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IV.

INNOVAIR'S BUSINESS STRATEGY ENTAILED SIGNIFICANT RISK

lnnovair's business plan, which entailed the sale of kits rather than completing an aircraft, bifurcated the process of delivering a completed aircraft to a customer between two organizations. Innovair would provide the kit to the conversion center and ensure quality control. A conversion center would physically undertake the three fundamental elements of the conversion process, interface with the customer, price the end product, and provide on-going parts, service and support fuq.,ctions. The process in moving from a DC-3 to a completed BT-67 aircraft requires three fundamental steps:

The first step is maintenance and restoration of the basic airframe, which entails bringing the airframe to "zero time" condition. In this process, the aimraft is fundamentally disassembled to the bare airframe. Any corrosion, cracks, or other maintenance issues are resolved, and the aircraft is restored to "zero time" condition. A maintenance facility familiar with DC-3 maintenance will be more efficient than a shop lacking experience on that aircraft type. The second step is the installation of the basic conversion kit, plus any conversion options specified by the customer. The basic STC, SA4.840NM, entails the installation of new Pratt & Whitney Canada PT-6A'(~7R~turboprop engines with Hartzell HC-B5MA-3/M11276 propellers, modified fuel system, revised electrical system, and forward fuselage extension. During this step, any options desired by a customer would also be installed, including SA2-438 long-range fuel tanks, SA996GL aluminum skin on control surfaces (replacing fabric), SA1253GL auxiliary cargo door, SA1756GL cargo winch ~ystem, SA1734GL Freon air conditioning, ST8CH supplemental oxygen and other options subject to Supplemental Type Certificates. The third step is the comple.~on and customization of the interior of the aircraft to a customer's specification, including the installation of seats, or weaponry, or other equipmenL These installations are typically performed on a field approval basis, and the modifications recorded in the logbook with an FAA Form 337 describing any modifications to the aircraft. A facility with experience as an aircraft =completion center' would be most efficient in this process. Each of these steps is necessary to deliver an aircraft that meets a customer's needs. Each of these steps requires specific skills and regulatory approvals, including being an FAA Approved Maintenance Facility and having the appropriate FAA Designated Representatives to sign off on modifications. While military customers do not require certified modifications, most modification centers utilize certified designs or equivalent engineering analyses to avoid legal liability in the event of an accident.

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Innovair's kit business is akin to a franchised operation. Innovair would effectively =franchise" the rights to install the base level BT-67 conversion kit to an international maintenance facility. That facility would be responsible for maintenance and rehabilitation of the subject airframe, installation of the kit, installation and regulatory approval of any options (including Basler owned STC options and arrangements for their use), installation of the interior =completion" to customer specification, and after-sale service and support. Innovair, acting in the role of franchisor, would be responsible for selling the parts for the basic conversion as a kit, and maintaining an overall level of quality control by monitoring the activities of its conversion centers.
There are several reasons such a franchised model would be difficult to implement in the aviation sector: First, it would be difficult for innovair to sell an aircraft to an end customer when it lacks the ability toset the price. Prices for the initial maintenance (which varies by condition of the aircraft) and the interior completion (which it has norolein providing) would need to be provided by the conversion center. Customers are interested in purchasing aircraft, rather than kits. As a result, Innovair would need to sell aircraft jointly with or through its conversion centers,, rather than directly market thereto end customers. Most maintenance centers, however, are not experienced in ¯aircraft sales, tnnovair would either need to closely coordinate with its conversion centers in marketing, or train its affiliates in the aircraft marketing and sales process. ¯ Second, Innovair did not have the rights to provide the optional equipment that was selected by most international purchasers of the BT-67. Without access to the STCs for optional equipment, Innovair would either need to invest significantly to develop those STCs, or to arrange for optional equipment to be installed on a field approval basis, .wh~ich requires considerable additional regulatory and administrative burdens and cost. ¯ Third, innovair was not in a position to develop~customized interior designs forits customers. Providing design and estimates for intedor completions for aircraft has often been called as much an art as a science. Without the ability to estimate and quote the cost for a finished aircraft, marketing such an aircraft would be a difficult task. Innovair would need to closely coordinate with its =effective franchisees" to accurately determine the cost, and price, for completing the interior of an aircraft. Fourth, lnnovair planned to establish several international completion centers in a market that lacked the volume for one. There are significant learning curves associated with =zero-timing" DC-3 airframes and learning the subtle nuances of the type. There is also a significant learning curve in installing the. basic BT-67 conversion kit and the popular long-range fuel tank

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option. There are also learning curves associated With developing interior completions for the BT-67. With significant learning curves and a relatively small potential market for the BT-67, it is doubtful whether multiple facilities would ever achieve steady state productivity, cost levels, and associated profitability. Combined with Innovair's plan to have conversion centers carry spares inventory and handle service and support, the investment in becoming a conversion center may not be financially warranted in a small market with multiple participants. As a result, Innovair's strategy to sell kits, rather than aircraft, was fatally flawed. To be successful, Innovair would have required significant market penetration to succeed. The reality of the market is that commercial operators had no compelling reason to undertake the conversion, leaving .the small special purpose and military niche as the only set of potential customers. Those customers did not generate adequate demand to support international conversion centers, and the Innovair program would have proven to be not economically viable. United Technologies Corporation (UTC) expended considerable effort and financial resources in an attempt to find a partner to invest in the program in Taiwan. It was urisuccessful in finding an investor, as well as unsuccessful in finding a single customer for the BT-67, reflecting the difficulties outlined above. "

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V.

CRITIQUE OF OTHER EXPERT REPORTS

! reviewed two expert reports that were submitted on behalf of the plaintiff in this case by Barbara Beyer and Arthur Cobb. Each of these reports mischar&cterizes the market and is based on an incorrect assumption regarding the competitiveness of the BT-67 aircraft. Neither report examines the mission requirements of potential customers in assessing the pbtential market for the BT67, and each fails to recognize the shortcomings of the aircraft and those characteristics that preclude demand from regional airlines, package express carriers, and commercial cargo carriers and limit the marketability of the aircraft to a small niche market. Inappropriate methodologies, combined with incorrect assumptions, lead to erroneous conclusions regarding the potential market for the BT-67.
Beyer concludes that the BT-67 would achieve "reasonable sales'a9 and a "reasonable share of the market"a°, but does not define reasonable, nor provide an estimate of what reasonable sales would have been. Her analysis is fundamentally flawed through both methodological errors and incorrect assumptions that lead to faulty conclusions.

She uses data from the United States to infer similar characteristics. to the international markets relevant to this case, which behave differently and have different market characteristics. The markets in China, and sub-Saharan AfriCa, and other regions differ markedly from the market in the United States. While the United States is the largest market for regional aircraft in the world, it differs in economics, demand patterns, regulatory characteristics and technological infrastructure from other. markets. She uses data from the passenger sector to project demand for cargo, military and special mission aircraft, which serve different markets with different economics and decision drivers. She cites the lack of consistent data for other markets as a factor in utilizing the commercial airline market in the United States as a surrogate for the rest of the world..In reality, however, the decision process leading a customer to purchase a turboprop aircraft in tiie United States is quite different than that for a customer purchasing a geophysical sUrvey aircraft with skis to fly to Antarctica, or for cloud seeding ope.rations in Thailand. Such operations have no relationship to the market for commercial passenger regional turboprop aircraft in the United States. As a result, her methodology leads to an incorrect conclusion regarding the marketplace.
She incorrectly assumes that the BT-67 is competitive and would compete successfully with contemporary turboprops being sold during the 1991-1998 period. In her deposition, Ms. Beyer indicates that she did no research on the competitiveness of the BT-67 with other contemporary turboprops, making an assumption regarding
29 Beyer report, page 24 ~o Beyer report, page 24

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competitiveness.31 The BT-67 was not competitive for regional airline, package express, and general cargo operations, and was an effective competitor only in special mission and military markets. Beyer cites the Shorts 360 as the most comparable aircraft ~o the BT-67, and cites the cessation of production of.the Shorts 360 as a potential positive for the BT-67a2. This conclusion is illogical, because the Shorts 360 was taken out of production because there were no additional orders forthcoming for the aircraft. If the market has moved away from an aircraft with the characteristics most similar to the BT-67, the market would logically also likely move away from the BT-67 itself. These flaws lead to an incorrect conclusion that the BT-67 would have achieved "reasonable" sales and a "reasonable" share of the market. Cobb also utilizes flawed logic in his assessment of the potential market for the BT-67. He indicates that "introductions and deliveries of competitive aircraft into civilian and military markets indicate the ability to enter the market and generate sales"a3, which is incorrect. The fact that deliveries of other aircraft into a market exist simply indicates that a potential market exists. The ability to generate sales in that market depends on the competitiveness and °relative characteristics of a product, its reputation, the company standing behind the product, the quality of its marketing and sales efforts, and other factors. For an aircraft to successfully penetrate a market, it must be competitive, and for.most commercial operations the BT-67 could not compete effectively.
¯ Cobb further assumes that "the Turbo-67 was competitive based on speed, range, capacity, performance, and ptice."~ On a mission-by-

mission basis, the BT-67 is not competitive in regional.airline, package express, or general cargo use, which dramatically reduces the potential market for the aircraft. Mr. Cobb fails to consider the negative characteristics of the aircraft, including lack of pressurization, conventional landing gear, airframe age, and other factors that unfavorably impact its competitiveness. As a result, he grossly overstates the potential market during the relevant period in his analysis. Cobb cites the Shorts 360 as the most comparab!eaircraft to the BT-67. Demand for the Shorts 360, however, had waned by the late 1980s and production of the aircraft ceased in 1991, at the beginning of the relevant period. Production ceased due to a lack of demand for a non-pressurized regional aircraft of its size from passenger and cargo carders. If the market has moved away from an aircraft with the characteristics most similar to the BT-67, the market will also likely move away from the BT~7 itself.
Cobb incorrectly concludes that lnnovair "~/as poised to successfu!ly

Bcycr deposition taken 26~ June 2007, page 27 lines 2-7

Bcycr report, page 24
Cobb report, page 37 Cobb report, page 37

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enter the market"~5 and that it had "established the foundation of a distribution network with United Technologies."~6 While Cobb notes that United Technologies devoted significant resources to marketing the DC-3/C47 conversion, undertook marketing and sales efforts and was attempting to arrange for conversions tobe performed in Taiwan, he failed to mention that UTC achieved no positive results. Despite its efforts, which included a team of retired executives and the purchase of a demonstrator aircraft, UTC was unable to generate a single customer order for a conversion kit or aircraft. UTC was also unable to obtain an investment from third parties to participate in the conversion program. He also fails to mention that UTC had ordered a kit from Innovair, and that Innovair was unable to deliver that kit to UTC. As a result, UTC concluded that the program would be unsuccessful and withdrew from its distribution agreement under non-performance provisions of that contract.37
Cobb inco~, ectly mentions more than 2,500 Lisunov Li-2 aircraft built in the former Soviet Union are potential airframes for the BT-67 conversion,s8 The LI-~2 aircraft built in the Soviet Union had numerous differences in detail from the U.S. version. Those airframes are not subject to conversion under the STC and thereby are incorrectly identified as candidate airframes. Cobb indicates that the "short-field take-off and landing characteristics ahd conventional landing gear of the DC-3/C-47were advantageous. " 99 The DC-3 was the last transport aircraft to incorporate that conventional landing gear technology, which is now considered obsolete. Modem short take-off and landing(STOL) aircraft utilize the tricycle landing gear configuration that is the industry standard today with equal or better performance than the DC-3 on short and unimproved fields. Conventional landing gear, or =taildragger" aircraft are more difficult to land, are subjectto potential "ground 10op" accidents that cannot occur with tricycle gear aircraft, and result in an aircraft sitting at an angle that makes it more difficultto load. He fails to acknowledge that conventional landing gear are an obsolete configuration, and commonly viewed as less safe than the tricycle gear configu, ration in common use today. Cobb misleadingly indicates.that Basler generated intemationaf sales Of at least 26 Turbo-67 aircraft, implying that such sales would have been available to, Innovair. That total included Foreign Military Sales contracts that were considered domestic sales under the TLA and would not have been in Innovair's territory: The correct number between 1991 and 1998 in Innovair's territory is 16 BT-67 aircraft4°.
~s Cobb report, page 3 36 Cobb Icport, page 3 3'~ Interview with Fred Johnson, former UTC employee

3s Cobb r~Vort, page 16

39 Cobb r~ort, page 41 4o An additional 17~h aircraf~ was delivered to r~plac~ an aircraft lost in a crash.

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Cobb also indicates a potential for three other conversion programs using the "technology" from the BT-67 program41. Each of the other three conversion programs has been attempted in the marketplace, and each has failed, illustrating the risk of programs to re-engine older aircraft unless they have unique characteristics that remain in demand in the marketplace. The potential market for converting the deHavilland Caribou, Fairchild C-123, and Grumman Albatross was quite limited.. Each of these aircraft had significantly fewer aircraft built than the DC-3/C-47, and appealed to a very narrow market niche. As a result, the potential for a conversion program .with adequate volume for profitability is speculative, at best. A program for turboprop re-engining of the deHavilland Caribou has not yet generated a customer, and appears to be in difficulty. Penn Turbo Aviation has recently certified a re-engining program for the deHaviiland Caribou with the Pratt & Whitney Canada PT-6-67T engines, but has not .~ found any demand for.the converted aircraft. Only the prototype aircraft used for flight test has been completed. A second aircraft is in the conversion process, but.is being converted without a customer order and is currently available for sale. To date, no market demand has been found for this conversion program. Cobb has no evidence that such a program would have succeeded in the 1990s. ,
,0

A program for turboprop re-engining of the Fairchild C-123 failed. Monarco Aircraft attempted a re-engining for the C-123 with Allison T-56-A7 turboprops in 1980 by on behalf of the Royal Thai Government42. During that process, the company discovered that several systems needed upgrading. The resulting aircraft had new wet wing fuel tanks, a new de-icing system, a new APU, resulting in a price that made it economically infeasible.for the Thai government to continue. The project was dissolved after the prototype was completed. Fifteen years later, even with modem engine technology,. improvements to the aircraft systems would have resulted in a conversion that would be.quite expensive, thereby limiting its market success: A program for turboprop re-engining of the Grumman Albatross failed. In 1970, Conroy Aircraft converted an HU-16 military version of the Grumman Albatross with Roils. Royce Dart turboprops4z. The company attempted to market the aircraft and found no demand: As a result, only the single prototype aircraft was converted and the program was abandonecl. While newer technology engines would have been available in the 1990s, the population of candidate airframes was rapidly shrinking. As a seaplane, the " Albatross was subject to corrosion if operated in salt water. As a result, there is ahigh probability that significant airframe maintenance expense would be required, and that the resulting cost of that maintenance would negatively
Cobb r~port, page 5
Jancs All the Worlds Aircraft, various editions, Janes All the Worlds Aircraft, various editions

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impact the economics of a conversion program. Cobb cites that 184 Fairchild C-123 aircraft "were converted to jet power between 1966 and 1969'~, and his wording implies that the existing piston engines were replaced. That conversion was not a re-engining, but an installation of small jet engines to augment the existing piston engines for supplemental thrust to improve take-off performance45.

Cobb relies on a United Technologies estimate of sales potential that was developed prior to their receipt of the Avmark Asia report. The report by Avmark Asia examined the potential market in Asia on a country-bycountry basis and was quite negative. When compared, on a country-bycountry basis with the 129 potential sales cited by a prior United Technologies estimate, the later Avmark Asia report was more negative. Mr. Cobb fails to take into consideration the more negative market' assessment that was available to UTC in early 1991 that contradicts and would have resulted in a lower estimate of sales than the projections of market potential he relied upon.
Mr. Cobb's forecast of 50-90-130 unit sales is unrealistic and speculative, failing to consider a number of facts:

¯

The BT-67 was NOT competitive for airline, package express, or general cargo service and Was well suited only to limited special mission and military applications. ¯ Innovair lackedthe rights for STCs to produce the entire Turbo-67 described in its marketing brochures'~.. Mr. Cobb cites that "lnnovair expected to offer optional equipment for spec'~ic operating functions, including, for example, enlarged cargo doors and oxygen systems"~7 but fails tocite that they. did not have the regulatory authority to deliver them. ¯ United Technologies spent considerable time and expense in marketing the aircraft,, including a demonstrator aircraft, and failed to sell a single kit, a single converted aircraft, or even convince an investor to participate in the conversion program. The failure of UTC to find customers in its large market shows.that the potential was very limited for BT-67 sales. ¯ Basler, with an established program, strong DC-3 refurbishment expertise and completion capabilities, and an active marketing program with international agents, could not capture mbre than 16 sales in Innovair's territory during the 1991-1998 pedod.

4~ Cobb report, page 5 45 Jancs All the Worlds Aircraft, various editions. The C-123, originally designed as a glider, is the only aircraft in th¢

world toWeight dcposilion taken 16 July 1997, page 70, line 14 and jet engines during its lifcspan. 4s Tom haw no power, and operate with piston, tattoo, prop
47 Cobb report, page 47

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VI.

BACKGROUND AND QUALIFICATIONS

I, Ernest Stephen Arvai, am President and CEO of The Arvai Group, Inc., the company I founded in 1991. I have more than 32 years of management and consulting experience and have counseled senior executives internationally on a variety of issues. I specialize in strategic and operational issues in the airline and aviation industries. I have been engaged by counsel for the defendant in this matter to provide consulting services relative to the market for the BT-67 aircraft and other aviation issues, including a review of the reports submitted by Cobb & Associates, Ltd. (the "Cobb Report") and Avmark, Inc. (the "Beyer Report") and to present my findings and conclusions in this report and in testimony. My billing rate on this engagement has been $350 per hour. The preliminary opinions presented in this report are based upon my analyses of documents and other information made available to date. My engagement is on-going and these preliminary opinions are subject to refinement and revision if additional information becomes available for my consideration. I also reserve the right to prepare demonstrative charts and other graphic materials as directed by defendant's counsel for presentation at trial. I have significant experien .ce in working with aircraft manufacturers, airlines, suppliers and operators on a wide variety of issues, including business strategy, market and market research, financial and valuation and operational issues. I have been widely recognized as an aviation industry expert. I have frequently been called on for expert testimony focused on industry economics and markets and providing expert assistance in calculating economic damages. ' Examples of recent consulting assignments I conducted include: Aviation Related Business Strategy For a major European manufacturer of commercial aircraft, I directed a study to evaluate the feasibility of innovative "bundled maintenance" contracts with the sale of new aircraft. In that process, I designed processes and procedures for the excl~ange and overhaul of line replaceable units with odgin, al equipment manufacturers, and the design of an Intemet-based application to manage and administer these maintenance processes. That study included field interviews with key airlines and suppliers worldwide. For a major manufacturer of aircraft engine accessory components, I .completed a review of the aviation aftermarket and facilitated a strategic planning session for the organization to guide their activities through a rapidly changing environment. That study included interViews with airline

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maintenance customers in Europe, Asia and North America and resulted in a substantial change in their approach to the international marketplace. For a major global distribution system, I directed a strategic planning study to evaluate market entry into the emerging Internet travel portal market more than a decade ago. My recommendations to aggressively pursue this segment were followed, and his client remains the market leader as the booking engine source for most major Internet travel portals.

For a major manufacturer of commercial aircraft, I provided an economic assessment template to assist the company in sales campaigns with major airlines, taking into account several factors in the airline fleet planning decision process that were previously not considered by the manufacturer. The first test of the new methodology resulted in an order for more than 100 jet aircraft. Aircraft Operations and Maintenance
For a service company offering specialized maintenance information products for corporate aircraft, I directed a strategy study that resulted in -the development of new products, including a ."virtual logbook" enhancement to their product line. This new product provides an easy to use on-line mechanism to ensure that maintenance requirements are complied with through scanned logbook records. That new product has been successfully implemented. For a US govemment agency with a major air operation, I directed a study to review and evaluate maintenance and ~;afety procedures and improve maintenance activities at the agency's hangar facilities. That review resulted in a redesign of maintenance processes and a realignment of activities inthe hangar, including line maintenance shops. After successful implementation, dispatch reliability for the operation improved, with lower overall maintenance costs.

For a Part 135 charter operator, I directed a due diligence review of the company's operations, including flight operations, initial and recurrent training, flight planning and dispatch, maintenance operations and regulatory compliance. My recommendations for improvement were implemented prior to acquisition of the company.
Due Diligence of Maintenance Facility Acquisition - For a potential investor, I directed a due diligence study of an aircraft maintenance facility that was for sale after a bankruptcy. My team investigated the physical facility, capabilities of the maintenance staff, market for maintenance services and "gaps" which would need to be filled, to bring the facility to

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profitable status. After presenting our findings, our client produced an appropriate bid.

For a new entrant contemplating a re-engining program for a popular business jet, I assessed the market and estimated the fair market value of a Supplemental Type Certificate for such an aircraft conversion program should such a certificate be obtained., For a company in the aircraft spare parts business, I assisted in developing the business plan, obtai..ni.ng funding, and establishing information technology and other-processes. That company acquired more than $400 million ~n surplus spare parts from a major airline and successfully entered the spare parts market. Airline Studies Airline Due-Diligence Review: For the Alaska Industrial DeveloPment and Export Authority, I directed a review of Mark Air, which had recently emerged from Chapter 11 Bankruptcy, with respect to a potential Employee Stock Option Plan. That study outlined the financial and market risks associated with Mark Air, and the Blue Ribbon Commission appointed by the Governor of Alaska accepted the recommendation not to move forward with the proposed loan. Airline Financial Review: For the State of Minnesota, I directed a study of the financial condition of Northwest Airlines in conjunction with State financial support for the construction of two maintenance facilities in northern Minnesota. That study, which isa public document, outlined clearly the financial risks and position of Northwest and provided the first public disclosure of the holding company financial statements after the leveraged buy-out.
Airline Safety Audit: For an independent third party, my team conducted an independent safety audit of a major airline following their entry into Chapter 11 bankruptcy. That review concluded that the airlines ope .rations were in compliance with FAA Part 121 requirements, and provided comfort to our client that their: p~rsonnel,were not subject to undue risk as passengers. -

For a major Middle Eastern airline, I directed a strategy ~tudy to reposition the aircraft in. a changing economic environment. That study resulted in a major directional shift, re-organization of flight schedules and frequencies, and a financial turnaround of the carrier that returned it to profitability.

¯ For a major regionarair carder, I directed an evaluation of airport real estate and provided an expert report to assist the carrier in negotiations

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with the airport authority. That study evaluated considerations such as ramp access and taxiway strength to determine the relative suitability of the facility to alternative operations, and establish a fair market value for the facility based on its highest and best use. For several new entrants, I have evaluated business plans for airline and air-taxi operations, and assisted clients in refining their business models to improve their competitive positioning in a difficult market segment.

Aircraft and Component Manufacturers For a major manufacturer of regional aircraft, I directed a study to determine the feasibility and market potential for the sale of their commercial aircraft models into the corporate marketplace, With a focus on corporate shuttles and sports team transportation. This study resulted in a successful new marketing effort. For a.major manufacturer of regional aircraft, I conducteddue diligence with respect to the acquisition of another manufacturer of regional aircraft, focusing on the market for turboprop transports in the 20-40 seat range. That review led to the cessation of production of an aircraft model after acquisition due to the. lack of potential market demand for aircraft with those characteristics. For a major supplier of aircraft components, I directed several Studies involving potential acqeisitions of companies with market synergy and the creation of an Aerospace division. That division was successfully created after several acquisitions and the company has increased its market presence in aviation. ¯ For a major manufacturer of general aviation aircraft, I assisted the company in obtaining additional financing for the introduction of a new aircraft. Finance and Leasing For an international association of airlines, I directed a feasibility study for the establishment of a regional aircraft leasing organization geared to the special needs of carriers within a geographic region. The recommendation, to proceed was implemented by a sub-set of the group, with positive results. For an intemational investment group, I conducted a due diligence review of a new manufacturer of light aircraft, and recommended that the investment move forward. The new aircraft was subsequently certified, and has now achieved market leadership in its sector.

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For a variety of financial institutions, I have provided expert valuation and residual value forecasts for virtually every type of commercial, regional and general aviation aircraft. I routinely assists clients in examining aircraft values and projecting those forecasts under differing industry scenarios. ., I was formerly Vice President and Managing Director, Technology Management at Battelle Memorial Institute, where I was responsible for the research institute's activities in management.consulting. Prior to my tenure at Battelle, I was a Director at Arthur D. Little, Inc. where I was responsible for the firm's worldwide activities in the Airline and Aviation Industries, headed that business unit, and codirected the firm's practice in travel, tourism and hospitality. Earlier in my career, I was a consultant with Arthur Andersen & Company, and a research associate at the Highway.Safety Research Institute. I received a BSE degree in Industrial Engineering from the University of Michigan-Dearborn (with high distinction) and an MS in Industrial Administration from Carnegie-Mellon. I am a Certified Public Accountant (but not active in public practice), an. instrument-rated pilot, have been widely quoted in major publications, including The Wall Street Journal, Newsweek, The New York Times, HouSton Chronicle, and .Los Angeles Times and have appeared as an industry expert on business oriented radio and television programs. I have also taught Business Strategy in the MBA program at Daniel Webster College, and am a member of several industry and professional associations.
RECENT EXAMPLES OF EXPERT TESTIMONY AND LITIGATION SUPPORT ASSIGNMENTS INVOLVING ERNEST S. ARVAI

2007: Expert assistance to counsel in litigation regarding a dispute over intellectual property rights between two manufacturers of avionics equipment, and provided inputs'into a calculation of economic damages. 2006-2007: Preparation of an expert report and testimony regarding damage to an executive aircraft that occurred while the aircraft was at a maintenance facility due to negligence in moving the aircraft, and calculations of the resulting diminution in value to the aircraft as a result of the damage. 2006-2007: Expansion of scope of advice and testimony in insurer/aircraft lease portfolio dispute to represent a consortium of eight insurers in addition to the single entity. 2006-2007: Expert advice to counsel and testimony in a dispute between an insurer and an aircraft leasing subsidiary of an aircraft manufacturer related to losses related to an insured lease portfolio. Testimony, in the United Kingdom,

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will be focused on econometric modeling, forecasting and due diligence efforts by the insurers. 2005-2006: Preparation of an expert report and economic damages calculations for an arbitration hearing before the American Arbitration Association between a structural component supplier and a manufacturer of business jet aircraft. 2004-2005: Preparation of an expert report and testimony in an arbitration hearing before the American Arbitration Association regarding the potential market and economic damages from the cancellation of a contract for a business jet re-engining program. 2004: Preparation of an expert report regarding pre-delivery damage to an executive aircraft, and the diminution of value of the aircraft resulting from that damage. Our analysis discovered a statistically significant difference on a key safety issue between the subject aircraft and its major competitors, which was incorporated in our expert report and affidavit. This case was adjudicated in the Province of Quebec, Canada. 2003-2004: Preparation of an expert report regarding diminution of value for commercial aircraft that had been modified to freighter configuration and subsequently grounded after the FAA rescinded approval, and economic damages resulting from the grounding of that aircraft. 2002: Preparation of expert report regarding diminution of value of Gulfstream aircraft as a result of a ground-induced accident andsubsequent maintenance. 2001-2002: Expert testimony at trial regarding a freighter conversion of several Boeing 747 commercial aircraft and their market value. 1999-2000: Expert testimony and expert reports regarding market values of commercial aircraft modified to cargo configuration, as well as storage and maintenance practices. 1998-9: Expert testimony regarding maintenance charges and costs resulting from a maintenance contract for airframe and engine overhaul of a wide-body jet. This litigationwas adjudicated in Hong Kong.
1997: Expert Testimony regarding airline maintenance practices in a, legal action by the owner of an aircraft against an airline related to changes in the airline's maintenance practices.

1997: Expe .rt testimony regarding the market conditions for an aircraft re-engining program in which one party claimsbreach of contract by the o~er party, who pulled out of the joint arrangement and caused the program, to develop a supplemental type certificate, not to goforward.

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¯ 1996: Expert testimony regarding aircraft performance guarantees between an airline customer and an airframe manufacturer. In this situation, the aircraft in question did not meet its designed range criteria, causing the airline not to be able to fly certain planned reutes non:stop, causing economic damage and a cancellation of the aircraft order. This litigation was settled prior to completion of trial. 1995: Expert report regarding the financial condition of a helicopter company in bankruptcy and the reasonableness of key expenditures for aircraft and their financing arrangements, and key operating and maintenance expenditures. The litigation was settled prior to trial.

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VIi. DOCUMENTS AND OTHER INFORMATION CONSIDERED The data or other information considered by Mr. Arvai include his educational and professional experience, discussions with representatives of Basler Turbo Conversions and a former employee of United Technologies Corporation, a visit to the Basler Turbo Conversion facilities in Oshkosh, Wisconsin. Mr. Arvai also utilized the Baddour Library at Daniel Webster College, an Aviation.University in Nashua, New Hampshire for reference materials, including Janes All the Worlds Aircraft, Flight International Magazine, and the Lexis/Nexis on-line information service to find relevant information. Mr. Arvai read and analyzed a vadety of documents and information in conjunction with the preparation of this report, including, but not limited to the following: ¯ Findings of-Fact, Conclusions- and law and Order regarding United states of America vs. Basler Turbo-67 Conversion DO-3 Aircraft FAA Registration no. N8059P, et. al.

¯ Transcript of Bench Trial-Before the Honorable Robert C. Broomfield, United States District Judge ¯ Deposition of Thomas R. Weight taken ;I 5 July 1997 ¯ Deposition of Thomas Weight taken 16 July 1997 ¯ Portions of the United States of America vs. Basler Turbo-67 Conversion tdal transcripts, including the testimony of Bryan Carmichael, Herbert Hayes, Mark ' Backus, John Keamey, and Clive Medland ¯ De ~osition of Arthur H. Cobb taken 19 June 2007 ¯ De ~osition of Barbara L. Beyer taken 26 June 2007 ¯ De ~osition of Rbbert Clark taken 22 June 2007
¯ De ~osition of David Thompson taken 28 June 2007

¯ Wodd Airliner Census, Flight Intemati0nal Magazine, 1990, 1992-1998 ¯ FedEx Earnings Release, 4t~ Quarter 2001 ¯ Flight International, November 27, 1996 issue, article entitled "FedEX launches Ayres Load~aster" ¯ Flug Revue, January 1997 issue, article entitled NBAA'96: Business Aviation has Bright Future ¯ www.lufffahrtmuseum.com, the Virtual Aviation Museum, Ayres LM200 Loadmaster ¯ Aviation Week and Space Technology, Annual "Aviation Source Book" Issues, various years ¯ Innovair produced Performance and Price Chart for Competitive Aircraft. ¯ Technology License Agreement

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¯ Supplemental Type Certificate for Engine Installation ¯ Basler Turbo-67 Pamphlet ¯ Basler Turbo-67 Outline of Conversion ¯ 04-24-91 Article from Flight International Magazine: Basler Turbo-67 Flight Test ¯ 12-10-90 Article from Private Pilot entitled New Life for the DC-3 ¯ Basler Turbo-67 Newspaper Clipping ¯ Basler DC-3 Turbo-67 Conversion charts ¯ 7-13-90 Purchase Agreement ¯ Basler Turbo-67 Conversion Objectives document ¯ Avmark Asia 1991 Report to Pratt & Whitney regarding Asian Market for BT-67 ¯ DC-3 JV Summary ¯ Taiwan Joint Venture PowerPoint Presentation ¯ N95BF Delivery Trip Summary ¯ 11-8-89 Avma~k Report: Basler Turbo-67 Valuation ¯ Deloitte Touch Projected Financial Statements ¯ 5-18-91 Warwick Consulting Group Report ¯ 4-15-91 Taiwan JV BT-67 Program Status ¯ 6-19-91 Innovair United Distributor Agreement ¯ 6-30-91 Carmichael Letter to Johnson, Hayes, Stone ¯ 7-25-91 Distributor Agreement between lnnovair and UTC ¯ 7-3-91 Lang Letter to Carmichael ¯ 10-10-91 Carmichael Letter to Johnson and Stone ¯ Five Year Business Plan 1990-1994 BTC and Innovair ¯ 1-22-90 Thompson. letter to Carmichael ¯ 4-8-90 Carrnichael Letter to Johnson ¯ 4-30-90 Outline of Proposal between Innovair and United Technologies ¯ 7-13-90 Purchase Agreement ¯ 10-6-90 Carmichael Memo to Eastlick regarding capital requirements ¯ 10-17-90 Eastlick letter to Basler, Carmichael, Wilson regarding reorganization ¯ 12-3-90 Weight letter to Johnson ¯ 3-5-91 Eastlick, Fraker letter to Carmichael, Wilson

¯ 4-11-91 Letter from Carmichael to Basler
¯ 4-25-91 Memo from Eastlick to Carmichael/Wilson regarding negotiations

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¯ 6-13-91 Fraker Innovair Update ¯ 6-11-91 Carmichael letter to Weight ¯ 8-28-91 Letter from Kriehn to Burnett re: termination of TLA ¯ 7-25-91 Carmichael Letter to Fraker, Eastiick ¯ 9-3-91 Bumett ILetter to Carmichael, Binder ¯ 9-30-91 Meetings with United Technologies ¯ 9-22-93 Settlement Agreement between Innovair and Basler Turbo Conversion

Resp~. Ernest S. Arvai

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APPENDIX A: AIRLINE OPERATORS OF DC-3. Source: Flight International Magazine, December 12, 1991

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7

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1 4 9 &

2 4

1

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