits, which contain th.eparts necehsary to convert a DC3 into a Turbo-67. BTC would assemble kits at its facility, and sell them to BFS and, at least initially, to Innovair. BFS would refurbish the DC-3 air firames and

install the kits and, thereby, produce.Turbo-67~ for.domestic customers and
foreign customers financed by U.S. government agendes. Irm0vair planned to sell the kits to conversion facilities located in various p.arts i3fthe world that

would produce the Turbo-67 for customers in its territory.

¯ 21. Innovair's kit strategy depended critically not only on demand for the aircratt but also on the cooperation of the Basler companies. BTC was not only an important supplier of kits, but the Basler companies were also to ¯provide Innovair with componentry, teelmologies and important know-how.- The Carmichael and Basler

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groups, however, could not work cooperatively and ultimately sued one another. Tlie critical role of the Basler group in the operations of Innovair coupl.ed with a lack Of cooperation fi:om the Basler group certainly impaired any profit potential Of the TLA.

22. Even.more fundamentally, demand-for the aircraft proved to be relatively small. UTC,.-which entered into a distribution agreement with Innovair, could fred neither investors to fund conversion facilities nor potential customers, and it ¯ ultimately abandoned the project. BryanCarmichael t~ad come to view UT. C~. pa~icipation as the linchpinto the project's success. UTC'.s lack of ~uccess . further demdn~trated the limited value of the TLA.

A. - Implem~ntinga Kit Strategy

23, Innovair planned to concentrate on the sale of kits.~6 Indeed, it did not even .. anticipate manufacturing them. Irmovair, therefore, planned to operdtea relatively lean structure by entering into exclusive agreements with distfibu(ors. These distributors would h~dle "1) sales and.marketing, 2) installa~i6n of conversions, 3) product support and maintenance, 4) warranty programs, 5) spares support, and 6) training.''~7

16 The kit would be ~'complete with all parts including rivets, nuts find bolts required for the.conversion and overages to cover normal losses during installation. All specialized toolg, drawings, detailed kit installation instmction~, maintenance manual, flight manual and structural repair manuals are included." (Five Year Business Plan, Carmichael Exhibit 25, p.9)

17 op.cit, p.8

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24. Locating distributors and providing them with the required skills represented a major aspect of Innovair's operation. These distributors, in turn, would have to make .signi.ficant investments in human, physical and financial capital. Yet, vu-tually every phase ?fdeveloping a successful.distribution network depended

critically on Basler's input. The Basler companies' role was to be especially
important in the conversion process.

25.Tl~e process of creating a Turbo-67 from a DC-3 is refer~d to as.a conversion. A 6onversion consists of three separate and signifieant steps: 1) stripping and refurbishing the airframe, 2) extending the fuselage and installing new engines, ~d 3) installing a cockpit and incorporating modem avionics. STC 4840 applied only to .the second phase, which is the installation ofttie kit.- BFS had.been working with DC-3s for years and had subs.tantial experience not only with the reengining process, but also With other aspects Ofmhintaining-and modernizing -- DC-3s, Basler, therefore, had experience relevant to all parts of the conversion .. process. Indeed, the TLA granted ttmovair the right.to send one or more of.its employees or agents to "Basler's place ofbusin~ss...to acquire the khowl~dge. and skills necessary for the manufacture of License Products." For example, Air Asia, which was considering operating a conversion facility for UTC,sent at least t~ee employees, who were involved with the installation of conversion kits as well as with the total conversion to Basler's facilities in Oshkosh.~s The TLA also provided for Basler "to make available at its place of business or elsewfiere in
18 Fax from Bradley Shickel and Herb Hayes to FredJohnson, September 12, 1990; Carmichael, however, recalls approximately 10 Air Asia employees being sent to Oshkosh for training. Carmichael Deposition

(11/15/05), p. 77. 12

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the Territory qualified personnel for consultation and assistance in the ¯ manufacture, maintenance or repair of licensed products."~9

26. As part of its work.with DC-3s, BFS had developed or acquired a numbe~ of technologies to improve flae operation of DC-3, and BFS had STCs to cover many of-them. Most notable were the STCs to install metal controlsurfaces in replace ¯ of the cloth ~urfaces on the ori .ginal DC-3s, as well as long range fuel tanks in the wings.,z° Innovair's marketing materials featt~ed these items21 and the aircraft s01d to.UTC and used for demonstrations included these features. Virtually every reengined DC-3 sold by Basler. also.included both the long range fuel tanks and metal eontr01 surfaees.~ Indeed, the extended range and the. lower-makltenance-. ¯ 0f fhe.a~rcraft, two aspects of the aircraft featured in the promotional material, rel.ied on fiiose technologies.

27. The TLA, however, covered neither of these options. The ~A sirnilarly did not cover a number of other technologies BFS had developed¯ and for which it had received an STC. Because it did-not cover these lea ..t~r. es, .the TLA did not grant Irm0vair the right.to produce and marl~et Turbo-67 aircraft with the attributes

aircraft Operators sought.

19 TLA 3.07. The TLA does not seem to require Basler to send his personnel overseas. 20 Because the turboprbp engines ¯were less fuel efficient than the piston engines they replaced, the reengined aircraft would experience a substantial diminution in range without additional fuel capabilities. 21 Brochure, Basler Turbo-67. (Carmichael Exhibit 4.) 2~ Interview with Tom Weigt, May 9, 2007.

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28. An STC is not a patent, andit is not ~ubject to copyright protection. Though irmovair would probably have been able to develop the technologies for these optioris and obtain the appropriate STCs, the process would undoubtedlyhave been cosilyin terms of resources and time. Consequently~ Irmo;cair's success Would have depended significantly on it~ ability to work cooperatively with Ba~ler,to obtain the technologies not covered by the TLA. A lack of alternative suppliers .of these technologies would.have given BTC the ability to charge : re. latively high prices for th~ options and thereby limit any pj:ofits to be earned by Innovair,..its distributors and converters.23

29. Cooperation bdtween Innovair and Basler may have al~o p)oved important in the ¯ marketing of.the aircraft. There were strong r~asons, even as the aircraft was being developed, to believe the Turbo-67 was best suited for niche markets. In that case,.a '.'one size fits 1 approach might not adequately serve potential market, segments. Rather, a purchaser would want the aircraft to have the sperifie

fen .tu~. es and equipment negessary forihe relevant missi~on. Responding to these " reques~..w.ou!d be easier for a.faciIitythat had deve!oped the requisite expertise
a~d experts and had performed the same or similar modifications.24

23 As discussedmore fully belo~v, the Distributor Agreement between UTC and Innovair allows UTC to ~obtain the rights directly from Basler iflnnovair is unable to procure thos~ rights itself. See "Distributor Agreement," July 12, 1991. (Carmichael Exhibit 22.) ""o¯ Planes used for cloud seeding, crop spraying, or as a gunship - all uses for which the reengined aircraft ultimately sold by Basler have been deployed - require specialized equipment. Because such equipment can affect the aerodynamics and the operability of the aircraft, aircratt so equipped often requires testing

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¯ 30. Cooperation would likely also b.e "m)P0rtant in providing sales support. The ultimate customer, the aircraft operator, was interested in purchasing a completed aircraft. Irmovair's goal, however, was to sell aircraft kits. Under Carmichael'.s ¯ plan, therefore, a firm separate and independent of both BTC and Inn6vair would actually be selling and se.rvicing the aircraft. Accordingly, three separate e~tifies (and potentially more) could.be involved in-the sale of the aircraft in Innovair'~ territory:. 1) BTC,.the kit producer, 2) Innova~r,-the seller ofkits, and 3) a' " "c.onversion faeility", which would actually p~oduce the aircraft.25 All three, therefore,.would have an incentive to support a cooperativeand dfficient sales and" marketing effort. In an environment requitingsuch coordinated behavior, it can often be profitable for each of the pai'ticipanks.to provide less than the optimal amount of sales and marketing support. Developing mad enforcing an. agreement to prdvent such non-doopemtive behavior can be cosily.
:

~B.

.The End of Cooperative Behavior

31. Despite a fair amount of media attention after the grant of the STC, the Turbo-67 did not generate many orders. As a result, both Innovair and BTC wer~ in.poor

financial condition.26 The financial difficulties undoubtedly contributed to a
dramatic deterioration in the relationships between the B~sler and Carmichael groups. These strains surfaced well before the seizure of the TLA.:~7

Innovair also planned to use distributors and sales agents. (See Carmichael Ex. 25, p. 8.) See Opinions ofMaurice Whalen.

See, for example, McCreery Deposition January 20, 1998, pages 53, 77. 15

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32.The Basler and Carmichael groups came from very different baekgrotmds and had very different perspectives. While Warren Basler had substantial aviation exper_i. "ence, he ran a small business without the long range.planning and financial reporting systems of major corporations. Carmichael and Wilson, meanwhile, Worked in major international pharmaceutical corporations, but had no.aviation industry experience. These different perspectives inevitabl~, led to differences in opi.nion as to how to manufacture and sell reengined D~-3s.2s The CarmichaeI group continued to see th~ business as building and ~elling kits.a9Ba~ler saw the ¯ business as selling finished planes.

33. Warren Basler believed that the success of-the Turbo-67 depended on providing a homplete product?° This included not only the ability to inst~l the necessary p .arts, but ~so to provide customer assurance with respect tooverhauling aircraft .and providing after sales service. Most of the airframes were more than 50 years old and required substantial work to restore them to mhat condition?I Because¯ ¯ much of this restoration was not immediately visible. On inspection, Basler believed th.e purchaser needed confidence in the firm.performing the restoi'afion. Basler similarly believed.success depended on the prospeciive purchaser confidence in the manufacturer's commitment so it could be assured of aftei" sales ser4cice. In ~his regard, Basler constructed a substantial facility to signal potential ~ustomers of Basler's commitment to theTurbo-67 project.
2s See McCreery Deposition, J~nuaty 20, 1998, pages 52-3 29 See Deposition of Thomas tL Weigt, July 15, 1997, p. 31, and Carmichael Deposition, 11/15/05, p.39. 30 Interview/, with Thomas Weigt, May 9, 2007. 3~ Carmichael notes that it took approximately 2,000 hours to overhaul an airframe and approximately

15,000 additional hours to complete a conversion. Carmichael Deposition,l 1/16/05, p. 151. 16

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34. The Carmichael groupmeanwhile maintained faith in the kit strategy and became concerned that.the Basler group, on which it depended for parts and know-how, ho longer supported it.32 The plant built by BFS in Oshkosh epitomized this concern. Carmichael. believed the facility built by BFS was too-large and as a result, "they really didn't want any conversions.being done elsewhere...andin Innovair's case it made eminent sense for us to do at least a Certain number of conversions overseas''33 The Carmiehaellgroup ¯also had concerns about acdo .unting entries.between theBasl .er companies, "which hadthe effect of t~sferring profit l~om Basler Turbo Conversions, which we owned 49 percent 6f; to Basler Flight Services, which was a hundred pereent.Basler o .wned.''34

Basler apparently had a similar distrust o.f Carmiehad and feared the Carmich~el group wouI~l take unfair advantage of the Basler. companies. The TLA not only gave Innovair the right to purchase conversion kits from BTC, but it also gave Innovai~ the right to manufacture kits. ¯Coupled with a suitable p .artner.to perform bonversions, Irmovair could conceivably sell converted aircraft without the . services of-BTC and BFS?s Innovair wa~ actively cons~dering.th, e establishment

3~ As Bryan Carmichael stated, '"¢e [Innovair] did not contemplate doing conversions as such~ We contemplated manufacturing conversion kits." Carmichael Deposition, 11/16/05, pp. 160-163. ~ op.'cit, p. 163. 34 Carmichael Deposition, 11/17/05, pp. 316-17. ~.5 This asshrnes that the kit assembler or the converter was able t~ obtain the necessary.technology to ~upply the necessary optioaal equipment that customers desired. Basler also feared that the Carmichael

groupwas misappr0pdating itstechnology. 17

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of a kit manufacturing facility thereby cutting out BTC from sales in Irmovair's territory?6 .

36. In the year after the award of the STC, relations between the Basler and Carmichael groups deteriorated markedly.37 indeed asWeigt t(stified., the '"oond [betwEen the two companies] was broken and we were just unable to Work . together because.Irmovair hadoalready positioned themselves a~ a potential " competitor to BTC?'38 Ultimately, the Carmicha6l ar~l Bas~er groups filed suits against one ano~aer. The inability oftheBasler and Cm'michael groups to work together was especially damaging to .Innovair, and indirectly, to the value of the TEA. Prior to the seizure and subsequent taking of the TLA, a number ofp .artie.s recognized ~e importance of-cooperation between.BTC and Innovair. camaich~.el, for example, offered to buy .the Basler group's ~take in th6 con~cersion" business?9 A valuation performed for the Basler group conclfided "'failure of the current stockholders and managers to continue to worktogether would, in o~ opinion, lead to signifiean, tly reduced values for each of.the. businessentities "~Q This valuation, however, also concluded a lack.of

36 Warwick Consulting Group, "C~nfidential Memorandum: Ianovair Aviation Limited." Carmichael Exhibit 18. ¯ 37 Weigt Deposition, 7/15/97, p.57; Deposition of Michael Hintze, July 16, 1997, p. 47; Deposition of Joseph McCreery, January 20, 1998, p. 77-8. 3~ Weigt Deposition 7/15197, p.59. 39 See Memorandum t6 Cai-micha.el and Wilson from Harry Eastlick, April 29, 1991 (Carmichhel Erdaibit 35.) ~o Letter to Attorney Timothy M. Dempsey from Theodore F. Gunkel, Madiso_n Valuation Associates, March 6, 1991. ("Gunlde Valuation.").

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cooperation would have its largest effect on Innovair.4~ Robert Clark, who supervised the conversion process for the Basler companies, believed the conflicts between the parties threatened the conversion program. He also .thought .that, because of.file difficultie~ among the parties, Bryan Carmichael had.concerns about Innovair!s "ability to continue to do business,''42

" C. Innovair's Relationship with UTC

37.~A Critical feature of Innovair's Strategy was establishin, g distributors and contracting.with converters to actually'sell and produce the Turbo-67. From Carmichael's perspective, UTC was a key to. exeeuling that strategy: UTC was not only a major corporation, but its subsidiary, Pratt and Whitney Canada, mmaufactured the PT-6A.-67P, turboprop engine, which powered the Turbo-67: Carlnichael believed UTC's presence would not only result in theinjection of "needed capital into the venture, but UTC's participation would aid the public's perception 0fthe Turbo-67 and the conversion process..43 Indeed, Carmichael belie~red that,-.with .UTC as a distributor, Irmovair "had it made." 4~ C-arm$.'chael,. however, was wrong.

,u Ibid. Gunlde further remarked that "thegreatest negative impact would be. with those entities with the least established market position and the least developed structure of trained employees, production facilities and management staffing systems." Innovair had virtually no employees and itsprimary asset was the TLA. 42 See Deposition of Robert Clark, June 22, 2007, pp. 64-68. See also Stone Deposition, pp. 58-9: 43 See, for example: Carmichael Deposition, May 30, 1997, page 151; Carmichael Deposition, 11/16/05, p. 209.

4~ Carmichael Deposition, 11/16/05, p. 209.

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38. Four months after the FAA awardedthe STC to Basler, UTC entered into a Purchase A~greement with.innovair, BTC and BFS.45 In addition to the purchase Of an-aircraft, the Purchase Agreement awarded UTC exclusive International Marketing Rights" for over 25 countrie~46 as well as the ability to obtain certain ¯ offset credits w.ith foreign governments, obtaining the~e offsetcredits was valuable for UTC and was the primary reason it wished to obtain the distribution rights to the aircraft.47

39. An Offset credit is generated-b3; a saleto a foreign government and ~bliga.tes the ¯ seller to.buy goods and services in tfiat foreign country or,. failing that, to refund a portion of~he purchaseprice.48 UTC Was especially ifiterested in se~ing offset credits in Tai.wan, ~md vie~ved the conversioi~ project:as a method of.using ~em.49

40: In July ¯1991, approximately a year after entering into the Purchase Agredment', Irmovairand UTC entered into a Distributo~ Agreement. The Distributor ¯ Agreemenl~ made UTC the exclusive distributor for the sale of product in the

45 Executed Purchase Agreement, July 13, 1990. (Carmichael Exhibit 10.) 46 These countries are listed on Exhibit C to the Distribtitor Agreement. Several bfthe countries, however, were subject to significant restrictions under the ExpgrtAdministration Regulations. (IAL- Cobb005737.) 47 Deposition of Herbert Hayes, November 12, 1997, p. 70. 4s The buying country requires the selling firm to make purchases from the buying nation, which- may include pu~c .l~ses, marketing assistance, investments, or technology transfers. The selling 15xm provides the offsets to the. government iri exchange for the government having purchased the product from a foreign source. See Robert L. Waller, ;'The Use of Offsets in Foreign Military Sales," Acquisition Quarterly Review, Summer 2003, pp.225-32. http://72.14.253, lO.41search?q=cache:dlNgY6eYE7kJ:www.dau.millpubs/arql2OO3arqlsummer2OO31Waller SM03.pdf+%2Boffset+credit%2B foreign+sales&hl=en&ct=clnk&cd=3 &gl=us

49 CarmichaelDepositio.n, 11/15/05, pp..74-6.

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specified countries,s° Cazmi~hael believed that once the Distributoi: Agreement with UTC was signed, "we [Innovair] had it made. We did not need anybody to assist us with raising funds ..... had a deal with exactly the .tyEe oJ~ distributor We we wanted.''51

41. Rather hhan assuring Irmovair's success, the responses to a~tivifie~ by UTC after it had entered into the Distributor Agreement demonstrate the problem~ Innovaff. would haveconfrontedin operating under the TLA. First, the Di.stributor ' ¯ Agreement Clearly demonstrates the limitations Innovairfaced in the manufacture and sale of the Turbo-67. The Distributor.Agreement.acknowledges the TLA does not cover needed additional technologies by requiring Irmovairto?~p~o~de -~imely information" to UTC concerning its schedule for obtaining specific. STCse6ntrolled by BFS and problems encountered in aehievi.n,g this schedule. The Agreement further states that if the "seller [Innovair] is-unableto obtain the foregoing STCs in a timely manner, it agrees t9 allow¯Distributor to Obtain the options from Basler Flight Services." The Dis.tributor.Agreement spe~ificaJiy. mentioned:¯ ¯ ¯ ¯ ¯ ¯ "cargo floor inciuding 6 Brownline tracks and Winch!LD3 con~tiner configuration; metal.control surfaces; long range outer wing modification for. 400 gallon and 800 gallon tanl~. configurations, including-vendor manufactured tanks; wing and empennage de-icer boots; and passenger stair door." 52

so Under the Distributor Agreement UTC contracted to purchase a minimum of five kits per year. IfUTC failed to btiy this minimum number, Irmovair could cancelthe agreement. Basler was not a party to the ¯ Dislributor Agreement. s~ Carmichael Deposition, 11/16/05, p. 209

~ Distributor Agreement Article 5.17 (Carmichael Exhibit 22.) 21

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42. As previously noted, the extra fuel tanks and the metal control surfaces Were likely to be especially important to potential customerd. Se6ufing STCs for these technologies was likely to represent a significant undeflaking. UTC would, therefore, likely.have had little alternative but to secure these technologies-from . BTC.

43. I-hnde~stand the seizure and subsequent taking of the TLA was.not meant to preclude Turbo-67 sales in the territory assigned to Irmov~r under the TLA. Rather, the se.izure and subsequent taking was an act by the go.vemment ~o. assure that no one benefited from revenues generated by the..drug trade.53. The TLA, . howev~, was not involved in criminal activity. -In such cases, th4 government permits the re.levant asset to remain in the possession of the0wner, if the owner is willing to post a bond of an equivalent amount..~4 By allowing such a bond to be posted, .the Government does not limit commerce, but rathei: receives assurance-

..therelevant asset is backed by funds unrelatedto crimhaal"a~tivity.

44. UTC, therefore, w~ free to explore with Innovmr or others the possibility of pasting the necessary bond. Moreover, it is not even clear that the seizure of the TLA prevented UTC from proceeding as a distributor of the Turbo-67. The July 13, 1990 Purchase Agreement with UTC was signed not only by Irmovair, but
53 Innovair had paid its obligations for the TLA fi:om the proceeds of a sale to a Colombian airline. The government subsequently determined that the Colombian airline Was involved in the drag trade, and therefore, that Innovair had acquired the TLA with tainted funds.

54 See letter 0fReid t'ixler to Katherine Lunsford and Tim Atldnso.n, Septe.mber 9, 1991.

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also by BTC and BFS. This agreement granted UTC exclusive marketin~ fights " " related to the nverted atrcraft and other servxces related to the converted ~CO

air~raft?'55 Under this agreement, therefore, UTC would seem to continue to have ihose excltisive marketing rights iegardles~ of the seizure or the taking of the TLA. Indeed, UTC signed the Distributor Agreement with Innovair on J~ily 25, !991, which was more than a week after ~e TLA was seized.56.

,45. UTC decided not to proceed with the Turbo-67'progr~a because it failed to attract investors and customers. For ex. ample, Herb I-Iayes, a UTC consultant
actively involved in the program, was attempting to interest Asian Capital Pai'tners to invest in the program. In JuJy 1991, howev.er, Hayes informed Hok Yap of Asian. Capital Partners that three potential Taiwan in~est0rs had decided against investing in the conversion program having concluded "there was insufficient evidence of Turbo-67 marketability.'57 Asian Capital Partner, meanwhile, had substantial doubts about how the project was organized and even suggested that UTC and Innovair be combined.58

55 This phrase is included Section II(B) of the Purchase Agreement, which essentially descn'bes an International Business Transaction 0BT) to involve such sales in Iunovair's territory under ~e TLA. Section H(C) of the Purchase Agreement defines an International Marketing Representative to apply to the entity having any of the fights set forth for IBTs. Section HI(A) of the Purchase Agreement grants UTC exclusive IMR rights in countries named in an Appendix to the Agreement.. (Carmichael Exhibit 29.) 56 Apparently, UTC and Innovair had reached agreement on the issues a month before. See Men~orandum from Herb Hayes to Fred Johnson, June 27, 1991. This memorandum describes a number of action~ to be taken in support of UTC's efforts. -5~ Fax ~om Herb Hayes to E.H. Yap; July 8, 1991. 58 "By combunng the companies the principals would only need to raise approxin~ately"one-half of the total amount currently being sourced by UTC and Iamovair." Asian Capital Partners w~s also concerned that investors in Innovair would feel that "distributors in other parts of Lhe world source [sie] could be disadvantaged in terms of scheduling by UTC." Memorandum from BenjaminWiley to Bryan Carmichael, Suly 8, 1991. "

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46. Subsequently, Young Brothers Development Company, an aviation company in Taiwan, i .nformed Herb Hayes they would not be interestedin investing in the Conversion program because "there is no interest for this aircraft .(both m~litary and commercial) nor have we been able to identify any potential inv.estors.''s9 .The Republic Of ChinaAir Force, which Hayes had identified as a potentially . interested ~ustomer, decided it had no immediateinterest in the aircraft.6° Young Brothers also declined an opportunity to promote the sale of the aircraft l~y remarking-, "we have a belief that we should not take on any job whieh.w~, have no cor~fidenee of succeeding.''6~"

47~ These specific, examples are consistent with the overvibw 0fthe program provided by auTc executive. Ray Stone, an attorney with UTC, pointed ~o.a timber of difficulties from UTC's perspective. Most notably,hestates flaat investors "did not have confidence that the market.projecti0ns wei:e sound and could be relied on with a sufficient degree of c0nfidence.''62 This lackof success came despite the fact that UTC put "substantial efforts" into the projeei,a3 There ¯ was no specific date by which UTC decided to abandon the project.64 UTC, :

59 See Memorandum fi'om Lorin Young to Herb Hayes, October 8, 1991.¯ 60 Letter Of Lin Wen-Li of Republic of China Air Force to Lyman Marshal of UTC, September 10, 1991. Also see Stone Deposition, p. 31. 6~ Memorandum from Lorin Young. op.cit. 62 See stone Deposition, p.22. He also notes the adverse effects of the uncertain economic clin~te at the time. 63.op.cit, p. 23.

~ op.cit, p. 25. 24

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however, did have communications with BTC about the conversion proje.ct as late as July 1992.65

48. IfUTC perceived that there was potential profit in converting aircraft in Taiwan, it would have had ample opportunity to attempt to obtain the necessary. authorization to perform conversions in Talwan. It is inconceivable that UTC, which had invested substantial tim~, manpower~ and resources in pur~.uing a ~onversion strategy,.would have been stopped dead in its tracks because of a government action aimed at receiving collateral for an asse(, tn fac( UTC ultimately did not pursue the conversion project because.it perceived-it would not be successful.

49.. Carmichael pointed to UTC's size and acceptance in claiming the Iuno9air ~.'had it made" afteri~e Distributor Agreement was signed.66 Despite these attributes,- " '.UTC felt it could not make a success of the venture. Indeed, .UTC's-decision to -abandon its efforts demonstrates the limited value of the TLA at ~e time 6f the ~.aking. :

~s Tom Weigt wrote, .ve spoken w~th Fred [Johnson] about a joint project hi lieu of.the D~-3 which would allow United Technologies to. achieve their offset objective.s perhaps at a higher.level thanwith the DC-3. Letter by Tom Weigt to Donald Miller, July 7, 1992.

¯ Camuchael Deposlt~on, 11/15/05, p. I01 25

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V. " VALUING THE TLA 50. The TLA had three essential features: 1) It granted Irmovair the technologyunderlying STC 4840, 2) It gave Inn0vair the.exclusive fights to sell the aircraft Outside the United Statesto purchasersnot receiving.U.S, government financing, and 3) It grmated Ilmovair the fight to purchase products from Basler at "the full c..ost to Bas. ler 0fthe licensed product, including applicable general and administrative costs, plus .twenty percent (20%)." It did not, however, give hmbvair the right to the 0pfionaltechnol0gies ~ustomers sought.-¯

51.Ttie TLA, therefore, gave Innovair a unique set of rights with rdspect to a unique
:

¯ product. .This can make assigning a value to the license a challenging lmd.ertaking. Given the limited demand for theTurbo-67 and the incentives the TLA gave the licensee to work closely with the Basler Companies, however, only. tli~ Basler group would have been likely to have attached much value to it.

Difficulties With Several Approaches

52. An adset such as the TLA has value tothe extent that it can be expected to g6nerate a stream of after tax cash payments during its life.67 There are. a number. - of ways to value such a license. One approach wouldcompute the p~esent ValUe. bfthe cash flow the asset w6uld be likely to generate discounted by the

67. After tax cash flow will not necessarily equal profits, because of issues relating to depreciation and

amortization. 26

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appropriate cost of capital. Another approach involves analyzing contemporaneous information on the prices of comparable assets.third method A would estimate the replacement cost of the asset. .

53. The~e are problems with each approach. Arthur Cobb, an expert retained by the. plaintiff, estimates lost profits.6s Specifically, he-claims to be providing an estimate.of.the profits Innovair would have generated if.the TLA had nbt. been¯ ~eized?9 In a separate report,Mauri~e Whalen, an expert fo~ theDefendant, demonstrates the many deficiencies in Cobb's methodology, analysis and conclusions.7° (As discussed in the n~xt section, C~bb's estimate of value-is also Contradicted by contemporaneous evi~lence of the value the p~'tieshtta'ehed to the ¯ various companies involved in the production 0fthe Turbo-67.)

54~ .The .unique nature of the Turbo-67 and the TLA makes the use ofcash.flow anal~,sis extremely problematic:71 Cobb's approach is esPecially.troublesom~ . b~ause it ~eems to r.ely on the plaintiff's estimated co~ts and revenues. Innovair's estimates of revenues and.cos~, meanwhil~,.were.developed as partof an attempt by the plaintiffto attract investors and are not, by definition, objective.7:~ As a result Cobb's projections are not based on any recognizable
6s See Report of Arthur Cobb. . -. 69 -/kS Cobb acknowledged, he did not discount his lost profits to the date of the taking. See Deposition of Arthur Cobb, June 19, 2007, pp. 37-38. ¯ 70 See Opinions ofMaurice Whalen. 71 There is ample contemporaneous evidence to suggest that the forecasts 6fboth the Carmichael group and Cobb are wildly optimistic. The unrealistically high forecast of sales is just one reason Cobb's estimate of the TLA~s value is too high. .72 Even BTC's and Irmovair's bank felt that Carmichael's forecasts were overly optirnistie, calling thefi~

"unrealistic." (McCreery Deposition, pp. 52-53.) 27

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methodology. Moreover, they cannot be corroborated. For example, Cobb's estimate, ofinnovair's sales is. completely at odds with BTC:s actual, experience in - se!~ing the Turbo-67. Turbo-67 sales throughout the world since the STC was issued hav~ averaged about three aircraft a year.73 This is a far cry fi-om the 12.5 aircraft per year Cobb forecasts Innovair would .sell in a smaller geograptfic area ithrough.June i998.- It-iS also noteworthy that no suppliers haveentered the market to fillthe shortfall implied bY Cobb'sestimate.

55.I At the time of the taking of the TLA-and indeed in th.e subsequent 15 years few. attempfs had been made to modernize a 50-year old plane on a wide scale. Moreo~,er, the TLA provided only limited fights to produce and sell the. Turbo-67.
:-

. Not on13;" did the TLA limit p6tential purchasers, it dld no(include options -potential customers sought.74 In other words, the TLA involves a unlque p#oduct and offers an Unusual mixture, of rights..It would be extremely difficult, therefore, to base valuations on sales of comparable licenses.

56. A third approach, calcula.ting the cost of replicating itie STC 4840, the.technology that underlies the value of the TLA, is a more promising.ayenue for determining

its value. Thatreplacement cost, however, would overstate the value of the TLA. By obtaining a separate STC, Irmovair would not have faced restrictions .on time
7~ Carmichael had identified numerous parties that expressed interest in the Turbo-67. These included Air Aflantique, Tuikish AirForce, Zimex and a number of others. Despite their expressions of interest, few if any of these partie~eontinued discussionis with BTC after the taking. This is further evidence of the lack of demand for the aircraft. Warwick Report, pp. 27 to 29. Weigt Interview. .74 These technologies would likely have been expensive for a licensee to replicate. By charging a sufficiently high price for these complementary technologies, the Basler companies may have been able to reduce substantially any profits the licensee would have otherwise received from sales of the licensed product. This would further compound the difficulties in computing the value of the TLA.

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or territory, and a6cordingly, the cost of replacing STC 4840 overstates the value of the TLA.75 Nevertheless, replacing the STC would havelikely cost less than the $3.4 million it cost to create the original. It is gen.er~illy cheaper to ¯replicate a techn01ogy.than it is to create it. Using replacement cost, therefore, the TLA would have ~learly been worth less than $3.4 million.76

B..

Proper Valuation Methods -

57. Perhapsthe mostdirect evidence of the value of the TLA is.to consider: t-he ~:ransacti0ns that w.ere made and those that were nbt made involving the TLA around the time the license was seized. These actions by market participants and pb.t~ntial investors clearly demonstrate the TLA had little value forthem. Indeed, these actions conclusively show the Basler companiesto be the only interested party, and they would only need to pay a limited amount to secure k. The amount the Basle~s Would have had to pay for the TLA, therefore, determine its value.

58. Fii:st; consider the attempts by Irmovair to attract investors..AS just.noted, Carmichael sought investors in Innovair or some combination of Innovair and BTC..There are at least three documents prepared by Carmichael or by independent parties hired by Carmi.chael, whose aim was to raise funds:

75 On t/ae other hand, the TLA did limit competition from BTC. 76 This is based on a cost of $6.4 million for obtaining STC 4840.less $3.6 million in proceeds for the aircraft produced during the certification process. See Catmichael Deposition, 11/15/05~ pp. 59-60. See

also "5-Year Business Plan," p. 7. 29

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¯ ¯ ¯ Five-Year Business Plan 77 Deloitte and Touche-7-8 Warwick 79

The latest attempt by Carmichael to raise funds was in the hpring, of 1991 as the .relationship¯between Basler and Carmichael apparently spun out of control. ' These efforts failed to attract investors. Harry Easflick, who spea}he.aded the final effort, claimed to have stopped hi~ effolts to raise funds in July~ 1991.s° This was also around the time Irmovair signed the Distributor Agreement with UTC... Carmichael claimed its need for funds diminished after signing the Distli.b{itor ' Agreement.s~

60. ¯Given. Carmichael's faith in UTC, UTC's-parall.el attempts tb secure investors are ¯ noteworthy. As a Distributor and a pot .en.tial user of offset credits, UTC .~as very " interested in establishing a relationship with a e0nversion ~'aeility in TaJwan. 1517C sought investors in Air.Asia and consideretl making an investment in the. ¢ompanyitself. As previously noted~ however, UTC had abandoned the project by hhe middle of 1992 because of a lack of customer and investor interest. "

.77 Carmichael Extfibit 25. The 1990 Five Year Busines~ Plan was authored "to provide planning and financial data to prospective investors interested in taking an equity position in the companies." 78Carnfidhael Exhibit 13. Deloitte & Touche was asked "to provide a fair market value of the common effective. See letter from David Thompson to Bryan Carmichael, Januag¢" 22, would not be cost ¯shareholder equity of the companies." D&T, however, believed such a valuation1990. (Carmiehael Exhibit ¯

¯ 26.)Carmichael Exhibit 18. The warwick report was written "to inform interested paflies of the aircraft 79
conversion industry and how it relates to the business and the potential of Innovair Aviation Limited.'? 80 Easflick claimed the decision to stop seeking funds was made "some time in July [1997]." The TLA was seized in that month.. See Eastlick Deposition, p. 56.

8~ Carmichadl Deposition (I 1/15/07), p. 101.

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61. tt is als~ noteworthy that at the time the TLA was seized, Carmichael was
reluctant to p6st a substitute res bond of $1.375 million but instead offered only to collateralize tile TLA with an account receivable. The government refused the offer.82 Though Irmovair app~enfly..continued to negotiate with th.e government 6vet.the nextseveral montlis, Carmichael's failure totake decisive kction to obtain the TLA after it was seized flatly ~ontradicts his expressions of confidence. Clearl~ if the TLA was worth $36 million, as Cobb contends, Carmichael would haveb~en anxious.to preserve his investment by posting a bond of $1,375 .million.

6~. An appraisal performed at the request of the Baslers provides further evidence of {he:limited"valueofthe TLA at the time of the taking.. That appraisal estimated the value of Irmovair at $1.91 million, wiiich would represent a reasonable dstimate of the value of the TLA because it was essentially Inn~vair's only asset. Thi~ valuation assumed, however, 'Nlat the current contractual andfunctional business relationships between BFS, BTc, and -Innov~ir Aviation, Ltd.-wi.'ll be: maintained and thatthe current stockholders and managersof each of the entities .Wil! worktogether for the overall succes~ of the venture.''8s Given the failure of thelcamaichael-and Basler groups to work construdtively with one another, this-

valuation suggests the TLAwas worth far less than $1.91 million at the time of
the ~aking.

32 Letter from Katherine Lunsford to Reid Pixler, September 17, 1991. See Carmichael Deposition 11/17/05, pp. 371-372. Also see letter from Lunsford to Pixler, November 15 1991 and letter from Pixler to Ltmsford, January 8, 1992. 83 Gunkel Valuation.

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63. The lack of efforts by others to pursue similar conversion activities-provides further reason to believe the TLA had limited value. The technology underlying the TLA is.not esoteric, and it is not p~:ot.ected by a pat.ent or copyright. Mo.reover, a number ofpeople,.including'Carmichael, had Substantial knowledge of the. underlying technology and the procedures necessary to obtain an STC similar tb STC 4840. Iftherewere substantia~ oppoi-tUnities from reen~ing DC3s-the Basler e~mpanies were not exploiting, there would have been ample opportunity for others to enter the market. There liad,.after all, been other-firms prior to Bailer who had reengined DC-3s. USAC had done the one-off : ¯ conversion on which the Turbo-67 was based, and AM[ had obtained an ~TC for installing-a smaller turboprop engine On a DC-3.s4 Subseqtient to.the award of " STC 4840, however, no one has obtained a simil~ STC to. market a competitive product to the Turbo-67.s5

C.. The Value of the TLA to Basler

64: D~pite.the lack of interest by investors in the TLA, Basler did attach a positive value to it. Basler, in fact, did obtain the TLA by posting a substitute res b~nd. (In settlement of the litigation in Wisconsin between Basler and Carmichael, Carmichael received the right to recover - and ultimately did recover - the

84 Greenwich considered updating the AMI technology in the early 1990s, but elected not to proceed. See Clark Deposition, 6/22/07, pp. 132- 137. 85 Whil~ seeking funds to support its efforts to install turboprops on DC-3S Carmiehael suggested the conversion idea could be used on other aircraft and explicitly noted the Caribou, C-130, C-123 and the ¯ Albatross as possible candidates. Warwick Consulting Group, p. 32. It ~ noteworthy that no one has apparently successfully marketed such a conversion.

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amount that Basler had posted, $1.375 million.) The TLA was valuable to the
Basler companies because it gave them the rights to sell the Turbo-67 throughout .the Wo~ld. This enabled Basler.to use its existing resources 2_ including per~omael, facilities, equipment and parts inventory- more efficiently: Moreover, u.n!ike ¯ otliers, Basler did not have to be concerned with securing the fights to " complemeritary technologies when using the TLA, and'it did not have to be ~oncemed.with the potential demands ~n its personnel and resourcesfrom another

entity

65. At the ~nae of the seizure, -Irmovair had little prospec~ of using the TLA to run a
¯ pro. fitable.operafion. .It did not have the rights to the necessai'y complementary tectmologies,its relati0nship~ with the Basler companies wrre badly .frayed, and UTCI its only distributor, was having difficulties find'.mg bo.th customers and investors. Indeed, the ¯only value Imaovair ~oultt have realized, from the TLA was its sale to BTC. or BFS. -The value of a good or service is detdrmined by a~ interaction between buyers and sellers. A market would establish a price to allocate the available s.upply among potential¯ purcha2s.ers. Price rations supply,¯ because, as price goes up, the amount of a good or service consumers want to buy declines, if the item to be sold is a one of a kind license, such as the TLA, a bidder for the license .would only need to pay slightly more than the person or entity who attaches the next highestvalue to it. Because no one other than Basler would attach much value to the license, the price established for the license would be quite low.

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LBCG
66. Because Basler was the only entity that would attach a non-trivial value to the TLA, it would certainly be inappropriate to assign a value to the TLA that exceeded the amount Basler could pay for it. At the time the TLA was seized, the Basler companies were not in very strong.financial shape,ss.Ther, e islittle reason, therefore, to believe the TLA was worth much more than the amount.BT.C posted for the substitute res bond. :

VI.

-CONCLUSION

67. The primary reason an entrepreneur commits time and money to establish a business is to generate financial profits. Behind most new businesses, therefore, ¯ is some one with a compelling rsason to believe the venture will succeed. Many, ¯ if ~aot, most new businesses; however,¯ fail. These failuresresult from inaccurate forecasts of demand and/or cost& But even successful start-ups have difficulty forecasting demand.87 A claim for damages should not be based on a speculative fo~edast, which c~mot be authenticated. This is essen.fial[y the approach tak..en by flie p!aintif-Fs expert. .

s6 See, for example, Basler Turbo Conversions, Inc. Financial Statements and Report: December 31,¯1990 and.1989, Report of Independent Accountants, prepared by Price Waterho.use, September 4, 199l,-p. 2.; McCreery Deposition, 1/20/198, p. 25-6, 53. ¯ 37 Barbara Beyer, an expert for the plaintiffs essentially conceded this. She argued thatthere was demand for the Turbo-67, because there were forecasts of positive growth of regional p~senger c. arriers. She admits, however, such demand has little to do with the demand for the Turbo-67.- See Report of Barbara Beyer, .May 1, 2007, and Deposition ofBarbar, a Beyer, June 26, 2007, pp. 18-20.

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68. In this repoi-t, I have developed an analytical frameworkto explain why ~e TLA had only a iimited.value and offer contemporaneous evidence to support that conclusion. Two factors limited the TLA's value. First, demand for the aircraft proved t~ be tepid. But even if demand were sufficient to support Irmovair, ihe prbvisions 9f the TLA would have made it very difficult for. Irmovair to profit from it. Irmovair needed the Basler companies to provide the know-how to manufacture the aircraft and the licenses to provide necessary op.tions. Litigation between the parties made any such cooperation virtually impossible anal would ¢e~inly have reducedthe valueof the TLA to Irmovair as well as to any. independent party.

69. Evidence around the time of the supports a conclusion flaat the TLA had only . limited value. Carmichaelseemed to have had no success lining up investors. Indeed, the Carmichael group was reluctant to regaintheTLA by po.sting a $1.375 millionbond. UTC, who ~igned a distributor agreement with Iamo;cair,
o

¯ ~ould not attract investor