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

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 1 of 65

Deloitte& Touche

PROJECTED FINANCIAL STATEM~.~TS FOR THE PERIOD JAN~AR~ I, 1990 TO DEC~.~R 31e 1994

002572

JX68
A0400

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 2 of 65

INDEPENDENT ~CCOUNTlS.NT'$ COHPILkTION RI~ORT ................

S~:atements of £ncone and re~:alned earnings (def£c£1=) .......... Sl:a~:ement:s of cash flows ....... " ................. Sun~a~, of sign£ficant: project.ion assmnpt£ons and accounl:ing poll.ties ........................

2 3 4

APPENDIX

19

002573

JX68/2
A0401

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 3 of 65

Deloitte&

Touche

1000 Wilsh~m Boulevard Telex: 910 3214090 Facslm.e: ~ZI3) 688-0100 Los Angeles, Cahtornia 90017-2472 Telephone: {213) 688-0800

I~DEP~DE~T ACCOOWT~NT' S COMPILaTiON REPORT

Messrs. Bryan Ca_wnichael and Barry Wilson 1nnovair Aviation Limited Van Nuys, California We have compiled the accompanying projected balance sheets, s~a~ements of income and retained earnings (deZiclt} and cash flows of Innovair Aviation Limited (the Company) as of December 31, 1990, 1991, 1992, 1993 and 1994 and for each of the years than ending i~ accordance with standards established by the American Institute of Cez~ified Public A¢ountants.
The accompanying proje~ion and this repoz~ were prepared to assist certain stockholders sell all or par~ of their sophisticated investors who w~ll be able to question management of the Company directly about any or all assumptions, and should not be used for any other

A compilation is limited to presenting, in the form of a projection, information that is the representatio~ of management of the Company and does not include evaluation of the support fo~ the assum~ions underlying the projections. We have not exan~'Lnsd the projection and, accordingly, do not .tenements or assumptions. Furthermore, even if the easun~cions regarding sales and production detailed in Note 3 are realized, there will usually be differences batsmen the projected s.~d actual results, because e~ente end circumstances frequently do not occur as expected, and those differences may be material. We hsve no responsibility to update ~hls repor~ for events and clrcumst.ances occurring after the date of this report. The. historical financial statements, presented for comparative purposes herein, as of December 31, 1989 and for the year then ended, ~ere not audited, reviewed or compiled by us and, accordingly, we do not express an opinion or any other form of assurance on Chem. The appendix containing the supplemental schedules of projected monthly financial information is presented for the pUZl:oses of additional analysis and is not a required panic of the baalc proJe~ion. We have compiled this appendix containing the supplemental schedules of projected monChly financial information and, accordingly, do no~ express an opinion or any other form of assurance on such information.

May 16, 1990

JX6813
A0402

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 4 of 65

JX68/4
A0403

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 5 of 65

JX68/5
A0404

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 6 of 65

o~

JX68/6
A0405

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 7 of 65

INNOVATR AVTATTON LTM~TED SUMMARY OF SIGNIFICR~T PROJECTION .ASSimilaTIONS AND. ACCOUNTING POLTC~ES FIVE YEARS ENDING DECEMBER 31, 1994

This financial projection presents, to the best of management's knowledge and belief, Innovair Aviation Limited's (the Company) expected financial position, results of operations and cash flows for the projection period assuming that the hypothetical assumptions regarding sales and production detailed in Note 3 are realized. Accordingly, the projection reflects its Judgment as of May 16, 1990, the date of this projection, of ~he expected conditions and its expected course of action if the hypothetical assumptions were achEeved. The presentation and the hypothetical assumptions regarding sales and production detailed in Note 3 and other assumptions are based on the knowledge, belief, judgment and expectations of management and have been prepared to assis~ certain stockholders sell all or part of thei~ interests in the ~mpan¥. Accordingly, ~his projection may not he useful for other purposes. The assumptions disclosed herein are those that management believes are significant to the projection and are based on management's ~urrent research into and understanding of the aircraft conversion and modernization industry. Even if the hypothetical assumptions detailed in Note 3 were achieved, there will usually be differences between projected and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. The supplementary schedules of projected monthly financlal information have been prepared on a computerized model (in thousands of dollars} and, as a consequence, rounding differences may occur in column totals.

Or~anizatio~

Innovair Aviation Limited, a Hong Kong corporation, star~ed operations in April 1988, as the international licensee of Basler Turbe Conversions, Inc., an affiliated company, to parnlcipate in the modernization and conversion of Douglas DO-3 and C-47 aircraft to Turbo Prop po~ero Under the license, the Company will have the right to manufa~ure, distribute and install conversion kits in all countries outside of the United States of America. Pro~er~v, Plant. add E~uipmeDt
Proper~y, plant and equipment are assumed to be recorded at cost and depreciated on a etraight-~ine basis over ~he estimated useful live~ of the related assets.

002578

JX6817
A0406

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 8 of 65

( Con'£nued )

The Company is a Hong F~ng corporation and, accordingly, is sub~Ject "co an income tax equal "co 1St of i'cs "caxable ~ncome. Under Hong Kong tax law, a orporation's taxable ~ncome convulses all income a~is£ng in or derived from Hong Kong, but does no' include income f~n operations ~ubsta~cially ca~r4ed on outside Llong Kong. Hos~ of "che Company's customers will be ou~s£de Hong Xong. Sh£pments of the k£ts are proSecUted ~o be made d£rectly f~wnn ~he manufacturer (BTC| "co f£nal customer and, a~ord£ngly, ~' is l~O~jected "cha~: "chey will be considered to be "Ol~-rations substantially caddied on outside Hong F~ng" and exe~p~ from ~ccord~ngly~ no :Lucome "cax expense is pro~ec~ed ~1 "che accompanying financial
Inventories

Inventories are assumed "co be stated a' the lowe~ of cost (first-in, firs'-out me'chod) or market. Inventory cos'cs consist of engines and propellers. These are the only parts of "che ki' that are purchased and delivery "cakes by the Company. The balance of the conversion ki' will be shipped by BTC dlre~l¥ "co the cus'omer in the month of the sale and will, accordingly, not be included in inventory ~y the Company.

The Company has, in collabora'cion with BTC, developed a conversion kit tha' modernizes the cockpit and vir~ually all ma~or sys'cems of DC-3s and C-47s "co Turbo Prop power. The conversion kit Includes a pair of Prat' & Whi'cney PTS-67R turbo prop engines, new propellers, all par~s including rivets, nuts and bol~s and overages to cover normal losses during installa'cion. The kit also includes specialized tools, drawings, detailed kit installation instructions, maintenance, flight and repair manuals "Co enable cust~nere to install "che kit and carry out "che conversion "chemsel~eSo Excep~ for the sale of two conversions in 1990, ~he Company will no~ offer conversion services "co its ~us'omerso These services will be offered by Basler Fli~ht Services (BFS}, BTC's die~.Eibutor in "che UoS.Ao, or one of the Company°s distributors° A number of optional equipment items are available to equip aircraft for specific operating fun~ions such as enlarged cargo doors, oxyuen systems, e~c. All revenue from'che sale of optional equipment has been excluded for the purposes of "chis proje~ion.

002579

JX6818
A0407

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 9 of 65

Note 3 - RT~othetlcal Assumptions: The projection is based on the following hl~hetioal sales and production assumptions:
as Sales:

The Company and its licensor BTC have established contacts with owners and operators of DO-3 and C-47 airplanes, or have o~herwise identified the existence of 1,030 airframes ou~side the U.S.A. The Company and BFS have also identified 130 airframes available in the U.S.A. All sales in the U.S.A. and international sales negotiated ~hrough a U.So government agency will be handled by BFSo Sales for the five year proje~ion period are as followsz
Year ~ 1991 1992 1993 1994

Unit sales

6

32

45

48

43

174

Excep~ for 1990, which includes the proje~ced sale of two conversions at $2,?93,000 each, (see Note 20), sales are of co.plate kits, including engines and propellers, at a pEice of $i,900,000, which is consistent with current pricing. Production Capacity: of kits during the proJe~ion period is to be done by BTC. BTC is projected to operate on s batch manufacturing basis, wi~h each batch projected to take four months to c~mplete. BTC is proJe~ed ~o lease a 10,000-square-foot manufacturing facility fr~ Baslsr Flight Services, an affiliate of BTC, in oshkosh, wisconsin° ~ single shlf~, working a~ full capaclt¥, is pro~e~ed to be able to produce a maximum of 10 kits per batch° BTC is pr~je~ed to start its first full production batch in August 19~0, to be completed by December 1990.
All manufa~uring

002580

JX6819
A0408

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 10 of 65

SUMMARY OF SIGNIFICENT PROJECTION ASSUMPTIONS ~ACCOUNTING POLICIES FI~IE YEARS ENDING D~E~ER 31t ~994 [ continued } A second shift is projected to be added in January 1991, and a third shift in January 1992. This will give BTC a maxlmumprojected produ~ion capacity of 80 kits a year, after a~lowing for projected ineff~iencies associated with additional shifts. Inflation= For the purpose of this projection, management has assumed that there will be no inflatlonar~ impact on either o~e or revenues. Manag~men~ believes tha~ a~y inflationary impact o~ costs can be offset with corresponding increases in revenues.
Note 4 - Cash~ ~ash represents the surplus of net cash flows arisin~ from the projected activities described herein, and has been assumed to be noninterest-bsaring.

The Company is projected to appoint distributors to handle all sales, in order to provide better sales support, training, installatlon and malntenance services to its customers. The distribunors will be responsible for sales and marketing, installation of conversions, product suppor~ and maintenance, warranty programs, spares euppor~ and training. In the initial period (through 1991}, until distributors are in place, the services of sales agents are projected to be utilized. Commissions are projected to be paid to the distributors and sales agents in proportion to the progress payments re~eived from the customers (see Note 11}. Sales through distributors and salem agents are projected to be as foll~ws: Year 1990 1991 ~ ~ ~99._._~ Distributors 67% 95t 100% 100% 100% Sales Agents 33% For 1990, distributors and sales agents are projected to be paid co~nisslons of 10% and 5%, respectively. The weighted average co~uissions rate for 1990 is projected to be 7.8%. Beginnln~ in 1991, d~s~ribu~ors are pr~je~ed to be paid a commission of 12.50t and sales agents a 4t c~ission. Accordingly, ~he weighted average co~nission ra~e used in the projections for each of the years

Weighted Average rate

7.80% 8

12.075%

12.50%

12.50%

12.50%

00 581

JX68110
A0409

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 11 of 65

INNOVAIR AVIATION LIMITED SDMMARY OF SIGNIFICANT PROJECTION ASSUMPTIONS A~D ~CCO~NTING POLICIES ~VE YEARS ENDING DECEMBER 31, 1994 ( Continued )

These average rates have been used for all sales, exoe1~, for igg0, when commissions are shown to reflect the projected terms for each projected sale (See Note 20). It is projected that the Company's conT_ra~s with the distributors and sales agents will stipulate that commissions paid to the distributors a~d sales agents prior to receil~ of full payment from the customer will be required to be refunded in the event of a default by the customer. Accordingly, the commissions paid out at the time of receipt of a prowess payment have been treated as a prepaid expense, to he expensed in the month of the sale when the final payment is received from the customer.
Note 6 - Deposits - Aircraft

The conversion kit includes a pair of turbo engines, at a cost of $724,000, purchased from a single vendor. Except for 1990, when the vendor agreed to give the Company more flexible payment terms, "the vendor requires the Company to pay a 10% deposit six months prior to scheduled delivery of ~he engines. The engines are scheduled for delivery two months prior to sale and delivery of the conversion kit. The deposits made against the engines ordered are shown as a deposit until the month in which they are received, at which time the deposit is applied towards the purchase price of the engines.
Note 7 - DeDoslt~ -- Conv~;slons in Proqress=

The Company is projected to contrac~ with BTC for ~he purchase of the conversion k~ts, excluding engines and propellers, at a cost of $462,000. The Company will make progress payments to BTC in the same proportion ~hat it receives progress payments from the customers. Accordlngly, the followin~ deposits will be made:
Months prior to deliver7

5 4 2 Delivery

12.5% 12.5% 25% 50%

The progress payments made are shown as an asset until the month of delivery, at which time they are expensed to cos~ of sales.

002582

JX68/11
A0410

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 12 of 65

~SSUM~TIONS AND ACCOUNTING POLICIES F~VE YEARS ENDING DECEMBER 31. 1994 {Continued}
Note 8 - ~nvento~7:

The manufacture of the kite is projected to take place in batches. Each batch is projected to take four months to manufacture. The inventory build up in the months preceding the delivery of the kite is projected to be as followss

Description: Engines $ ?24,000 Propellers 36,000 Third-party manufacture 240,000 Raw materials and fabricated par~s 80,000 Direct labor and o~erhead 65,000 Total

12% 25t

25% 25% 25%

100t 100t 25% 25% 25% 25% 25%

13% 25%

$1.145,000 For the period covered ~Y the projections, all manufacturing of kits is projected to be done by RTC. This w~ll cove= the thlrd-pa~-ty manufa~ured items, raw materials end fabricated par~e, and dire~ labor and overhead items lasted above. The kite are projected to be delivered by BT~ directly to the customers in the month of sale. Accordingly, the Company will not carry this par~ of the kit in inventory. The Company is projected to pub.chase the engines an~ propellers directly from the vendors. The engines and propellers are scheduled for delivery two months prior to ~he salo. They are projected to be carried in inventory for these two months, and then delivered to the customer. As the company will not need to carry any other Itemsin inventory, and as each pair of engines and propellers are associated with a particular sale, there is no minimum inventory level that needs to be maintained.

I0

002583

JX68112
A0411

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 13 of 65

Note 9 - Property and E~ui~ment= The major classes of proper~y and equipment, and accumulated depreciation as of December 31 for each of the years, are as follows=
1990 ~99! 1992 1993 1994

Office equipment Demonstration airplane Office furniture Total cost Less accumulated depreciation

S40,000 30000 70,000 5.500

$ 40,000 $ 40,000 2,000,000 2,000,000 30.000 30.~000 2,070,000 ~9f833 2,070,000 310.833

S 40,000 2,000,000 30.000 2,070,000 ~2~,834

$ 40,000 2,000,000 30,000

T~2.834

564,500 51,970,167 $I,759,167

$I,548,166 $1,337,166

The Company had no proper~y and equipment at December 31, 1989. All balances represent additions during the proJe~ion period, which have been assumed to be as follows=

I. 2.

office equipment for the new Hang Kong Office of $40,000 in July 1990 Office furniture for the new Hang Kong Office of $30,000 in July 1990 A demonstration airplane, to be used in air shows and for test flights for potential customers, to demonstrate the effe~iveness of the company's product. The conversion kit for this airplane is projected to be purchased from BTC for $462,000, the engines and propellers from the vendors for $760,000. An old DO-3 airframe is expected to be purchased for approximately $100,000. The conversion is projected to be performed by Basler Flight Services, BTC's distributor in the O~ited States of America, for a cost of approximately $300,000, which is the charged ~e third par~ies. In addition, the airplane will be fitted with avionics at a cost of 5250,000 and long-range wings at Accordingly, the demonstration alrplane has been sho~n as being acquired in August 1991 at a cost of $2,000,000.

Depreciation, projected Indlvidually for each class of property and equipment, has been projected on a straight-llne basis over periods of 5 years for office equipment and I0 years for the demonstration airplane and office furniture.
11

JX68/13
A0412

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 14 of 65

SUMMARY OF SIGNIFICANT PROJECTION ASSUMPTIONS AND ACCOUNTING POLICIES FIVE YEARS ENDTNG DECEMBER 31. 3994 (Continued}

Nc~ 10 - Recounts payable: Accounts payable represent payables to the vendor for the propellers, who gives the Company terms of 30 days. The other items purchased by the Company are the engines and conversion kits, which are required to be paid for in full on delivery. Except for the months ending through June 1990, when the payment of certain expenses are projected to be deferred, all expenses a~e assumed ~o be paid in ~he month in which they are incurred.
Note 11 - Customer Deposl~B~

Thin represents progress payments received from~he customers towards the price of the k~t. ~xcept for 1990 (see Note 20}, when progress payments are shown to reflect the actual terms agreed to, it has been assumed that payments will be received on the following terms: Months prior to de~ve~
6 4 2 Delivery

Percent of ~a~e price
12.5% 12.5t 50%

The progress payments received are shown as a liability until the month of delivery, a~ which time they are app11ed to the sell~ng price and recognized an income o ~ote 12 - Notes Payable: At December 31, 1989, notes payable to stockholders were outstanding for approximately $354,395 at an average in~erest ra~e of approximately Interest on ~hese notes is accrued for monthly. At December 31, 1989, the Company also had an in,ernst-free note payable to BTC for approximately $97,000. RI1 the notes, including accrued in~erest ~hereon, are assumed to be repaid in December 1990.

12

002585

JX68/14
A0413

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 15 of 65

INNOVAIR AVIATION LZMTTED SUMMARY OF SIGNZFICRNT PROJECTION ~SSUM~TIONS AND ACCOUNTING POLICIES ?~VE ~ERRS ENDZNG DECEMBER 31. 1994 (Contlnued }

It has also been assumed that the company will arrange a IAne of credit facility with its bankers in 1990 of $1,500,000 in order to finance its working capital needs. Company management feels that this working capital need may in actuality be par~ially or fully met through tighter and lower inventory levels, and by obtaining ex1:ended payment terms from the Company's vendOreo ~nterest has been assumed at 12% (Prime rate of 10% at May 16, 1990 plus 2%} on the amount outs~andlng. This line will be fu11¥ paid down in November 1990. Note 13 - Dividends= Beginning in 1992, it has been assumed that a dividend of approximately 50% of the prior year's net income will be distributed in April of the ~rrent year. ¯ he dividend payment in 1992 has also been assumed to include any su~plus in retained earnings at the beginning of 1991.
Note 14 - Cost of Goods Sold:

Cos~ of goods sold comprises the following= Engines Propellers Conversion kits l~rchased from BTC Total $ 724,000 36,000 462r000 $1.222,000

The engines and propellers are purchased by the Company dire~:ly from the vendors, and the costs used are those currently being charged by the vendors. The conversion kits purchased from ETC comprise the following items at an agreedupon mark up of BTC's projected costs: Third-par~y manufacture Raw material and fabricated pans Dire~ labor and overhead BTC's mark up @ 20% Cost of kit ~462,000
$240,000 80,000 65r000

13

002586

JX68/15
A0414

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 16 of 65

Research and Development Expense=

The Company has incurred $i,275,000 prior to 1990, in a ~otnt effor~with BTC, towards the research and development expenses in the development and testing mf the kit and prototype, and in ob~alning a Supplemental Type Certificate from the Federal Aviation Admi~istratlOno The major portion of the research and development ef£o~ has been completed prior to 1990. Accordingly, Company management projects that on an ongoing basis, only nominal expenses will need to These ongoing expenses be incurred in making minor modifications to th~ kit° are projected ~o be borne by BTC.
Note 16 - Sellinq and Marketlna Expenses|

The principal expenses within this category are om~Isslons and product liability insurance. Commission commission rates and amounts are projected to be as follo~s~ 1990 1991 1992 1993 1994 Projected terms (Note 20) 12.075% 12.50% 12.50t 12.50% S 940,000 $ 7,341,600 510,687,500 $11,400,000 510,212,500

The above rates represen~ a weighted average c~ission rats for sales through distributors and sales agents (see No~e 5). ¯

The product liability insurance premium has been projected at lq of sales, based on managements' preliminary dls~ussions with its insurance agents, and has been assumed to be paid in equal monthly insnallmenns.

14

002587

JX68116
A0415

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 17 of 65

SUMMARY OF SIGNIFICANT PROJE~'ZION ~SSUMPTIONS A~D ACCOD~TING POLTCIES FIVE YEARS ENDING DECEMBER,,,31~ 1994 (Continued}

other selling and Marketing Expenses other expenses included under selling and marketing expenses are:
e

Depreciation of $200,000 a year on the demonstration airplane, charged on a s~raight-llne basis over 10 yea2s, star~ing August 1991. Cost of demonstration flights, projected at $50,000 for 1990 and $180,000 for years 1991 onwards. In the initial period, before the Company acquires its demonstration airplane, it is expected to have a maximum of four dumons~ration flights a month, each lasting one hour. The cost for one hour for a plane and crew are $2,000. In addition, the cost of flying the customer to the flight site and related expenses a~e projected at $2,000, which will be shared equally between the dlet.~i~utors and the Company. Demonstration flights are expected ~o star~ i~ September 1990. From JanuaEy 1991 to ~uly 19~I, ~he Company projects ~o have between five and six demonstration flights a month. Once the compan~ acquires its demonstration airplane in August 1991, it is proje~ed to hold six demonstration flights a mouth. The marketing manager ts pro~ec~ed to pilot the plane and, accordLngly, no addltional crew will be needed. The cost of each flight, including bringing the ou~tomer to the flight site, has been estimated at $2,500° This includes $500 towards repairs and maintenance, insurance and storage of the airplane. Cost of attending air shows, estimated at $75,000 annually. Salaries and bonuses of $120,000 for a marketing manager and $30,000 for an assistant star~ing in September 1990. A housing allowance for the marketing manager of $30,000. other allowances and benefits have been estimated at 159 of salaries and bonuses. Cost of adver~islng, deeign and production of marketing brochures and other materials, au $25,000 for 1990, $150,000 for 1991 when the Company intends to produce an in-flight video presentation, and $75,000 a year from 1992 onwards. Travel costs of $72,000 a year. This was arrived at baaed ~n a projected 12 travel days a month for the marketing manager at $250 a day towards hotel, ground transportation and per diem costs, and a to~al of 3 trips a month at $i,000 a trip for airfare. Entertainment costs have been projected at $i00 for each of the 12 days a month spent on sales ~rips.
15

JX68117
A0416

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 18 of 65

SDMMA~ OF SIGNXFICANT PROJECTION ASSUMPTIONS AND ACCOUNTZNC POLICIE~ FIVE YEARS EN~,ING DECEMBER 31r ~994 (Continued)

Distributor training expenses, which are projected to be incurred in the initial period when the five distributors are appointed. These costa have been projected at $30,000 for 1990 and 1991.
Note 17 - General.and A~mlnlstrative Expenses:

During the projection period, all kits are projected to be manufactured by BTC and shipped dire~ly to the customers. Freight and insurance costa associated with the shipment of kite will be borne by the ~uetomer8. Sales are projected to be made primarily through the five distributors proJe~ed to be appointed around the world. Accordingly, it is proje~ed that the Company will have s sales and head office in Hong Kong, with only limited general and administrative personnel and overhead. The principal expenses within this category are management and a~ministratlve salaries and holding costs paid to Pratt & Whitney. Manaoement and ~m~nis~ratlve Salaries Salaries, bonuses and housing allowances are proJe~ed cn an indivldual-by-indlvidual basis beginning in July 1990, ae followe~ s Preeiden~ ¯ Accountant ¯ Secretary s Assistant accountant $275,000
$ 50,000

(including a housing allowanc~ of $45,000)

$ 30,000 $ 30,000

Other allowances and benefits have been projected at 15% of salaries and bonuses. Holdlnc costs ~o Pratt & Whitney Because of Pratt & Whltney'e long produ~iom lead t~nee, the Cx~mpany is required to place orders at the end of each calendar year for engines to be delivered in the following year. For each engine ordered that the Company is unable to ~ake delivery of in the year, ~he Company will be required to pay a holding cost of 18% per annum on the cost of ~he engines, star~In~ in January of the following year, until delivery is taken. It has been assumed that the Company will order 20% more engines than it will take delivery of. These ~osts are projected to be as follows~

1991 1992 1993 1994

S 65,160 5217,200 $195,480 $217,200
16

002589

JX68118
A0417

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 19 of 65

o~h~r significant expenses included under general and administrative expenses a~e|

Office rent of $60,000 annually Gene=al office and business expenses of $43,000 annually Legal and audit fees of $34,000 annually Travel and en~er~alnment expenses of $35,000 annually cost of the move to Hong Kcng of $i0,000 in July 1990
Note 18 - Interest Ex~ense~ Interest expense for 1990 represents the interest charges on the no~es payable to stockholders, charged at the rates specified by the notes, and on the amount outstanding under the line of credit facility at 12% (see Note 12). All notes are estimated to be paid off by the end of 1990, and there are accordingly no interest ex~en¯e¯ for the period 1991 to 1994. Note 19 - Sen~itiv~t7 Sales estimates for 1990 are based on firm commitments and other sales currently under negotiation and are expected ~o be reasonably accurate. The Impac~ on net profit of a change in unit sale¯ by 15% above and below that presented for years 1991 - 1994, under ~wo different scenarios, is as follows:
1991 ~9~2 1993 (Dollars in 000's) 1994

15% higher saleas Sales in units Sales in dollars Net profit 15% lower sales: Sales in unite Sales in dollars Net profit

36 $58,400 513,978 28 553,200 $10,542

52 $9~,800 $20,171 38 $72,200 514,249

55 $104,500 $21,533 41 $77,900 $15,6~5

49 $93,100 $18,982 37 $?0,300 S13,959

17

002590

JX68119
A0418

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 20 of 65

~NNOVAIR AViATiON LTMI~ED SOMMARY OF SIGNIFICJt~T PROJECTION ~SSUM~TIONS A~D ACCOUNTING POLICIES FIVE YEARS ENDTNG DECEMBER 31o 1994 (Continued } Note ~0 - Special 1990 Operatinq Assumptions: Projected sales for 1990 have been based on firm sales c~mnitments oE sales currently under negotiation, and include two conversions Projected sales for 1990 are as follows= Customeq Air Columbia(I) Air Atlantlque(1) Taiwan joint venture Taiwan joint venture Type of SaSe . sales Channel Agent Agent Distributor Distributor Sal~ Deliver~ Commission Pri~e Cost Mont~ ~ or % ('000s) ('000S) $2,793 $2,793 $2,211 $2,127 June Augusn Novembe~ December $135,000 $135,000 $. 10t $

I conversion i conversion 2 kits 2 kits

$3,800 $2,444 $3,800 $2,444

During 1990, customer deposits were uniquely projected for each sale, and progress payments from customers reflect the actual payment terms agreed to; these differ from the assumptions detailed in No~e II. (I) Commissions of approximately $90,000 (paid out through December 31, 1989) were expensed in 1989, an ~he ccntrac~ did not contain a provision for a refund in the even~ of a default on the par~ of ~he customer.
Note 21 - Supplemental Type cert~cate~

The aircraft conversion industry is regulated by the Federal Aviation Authority (FA~). On February 2~, 1990, a Supplemental Type Cer~iflcate (STC) covering ~he Turbo-67 conversion was issued by the FAA in the name of BTC. A Par~s Manufacturing Authorization (PMA) was also issued by the FAA in March 1990, in the name of BTC, authorizing the sale of Turbo onversion kits. Accordingly, under the STC and PMA, BTC has all rights to manufacture and sell conversion kits°

The Company has entered into a license agreement with BTC, its licensor, granting the Company the exclusive rights to manufacture and have manufactured conversion kits, install or have ins~alled conversion kits, and to market and sell conversion kits and conversions in all markets outside the Onited S~atea of America.

18

002591

JX68120
A0419

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 21 of 65

19

00,.-°592

JX68121
A0420

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 22 of 65

002593

JX68122
A0421

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 23 of 65

|

002594

JX68123
A0422

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 24 of 65

002595

JX68/24
A0423

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 25 of 65

-/

002597

JX68125
A0424

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 26 of 65

002598

JX68/26
A0425

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 27 of 65

°

002599

JX68127
A0426

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 28 of 65

JX68/28
A0427

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 29 of 65

002~01

JX68/29
A0428

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 30 of 65

002602

JX68/30
A0429

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 31 of 65

~'°]

002603

JX68/31
A0430

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 32 of 65

JX68132
A0431

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 33 of 65

002605

JX68133
A0432

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 34 of 65

JX68134
A0433

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 35 of 65

002607

JX68/35
A0434

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 36 of 65

JX68/36
A0435

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 37 of 65

Deloitte & Touche

PROOECTED FZI'Z~CL~L ST&TL~,~NTS FOR THE PEI~OD ..~Jz.NU~I~Y 1. 1990 TO DE~EHBER 31~ 1994

002608

JX68137
A0436

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 38 of 65

INDEPENDENT ACCOUNTANTS' COMPILATION REPORT ................ PROJECTED FINRNCIAL STATE~TS-BaZance shee~s ............................. S~a~emen~s of income and re~aLned e~rnLngs ............... Statements of cash flo~s ........................ Summary of signL£ican~ projectLon asgump~ions and accounting policies ........................ APPENDIX

3 4

23

../

002609

JX68138
A0437

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 39 of 65

Deloitte&

Touche

1000 Wilsh~re Boulevard Telex: 910 3214090 Los Angeles. California 90017-2472 FacsJmde: (213) 688-0100 Telephone: r213} 688-0800

Messrs. Bryan Carmichael and Barry Wilson Basler Turbo Converslonsw Van Nuyo, California We have compiled the accompanying projected balance sheets, statements of income and retained earnings and cash flows of Sealer Turbo Conversions, Inc. (the Cu~--pany), as o~ December 31, 1990, 1991, 1992, 1993 and 1994 and each of the years then ending, in accordance with standards established by the American Ins~itute of Certified Public Accountants. The accompanying projection and thla r~por~ were ~repared to assis~ cer~aln stockholders sell all or par~ of their interests in the Company to sophisticated invesl:ors who will be able to~ue~ionyou (the responsible pal~ies} directly a~out any or all assumptions, and should not be used for any other purpose. A compilation is limited to presentlng~ in the form of a projection, information that is the representation of the responsible parties and does not include evaluation of the support for the assumptions underlying the projections. We have not examined ~he projection a~, express an opinion or any other form of assurance on the accompanying statements or aseu~ione. Furthermore, even if the assumptions regarding sales and production detailed in Note 3 are realized, there will usually be differences between the proje~ed and a~ual results, because events and circumstances frequenUly do not occur as expected, and those differences may be material. We have no responsibility to update this repor~ for events and circumstances occurring after the date of ~his report. The histor£cal financial statements, presented for comparative purposes herein, as of December 31, 1989 and for the year ~hen ended were not audited, reviewed or complied by us and, accordingly, we do not express an opinion or any other form of assurance on them. The appendix containing ~he supplemental schedules of projected m~nthly flnancial information is presented for the purposes of additional analysis and is not a required par~ of the basic projection. We have compiled this appendix containing the supplemental schedules of projected monthly financial information and, accordingly, do no~ express an opinion or any o~her form of assurance on such information.

May 16, 1990

002610

JX68139
A0438

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 40 of 65

JX68140
A0439

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 41 of 65

Lq--

JX68/41
A0440

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 42 of 65

JX68142
A0441

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 43 of 65

BASLER TURBO..CONVERSTONS,

TNC,

SUM~ OF SIGNIFICANT pROu-ECTION ASSI~PTIONS AND ACCOUNTING POLTCIES FOR THE FIVE YEARS ENDING DECEMBER.3.1. 1994

This financial projection presents to the best of the knowledge and belief of Messrs. Bryan Carmlchael and Barry Wilson (the responsible parties) who are responsible for the assumptions underlying the projection, the expected financial position, results of operations and cash flows of Baeler Turbo Conversions, Inc. (the Company} for the projection period, assuming that the hypothetical assumptions regarding sales and production detailed InNate 3 are realized. Accordingly, the projection refle&Wcs their Judgment as of May 16, 1990, the date of ~his projection, of the expe~ed conditions and the Con~any'e expe~-~:ed course of action if the hypotheUlcal assumptions were achieved. The presentation and the hypothetical assumption regarding s~les and production dete~Lled in Note 3, and other assumptions, are based on the knowledge, belief, judgment and expectations of the responsible parties and have been prepared to assist certain stockholders sell all or part of their interests in the Company. Accordingly, this projection may not be useful for other purposes. The assumptions disclosed herein are those that the responsible par~ies believe are significant to the projection, and are based on their current research into and understanding of the aircraft conversion and modernization industry. Even if the hypothetical aeeumlM:ione detailed in Note 3 were achieved, there will usually be differences between projected and actual results, because events and circumstances frequently do not occur as expe~ed, and those differences may be material.
The supplementary schedules of projected n~nthly financial information have been prepared on a computerized model (in thousands of dollars} and, as a consequence, rounding differences may occur in column totals.

Nc~e ) - Summary of Sioni~cant Accountino Policies:

Basler Turbo Conversions, Inc., a Wisconsin corporation, staz~ced operations in January 1988 for the purpose of modernizing and conver~ing Douglas DO-3 and C-47 aircraft to Turbo Prop Power.
Accountina for Contracts

The Company is projected to use the completed contrac~ method of accounting for its produc~ sales and related expenses. ~nder this method, all revenues related to the sale of a conversion kit, along with associated costs, are deferred until completion of the contract. PreteriT, Plant and EquipmeDt Proper~y, plant and equipment are assumed to be recorded at cost and depreciated on a straight-line basis over the estimated useful lives of the related assets.

002614

JX68/43
A0442

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 44 of 65

SUMM~/%Y OF SIGNIFICANT PROJECTION AS~q~qPTIONS AND ACCOUNTING ?OL~CI~S FOR THE FIVE ~EARS ENDING DECEMBER 31m 1994 (Continued}

The Company has elected to be taxed as an "$" Corporation for Federal income tax and Wisconsin state tax purposes. Accordingly, the Company's stockholders are responsible for the payment of taxes on the Company's taxable income, and accordingly, no income tax expense is projected in the financial statements.
Inventories

Inventories are assumed to be stated at the lower of co~ (first-in, first-out method} or market. Inventory costs consist of engines, propellers, materials, par~s contracted with third-party manufacturers, direct labor and manufac~urinq overhead. Note 2 - Description of the Produ~ and the CommenT's Prcjec~ Channels oK Di~r~bu~ion~
Towards meeting the Company°s obje~ive of modernizing and converting DC-3s and C-47s to turbo prop po~er, the Company has developed a conversion kit that moder~izee the cockpit and virtually all major syete~L~ of the aircraft. The conversion kit includes a pair of Pratt & Whitney PTS-6~R turbo prop engines, new propellers, all parts including rivets, nuts and bolts and overages to cover normal losses during installation. The kit also includes specialized tools, drawings, detailed kit installation instructions, maintenance, flight and repair manuals to allow customers to install the kit and car~y out the conversion themselves.

Apar~ from the exceptions noted below, these kits will ~e sold exclusively through: (i) Basler Flight Services (BF$), a related company, for domestic sales and certain international sales negotiated through an agency of the United States Government; and

(£i) lnnovair Aviation Limited (Innova£r), the Company's international licensee, for all other international sales. Except for the sale of chree conversions in 1990 (see No~e8 3 and 20), the Company wall no~ provide conversion services Customers of the Company's two exclusive distributors may obtain conversion services as follows: (i) BFS' customers may obtain conversion services dlre~ly fr~ BFS.

002615

JX68144
A0443

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 45 of 65

B~SLER TURBO CONVERSIONS. INC. SUMMARY OF SIGNIFICANT PRO~TECTION ASSUMPTTONS ~ND ACCOUNT.ING P.OLTCIES ,FOR THE F~VE YEARS ENDING. DECEmBeR 310 1994 { Cost inued } (ii) Innovair's customers may obtain conversion services from either BFS or any of the downstream distributors that Innovair is intending to appoint to help it penetrate the international market.. A number of ol~ional equipment items are available to equip aircraft for specific operating functions such as enlarged cargo doors, oxygen systems, etc. All sales of optional equipment, and accompanying profits, have been ignored for the purposes of these projections in order to present a better picture of the Company's basic operations.

Note ~ - ~7pothetlca~ ~s~mp~ions= The projection is based on the following hypothetical sales and production assump~ioss: Sales: BFS, the Company's exclusive distributor in the United States of America (USA), has esta~llshed contacts with owners and operators of DO-3 and C-47 air planes in the USA, and has ident£f£ed the existence of 130 air frames. In addition, preliminary studies by the Company and lnnovair indicate the existence of 1,030 air frames outside the USA

Domestic and international sales for ~he five-year period are projected as follows:
Year 1990 1 199__.~I992 1993 1994 Tota~

D~mestic sales (BFS| lnternatlonal sales (~nnovair)

~ __6 12

18 32 50

20 4--5 65

19 4_~8 67

22 85 4--3 17--4 65 259

Excep~ for 1990, which includes the projected saleof three conversions at $2,722,000, $2,627,000 and $2,279,000, and two kits $1,800,000 each, domesuio at sales are of cgmplete kits, including engines and propellers, at a price of $1,900,000 which is consistent with curren~ pricing. They will be made to BFS, the Company's domestic affiliate and distributor.

0026 6

JX68/45
A0444

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 46 of 65

SUMA~2%R~ OF SIGNIFICANT PROJECTION ASS~IO~S ~C~ING POLICIES ~OR ~ F~ ~ ~NG DE~ER 3~.~. ~994 (Continued)

Sales to lnnovai~, the international licensee of the Company, are of partial kits, which exclude engines and propellers. Excep~ for 1990, which includes the projected sale of one conversion at $883,000, these kits are priced at $462,000, which represents a gross margin of 20% over the Company's total cost:

Projected costa: Third-par~y manufacture items Raw materials and fabricated paz~s semi-variable costs (allocated labor and ~vsrhead}
20% margin
production Capacity

$240,000 80,000 , 65r000

385,000 77~000
5462.000

The Company is projected to operate on a batch manufacturing basis, with each batch proje~ed to take four months to complete. The Company is projected to lease a 10,O00-square foot manufacturing facility from BFS, An Oshkosh, Wisconsin. A single shift, working at full capacity, is projected to be able to produce a maximum of ten kits per batch. The Company is proje~ed to staz~ its first full production batch in August 1990, to be completed by December 1990. Star~ing in 1991, production of batches is projected ~o star~ in January, May and September of each year, with delivery projected to be made in April, August and December, respe~ively.

A second shift is progected to be added in January 1991, and a third shift in January 1992. This will give the C~m~any a maximum pro~ecte¢~ production capacity of 80 kits a year, after allowlng for proje~ed inefficiencies associated with additional shifts.
~nflati~

These projections assume that there will be no inflationary impa~ on either costs or revenues. The responsible par~ies believe that any inflationary impact on costs can be offset with corresponding increases in r~snues.

002617

JX68/46
A0445

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 47 of 65

BASLER TURBo CONVERSIONS.

INC.

SUMMARY OF SIGNIFICANT PROJECTION ASSUMPTIONS AND ACC0UNT~NG POL~C~S FOR~HE F~E YEARS ENDING DECEMBER 3~ 1994 (Continued} Note 4 - Cash: Cash represents the surplus of net cash flows resulting from the projected activities described herein and has been assumed to be non interest-bearing.

Note 5 -Prepaid Con~issions:
~nternat~onal Sales No commissions will be paid on sales to Innovairo

BFS will be responsible for sales and marketing, installation of conversions, produc~ support and maintenance, warranty programs, spares euppo~ and training. In the initial ~eriod (through 1990}, the services of sales agents are proje~ed to be utilized. Commissions are projected to be paid to the distributor and sales agents in propo~ion to the progress payments received from the customers {see Note II). Sales through BFS and sales agents are projected to be the following percentages of total sales:

BFS Sales agents

67% 33%

95%

100%

100%

100~

For 1990, BF$ is to be paid commiss£one ranging from 10.00% to 12.50%, and sales agents are to be paid 5.00%. The weighted average conuuiseion rate for 1990 was determined to be 10.83%. Beginning in 1991, BFS is projected to be paid a =ommisslon of 12.5%. Accordingly, the weighted average commission rate used in the projections for each of the years is as

Weighted average rate

lO.e3% l~.So~

12.~o~ ~2.so~

002B18

JX68147
A0446

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 48 of 65

SDMMARY OF SIGNIFICANT PROJECTION ASSUMPTIONS ~ ACCOUNTING POLICIES FOR THE FIV~ YE~R~..ENDING DECEMBER 31, 1994 (Continued}

These average rates have been used for all sales, excep~ for 1990, when commissions are shown to reflect the projected terms for each projected sale (see Note 20). It is projected that the Company's contracts with the distributors and sales agents will stipulate that commissions paid to the distributors and sales agents prior to receipt of full payment by the cu~omeE will be required to be refunded in the event of a default by the customer. Accordingly, the c~mmlssione paid out at the time of receipt of a progress payment have been treated as a prepaid expense, ~o be expensed i~ the month of the sale when the £inal payment is received from the customer.
Note 6 ~ Depoeit~.- ~ircraft ~nqin@s: The conversion kit includes a pair of turbo engines, at a cost of $724,000, purchased from a single vendor. Except for 1990, when the vendor agreed to give the Company more flexible payment terms, the vendor requires the Company to pay a 10% deposit six months prioE to scheduled delivery of the engines. The engines are scheduled for delivery two months prior to sale and delivery of the conversion kit. The deposits made against.the engines ordered are shown as a deposit until the month in which they are received, at which t~me the deposit is applied towards the purchase price of the engines. Note It is projected that the Company will manufacture the kits in batches. Each batch is projected to take four months to manufa~ure. The inventory buildup in the months preceding the delivery of the kits is pro~ected as follows:

Engines $ 724,000 Propellers 36,000 Third-pa~y manufacture items 240,000 Raw materials and fabricated pans 80,000 Direct labor and overhead 6~,000 Total $1,145,000

12% 25%

25t 25% 25%

100% I00% 25% 25% 25%

10

002619-

JX68148
A0447

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 49 of 65

BASLERTURBo CONVERSIONS,.INC. SUMMARY OF SIGNIFICANT PROJECTION ASSUM!~TIONS AND ACCOUNTING POLICIES " FOR THE F~VE YEARS ENDING DECEMBER 3~, ~994 (continued|

Indirect labor costs of $i00,000 in 1990, S160,000 in 1991, and $200,000 annually thereafter ¯ Hangar rental costs of $75,000 annually
Telephone and facsimile costs of $14,500 in 1990, $18,000 in 1991 and $22,000 annually thereafter

utilities of $7,500 in 1990, $10,000 in 1991 and $12,500 annually thereafter Facilities and equipment repairs and maintenance of $i0,000 in 1990, 512,500 in 1991 and 514,500 annually thereafter
Postage costs of $5,000 in 1990, $7,500 in 1991 and $I0,000 annually thereafter

Uniforms and cleaning co¯Us of $7,500 in 1990, SI0,000 in 1991 and $12,500 annually thereafter
Depreciation on tooling, machinery and equipment, cha~ged on a straight-line basis over a five-year period. For computing the selling price o~ international kit sales, the semi-variable .cost per kit has been projected at $65,000 for the projection period. Accordingly, e~cept for 1990 which included the sale of one conversion to Innovair with a cost of $676,000, the cost of kits sold to Innovair is projected a~ $385,000 (variable cost of $320,000 plus semi-variable costs of

565,000).
Note~5 - Research and Develo~enT The Company has incurred the ma~or potion of its research and development expenses, of approximately 52,700,000, prior to 1990, with an additional 5300,000 during the first quarter of 1990 in the development and ~esting of the kit and prototype, and £n obtaining a Supplemental Type certificate from the Federal Aviation Administration. Accordingly, the Company projects nha~ on a~ on going basis only nominal expenses will need to be incurred in making minor modifications to the kit. These expenses have been projected at $500,000 for the last three quarters of 1990 ~hen certain flight tests are tn be performed, and at $250,000 for each of the following years.
15

00,?,624

JX68149
A0448

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 50 of 65

BASLERT~RBOCONVERSTONS,

INC.

SOMMARY OF SIGNIFIC~qT PROJECTION ASSUMPTIONS AND ACCOONTINC POLICIES FORT HE FTVE ~rEARS.END~NG D~CEM~ER 31, 1994 (Continued) No~e 16 - Sell~nq an~_M~ketin~ Ex-oenses= The principal expenses within this category a~e commissions and product liability
i~sura~ce,

No commissions a~e to be paid by BTC to Innovalr on international sales. On domestic sales, commissions have been projected at ~he followlng rates for each of the years covered by the projection period: 1990 1991 1992 1993 1994 Projected terms (Note 20) 12.50% 12.50% 12.50% 12.50% $ 623,075 $4,275,000 $4,750,000 $4,512,50~ $5,225,000

The above rates represent a weighted average commissions ra~e for sales made primarily through BFS, the Company's do~eetic dIst.Eibutor (see Note S - Prepaid Commissions).

Product liability insurance premium has been pro~ected at I% of sales, based on management's preliminary discussions with i~s insurance agents, and has been assumed to be paid in equal monthly ~nsnallmenus.
Other,Sell~nq. and Ms~ket~n~ EFpe~ses

As all sales are pro~ected to be made either through its affiliate, BFS, for domestic sales and InnovaLT for International sales, it has been assumed tha~ the Company will incur negligible selling and marketing expenses o~her than sales commissions an~ product liability insurance. The only other selling and marketing expenses projected are: Cost of running a training school for customers. The training school is projected to be staffed by ~he following personnel at the following salariee~ - Training School Manager $45,000 - Flight Trainer $30,000 - Ground Engineer 530,000 - Mechanic Trainer 530,000 - Secretary $20,000

16

JX68/50
A0449

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 51 of 65

SUMHARY OF S~G~$FIO-..P, NT PROJECTION FOR THE F~VE YEARS ENDING DECEMBER 31, 1994 (Continued)

The school is projected to be established so as to be revenue neutral, with customers being charged for attending. However, it is projecued that there will be instances where the customer may not be charged a fee, and accordingly, an annual net out-of-pocket cost of running the training school of $75,000 has been assumed.
Warranty costs. The engines and pEopellers ere =overed under the vendors' warranties. The Company will have to bear the cost of a one-year warranty against defe=tive parts, which has been estimated a~ $i0,000 per unit, in the year of sale. The Company has expensed these costs and assumed them to be paid out in the monnh of sale.

The principal ty~es of expenses within this category are management and administrative salaries. Manaqement.and Administrative Salaries Total approxima=e compensation is projected 1 General Manager 1 Administra=ive Assistant to the General manager 1 Conuroller 1 Materials Manager 1 Storeroom Supervisor 1 Purchasing Agent 1 Inventory Control Supervisor 1 Production Planner 3 Produ~ Suppor~ Personnel 1 Secretary - Produ~ion 1 Purchasing Assistant 1 Secretary - Materials 2 Data Entry Clerks 3 Storeroom Clerks 2 Toolroom Clerks 8 Shipping and Receiving Clerks 1 Cost Accountant 1 Government Contra~ Compliance l Assistant Con~roller~OEfice Manager 3 Clerks - Accounting 1 Secretary - Accounting 1 Personnel Administrator 1 Personnel Clerk
17

to be as follower $110,000 (sha~ed equally with BFS) $ 25,000 $ 60,000 $ 50,000 $ 35,000 $ 35,000 $ 25,000 $ 38,000 $I0~,000 $ 21,000 $ 20,000 $ 21,000 S 38,000 S 55,000 $ 27,000 5108,000 $ 33,000 $ 33,000 $.40,000 $ 53,000 $ 21,000 $ 40,000 $ 19,000 (shared equally with BFS)

002626

JX68/51
A0450

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 52 of 65

Payroll taxes and other fringe benefits have been projected at 25t of toual payroll. A management profit-sharing bonus of $70,000 a year has also been provided for. Workmens' compensation costs have been projected at I% of ~otal salary. Salary expenses have been increased gradually during 1990, as the bulk of the employees will be hired in July, August and September of 1990, when production o~ ~he Company's firs~ full batch of kits will commence.
~cher General and Administrative~xDennee

O~her significant expenses included under general and adn~nistratlve expenses Holding costs to Pratt & Whitney. Because of Pratt & Whitney's long produc~ion lead t~mes, the Company is required to place orders at ~he end of each calendar year for engines'to be delivered in the following year. For each engine ordered, that the Ccaupany is unable to take delivery of in ~he year, ~he Company ~ill be required to pay a holding cost of 18% per annum on the cos~ of ~he engines, star~ing in January of the following year until delivery is taken. It has been assumed than the coa~any wall order 20% more engines than it will take delivery of. These costs are projected to be a~ follows:
Year of scheduled dwllverv Year cost Incurred

Amount

1990 1991 1992 1993 1994

1991 1992 1993 1994 199S

0

$ $ $ $

86,880 86,880 86,880 86,880

The cost of moving the company's operations from its existing facility at Van Nuyk, California ~o Oshkosh, Wisconsin is estimated at $100,000 and is to be incurred in July and August 1990 m ¯ Legal fees of 540,000 in 1990, and $30,000 annually ~hereafter Audit fees of $35,000 in 1990, and $50,000 annually thereafter Recruiting expenses of $80,000 in 1990 when the core management team is to be hired, and $I0,000 annually thereafter

18

002627

JX68152
A0451

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 53 of 65

8ASLER .~RB. O CONVERS~ONS~ INC. SUMM~X OF SIGNIFICANT PROJECTION ASSU~?T~ONS ~ ~CCOUN~NG POLiCiES F~ ~ F~ ~S E~ING DE~ 31. 1994 (Continued}

System consulting fees of $50,000 a year in 1990 and 1991, for assistance with the implementation of a computerized accounting and inventory control system. For subsequent years, consulting fees estimated at $i0,000 a year Kit packaging consulting fees of $10,000 annually Au~omob£1e expenses of 510,000 annually Computer and office supplies of $50,000 in 1990, when inltial prin~ing and other office star~-up costs will be incurred, and S35,000 annually thereafter Office rent of 510,000 annually
S

Telephone costs of 520,000 in 1990, and $30,000 annually thereafter Travel and entertainment expenses of $22,500 ar~ually Utility costs of 512,000 annually General insurance costs of 512,000 annually Facility repairs and maintenance of $5,000 annually Dues, subscription and other miscellaneous expenses of $8,000 annually Depreciation expense on automobiles, office furniture and equi~ent, charged on a straight-llne basis over a five-year period Royalty costs of $140,000 in 1990 towards the purchase of the kit conversion technology.

Note 18 - Interest ExpeDse:

Interes~ expense for 1990 represents the interest charges on the notes payable to stockholders, advances from officers and notes payable to banks, outsnandlng at December 31, 1989, at the ra~es specified by the notes. Interest expenses for ~he period 1991 ~o 1994 represent interest charges at 129 (prime rate of 109, as of May 16, 1990 plus 2%} on the borrowings under the line of credit facility which is to be arranged. This interest rate is consistent with rates charged by banks on lines of credi~ to similar companies.
19

002628

JX68153
A0452

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 54 of 65

Note 19 - Sensitivity Analysis=

Sales estimates for 1990 are based on firm CO.hi,merits &nd other sales currently under negotiation, and accordingly, are expected to be reasonably accurate.

The impa~ of a change in unit sales by 15% a~ove and below ~hat presented for years 1991 - 1994, under ~wo different scenarios, is as follows=
(Dollarm in 000's) 15% higher sales: Sales in units: Domestic International Sales in dollars Net income 15% lo~er sales= Sales in units: Domes=it International Sales in dollars Ne~ income

21 36 $56,532 $11,655

23 52 $67,724 $14,350

22 55 $67,210 $14,162

25 49 $70,138 $15,052

15 28 $41,436 $ 7,318

i? 38 $49,856 $ 9,252

16 41 $49,342 $ 9,088

19 37 $53,194 $10,215

Sales in dollars include both international sales at $462,000 a kit, and domestic sales a~ $1,900,000 a kit (see Note 3}.

2O

002629

JX68/54
A0453

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 55 of 65

SUMMARY OF SIGNIFICANT PROJECTION ASS~D~FTIONS A~ ~CCOUNTING POLICIES FOR TH~ FIVE YEARS ENDING DE~EMBER 31. 1994 (Continued} Note 20 - S~eclal 1990 O~era~inq Assum~tlonsz
Projected eales for 1990 have been based on firm eales commitments or sales currently under negotiation, and include three conversions. De~aile of sales for 1990 are as follows:

Customer
ao

of sale

Sales channel,

Sale Delivery Commission price month ~ or ~ (000's) (000's)
2,627 2,722" 3,600 1,900 2,279 June O~ober June July July $132,000 132,000 10.0% 12.5% -

Domestic Sales:
Air Columbia (i| Air Columbia (i) United States Air Force Federal Express United Technology i conversion 1 Conversion 2 KiSs 1 Kit I Conversion Agent Agent BFS BFS Direc~

b.

International Sales: Air Columbia Air Atlantique Taiwan joint venture Taiwan joint venture I Conversion 1 Kit 2 Kits 2 Kits Innovair Innovair ZnnovaLr ~nnovair 883 462 924 924 June September November December

(1) Commissions of approximately $238,000 {paid out through December 31, 1989) were expensed in 1989, as the contract did not contain a provision for a refund in the event of a default on the part of the customer. During 1990, customer deposits were uniquely negotiated for each sale, and progress payments from customers refle~ actual payment terms agreed to; these differ from the assumptLone detailed in Note ii.

21

002630

JX68155
A0454

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 56 of 65

~AS~ER'l'I3"R~O ~ON'VER~]OH~ ~. ASSUMPT~ONSRNDACCOUNT~NC ~R T~ FI~ YE~S ~ING DE~ 31. 1994 (Continued) lnven~o~ l~els t~ough June 1990 differ fr~ those which would flow fr~ ~he ass~pt~ns~de for ~he r~ainder of ~he pro~e~ion~riod (s~ pr~ily as result of ~he followi~g: o o o Conversions in profess, Delays in ki~ deliveries, and Actual costs for the fir~ four eDgine p~s being slightly lower ~han the costs proje~ed.

Accordingly, for 1990, certain fin~cial s~a~ent i~em= ~y not foll~ assumptions de~ailed in No~e 7, Note 9, No~e II and No~e 14.

Note 21 - Su~lemental Type Ce~ificate=
The aircraft conversion industry is regulated by the Federal Aviation Authority {FAA). On February 27, 1990, a Supplemental Type Certificate (STC} covering the Turbo-67 conversions was issued by the FAA in the name of BTC. A Par~s Manufacturing Authorization (PMA) was also issued by,he FAA in March 1990, in the name of BTC, authorizing the sale of Turbo conversion kitao Accordingly, under the STC and FMA, BTC has all rights to manufacture and sell conversion kits.

The Company has entered into a license agreement with Innovair, its innernstional licensee, granting Innovalr ~he exclusive rights to manufacture and have manufactured, conversion kits, install or have installed conversion kits, and ~o market and sell conversion kius and conversions in all markets outside the USA.
Note 2~ - Other

O~her income for 19B9 includes approximately $1,275,000 received from lnnovalr as its contribution towards the research and develop~en~ expenses incurred in a joint effor~ towards the devel~pment and tesUlng of the kiE and prototype, and in obtaining a Supplemental Type Certificate from ~he Federal Aviation Administration.

002631

JX68156
A0455

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 57 of 65

002632

JX68157
A0456

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 58 of 65

002633

JX68/58
A0457

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 59 of 65

0026.34

JX68159
A0458

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 60 of 65

002635

JX68/60
A0459

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 61 of 65

002636

JX68161
A0460

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 62 of 65

002637

JX68162
A0461

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 63 of 65

002638

JX68163
A0462

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 64 of 65

oo26a~

JX68/64
A0463

Case 1:96-cv-00408-LAS

Document 158-13

Filed 03/03/2008

Page 65 of 65

002643

JX68/65
A0464