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

Case 1:96-cv-00408-LAS

Document 158-17

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DEFENDANT'S

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DISCLAIMERS THE "INFORMATION CONTAINED IN THIS EXECUTIVE SLrMMARY, INCLUDING BUT NOT. LIMITED TO THE BUSINESS DESCRIPTION, CORPORATE HISTORY, BUSINESS PLAN AND PROJECTED FINANCIAL STATEMENTS, WHICH WARWICK CONSULTING GROUP, INC. ("WARWICK") OBTAINED IS, TO THE BEST OF ¯WARWICK i S KNOWLEDGE, ACCURATE AND COMPLETE. WARWICK HAS NOT AUDITED OR OTHERWISE CONFIRMED AND, ONLY TO A LIMITED EXTENT, HAS IT REVIEWED THIS .INFORMATION.

NO REPRESENTATIONS, EXPRESS OR IMPLIED, ARE BEING MADE AS TO THE COMPLETENESS OF, OR THE CONCLUSIONS TO BE DRAWN FROM, THE INFORMATION CONTAINED IN THIS EXECUTIVE SUMMARY.
THIS EXECUTIVE SUMMARY DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION¯. OF AN OFFER TO BUY, ANY SECURITIES OF THE COMPANIES DESCRIBED HEREIN. ANY SUCH OFFER OR.SOLICITATION MAY ¯ ONLY BE MADE THROUGH DIRECT NEGOTIATION WITH THE COMPANIES AFTER PERFORMING A THOROUGH INDEPENDENT DUE DILIGENCE INVESTIGATION OF THE COMPANIES AND THE SUBSTANTIAL RISKS ASSOCIATED THEREWITH. THIS EXECUTIVE SUMMARY DOES¯NOT CONTAIN ALL MATERIAL INFORMATION WHICH MUST BE CAREFULLY CONSIDERED BY ANY PARTY DESIRING TO INVEST IN ~ SECURITIES OF THE COMPANIES AND, THEREFORE, NO RELIANCE SHOULD BE PLACED ON THE CONTENTS OF THIS EXECUTIVE SUMMARY FOR SUCH AN INVESTMENT PURPOSE. BY ACCEPTING THIS EXECUTIVE SUIKMARY, THE RECIPIENT EXPRESSLY AGREES TO TREAT ALL INFORMATION SET FORTH' HE/%EIN STRICTLY CONFIDENTIAL AND NOT TO DISCLOSE OR USE ANY SUCH INFORMATION FOR ANY PURPOSE OTHER THAN AS DESCRIBED IN THIS EXECUTIVE SUMMARY CONSISTENT WITH THE TERMS AND CONDITIONS OF THE CONFIDENTIALITY AGREEMENT EXECUTED BY SUCH RECIPIENT IN CONNECTION HEREWITH. ANY DISTRIBUTION OR REPRODUCTION OFTHIS INFORMATION, IN WHOLE OR IN PART, OR THE DIVULGENCE OF ANY OF ITS CONTENTS, WITHOUT THE PRIOR CONSENT OF WARWICK IS STRICTLY PROHIBITED.

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PURPOSE This Executive Summary is presented by Warwick Consulting Group, Inc. to inform interested parties of the aircraft converslon industry and how it relates to the business and the potential of Innovair Aviation Limited. Bryan Carmichael and Barry Wilson, principal shareholders of Innovair Aviation Limited, are initiating a plan to recapitalize this company in order to realize the anticipated growth The structure and capitalization of Innovair potential. be negotiated by all parties. The Aviation Limited is to such recapitalization may differ ultimate structure of substantially from that assumed in the financial projections contained.herein.

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EXECUTIVE SUMMARY Description:. Innovair Aviation Limited ("Innovair") and Basler Turbo Conversions, Inc. ("BTC'") were incorporated in the first half of1988 with. the express business objective of jointly modernizing. and converting Douglas DC-3/C-47 aircraft by adding turbo-prop power and other improvements. They have successfully obtained the supplemental .type certificate approving its turbo-prop conversion -and have achieved a c6mbined $13,632,000 in sales during 1990. Because of the many benefits of this converted aircraft over other similar aircraft, the market potential is believed to be excellent. Innovair has a license agreement with BTC that allows Innovair to manufacture and install conversion kits and market- the Turbo-67 in all countrie~ outside the United States. BTC builds kits for sales to Basler Flight Services (BFS), who. is the distributor for the U.S. market', and also for sales to any U.S. government agency. Because of rapidly escalating costs of newaircraft production and increases in delivery delays, the aircraft conversion industry has become an accepted supplier of aircraft. The conversion :industry has helped to relieve budgetary pressures, both military and civilian. With the recent availability of a broader range of reliable turbo-prop engines to accomplish efficient conversions,, conversions such as the Turbo-67 are expected to become a significant competitor and logical alternative to higher priced new production ai#craft. During the iast four years, these companies have jointly funded ¯ approximately $7,000,000 towards research and development costs to secure a type certificate for the Basler Turbo-67 DC-3/C-47 conversion from piston power to turbo-prop power. On February a Supplemental Type Certificate (STC) covering this 27, 1990, (Turbo-67) was issued by the Federal Aviation conversion Administration (FAA). A Parts Manufacturers Approval (PMA-) was issued by the FAA subsequently in March 1990 authorizing the sale of Turbo-67 conversion kits. Approximately 1,200 Douglas DC-3/C-47s are operating in many countries around the world, in military and civilian roles. This aircraft plays a unique role p&rticularly in third world countries because of its broad range of operating capabilities. Due to the scarcity of avgas and the increasing -unreliability of its piston engines, it is believed the need for conversion to turbo-prop power has become a real priority. Because of the successful Turbo-67 conversion, interest in utilizing the DC-3/.C-47 in Western countries has increased dramatically, " particularly for small package freight use and for drug interdiction and surveillance roles.

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Since obtaining the STC last year, joint sales have included the following: two conversions delivered to the U.S. Air Force under a Foreign Military Assistance (FMA) program with negotiations in the final stages for four more to be ordered in 1991; one "has been delivered to the U.S. Forestry and a second conversion is nearing completion; one has been Forestry delivered to United Technologies Corporation for demonstration and promotion of international sales and two have been sold to a .South American freight airline. In total, these Companies jointly completed the in-house manufactured items for twelve DC-3/C-47 conversion kits,~seven of which have been installed along with purchased components.on aircraft which have been, or are nearing, delivery. An additional six kits have been approximately 50% completed. It is. believed that the Turbo-67 conversion is superior to the piston engine DC-3/C-47 in all performance parameters. Its low~ capital and direct operating cost, ease and low Cost of maintenance, a~d reliability in a widerange of military and civilian roles, makes it a very competitive -product. The Turbo-67 conversion modernizes the cockpit and replaces all major systems on the aircraft. Due to the enhanced original DC-3/C-47, the airframe, with specifications over the appropriate maintenance, has no life limitations. As such, the "completely modernized" and can be converted aircraft is positioned against new aircraft with comparable performance. The capital cost of the Turbo-67 is about one-third of the price of comparable new air~raft, providing considerable price elasticity to increase profitability. Presently, the principal shareholders of Innovair Aviation Limited (Mr. Carmichael and Mr. Wilson) and the management have decided to secure additional capital for the operation as-a distinct entity. This will al!ow the manufacturing of kits in a new company, InnovairTurbo Conversion, which may be a separate company or a subsidiary of Innovair Aviation Limited, and the expansion of the marketing activity internationally through Innovair Aviation Limited (collectively "Companies" or "Innovair"). The minority partner (Warren Basler) in Innovair has decided not to participate in this business expansion. However, the license agreements will remain in place with BTC. It should be noted that the future of Innovair is not limited to the bright prospects of "converting" a significant portion of still in operation. Instead, the the 1,200 DC-3/C-47s experienced operational group that successfully developed the Turbo-67 conversion has already identified- several aircraft types which would also be logical conversion candidates, using the technology developed on the Turbo-67. DX 254 1 8 Innovair management believes it has all the key elements in place to benefit from the future potential within this industry:

certifications, an experienced operational team, the foundation
of solid distribution systems, proven performance, customer base and plans for new product deve!opment. ~ IAL 07020

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Important ~spects of the Investment Strong Management: An experienced management team will be led by Bryan Carmichael and Barry Wilson, who have a combined forty-five years of .international business background. The technical team, who played a major role in designingand manufacturing the prototype aircraft, will direct the production team. Attractive Marke~: The DC-3 "conversion market is attractive because of the barrier of entry (large initial cost and lead time obtained by Innovair), lack of present competition, high margins and the demand for this aircraft. Proprietary Product: Turbo-67 conversions have a unique position within the conversion market because of its many benefits, i.e. costs, reliability, and efficiency. Favorable Economics: The conversion of.DC-3/C-47 has a very low capital rgquirement, for manufacturing. The low cost to manufacture complemented by the inelasticity of price creates an attractive profit potential.
Company Highlights

Innovair will manufacture and market a product which has many benefits over competitors' products including, cost, higher efficiency, and better reliability. Customers have purchased kits and converted DC-3/C-47 aircraft, thus creating an excellent base for. referrals, testimonials and future business. Because of the time and cost to obtain FAA approval for this product, entry by additional competition is limited, thus allowing for profit margins from kits and operational equipment to. remain very high. The accumulation of expertise -in the development of this conversion is believed to be adaptable to other products which have a good profit potential. Sufficient supply of airframes available should be more than adequate to meet the expected demand. Competition for this specific conversion is limited because of the many product benefits that the DC-3/C-47 has relative to the purchase of new aircraft. Because of budggt restrictions in the military and also in the private sector, the importance of the cost of the DC-3/C-47 conversion versus other conversions has increased. .. Customer .satisfaction has been very high and the aircraft which have been sold have exceeded expected perfo~ance standards.

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Historical and Projected Financial Data - Innovair The following table summarizes certain historical and projected financial data of Innovair Aviation Limited and its planned manufacturing affiliate which must be read in conjunction with the complete projections and the related assumptions that are contained "in the Confidential Memorandum.

1991

]992

1993

1994

1995

$ 8,000

$36,000

$40,000

$4B, 000

$56,000

4,too ¯ 3,]90 ¯

~ 13,833

~4,359 15,641

29,~7B 18,822

~ 22,209

489

4,865

5,926

7,980

10,]96

240

474

482

490

"498

$ ~

$ 5,3~

S 6,4o8

(1)
(2)

Since some sales were made on a joint basis, this Historical Income Statement for 1990 is based onour estimate of the proper allocation of activity attributed to Innovair. Sales are recognized on delivery of kits. Consequently, some kits ordered in 1991 will not be recognized until 1992 when they are d~livered. The projected value of kits ordered during 1991 is $16,000,000.

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M E M o_R A N D U M DATE FROM ~O : June 13, 1991 : : Thomas A. Fraker Bryan Carmichael

SUBJECT:. INNOVAIRUPDATE

The following is a summary of the people we have contacted, the number of Confidential Memorandums and summaries we have sent out:
Contact .Primas Venture Capital Services .T_yp_~ Venture Fund Venture Fund Results Fund will return book--no interest. Is evaluating. Package is being Good " sent to Calif. prospect. Wants ¯ to : :see agre6ment" with U.T..C. Private Group No contact since Saturday - working with-two groups. Likes project - No $ available now for new products. Received brochure on Tuesday no response yet.

Strategic Investment Venture Fund (simon Group) Kelso Holding

conquest - U.K~

Avacelle - OKC

Private Gr6up

Paradise Investments

Private Group

David Deeds

Private Group

To be in Phoenix to next week discuss.
Too risky - even though great package and plan - no hard assets to backup new

BTC Int'l.

~rivate Group

$2.omi.

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Fraker/Carmichael June 13, 1991

Page 2

Group H.

Private Group

Likes project - got. brochure on Monday discussing with .partners. Have not been able. to arrange meeting-involved in another large deal now--is checking on Turkey.

¯capital & Security Management

Avacelle CFO/IDA Financing

Private Financing & IDA

Beginning Stage

The following is a list of those who have received summaries and are filling out the Confidentiality Agreement: contact Lucas Air Space Judy Victor ~ Results

Industry Player Waiting for C/A. Contact to Argentina Group Waiting for C/A.

I have sent out letters to approximately 39 Venture funds. I am. awaiting the response of approximately 9 of these venture funds. The rest have declined for reasons such as too small, wrong location and not type of project they are presently looking for. I have also sent out approximately 43 letters to selective industry potential partners. That letter went out seven days ago and I will start on Thursday and Friday to follow-up with these people. As you know from Harry per my discussion with him, I feel that very, very preliminarily the Simon Group in Califbrnia will have an interest. Also, John Berry has an expression of interest from Kelso in Portland as well as a group in Oklahoma to work with funding .the marketing budget and to have the rest through an IDB financing. He. is still .awaiting a response from Conquest. Please call with any questions you might have. TAF:dlg

cc: File

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PURPOSE

This Executive Summary is presented by Warwick Consulting Group, .Inc. to inform interested parties of the aircraft conversion industry and how it relates to the business and the potential of Innovair Aviation Limited. Bryan Carmichael and Barry Wilson, principal shareholders of Innovair Aviation Limited, are initiating a plan to'recapitalize this company in order to realize the anticipated growth potential. The structure and. capitalization of Innovair Aviation Limited is to be negotiated by all parties. The ultimate structure of such. recapitaliz~tion may differ substantlally from that assumed in the financlal projections contained herein.

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DISCLAIMERS THE INFORMATION CONTAIITED IN THIS EXECUTIVE SUMIW.ARY, INCLUDING BUT NOT LIMITED TO THE BUSINESS DESCRIPTION, CORPORATE HISTORY,." ¯BUSINESS PLAN AND ~ROJECTED FINANCIAL STATEMENTS, WHICH WARWICK CONSULTING GROUP, "INC. ("WARWICK") OBTAINED IS, TO THE BEST OF WARWICK'S KNOWLEDGE, ACCURATE AND COMPLETE. WARWICK HAS NOT AUDITED OR OTHERWISE CONFIRMED AND, ONLY TO A LIMITED EXTENT, HAS IT REVIEWED THIS INFORMATION. NO IZEPRESENTATIONS, EXPHESS OR IMPLIED, APE BEING MADE AS TO THE COITPLETENESS OF, OR TI~E CONCLUSIONS TO BE DRAWI~ ~ROM, ~ INFORMATION CONTAINED IN THIS EXECUTIVE SUMMARY. THIS EXECUTIVE SUMMARY DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OF THE COMPANIES DESCRIBED HEREIN. A!~ SUCH OFFER OR SOLICITATION MAY ONLY BE MADE THROUGH DIRECT NEGOTIATION WITH THE COMPANIES AFTER PERFORMING. A THOROUGH INDEPENDENT DUE DILIGENCE INVESTIGATION OF THE COMPANIES ANDTHE SUBSTANTIAL RISKS ASSOCIATED THEREWITH. THIS EXECUTIVE SUMMARY D~ES NOTCONTAINALLMATERIAL INFORMATION WHICH MUST BE CAREFULLY CONSIDERED BY ~ PARTY DESIRING TO INVEST IN ANY SECURITIES OF THE COMPANIES AND, THEREFORE, NO RELIANCE SHOULD BE PLACED ON THE CONTLNTS OF THIS EXECUTIVE SUMMARY FOR SUCH ANINVESTM~NT PURPOSE.

t

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Description: Innovair Aviation Limited ("Innovair") and Basler Turbo Conversions, Inc. ("BTC") were incorporated in the first half of 1988 with the express business objective of jointly modernizing .and converting Douglas DC-3/C-47 aircraft by adding turbo-prop power and other "improvements. They have successfully obtained the supplemental type certificate approving its turbo-prop conversion and have achieved a combined $13,632,000 in sales aircraft over during 1990. other similar the many benefits of this converted Because of aircraft,, the market potential is believed to be excellent. Innovair has a license agreement with BTC that allows Innovair to manufacture and install conversion kits and market the Turbo-67 in all countries outside the United States. BTC builds kits for sales to Basler Flight Services (BFS), who is the distributor for the U.S.'marMet, and also for sales to any U.S. government agency. Because .~ rapidly escalating costs of new aircraft production and increases in delivery delays, the aircraft conversion industry has become an accepted supplier of aircraft. T~e conversion industry has helped ~0 relieve budgetary pressures, both military and civilian. With the recent availability of a broader range of reliable turbo-prop engines to accomplish efficient conversions, conversions such as the Turbo-67 are expected to become a significant competitor and 19gical alternative to higher pricednew production aircraft.

""

:o

During the last four years, these Companies have jointly funded approximately $7,000,000 towards research and development costs to secure a type certificate for the BasierTurbo-67 DC-3/C-47 conversion from piston power to turbo-prop power. On February 27, 1990, a Supplemental Type Certificate (STC) covering this was issued by ~he Federal Aviation conversion (Turbo-67) Administration (FAA). A Parts Manufacturers Approval (PMA) was issued by the FAA subsequently in March 1990 authorizing the sale of Turbo-67 conversion kits. Approximately 1,200 Douglas DC-3/C-47s are operating in many countries around the world, in military and civilian roles. This aircraft plays a unique role particularly in third world countries because of its broad r~nge cf operating capabflities. Due to the scarcity of avgas and the increasing unreliability of its piston engines, it is believed the need for conversion to turbo-prop power has becbme a real priority. Because of the successful Turbo-67 conversion, interest in utilizing the DC-3/C-47 in Western countries has increased dramatically, particularly for small package freight use and for drug interdiction and surveillance roles.

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Since obtaining the STC last year, joint sales have included the two conversions delivered to the U:S. Air Force followin~: Foreign Military Assistance (FMA) program with under a negotiations in the final stages for four more to be ordered in 1991; one -has been delivered to the U.S. Forestry and a second Forestry conversion is nearing completion; one has °been delivered to United Technologies Corporation for demonstration and promotion of international sales and two have been sold to a ¯ South American freight airline. In total, these Companies jointly completed the in-house manufactured items for twelve DC-3/C-47 conversion kits,seven of which have been installed along with purchased components on aircraft which have been, or are nearing, delivery. An additional six kits have been approximately 50% completed. It is believed that the Turbo-67 conversion is superior to the piston engine DC-3/C-47 in all performance parameters. Its low capital and direct operating cost, ease and low cost of maintenance, and reliabflity i~. a wide range of military and civilian roles, makes ~t a very competitige product. The Turbo-67 conversion modernizes the cockpit and replaces all major s~stems on the- aircraft~ -Due to the enhanced specifications over the original DC-3/C-47, the airframe, with appropriate maintenance, has no life limitations. As such, the converted aircraft is "completely modernized" and can be positioned against new aircraft with comparable performance. The capital cost of the Turbo-67 is about one-third of the price of comparable new aircraft, providing considerable price elasticity to increase profitability. Presently, the principal shareholders of Innovair Kviation Limited (Mr. Carmichael and Mr. Wilson) and the management have decided to secure additional capital for the operation as a distinct entity. This will allow the manufacturing of kits in a new company, Innovair Turbo Conversion, which may be a separate company or a subsidiary of Innovair Aviation Limited, and the expansion Of the marketing activity inte~nationally through Innovair Aviation Limited (collectively "Companies" Or "Innovair"). The minority partner (Warren Basler) in Innovair has decided not to participate in this business expansion. However, the license agreements will remain in place with BTC. It should be noted that the future of Innovair is not limited to the bright prospects of "converting" a significant portion of. still in operation. Instead, the the 1,200 DC-3/C-47s experienced operational group that successfully developed the Turbo-67 conversion has already identified several aircraft types which would also be logical conversion candidates, using the technology developed on the Turbo-67. Innovair management believes it has all the key elements in place to benefit from the future potential within this industry: certifications, an experienced operational team, the foundation of solid distribution systems, proven performance, customer base and plans for new product development.

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Important Aspects of the Investment Stronq Manaqement: An experienced management team will be led by Bryan Carmichael and Barry Wilson, who have a combined forty-five years of international business background. The technical team, who played a majgr rule in designing and manufacturing the prototype aircraft, will direct the production team. Attractive Market: The DC-3 conversion market is attractive because of the barrier of entry (large initial cost and lead tim~ obtained by Innovair), lack of present competition, high margins and the demand for this aircraft.

Proprieta~ Product: Turbo-67 conversions have a unique position within the conversion market because of its many benefits,'i.e, costs, reliability, and efficiency.
Favorable Economics: The conversion of DC-3/C-47 has a very low capital requirement for manufacturing. The low cost to manufacture complemented'by the inelasticity of price creates an attrac~ige profit potential.
Company Hiqhli~hts

Innovair will manufacture and market a product which has many benefits over competitors' products including, cost," higher efficiency, and better reliability. Customers have purchased kits and converted DC-3/C-47 aircraft, thus creating an excellent base for referrals, testimonials and future business. Because of the time and cost to obtain FAA approval for this product, entry by additional competition is limited, thus allowing for profi~ margins from kits and operational equipment to remain very high. The accumulation of expertise in the development of this conversion is believed to be adaptable to other products which have agood profit potential. Sufficient sgpply of airframes available should be more than adequate to meet the expected demand. Competition for this specific conversion is limited because of the many product benefits that the DC-3/C-47 has relative to the purchase of new aircraft. Because of budget restrictions in the military and also in the private sector, the importance of the cost of the DC-3/C-47 conversion versus other conversions has increased.

Customer satisfaction has been very high and the aircraft which ha~e been sold have exceeded expected performance standards.

173

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Historical and ~rojeoted Financial Data - Innovair The following table summarizes certain historical and projected financial data of Innovair Aviation Limited and its planned manufacturing affiliate which must be read in conjunction wi~h the complete projections and the related assumptions that are contained in the Confidential Memorandum.

Net Sales (2)

$ 2,792

3,390

~,833

15,~i

18,822

22,209

Net Irmm~

265

489

4,865

5,926

7,980

10,196

240

474

482

490

498

Interest,

~

$ ~

Ci)

Since some sales were made on a joint basis, this Historical Income Statement for 1990 is based on our estimate of the proper al!ocation of activity attributed to Innovair. Sales are recognized on delivery of kits. Consequently, some kits ordered in 1991 will not be recognized until 1992 when they are delivered. The projected value of kits ordered during 1991 is $16,000,000.

174

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May 13, 1991

Mr. Joe Kelso Kelso Holding Ltd. 7981 S. W. Nyberg Tualatin, Oregon 97062 Dear Joe: Several weeks ago, I briefly spoke with you regarding a client we .represent in the aircraft conversion .industry, Innovair Aviation Limited.

We are now selectively marketing an opportunity to invest in this company. I believe you will discover from the enclosed

summary why this company's future is very attractive.

Innovair Aviation Limited salient points:

A management team that has a balance of experience in international marketing along with technical training and background in aircraft conversion.

The manufacturing of a product tha~ has a market niche, many key benefits to end users, low capital

requirements and an attractive profit margin.

175 DX 254 1 19
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The present competition is very limited and because of barriers of entry (cost and time), possible new competition is negligible.

The capital requirements will be in the area of $4MM-$BMM with initial capital to be in the range of $1.75MM to $2.0MM. The remainder of the capital requirement will be requfred in the near futurel

Enclosed you will find a summary and Confidentiality Agreement. If you would like to pursue this opportunity~ please sign the enclosed Agreement and return it to us and we will send you a complete Financial Memorandum.

If there are any. questions regarding the company structure or capital needs prior to signing the Confidentiality Agreement, please give me a call. Best regards,

John H. Berry JHB:dlg Enclosures cc: File

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PHce [~/~terho~se

~.h 19, 1991

Wal-z~=n a~l l~t

tky~ Dc~
Att~ch~'~.~s a stat=s report o~ ccrtaln findings noel during ~h¢ course of our -Mr. I'Iaw/

Trent B. Cha~m

DX 254 ! 21
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BASLER TURBO CONVERSIONS

.Airframe 96B~ I. BFS sales commission 2. Pricing
3. customer deposit 4. Customer deposit .allouation
If.

i. Adjustment proposed 2, Absent additional info., no change 3. See airframe SlONR below 4. No significant effect unless pricing adjustment in poin~ 2.

III.

Airframes FAES_II6 ~ 118 I. Profit allocation on spares AirTrame..72BF I. Allocation of insurance proceeds 2. Billing for inspection and overhaul 3. Costs associated wi~h long range wings 4. Capita!izatioq of costs 5~ General and administrative cost allocation a) definition of "G&A" ¯ b) Allocation for STC program o) Time frame applicability

1. Adjustment proposed
I. Open - need clarification 2. Open - need support 3. Open - need support 4. No adjustment requi~ed Adjustment needed - " amount open a) open - need shareholder agreement b) No adjustment required c) Adjustment proposed d) Open - need clarification I. COrrected; adjustment proposed 2. No adjustment required

d) Hours

Airf~rame 387T I. Progress payment recording error 2. Timing of revenue recognition

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BASLER TURBO_CONVERSTONS, TNC.

Dis~o~

Aili~rames I00~ & 146Z i.. Recording of progress billings Airfr_amg_80sgP I..Recording of 1989 work in progress
Vll ¯

Correcting entries posted. I. No adjustment proposed. I. EZ£ect is minor; policy must De adopted. i. Open - additional analysisneeded i. Questions addressed 2. Open - awaiting final adjustments
3. QUestions addressed

AirZrame 51Q~' I. Custome~rdeposlt
Airframe_95BF i. Customer deposits Other~Matters I. Lnterc~mpany expense allocation 2. Loan balances 3. BFS repayment 4. Cost of long range wings

4. Open - need clarification

*

*

,. ,

DX 254 ! 23
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Disposition states tha~ paragraphs 6.2 and 6.3 of the Aircraft Distributor Agreement do not include provisions for a sales comnission. BRC makes reference to relatively minor amounts potentially due undo2 paragraph 6.3, as the sale ~as not "for substantial ~irst use in the territory." ParagTaph 6.2 stntes BTC reserves the right, withoit compensation to BFS to sell the Product and converted aircraft in the Territory wher~ market or customer requirements make it difficult or impracticable

in the opinion of BTC.

Based upon discussions with ~imDempsey, adjustment made to reverse the ~ommission expense 6~ $190,000, currently"

recorded on BTC books.
e

~

~ricinq - BRC sta~es that purchase order #01108 plus $143,000 of new options represents the appropriate pricing for 96BF.

Tim advises that all internal documentation concerning 96BF be changed to reflect the substitution of N510NR in accordance with the Air Columbia substitution agreement. addition, Tim strongly advises against any representation that p~rchase order #01108 relates to 96BF. Shoul~ .the documentation not be' ~changed, Tim advises tha~.. 96BF cmuld be subject to " the Drug EnforcemantAgency seizure.

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BASLER_TURBO CONVERSIONS. INC. Air~a~e_96BF
Disposition

_Cust~mer~deposlt - BRC believes $470,000 custmmer deposit was inappropriately transferred to 510NR.

tO the respective shareholder intentions related to the pricing of th% UTC contract remains. It appears that no purchase order exists to supporhthe pricing, except for T.he selling priue structure enumerated in Ex~ibi~ B to the P~rchas~ Agreement. Absent any additiunal. documentation, it appears reasonable that this selling price structure, which reflects prevailing list prices for BTC and B;S, should ~overn .the pricing of the airframe. See 510NR airframe analysis following.

~on~theless, the issue as

DX 254 / 25

IAL 07037

A0577

Case 1:96-cv-00408-LAS

Document 158-17

Filed 03/03/2008

Page 26 of 50

C~$Domer deposit Ent-:ies are only allocati~D - Proposed entry significant if point 2 in July to reduce BTC note results in an adjustment. payable by $1,320,053 ~I~d a reasonable allocation back to BFS (BRC amount computed iS $915,552). APproximate impact on ~he income statement is to reduce interest expense as follows: Reduced note Interest rate $404,501 ~ 46t517

6 ~onths

-: 2

PrOposed entry to. appropriately record cash receipt in 8/90:

Approximate impel, on the
income statement is to reduce interest expense as follows: Reduhed note Interest rate 5 months $ 75,400 8t671

DX 254 / 26

IAL 07038

A0578

Case 1:96-cv-00408-LAS

Document 158-17

Filed 03/03/2008

Page 27 of 50

BASLER TU~.BQ..CONVERSION$,.INC. Airframes FAES.II6_& 118

sDa~es - BRC believes BFS is entitled to a 10% commission on $475,000 on the sales price of the engine and no additional compensation.

Absent any additional documentation, it would appear based upon review of the contract modification that the selling price for the engine should be $475,000~wlth a. corresponding I0%, or $47,500, co~mission due on the sale. Using ~he original sales amounts, the component spares amount would also be adjusted. Sales of $534,174 co~pared to $459,658 .c%%_rrentlyrecorded ¯ in the BTC accounts results in a difference of $74,516. ¯The ~djusting entry would be as follows: Dr. Receivable from BFS $27,016 Dr. Commission expense 47,500 Cr. Sales 74,516 Approxim~tm impact on the income statement is to reduce interest expense as foll~ws: Reduction of due to BFS Interest. Assume six months $ 27,016
:3,107 --'. 2

DX 254 ! 27
IAL 07039

A0579

Case 1:96-cv-00408-LAS

Document 158-17

Filed 03/03/2008

Page 28 of 50

BASLERTURBO CONVERSZONS, ZNC. Ai~rame

Allocating of insuranc? oroce~d~ - BRC proposes £ollowing entries to record the receipt of insurance proceeds on Innovair and BTC books. ~nnovair Dr. Cash Cr. C~stomer Deposits
Dr. Due from BTC Cr. Cash $1,355~571 1,355,571

D isDos it .i.o.D Why debit "due from BTC" on Innovair,s books? Isn't BTC owed under contract?

Why is RFS not entitled to amounts due BFS in accordance with the purchase order?

Dr. Note payable -- bank $I~35~,571 Or. Due to Innovair I,~55,5~I

Billin_~_for_insDecti~n_and No documentation to support overhead - BRC states that this statement has been BFS billed Innovair $30,000 made avai!a~le to us. for inspection and overhaul on airframe 72B~. ~RC states that. BTC performed some inspection and overhaul work to get pla~e back to Van Nuys. Costs assoc~a~.ed with lonw No documentation to suppor~ raDqe win~s - BRC states this s~ateme~ has been that long rahge wings were made available tous. repaired by B;S and supplied to BTC fo~ installation on 72BF. BRC stated that the wings were not in condition to be installed upon receipt. BRC states that additional costs were incurred by BTC. Amount should be billable by BTC to BFS and, correspondingly, IAL 07040 reduce amount due BTC by Innovair.

DX 254 / 28
A0580

Case 1:96-cv-00408-LAS

Document 158-17

Filed 03/03/2008

Page 29 of 50

BASLER, .TURBO CONVERSIONS, .~NC.. Air~rame_72BF

e

Point DiSDo~i~.i~n _C~D~&lizatlon of R&D FA~2 states that research costs - BRC believes and development costs with excessive labor .and overhead .alternative future use on 7~BF should berecorded capitaliza~le as tangible as research and development assets. Authoritative expense by BTC, thus not literature states tha~ included in inventory cost definition of cost is used to determine sales understood to mean price to Innovair. BRC acquisition and production believes approximately costs. These costs were incurred directly in ~he of labor and overhead, or $77,161, should be recorded produ~ion of the ~ as research and development conve~slon kit and I expense. installatio~ of 72BF. Accordingly, no adjustment Proposed entries on BTC required. books would be as follows: R&D expense Cost of Sales $ 77,161 77,161

! ~--

Sales 15,432 Receivable from Innovair 15,432.

DX 254 1 29
IAL 07041

A0581

Case 1:96-cv-00408-LAS

Document 158-17

Filed 03/03/2008

Page 30 of 50

BASLER TURBO C0NVERSTON.S,. INC... Airfr.ame .72BF Poin____t_t Gen era!_and~a.dminis.tr at ire cost allocat~oDs - BRC poses the following questions concerning t~e allocation of general and administrative expenses of $253,610 to airframe 72BF.
D__isDosition

A) certain costs should not be A) Section 3.06 of ~he included in general and ' Technology License A~reement : adm~nlstratlve expenses. st~.tes that the purohase.. ,/ " prlce is th? ful! cost to//~ BTC, includzng ~appli~able m~4 general andadmlnls-~e costs". Shareholders must determine whether the definition of "applicable ! ! all-inclusive as ~]/~ general.and administrativeit "-',----~q~interpreted for purposes of billing Innovair. BRC believes amount:should be reduced (approximately i/3)-for time devoted to STC program.

As underlying STC costs were separately categorized as research and development expenses or capitalized as inventory cost of the prototype, t_here is no basis for an adjus.tment.
C) Valid point raisedby BRC, except that time frame should also include the period of manufa=ture and assembly of kit before 72BF airframe arrival in Van Nuys. MGH" has recomputed the allocationspecifically including only the time rela~ed to the manufacture and assembly of / kit and aircraft conversion. Proposed adjustment is to reduce sales and receivable from Innovair{~$74,55S.

c) BRC believes general and
administrative costs incurred while airframe 72BF was not in Van Nuys should be excluded.

DX 254 / 30
IAL 07042

A0582

Case 1:96-cv-00408-LAS

Document 158-17

Filed 03/03/2008

Page 31 of 50

BASLER TURBO CONV~:RSTONS. T~C.. Air, frame 72BF

DisDo~itlon

D) BRC presented a lengthy
"discussion concerning installation hours on 72BF as a percentage of total manufact.uring. labor hours. ~mpa~t of proposed methodology is as follows: Sales $211,797 Rec. from I!lnovair 211,797

D) We need additional information to better understand this issue.

DX 254 / 3i
IAL 07043

A0583

Case 1:96-cv-00408-LAS

Document 158-17

Filed 03/03/2008

Page 32 of 50

BASLER TURBO CONVERS~.O.N..S, INC. Airframe~387T

~ro~.ess payment reco.rdlng ~ - BRC pointed out a~

error in recording the

D_isD9 sition Correcting entry was posted in December.

October progress payment of Approximate impact on the $36,481 and resultant impact income statement is to on the note payable. reduce interest expense as

follows:

Reduced Tare Interest rnte 2 months

$ 36,481 11.5% 4t195 x 2112 ~ 699

MGH agrees ~nd will post ,adjusting entry.
Timin~ o~_revehue recoqnltlon, - BRC stated that the kit was deliv.er.ed at the end of November, accordingly, BTC should recognize the sale of the kit at. that time. The sale was recorded in December 1990. Customer accepted delivery on 12/28/9o.

DX 254 1 32
IAL 07044

A0584

Case 1:96-cv-00408-LAS

Document 158-17

Filed 03/03/2008

Page 33 of 50

D.isD~o sit.i on Appropriate accountdng for Reco~dinm of Dro~ess. ~b£11inms - BRC brought to ou~ the progress billings, attention that no progress includi.ng gross recording of billings on airframes 100Z and retainage amounts, was 146Z were recorded in the BTC discussed with MGH and accounts. Correcting entries . correcting entries were agreed to and made. are proposed based Upon progress billings.

The progres~ payment ~r~m the

BRC states that it is his understanding that cash should have been received by BFS by :zz/:~o/9o on the zo/~-ol~o progress billing.

U.S. Forest Servi=e for the i0/20/90 progress billing us received on 12/13/90 per review of the bank statement and note payable activity. ~

DX 254 / 33
IAL 07045

A0585

Case 1:96-cv-00408-LAS

Document 158-17

Filed 03/03/2008

Page 34 of 50

BASLER~TURBO CONVERSIONS, ~NC.
Airframe

progress - BRC states that to the extent that work done by B~S at 12/31/89 was not recorded in the BTC accounts there was an ~nderstatement of BTC liabili~ie= at 12/~!~89.

No progress billing was issued by BFS to BTC at

z~/3z/~.

DX 254 / 34
IAL 07046

A0586

Case 1:96-cv-00408-LAS

Document 158-17

Filed 03/03/2008

Page 35 of 50

BASLER TURBO CONVERSIONS,.. INC. Airframe_N51

Point
¯ Customer de~os~t - BRC believes that the transfer of S470,000 of payments to BTC by BFS to be classified as.inventory deposits on N510NR is improper and he proposes an adjustment entry. ~RC acknowledges an

Ti~ Dempsey advises thaiall internal documentation concerning 96BF be changed to reflect the substitution of NSIONR in accordance with the Air Colombia substitution agreement. Tim strongly advises against any additional entry is required representation that the 96BF. Any such representation would expose airframe 96BF to potential seizure by the Drug Enforcement Agency.
Thereexists no formal policy for the determination of progress payments between the companies, a~though, sucha policy must be agreed to by the shareholders. However, as the following calculation indicates, even if the progress payments were recomputed, the impact is not significant.

for work actually completed by BFS.

Inventory'cost at 12/31/90 is $308,888. Assume $400,000 is representative of a reasonable allocation in relation to inventory cost of. $308,888 at 12/31/90. Approximate impact on the income statement is to reduce interest expense as follows:
Reduced note Interes~ rate

70, ~60

~.5%
8,050
1,342

months

07047

(I) Represents the tim~frame between the subsritution of NSIONR for 96BF and the time the initial, inventory costs were incurred on N510NR.

DX 254 1 35
A0587

Case 1:96-cv-00408-LAS

Document 158-17

Filed 03/03/2008

Page 36 of 50

BASLER TURBO qQ.NyERSIONS, INC.

DisDosi~o~

Customer ~eDosits - BRC believes that customer deposits allocated to S5BF ($697,895, based upon the 9/30/90 airframe analysis) in relation to worm perfoz-med by ~TC ($103,532, hased ~pon the 9/30/90 airframe ~nalysis) are excessive.

Based upon discussions with Tim Dempsey, the inventory allocation to airframe 95BF of $103,532 isnot representativeof actual costs that should be attributed to 95BF. By this, Tim ~eant~hat ~urchamed and manufactured components in BRC believes that it is ending inventory, though not necessary to ascertain a more specifically allocated to reasonable allocation by BTC to airframe 9SBF, must be Innovair and adjust the attributed to the airframe. inventory deposit. This allocation must be done to minimize any potential it should be noted that the exposure due to the seizure same allocation of c~stomer of the airframe. Tim and MGH deposits and amount of believe allocable amounts inventory is presented on the will approximate or exceed preliminary airframe analysis ~he $697,895 ~Is~omer 2/ z/90. deposit. Tim asked MGH to prepare the ¯ analysis for review.

DX 254 / 36
IAL 07048

A0588

Case 1:96-cv-00408-LAS

Document 158-17

Filed 03/03/2008

Page 37 of 50

QTHER MATTERS Reasonableness of inter=ompany expense allocations need to be t~sted. The following comments address issues raised by BRC: The airport liability

policy premium was

indeed allocated 75% to BTC and 25% to BFS. It was represented to us that the insuramce carrier verbally informed MGH as to this allocation methodology. The methodology apparently attributes a greatsr level of risk of f~ilure to the component parts in the uonversion kit than the airframe conversion. ~o written documentation supports this assumption to our. knowledge. Intzr~st expense was computed a~ 11.5% of t_he end of the month outstanding balance.

BRC recommends, certain uorre~tions to the loan allocation based upon the resolution of open audit issues.

Consideration will be given to all required adjustments.

BRC questioned the nature of The payment was to settle the $463,933 repayment to the November 1990 month-end. .BFS on 1/10/91. related par~y payable balance. BRC questions whether or not We need additional the amount of $100,700 less i~fol-mation to better commission paid to Burton understand this issue.
Golb by Xnnovair related to long range wings, needs to be debited to innovair and credited to BTC.

IAL 07049

A0589

Case 1:96-cv-00408-LAS

Document 158-17

Filed 03/03/2008

Page 38 of 50

The I~AL ~S'I'A.T~ ~i~e~ Dh~ion
ot" U~t~d S~s A~ Co~

HOLDINGS

~e~ ~d. S~ ~ ~ ~ ~6 (~)~ F~ (~2} ~

246-9842

841-22~9

F A X

T R ~ N S M I T T A,f,

TO: COMPANY:

FROM: COMPANY:

~.;~.[~-~.R OF PAGES INCLUDING COVER PAGE: .10

IF Y~.? DO NOT RECEIVE ALL PAGES OF THIS FAX, PLEASE CALL ME AT (602! 2-;~-9842. MESSAGE: We are faxin~ the letter agreement which reflects changes I discussed with Bryan Carmichael on 3-1-91. The lines on the fax copy.ind~ates where.chanqes to the letter have been made. After you have reviewed ~he l~tter please call so we can meet sometime
today and reach an agreement.

DX 254 / 38
IAL 07050

A0590

Case 1:96-cv-00408-LAS

Document 158-17

Filed 03/03/2008

Page 39 of 50

We will closely monitor this transaction throughout all phases set forth ~3ve and assist" y~ur attorney and accountants to muve tuwards an expeditious closing of the transaction. Our fee for services shall be ~ follows: A. A monthly fee o~t shall .ctmmence upon the execution of

this agree~_~t ~~tinue ~or thr~ (~) months or until the
. pursuant to the pruvlsions set fo~. herein. ~r~ " , B. A fee of $5,000 for preparation of the "Conf~-~_%l~emorardum" on

the Reor~z~ ,C~ and ~ ,~tg~ction cnnt~lated herein to
be paid ..... the .ccupletion of the

c. -~ Financial Advisozy Fee based upon the following cc~ents: An (I). amuunt equa! tm five percent (5%). qf the first $5,000,000 9ms "~eq.dty anU/or the next $5,000,000 of funds (equity and/or debt e~cl~ any bank debt) provided to the Reorganized Company, but "~n ho even~ less than $150,000, tobe paid at the closing of the trans~ctlon; and

US Holdings and Warwick agree to s~ a portion of the fi~ advisory fee (C(1); C(2) or C(3)) with anther i~vestment banker resulting from the fee below our ~ of $150,000.

introduction of qualified investors ~y camidmel and Wilson. In n~ evznt can such a ~har~ of the fee r~duce the US Hclding/Wa~ick portion of the nthly ~. ALl billings are due on pr~mtati~n. Any ~ut _of

.

195

DX 254 / 39
07051

A0591

Case 1:96-cv-00408-LAS

Document 158-17

Filed 03/03/2008

Page 40 of 50

Your right to cancel future monthly fees and this agreement is implemented upon ten days written notice by either Mr. Carmichael or Mr. Wilson that the reorganizition cannot be agreed to or completed within a reasonable period of time or if in gccd faith the financing sources cannot be approved.

Our fees for services set forth in pa~graphs C(1) ~nd C(2) above will still be due to US Holdings and Warwick in-the event that a transaction is consum~ted within ~o (2) years with a pr~ which we presented and with
whom we negotiated cn your beh~l, f.

It is agreed and undzrstco~ that the Reorganized ¢nmp~ny, its predecessors and its shareholders shall seek the advice of their own attorneys and accountants as to ~ny and all legal and tax matters and shall not look to US Holdings or Warwick for same.

It is agreed ~nd ~erstood that ~r involv~nh in assisting you in obtaining fi~ is on a '%~st efforts" h~is and no gu=rm~s or w~rranties of any kind ar~ ~ made ~y us for the success of same
Additionally, it is agreed ~nd understccd that any and all r~asonable .financial information about your cu~es will be pried tm US Holdings. US Holdings shall m~ke no representatiun ur warr~ as to the accu~ or completeness of such info~tion. Also, due to the source of the information and the m~ny social and economic variables affecting same, U~ Holdings ~ make no representation or warrm~y as t~ the ~ccuracy of financial projections it may pr~para.

If you are in agreement with a!l the above, an~ be!!eve this ~ defines the unde~ between us, pl~. sign and r~mrn an ~cute~ ) copy of this let~or agreemen~ to me along with y~r check for t/~ $2,ooo/'
We look forw~zd to w~rking with you on this transaction.

Very ~ruly yours,
US HOLDINGS
Harry V. Eastlick President and (~ief Executive officer

DAYOF

DX 254 1 40
IAL 07052

A0592

Case 1:96-cv-00408-LAS

Document 158-17

Filed 03/03/2008

Page 41 of 50

" DX 254141

IAL 07053

A0593

Case 1:96-cv-00408-LAS

Document 158-17

Filed 03/03/2008

Page 42 of 50

LAL 07054

A0594

Case 1:96-cv-00408-LAS

Document 158-17

Filed 03/03/2008

Page 43 of 50

MEMORANDUM

DATE FROM TO SUBJECT:

April 12, 1991 John Berry Ron Conquest TURBO-67 REORGANIZATION/~IBABCING TRANSACTION

We are presently documenting the buyout of the Basler family. interests in preparation, for reorganizing Innovair Aviation, Ltd. and Basler Turbo Conversions~ Inc. Please accept the following to assist you in helping us secure the necessary funding: OUTLINE OF PROPOSED FINANCING: The proposed financing for -the reorganized Turbo-~7 corporation (T-67) is expected to be similar to the ¯ " following:

Common Stock Purchased in T-67 = $1,500,000 Convertible.Subordinlted Debt = $6,000.,.000
Total Capital Required $7,500,000 The .percentage of ownership to the investor to be received for the common stock of T-67 is expected to approximate 20%. This is, of course, to be determined during negotiations with the investor. The terms of the convertible debt is expected to be as

follows:

DX 254 1 43

Five-year subordinated deb.entures with interest only payable quarterly at approximately 12%. Additional provisions: Accrual of additionalinterest equal to 10% of the cash flow from operations to be defined until yield on subordinated debt equals 20%-25% per annum. The definition of cash flow from operations will take into consideration the reduction for dividends to be paid to the shareholders to offset the shareholder's personal income tax resulting from the Subchapter S election of

the cpmpany.
IAL 07055

A0595

Case 1:96-cv-00408-LAS

Document 158-17

Filed 03/03/2008

Page 44 of 50

Berry2Conquest April 12, 1991

Page 2

Sinking fund to be established to retire the debentures with annual contributions as follows: Percent of Originil Balance (or if debentures have been. converted to the remaininq balance) None 15 20 25

End of

Year Year Year Year

1 2 3 4

Current shareholders will pl~dge as collateral shares of their common stock equal to 3D% of the outstanding stock as security for performance under the provisions of the loan agreement. Pledge of shares willbe released upon payment of subordinated debt. Debt would have as follows: First Two Years Year 3 Year 4 Year 5 maximum call provisions approximately Non-Callable ¯ 107 103 i00 .

It is intended that the call proyision would give the investor assurance of his required return; therefore, the call premium would have a provision for reductions if certain amounts have been accrued as additional interest. A pcr~.ion of the principal of the debt can be converted .into newly issued common stock. The new shares acquired on exercise of the conversion rights will represent approximately 20% of the issued and outstanding shares. The conversion rights shall expire two years from the date of issuance and the principal reduction of the debt on conversions will be: First Year Second Year $3,500,000 $3,500,000, plus an additional amount based on a formula taking into consideration performance up to the date the conversion privilege is exercised.

IAL 07056

DX 254 / 44
A0596

Case 1:96-cv-00408-LAS

Document 158-17

Filed 03/03/2008

Page 45 of 50

Berry/Conquest April 12, 1991

Page 3

The use of proceeds from the common stock and subordinated debt is expected to be as follows:. Acquisition of Basler Shares and Repayment of Stockholders Debt : $3,000,000

Inventory:
Kits optiona% Equipment Product Support, Spares, Etc. Total Inventory Working Capital and Transaction Costs Payoff of Valley Bank Loans Partial Payment of Shareholder Loans Product Development Enhancement to the Supplemental Type Certificate ¯ 680,000 300,000 400,000
$1,380,000

800,0001,000,000 500,000 500,000
320,000

$7r500rO00 It is expected that the company's board of directors after the financing and reorganization would be as follows: Number of Directors

Carmichael/WilsonNew Equity/Investors Representatives Subordinated Debentures Representatives

1/4

i/2

1/4

The subordinated debenture fnvestor would also be available to enhance the Company's credit with its banking institutions. It is anticipated that the investor's backing will allow: The elimination of the current shareholders personal guarantees. Increased $2,000,000. borrowing capacity of approximately

JB:dlg

DX 254 / 45
LkL 07057 -."

A0597

Case 1:96-cv-00408-LAS

Document 158-17

Filed 03/03/2008

Page 46 of 50

A0597A

Case 1:96-cv-00408-LAS

Document 158-17

Filed 03/03/2008

Page 47 of 50

A0597B

Case 1:96-cv-00408-LAS

Document 158-17

Filed 03/03/2008

Page 48 of 50

A0597C

Case 1:96-cv-00408-LAS

Document 158-17

Filed 03/03/2008

Page 49 of 50

A0597D

Case 1:96-cv-00408-LAS

Document 158-17

Filed 03/03/2008

Page 50 of 50

A0597E