Para.9.10. Airbus A340-500/600 pricing projections – some initial inputs/reminders(A) Reminder from para 8.5 re extract from Mr Dekker’s oral evidence in April 2008 Mr Dekker “….. This schedule is an estimate at complete, and each quarter we do various scenarios of this schedule, there are three major variables that affect the outcome of this schedule, sorry to bring it to such basic levels, but it's number of units, times revenue per unit, and the cost……….. If our best view, our -- let me identify best, our most reasoned view and most likely outcome showed a 10 million loss, yes, we would post that loss.
(C) Mr Dekker – Oral evidence on 10 June 2009
9.10.1 NONE of the contents of my CD2 emails/folder files are mentioned or Exhibits in either of the PwC Reports. The reader will have noted that the Final PwC report was published at the end of August 2007 after the seven-month C$3m “independent forensic investigation?” was commissioned by Mr Dimma. I wrote specifically about this crucial subject and the broader PwC Final report to both Mr Edwards and Mr Dimma on 11 September 2007 (Read receipt from both). (A few examples of those crucial omissions (1) my 19 Feb 2006 email above -- on probable A340 -500/600 production build projections of 150 aircraft or (2) Mr Butyniec’s Best and Final Offer (BAFO) pricing settlement letter to Aircelle - 11 August 2006 I never saw anything in writing from Mr Neill at that time ( I had on 22/23 February 2006 when Mr Furbay emailed us that “our true impact is 9%” etc and Mr Neill had initially wrote that he considered that “10% seems reasonable” but subsequently understood that by 15 August 2006 that Mr Neill had rescinded his subsequent 23 February 2006 written instruction to Mr Furbay of “.. Walkaway has to be around 15%.” and was supportive of the written “settlement terms” in Mr Butyniec’s BAFO counter-offer proposal to Aircelle – “V. Lafond expects a counter offer. Letter sent by JSB to V Lafond.” – MAC staff meeting minutes on 15 August 2006 (doc 2021). Whilst I accept Mr Neill’s written evidence (RAN22) that I can be a strong negotiator in my Magellan roles I was personally dismayed and disappointed to learn - after both that MAC Board 10 August 2006 meeting and I had left Toronto Head office on the 11th - as I was unaware of any discussion or approval or Mr Butyniec’s/Mr Dekker’s BAFO proposal to the preceding MAC Audit Committee or during my attendance at the MAC Board (nor is it minuted) - that Mr Butyniec in his 11 August 2006 letter was prepared to settle, on behalf of MAC, in his Aircelle settlement discussions for a price increase of only 8.7% in the MAC commercial agreement for A340-500/600. This was instead of pressing for at least the “low teens /12.3% +” as a FY2006 pricing/baseline for the budgeted 64 {operations planned more/actual 81} Exhaust system deliveries in FY2006. This “pricing deficit” alone would cost MAC at least C$0.5m in additional revenues/gross profits/cash in FY2006. I believed then that we had a very sound business and legal /arbitration “case” for 12%+ (an additional $6000+ per exhaust unit) and up to perhaps theoretically 32% for FY2006, although the escalation formula challenges for MAC would really come within our strategic planning horizon in 2009+ as per point (c ) above. Astonishingly --- and I could never understand why {given Mr Butyniec’s “tough” vocal and written position within Magellan in the past (e.g. his email in January 2006- {…. My concern is that we keep changing the numbers until they look like we need them to be ……….We need a real offer in writing from them now. We are negoitating with ourselves and have been for months…… I want a deal like anyone else, but one that provides a profit”} Mr Butyniec’s BAFO FY2006 price of $179,623 per unit – an 8.7% price increase etc etc as requested by Aircelle as the MAC basis of a settlement (his term : “stopping negoitating with ourselves”) was then WORSE /LOWER than had already been secured by Mr Furbay/us in Aircelle commercial discussions in late June 2006 (read doc 1790-23 June 2006). It was on that June 2006 Aircelle “agreed” 9.7% price increase basis that a minimum $ price number of $181,270 per unit for production/spares was derived and all of us submitted in the Q2.2006 EAC/financial reporting for the A340-500/600 program. The net effect of Mr Butyniec’s final “real” offer was to inevitably increase further the Q2.2006 EAC gross losses of $5.2m on the A340-500/600 program. Against the difficult Magellan liquidity/financial results and Mr Butyniec’s “lower” Aircelle A340-500/600 pricing proposal, combined with our failure to meet our operational A340-500/600 cost targets for labour and overheads at Aeronca / Bristol – as per the recently circulated July 2006 results, I told Mr Butyniec, just before the formal start of the 15 August 2006 MAC weekly staff meeting.doc.2021, that his BAFO A340 pricing “settlement” offer of $179,623 per unit was just TOO LOW for FY2006 etc and subsequently In particular after I had told Jim Butyniec on 15 August 2006 that his final settlement offer of 8.7% for a reduced price in FY2006, the subsequent base value etc (in his letter sent on the 14 August 2006) was LOWER than had been previously agreed with Aircelle ( the 9.7%/12% reported in June 2006 email above) he seemed shocked / perturbed and began to back-peddle – subsequently I believed pushing the responsibility back again to Mr Furbay et al. You can read this as part of the email trail and specifically relevant is his email shortly afterwards on Friday 18 August 2006 (2179B) where he states to all of us – in particular to Mr Furbay - “Thanks, we can talk more about this in a few days. John, I do not want Nicky to think there is hope that a call from Rich to Pascal or vice versa will bring a settlement at less than the 10% or 12% needed to close the issue. As she stated the offer from Vincent was a take it or leave it one, that also applies to them with ours.” Note Mr Butyniec’s back-peddling out of his formal A340 pricing counter-offer to Aircelle to the minimum 9.7% /10% we all thought had been secured in June 2006 when reported through Mr Furbay’s email dated 23 June 2006 and which we (in particular CFO Mr Dekker and CEO Mr Neill) had used as the basis of the A340 EAC for Q2.2006. The net effect of this intervention by Mr Butyniec was that prior to his direct involvement we had secured in late June 2006 a price increase of 9.7% - 12.0% and a higher subsequent base, which we had used in our pricing assumptions in the Q2.2006 EAC. His “approved” counter offer would result in a lower price increase of only 8.7% and higher gross losses in the A340 Program (only worsening the C$5.2m+ gross losses calculated in our Q2.2006 EAC) rather than the management override to a “A340 program break-even”, as determined by CFO Mr Dekker and CEO Mr Neill and which was the basis of the MAC Consolidated Accounts/Q2.2006 Earnings release on 14 August 2006 to the TSE. It would be a matter of speculation on my part, but it may have been that in approving this 11/14 August 2006 BAFO Mr Butyniec had persuaded himself , Mr Edwards and Mr Dekker that this MAC final, final offer “almost recovered” our “true impact of 9%.” Mr Butyniec never did explain to the full team the precise reasons as to why he did what we did; we in fact now seemed to be “negotiating with ourselves” with a consequent negative effect. I related these A340 points, amongst others, to Mr Dekker in a 29 minute telecom, only days before my visit to Toronto to lead our MAC Group 5 Year strategic planning sessions, and before my instant dismissal on arrival at Toronto Airport. Q9.10A Why did PwC not include these clearly relevant pricing documents in their Report as at Q2.2006 when I communicated their existence and indeed provided them to PwC from my PC forensic files?? Q9.10B Did PwC establish whether Mr Dimma or any of the MAC Board, other than Mr Edwards, had approved this BAFO settlement offer to Aircelle before , during or immediately after the 10 August 2006 Board at pricing that was LOWER than the Q2.2006 EAC before the financial results were released and published to the TSE on 14 August 2006? Why did they not assess what implications this pricing offer would have if accepted by Aircelle in increasing further the documented $5.2m gross losses? Post Note Subsequently Magellan publicly disclosed on its website that the commercial terms of that agreement was for increased revenues and gross profits of $4900K in 2006 and 2007 and $5500K in Q1/Q2/2008. I know that during the course of FY2006 Magellan budgeted/EAC.Q4.2005 to ship 64 A340-500/600 units, and actually delivered 81; whilst in FY2007/EAC Q4.2006 budgeted for 40 units and actually delivered 45 units…for a combined total of 126 units over that 2006/2007 year period. In FY2008 48 production and spares units were delivered by MAC: 25 during Q1/Q2/2008. Subsequently with the A340 airline series production programme now nearing an end - only 17 A340-500/600 exhaust system units were produced by Aeronca/Magellan in FY2009. Mr Edwards in his oral evidence to the UK court on 31 March 2009 stated “MAC gained a material price increase of C$10m to C$15m for the A340 program last year. The contract called for certain price adjustments and it was resolved favourably. That’s my degree of knowledge. It was a large contract; commercial discussions went on and it was resolved satisfactorily in FY2008.” It would seem from my knowledge, experience and logic (recognising that this settlement ought also to include that for the A380) that the commercial terms of this further Aircelle “settlement” agreement has NOT been constructed (as most stakeholders, including the professional stock market analysts, expected,) on a “normal stepped increase pricing basis for the actual units delivered each year”, as per any normal arbitration of the escalation formula, but to substantively meet the financial and accounting needs of Magellan in reducing further its “over-stated” A340-500/600 asset valuation on the Balance Sheet. Though we do not have the precise “pricing/settlement terms” information with Aircelle, or that MAC accounting value, it seems very likely that a substantial portion of that CDN10.4m has been expensed against the Amortisation of A340 Deferred Development Costs. It is not known what concessions in commercial terms were made, if any, on other programs in their amended commercial contract. One of my former business colleagues and friends, Mr Robert Beckett, asked Mr Dekker to see the documents (privately if necessary) which would demonstrate that I was and I am wrong on the A340 facts and the totality of the commercial agreement. Based on the above and the fact that these have not been disclosed to the court, to underpin their oral evidence, I firmly believe that Magellan have sacrificed other commercial and financial matters to Aircelle / Safran to secure this settlement focused on covering up the A340 NRC. This approach would be consistent with the example of the Boeing 737 systems kits from Ellanef also examined by PwC at Section 9 of their Report where medium/long term revenues and profits were and will be further reduced by FY2012 by approximately C$10m. If part of this C$10.4m was set off against A340 Deferred Development Costs then of the circa C$40m “MAC asset value” at December 2006 approximately C$10m will have been reduced through “inventory accounting standards changes per 3031”, which permitted the write-off of the A340 escalating labour-learning costs accepted by E&Y/PwC AND the majority of that C$10m + in amortization of deferred development costs via those “accounting-led” retroactive price adjustments in Q3 and pricing/terms in Q4.2008 with Aircelle will also have been “written-off“. Despite these reductions I continue to believe from the evidence, as you have read earlier in Website part D. Exhibit 8.3. that as at today, from the documents/information available, I believe the MAC Balance Sheet continues to be over-stated by in excess of C$10m on an equivalent basis, a “material” value. For completeness, you will also see in Part K that the basis of my “reasonable belief” in MAC Q2,Q3 and FY2006 financial statements is central in the UK Employment case for the A340 Protected Disclosures PD22,PD23 and PD24. At that time we faced actual costs on A340 which were escalating further and further away from our FY2006 Budget/Program EAC, a North American management team (with Mr Edwards approval) who were prepared to settle with Aircelle - and not proceed into the Arbitration/commercial processes etc – as per Mr Butyniec’s 11/14 August 2006 Best and Final Offer letter for A340-500/600 pricing that was LESS than we had used in our Q2.2006 EAC, which itself had already generated a publicly unreported $5.3m gross loss outcome as at Q2. Although just a couple of days after my Protected Disclosures to Mr Neill (PD22,PD23) and Mr Edwards (PD23) from his written 12 August 2006 approval it appeared that Mr Edwards and MAC were prepared to settle at these pricing levels/terms and further concede those lower A340 Revenues ($5.2m- $8.9m) and even higher gross losses (>5.2m) than those in the Q2.2006 EAC as NOW being acceptable on 11/12 August 2006, for whatever unstated reason(s), to settle this long-running dispute and avoid arbitration/litigation in Europe. That “management override” of the Program EAC gross losses of $5.2m, compounded further by this 11/14 August BAFO settlement letter financial implications were NOT reflected in MAC Q2.2006 Financial Reporting by Mr Neill /Mr Dekker/Mr Dimma published to the TSE on the 14 August 2006 (see Exhibit 8.3 oral evidence in Part D), despite also an increasing clarity from multiple sources and decisions that the quantities/volumes which were also being used in our A340 Program EAC were no longer valid or justifiable from any “reasonable” business or accounting assessment/quarterly financial reporting certification. None of this pricing aspect was dealt with by PwC, compounding further the pricing matter at Para 9.1. Para.10.0 PwC C$3m report over 7 months from January 2007 – August 2007 and the implications for non- management shareholders of MAC from 14 August 2006 and subsequently – some initial reminders / inputs (A) Mr Dimma as Chair of the MAC Audit Committee and author of Corporate Governance books, such As a matter of record PwC also reported (para 8.58) that at the very time of Mr Dimma’s alleged “internal investigation” the senior Magellan management (Aeronca, Mr Butyniec, Mr Dekker and Mr Neill) had failed to produce a quarterly A340 Program estimate to complete (EAC) for consideration/inclusion in their Q3.2006 published earnings statement. The reader may also wish to consider the commentary in my website Part F (2) on the Boeing 737 Systems Integrator kits discounts and Revenue recognition at the same time (Q3.2006) as Mr Dimma’s “investigation” and his report “conclusions” above. (B) Mr Dimma’s instructions to PwC and their professional indemnity limitations (doc 588/589) included “PWC should recognize that its engagement and the resulting report is prepared for the purposes of findings of fact relating to existing, contemplated and pending litigation, including the Legal Proceedings. In substance the investigation is as to whether there is any substance to the “whistleblowing” allegations made by Mr Little for potential use in the existing Legal Proceedings, or potential subsequent proceedings arising out of the whistleblowing disclosures or any future shareholder claims and/or regulatory investigations and not an investigation of the dismissal, which is the subject of the current Legal proceedings.” And then PwC Limitation of Liability (doc 595) “The limit for the purpose of paragraph 28 (a) of Appendix A will be the lower of £1.0 million and 10 times the amount payable by you in respect of the Engagement at the date of breach of Contract or the commission of the tort.” (C) Magellan Aerospace Corporation (MAC) - Q1/2007 Earnings release (public - 11 May 2007) and FY2007 Annual Report (public- 31 March 2008) “In addition, administrative and general expenses also contain legal and accounting fees of approximately $3.5m incurred by the Corporation in relation to a wrongful dismissal claim by a former employee and as a result a detailed investigation of concerns raised by a former employee regarding certain accounting issues. The concerns were thoroughly investigated by PricewaterhouseCoopers (“PWC”) who, under the direction of the Corporation’s audit committee, prepared a report for the audit committee on their findings. The Corporation’s legal counsel has advised the Board of Directors that PWC met with the audit committee and the Corporation’s external auditors, and based on the report prepared by PWC, PWC has advised the audit committee that they had not found anything that would undermine the integrity or accuracy of the Corporation’s financial statements.”
(E) Furthermore certainly PwC (and Mr Dimma and his lawyers?) denied us any opportunity to comment on the A340 “findings of fact” – Mr Dimma’s oral evidence on 4 June 2008
Following the completion and publication of the PwC report I also wrote to Mr Dimma (and Mr Edwards) in September 2007 setting out a few illustrative examples on A340 outlining my concerns over the PwC “findings of fact”.
(F ) Mr Edwards was asked during his testimony by videoconference in the UK public court on 5 June 2008
10.1 My offer to support the recovery of the C$3m of PwC monies to MAC remains open. and later in email trail Kind regards and also to PwC : (UPDATED AUGUST 2010) See My A340 Report for PwC comments (pages 132-148) including my emails to You all also know from above Mr Edwards position on the cost of your PwC report. I ask once again on the basis of all the evidence/information available together with your own internal review last year , on behalf of the other MAC public shareholders, that PwC now return at least £1m (of the C$3m paid for the investigation) to Magellan Aerospace Corporation. If Mr Edwards wishes to achieve more, given his recorded concerns about the costs, then I will leave that to the MAC Board and he to pursue. If they wish with my assistance.” Q10. Questions – updated to those below ADDED 12 January 2010 Following the 12 January 2010 Press Conferences /website release of the Airbus Orders & Deliveries (O&D) information at December 2009 - I sent a follow up email to PwC - Mr Ian Powell, Mr Christie Clark and Mr J Tracey (Copy Mr N.Murray Edwards, E&Y and others) in which I concluded with “At the Magellan AGM in May 2009 (transcript in Part H of the website) I said I would publish all the relevant evidence available to me for the MAC shareholders and other stakeholders to review and consider for themselves . As you know from my prior emails I have just released this on my website www.fortfield.com. You all also know (from 2009 and documented in my Final Report at page 138) Mr Edwards position on the cost of your PwC report. I ask once again on the basis of all the evidence/information available together with your own internal review last year , on behalf of the other MAC public shareholders, that PwC now return at least £1m (of the C$3m paid for the investigation) to Magellan Aerospace Corporation. If Mr Edwards wishes to achieve more, given his recorded concerns about the costs, then I will leave that to the MAC Board and he to pursue. If they wish with my assistance.” Q10. Questions – updated to those below ADDED 6 AUGUST 2010 Earlier today following (a) a review of my “findings of fact” inputs – part of the A340 Final Report.15.December.2009 (a) the circulation of the latest Airbus production programmes for A340 as at 30 June 2010, and (b) the final A340-600 aircraft delivery to Iberia on 16 July 2010, (c ) the Airbus published 31 July 2010 website update for A340-500/600 aircraft deliveries and orders (after zero A340-500/600 orders from the Farnborough Airshow 2010 orders and commitments for 255 Airbus a/c were formally recorded/published) I sent a further email to a similar circulation as in January 2010 earlier today, in which amongst other material I stated Q.10A “ So in light of the PwC “Tone at the Top” and leading ethical actions etc from the front , together with all the evidence etc, will PwC ever have the ethical leadership and standards to voluntarily return at least £1m to Magellan and its ordinary shareholders.?”. My reference to “Tone at the Top” is a PwC June 2010 survey/report (commissioned in part by the same Mr John F. Tracey) which a former PwC partner brought to my attention recently as being relevant to the case and the conduct of PwC set out in my website. Colloquially put “PwC telling others (and taking fees in that process) what THEY should DO whilst NOT practicing that conduct and behavior in their own leadership organization structures”. Q.10B What did PwC’s (Mr Powell’s /Mr Clark’s) internal review of the conduct of this C$3m PwC reveal?? What actions did PwC leadership take as a result of their internal review – internally and with their client, Magellan?? Post Note – PwC Website - August 2010 (A) “At PricewaterhouseCoopers we aim to deliver outstanding service to our clients. We put quality, integrity and client relationships at the heart of our approach. We have talented, enterprising and intellectually curious people who strive to help our clients achieve success.” whilst at Consulting “……….. Our work is always evolving to respond to industry trends and management focus, and we combine our deep technical skills in response to our client’s changing needs. … ” and for the Aerospace/Defence practice PwC UK claim on their website that they have over 100 A&D sector specialists which are an integral part of the PricewaterhouseCoopers global Aerospace and Defence network, which is led by Neil Hampson of PwC UK, “giving our experts access to industry specialists in over 140 countries.” (B) Mr John F. Tracey a partner in PwC Forensic Services UK led this “independent forensic investigation” engagement, although he had never undertaken any prior civil aerospace assignments. PwC Forensic Services website My reference to “Tone at the Top” is a PwC June 2010 survey/report (commissioned in part by the same Mr John F. Tracey) which a former PwC partner brought to my attention recently as being relevant to the case and the conduct of PwC set out in my website. (C ) whilst PricewaterhouseCoopers LLP Chairman & Senior Partner (PwC UK): Mr Ian Powell refers to "responsible leadership" and "doing the right thing" in the PwC 2009 annual report. Conclusion In conclusion, in Paragraphs 9 and 10 above I have posed a series of semi-rhetorical questions as the 'subject matter is beyond belief '. If anyone who reads this document can answer these questions with any degree of authority and credibility I would seriously and genuinely like to hear from them. Finally I need to record that this document has concentrated predominantly on how PWC reported on A340-500/600 matters, to demonstrate the 'magnitude of the monument to mediocrity' that they have created by their approach to the investigation, their selective choice of data and the basic errors in mathematics/logic used in arriving at their conclusions. It was initially intended that PWC would investigate the full range of my 21 Protected Disclosures (PD'S) but the Audit Committee and its Chairman, Mr. Dimma, limited the scope of PWC's investigation considerably to exclude the PD'S I had made, largely, in relation to Doubtful Solvency and the statutory Supplier Payment Policy and contract terms at MALUK. This is important as the conclusions of the PWC Report were relied on by Magellan and their legal team in the ET tribunal process, to challenge and change their view on the reasonable belief I held initially in making my disclosures. Astonishingly this change of view on my reasonable belief was not restricted to the matters investigated by PWC but was generalised to include my Protected Disclosures on other matters. For the other matters investigated by PwC it is evident that there are other examples of “forensic deceit” but I have not sought to set that evidence out here. The consequences therefore, as a result of the flawed conclusions of the PWC report, are far reaching and have generated a 'litany of lies' in how other substantive issues have been dealt with by the UK court. Brian Little 13 December 2009 (updated 12 January 2010 and 6 August 2010) |
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