Firstly please select this file to Download my A340.ON.THE.RECORD.FINAL REPORT 15TH DECEMBER 2009
(The first part of the report contains an executive summary)
The reader can also download and print a 3 page glossary of terms and abbreviations if they wish – click here

This part of our fortfield.com website is at once the story of one of the lawsuits against Magellan Aerospace Corporation (MAC) and its UK subsidiary, Magellan Aerospace UK (MALUK) and the documentary record of what I believe to be the attempt of Magellan Aerospace to mislead the market on the value of its largest contract. I hope you will take the time to study the evidence I have included and form your own views. The case is important to me but I believe the issues it raises on corporate conduct and behaviour are essential to all of us, whether we are investors, employees, regulators or company directors or are just concerned about the standard of ethics in business life.

To open the narrative, I asked an experienced business person uninvolved in the case to summarise the feelings that the material provoked in him. His summary follows immediately and then I ask and answer two essential questions.

I hope you will then be encouraged to read on. Brian Little

"WHO CAN WE TRUST?    When clever, able people join their skills in a common purpose, they can achieve outstanding results - and benefits for others as well as themselves. Such is what we expect in a publicly quoted business. But when these executives do so in order to cover up an embarrassing mistake, engage in a “fraud”, and then get rid of the witness best placed to detect and expose it – their collective skills become focused on destroying that witness.  Woe betide the effect of this on the business, the witness, and on the third parties involved.

This is the story of Magellan Aerospace Corporation and its third highest-ranking executive, Brian Little. In the 3 years since they fired him in September 2006, during which time they have been locked in battle in a Bristol court, the stock market value of the company has indeed collapsed and he and his family have forfeited their family home to pay his legal fees. As if this were not enough, the stress in explaining his story and the facts in the case has rendered Mr Little unconscious with seizures on three occasions in court, requiring paramedic support. Indeed, he is since recovering from a nervous breakdown (Feb 2010) diagnosed as caused by legal abuse syndrome (April 2011).    You may ask ‘Why should this matter to me?’

The answer is – there, but for the grace of God, go I.  If Brian Little was not there to pursue justice, all of us would be worse off because, without people like him, the big corporations would not be brought to account and would simply walk over us.

But, you may say, if there was a misstatement of the accounts by management the external auditors would find it and refuse to sign off the accounts. Could there ever be a situation in which they found deception and still sign off the accounts?  If so, is that not something everyone should know about?

Then you say, surely the shareholders would want to know all about this? Why would any shareholder want it covered up?  What possible interest could that shareholder have?

And even if a shareholder did have such an interest, you may then ask – by what possible means could he and/or others enlist the support of such impeccable institutions as Ernst & Young and PricewaterhouseCoopers?  Because of being able to rely upon the unquestioning support and reputation of the Chairman of the company’s Audit Committee,   who is an internationally recognised authority on corporate governance?

And what sort of pressure could have been brought to bear on the corporation’s UK lawyers PinsentMasons LLP to retrospectively certify crucial Magellan UK written resolutions – involving Mr Little, and pivotal to his UK case as true and complete, when no such Notice of or Board meeting /resolutions took place before his dismissal?

Could all of these icons of respectability have contributed to a cover-up? If our confidence in them were to be so undermined, in whom could we place our trust to regulate the world of business? 
The answers to these deeply disturbing questions lie in the document attached.

Add your own Reader comments / observations / conclusions review at the end of website to those other Reader comments / observations / conclusions

What matters if the truth doesn’t?"

Part A :

Q1 A340 WAS AND IS VITALLY IMPORTANT TO MAC   -   Magellan Aerospace Corporation (TSE : MAL) 

Extract from Magellan Annual Information Form (AIF) for 2001 - from Aeronca section (page 10/11) when Mr Murray Edwards was both MAC Chairman and Chief Executive Officer – underlines are my emphasis

In December, 1998 Aircelle, a limited partnership of Airbus Industrie and Hispano-Suiza, located in Harfleur, France awarded the exhaust nozzle and plug for the Airbus A340-500/600 to Aeronca and Magellan. This program is expected to provide in excess of $30 million in annual revenue at full production rate.

On May 9, 2000 Magellan announced plans for the expansion of its Aeronca, Inc. Division Manufacturing Facility located in Middletown, Ohio. The expansion consists of approximately 60,000 square feet of office and manufacturing space. The total project cost is in excess of $3 million. In addition, Magellan is investing over $7 million for the engineering and development of the new exhaust system for the A340 Aircraft.

and then in the Magellan Annual Information Form (AIF) for 2003  notification of substantially increased A340-500/600 Engineering and Development of over $ 20m investment:

“In December, 1998 Aircelle, now owned by Hurel-Hispano, located in Harfleur, France awarded the exhaust nozzle and plug for the Airbus A340-500/600 to Aeronca and Magellan. This program is expected to provide U.S. $20.0 million in annual revenue at full production rate.  Magellan has invested over U.S. $20.0 million for engineering and development of the new exhaust system for the A340 aircraft.”

Even as early as 2003  the expected maximum annual revenues were reducing ($30m to $20m) whilst the MAC program investment (Engineering : $7m to $20m+) was substantially higher than bid / budgeted.

To put this subject in some further context, from a TSE shareholder/financial markets analyst perspective, please LISTEN to an important question asked by Nick Morton of RBC? and then followed by a Mr Claude Proulx of BMO Capital Markets (a respected aerospace analyst in Canada)  on the subject of Magellan Inventory and third party verification during 5 minutes of the Q3.2006 earnings webcast call in mid-November 2006 and answered by Mr Neill (President and CEO: shortly to retire and be promoted to Vice Chairman)  and Mr Dekker , the current Magellan CFO and Corporate Secretary.  The complete transcript of the Q3.2006 MAC Earnings call on 14 November 2006 (shortly after my dismissal and Mr Dimma’s “own investigation” concluded) can be read here. At p15

“Claude Proulx - BMO Capital Markets - Analyst
And the second question is , I mean, I look at your stock today and it’s trading at roughly 80% of book value. And I always believe that the market to some extent is efficient. And I’m  wondering , to what extent can we trust your book?  I mean, the book is really – that’s its real.  I mean , understand that there is some real estate probably – maybe understate the book. But at the same time, there’s a lot of things in your inventories – engineering , average excess over costs – where it’s going to be more questionable, especially in light of the performance that you are generating these days. Can you talk about this or – interrupts

John Dekker - Magellan Aerospace Corporation - VP-Finance and Corporate Secretary
- Sure, sure. Sorry .. R Neill now interrupts then …….. Dekker returns

Claude, let me try to address the valuations of the inventory. Clearly , if you look at our balance sheet, the inventory is one of the most significant assets we have. That alongside capital assets. And we’ve spoken about capital assets and some of the valuations on the property. So let’s focus on inventory, which is really I think the crux of your question.  We go through extensive reviews of our inventory at any point in time. And I would estimate 80% of the external audit focus at the year end is on inventories. So there is an extensive amount of work done to confirm that those values are appropriate. So we have third party verification of those amounts.

Claude Proulx - BMO Capital Markets - Analyst
I’m just concerned because a lot of it is program-related. And you need to generate some earnings in order to justify the value that is there. And the earnings are not there at this point. So..…..R Neill interrupts

Richard Neill - Magellan Aerospace – President & CEO
Well, we may want to differ with you in opinion on that Claude. Because I would argue that book value is likely higher than what you’re stating right now.  – see remainder of transcript

Claude Proulx - BMO Capital Markets - Analyst
Well, but I’m – what I did is I’m just taking your equity at the end of the quarter .

Richard Neill - Magellan Aerospace – President & CEO
I know what you did. Yes.  I’m just challenging that theory. That’s all.

<For information : Magellan Aerospace Corporation used only a fixed amortization amount of $30,000 per exhaust unit in FY2006  – which if continued at $30000 per exhaust unit would lead to only 65% recovery of the circa C$40m+  (USD 38.25M) inventory on the December 2006 MAC Balance Sheet.  PwC  set this out further in their para 8.117 : Current production costs per unit are such that at present the pre-amortisation margin generated per unit is not sufficient to absorb an amortization of USD 30,000 per unit and still break-even. In order for MAC to report an overall breakeven position, while at the same time amortising NRC inventory, it has been capitalizing that amount of production costs that is necessary to achieve the break-even position each year.  For this reason , “production inventory” for the A340 programme has been increasing”.  If MAC were to maintain the amortization at $30,000 per exhaust system, as in FY2006, only $3.30 million would have been reduced from the total A340 programme asset for the 110 units delivered by MAC in the three years between January 2007 and the end of December 2009/FY2009. (Updated 18 January 2011: With aircraft production exhaust units now all delivered a total of 110 production – to 131 A340-500/600 - production aircraft and 11 spares were delivered by MAC in the four years between January 2007 and the end of December 2010/FY2010, or equivalent to $3.63m).  PwC continues at para 8.118 “PwC believes that MAC’s NRC and production inventories should be considered collectively (for a total inventory of USD 38.2 million) and then amortised from this basis onward. Aeronca should also review the NRC amortization factor.  We believe that this factor should vary with the profitability of each unit.  As increasing labour and material cost efficiencies are realized in the production process, furthermore, the amortization rate should increase.” 

This policy does not appear to be a logical and mathematically sound approach on A340 as PwC recognised earlier in their report at PwC 8.94 – 8.95 that the current escalation formula – under any interpretation – would not  lead to increased profitability per unit once BETA21S materials costs exceeded 31% of the cost.  Those relevant PwC paragraphs are

8.94  The price escalation formula currently in effect (as per the SA dated 11 March 2005 between Aeronca, MAC and HH) directs that the total sales price for exhaust system units will increase by 0.31% for every 1% increase in the cost of Beta 21S.  In effect, MAC is protected for increases in the cost of Beta 21S, providing that the cost of Beta 21S per unit remains equivalent to or below 31% of the total cost of production per unit.

8.95  Given the volatility in the cost of Beta 21S (a titanium compound), there is a risk that in future years the cost of beta 21S could exceed 31% of the total cost of production. Indeed taking into account the existing assumptions in the EAC model , the cost of Beta 21S per unit would represent approximately 35% of the total cost of production per unit by FY2012.

This rising profit/contribution year on year subject is dealt with in some detail at website Exhibit 8.1. PwC failed to apparently integrate and challenge themselves, E&Y and MAC on this varying profit per unit policy in its specific implications for A340 amortisation with the escalation formula in place. I should also add that it has not been my experience elsewhere that such an approach was countenanced either by  management or auditors.

As above MAC continued to add Labour learning costs – after 400+  A340 nacelle sets/5 years of production to production inventory (and E&Y as their auditors accepted the further US $1.5m to US $8.63 million added in the FY2006 Balance sheet to sustain the “break-even” ) whilst the Inventories Exposure Draft (3031) which would end this capitalisation was issued by the CICA in August 2006.   The subsequent introduction of that Canadian Accounting Inventories Standard  3031 in MAC from 1 January 2008 permitted some C$40m of inventory assets to be written off against retained earnings (approx C$10m of which was for these A340 -500/600 program labour learning costs) and the reader can see Mr Dekker’s opening comments at Page 2 and then in his answer to questions regarding Magellan inventory and the new accounting standards from Mr Cameron Doerkson of Versant Partners (p6) and in more detail again by Mr Claude Proulx at Page 8 of the published transcript of that May 2008 webcast for Q1/2008 Earnings.>

Claude Proulx - BMO Capital Markets - Analyst
Thank you, good morning. Just again on that accounting change, if we look going forward, it seems to me conceptually that because you wrote off a cost that your margins will be improved going forward. But at the same time, when you start delivery and probably you brought up like a bonus for the Joint Strike Fighter or 787 or the Airbus A350, the margins will be depressed.  So when we look going forward, like for the rest of 2008, that C$550,000, is that something that we could put in our model for each of the [next three] quarters or – Dekker interrupts

John Dekker - Magellan Aerospace Corporation - VP-Finance
..I guess there is a couple of comments, Claude. First of all, the fact that we had to take that charge against retained earnings does not mean that those were not valuable costs and not anticipated costs. Those were costs that we had anticipated when the programs were originally bid, and we will still get recovery of those costs going forward.  As we sit here at this point in time, very few of our programs going forward will require learning curves with the current programs……

Claude Proulx - BMO Capital Markets - Analyst
Okay. And what about guidance for the rest of the year?   Or it’s impossible for you to give any guidance on that – the impact of the accounting change? 

John Dekker - Magellan Aerospace Corporation - VP-Finance
The impact would have been highest in the first quarter. As we move forward, as I said, with the programs – take?  for the Joint Strike Fighter, most of the programs are well into or through the learning curve phase.  So we should not see any adjustments of any magnitude.”

A340-500/600 was and is vitally important to MAC.   The A340-500/600 project investment/asset was the single largest financial number (>C$40m asset in FY2006) and failure to fully realize the value of the project would, inter alia, bring about the triple consequences of 

     (1) an overstatement in the project / non-recurring costs/engineering development assets of > C$40m .

     (2)  a program gross margin “breakeven”  to actual financial losses and

     (3)  create a future cash deficiency / non-recovery in the internal and public reporting (MAC 5 year strategic planning base -  Sales revenues / cash projections of C$100m +)

One of my colleagues who read the following material interpreted the actions of MAC as “the MAC Directors representing this C$40 million as being part of Magellan’s  accounts receivable /debtors, with that cash being returned to MAC on a timely basis within the contract period".      My aim was of course to demonstrate that C$40m was NO longer justifiable on any business and accounting basis in accordance with our legal reporting obligations.

Mr Richard Stoneman asked this question about the MAC Balance Sheet/Book value in the Q3/2008 earnings call webcast (P10/11) following the public disclosure by MAC of the CDN10.4Million price adjustment set against the NRC/amortization against the A340 and A380?

“Richard Stoneman – Dundee Securities Analyst
“Book value per share is about CDN13 a share.  Are you comfortable with that number, and has it been tested over the last 12 months?

John Dekker – Magellan Aerospace Corporation – VP-Finance
We have not formally done any valuations to test that number, Richard.

Richard Stoneman – Dundee Securities Analyst
But are you comfortable with it?

John Dekker – Magellan Aerospace Corporation – VP-Finance 
Yes

Q2. WHAT HAS BEEN THE PUBLICITY TO DATE?

Although Magellan’s UK counsel (Mr Lynch QC)  has argued that my Protected Disclosures – A340 etc /story is not in the public interest nevertheless since 19 September 2006 MAC and third parties have set out their views publicly through various channels. The following documents/articles have appeared in addition to the UK public court evidence and I include them below.

Additionally, now that the evidence phase is completed in the UK court and for the first time, I am going on the public record in January 2010 through our website.  My account starts in Part B of this material.

1A. Magellan Aerospace Corporation (MAC) - Q1/2007 Earnings release (public - 11 May 2007) and FY2007 Annual Report (public- 31 March 2008) and MAC Board minutes - 10 May 2007

“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.”

This matter was also raised in the Magellan Aerospace Corporation Q1/2007 earnings webcast call by the CFO Mr Dekker  (at page 4) and then in a question from Richard Stoneman (p5)

“Richard Stoneman - Dundee Securities Corporation - Analyst
An ex-employee made a complaint that cost the Corporation $2 million. Does the ex-employee have any liability in terms of repaying that money?

(BL See part G - Corporate Framework & M Edwards 16th November 2009)

John Dekker - Magellan Aerospace Corporation - VP of Finance, Corporate Secretary
Richard, this is a clearly sensitive issue, since it's in employment manner and also a legal matter, so I'm not sure it's appropriate”

1B. The “independent forensic” PwC Final Draft Investigative Report into Areas of Concern Raised by Mr Brian Little : Executive Summary circulated to the Board of Directors at MAC – relied on above in the Magellan Aerospace May 2007 earnings statement - at PwC paragraph 2.40 (doc 605/606) recorded

Examples of poor financial control that we identified during our work include;

1.   Accounting adjustments made with insufficient supporting analysis and documentation;
2.   Inadequate understanding or documentation of balance sheet provisions and insufficient documentation of  the decision to release certain provisions
3.  A lack of awareness of the program accounting requirements under either Canadian or UK GAAP….
4. Poor control over individual projects from an accounting perspective. Project sales volumes, revenues and costs are not reviewed with sufficient frequency or rigour.”

Mr Dimma told the public court in his evidence, that following his own “internal investigation” and report in late 2006 --- which found “the matters you were raising were historic” and that there is “no substance to the purported concerns”      ---      he instructed PwC to carry out an “independent forensic investigation”, after I had met E&Y in December 2006, as in his view  "auditors are extremely risk averse".  It is significant to me and others that despite his apparent dismissal of my views in 2006, Mr Dimma saw fit to personally chair the PwC investigatory process in 2007, described, I remind you, as “independent” in order, I suspect, to retain control over its conclusions.  

The Canada IFA Standard Practices at 600.04 published in November 2006 states that the “IFA practitioners should present their findings and conclusions in an objective and unbiased manner” and at 600.06  “IFA practitioners should consider all relevant information that could impact their findings and conclusions.”

This MAC conclusion on poor financial control only became public following the UK Court Order on 6 June 2007 for the disclosure of the PwC report which MAC had relied and referenced in the MAC public statement at 1A above.

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 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.

It is significant that this critical comment is totally omitted from PwC’s Final Report in August 2007, supporting my strong belief that this report was in effect an attempt to “whitewash” my concerns and vindicate the position already taken by Mr Dimma and Magellan Aerospace Corporation.

 
     According to “A Guide to Forensic Accounting Investigation” (Golden & others, Wiley 2005) the bedrock of an effective audit are 

                                                               1.  professional scepticism,
                                                             2.  knowledge and experience and
                                                            3   independence and objectivity.

One of our real concerns, from the very outset from the outset of the PwC “independent forensic investigation” (585), the terms of which were set by Mr Dimma, was that it would NOT follow the key recognised standards for a forensic investigation. These were, inter alia, outlined in a Network of independent Forensic Accountants (NIFA) editorial article, published during the time of the investigation on 14 March 2007: “A healthy dose of common sense and scepticism. Does what you are being told tally with other evidence that you have been presented with? One of the key mistakes that had befallen many a forensic accountant is paying lip service to a client’s claim – only for it to slowly disintegrate before their eyes, due to not carrying out some commonsense reasonableness checks. “

So, when I use the term “Forensic Deceit” in my Final Report on A340, I mean that it is NOT TRUSTWORTHY, because the intention of the authors PwC and the effect of their less than rigorous investigation or audit standards was to mislead the reader in their “findings of fact” and conclusions from its work.

1C.

1. MAC Promotion and My Current Curriculum Vitae and System of Identified Motivated Abilities (SIMA).

2. Short Brothers PLC / Bombardier Belfast ; 1979 - 1995 - Reference Sir Roy W.R. McNulty and other contemporaneous materials.

3. Harland and Wolff PLC - 1995 - 1997 - References Mr Per Neilsen, Chief Executive and Mr Bill Gallagher - General Manager and the H&W 1996 Annual Report extracts

4. Non executive roles - 30th April 1997       Mr Robert Beckett - Valpar
                                      February 2006        Mr Raymond Semple - Moyola Precision Engineering

5. Selection of 12 Quotes from letters, emails, cards (157) to Brian Little on exit from MAC/MALUK in September / October 2006 -  DIR3   attached for MAC Directors 

With a career-long unblemished personnel record (Magellan doc.533-584) I believe that the reason for my summary dismissal by my superior/CEO Mr Richard Neill on my arrival at Toronto Airport on 18 September 2006, in his conscious contravention of HR advice/corporate and statutory procedure, was primarily as a consequence of my series of recent Protected Disclosures in 2006. These came to a head on 17 September 2006 when I formally requested MAC to commence an internal investigation into whistleblowing concerns I had raised, and was continuing to make, about the operations of MALUK and MAC.  I sent an email on 17 September 2006 (doc.2340) to my superior Rich Neill (the President and Chief Executive Officer of MAC), in which I stated that, if my concerns were not resolved through corporate processes by 19 September 2006, I would escalate them to Murray Edwards (the Chairman of MAC), and in the final event to William A. Dimma (an independent director of MAC and the Chairman of MAC’s Audit Committee) for an investigation to take place, either under the whistleblower or ethics policies or anyway by the Audit Committee.  I believe that the concerns which I was making at that time, and which I had previously made, amounted to whistleblowing and were “protected disclosures” under UK law.  This, of course, was of great concern to me and I expected that my visit from the UK to MAC’s HQ in Toronto on 18 September 2006, to lead a week-long strategy planning meeting with the senior executives of MAC, would provide the time and opportunity to properly deal with these matters, including the creation of an action plan to address these crucially important issues.

The very next day, on Monday 18 September 2006, I was dismissed upon my arrival into Toronto Airport by Mr Neill, accompanied by Ms Jo-Ann Ball (MAC’s Vice President for Human Resources) right after my long flight from the UK.  That instant dismissal decision was taken by Mr Neill (and Ms Ball?) having read the documentation they had been sent, together with the specific advice from the UK about what actions they must take immediately.   As the Judge remarked in the UK case in January 2008 “It was clearly a conscious decision not to follow statutory procedure. It says quite a bit about the allegation of breach of statutory procedure. “

I had requested and expected to meet Mr Neill later that afternoon at MAC’s offices, to discuss my concerns with him.  But I was surprised when Mr Neill and above all Ms Ball met me at the airport at around 3:15pm (Toronto time), just after I had cleared immigration and customs.  Mr Neill told me that they wanted to have a chat with me, and led me into the Sheraton Gateway Hotel in Terminal 3 of the airport.  I hoped that the reason for this impromptu chat was that they genuinely wanted to understand my whistleblowing concerns so that we could move forward together and resolve matters. 

Rather than return home as Ms Ball wished I flew that evening to Calgary, Alberta and Mr Edwards hometown with the purpose of following up what I stated I would do and meet with him during the next few days.  On Tuesday 19 September 2006, after he met with three people from the University of Saskatchewan for about an hour (as a prelude to that University transforming the College of Commerce to the N. Murray Edwards School of Business on 24 July 2007 following his substantial donation) Mr Edwards met with me.  On three occasions Mr Edwards referred the various financial and governance matters I was directly raising with him to Mr Dimma.  Put simply, he did not want to know.  Eventually I was also able to meet with Mr Dimma in Toronto for 80 minutes to discuss my “whistleblowing” concerns and provide him with a covering letter and 18 document dossiers.

In his written evidence to the UK court the current MAC Deputy Chairman, and my former boss President and CEO, Mr Neill (RAN20), stated that Brian “was an experienced operator in the aerospace industry, with excellent links with key figures (such as Ken Brundell – should be Brundle at Bombardier– and indeed many others) …and (RAN22) “It was clear to me that the Claimant had lots of experience and knowledge of the industry. He had a good technical understanding of the issues, a good grasp of contractual issues (which led me to believe he would be a strong negotiator) and a sound strategic approach”

As a matter of my normal diligence I have always recorded the key events on an almost daily basis from the time of my termination , from Toronto Airport to the Magellan AGM in May 2007 and the MAC earnings statement public release on 11 May 2007 at 1A. I created a separate document - DIR64 Chronology - external - “process/timeline facts”. This document DIR 64 was provided to each MAC Director on a regular basis as the process unfolded from November 2006 to May 2007. E&Y and PwC were included in the circulation of it from January 2007 to May 2007. This chronology document is now provided by me for the first time now.

2A.  Magellan Aerospace UK (MALUK) statutory financial statements for FY2005 (public 12 July 2007) UK Companies House correspondence exchanges and filings,    MALUK General & Special Resolutions – 18 October 2006 and then retrospectively written by Mr Dekker on behalf of Banks/MAC and dated as 28 April 2005 – before my termination.     MALUK documents submitted by Pincent Masons

Extract from Directors Report

“It is a source of disappointment and regret that the directors have not been able to file these accounts in accordance with the statutory reporting deadlines.

The lateness of the filing is a consequence of some concerns raised by a former employee regarding the integrity of the Company’s financial statements. The concerns have been thoroughly investigated by  PricewaterhouseCoopers (PwC) who, under the direction of the audit committee of Magellan Aerospace Corporation , the ultimate parent company, prepared a report for the audit committee on their findings  PwC has advised the audit committee that they have not found anything that would undermine the integrity or accuracy of the Company’s financial statements. No adjustments have been required to be made to these financial statements as a result of PwC findings.

Directors and their interests                  B.Little (removed 15 November 2006)

It is in fact evident from the contemporaneous documentation at 2A that the first draft incomplete MALUK FY2005 statutory financial statements (doc 3548 – 3556) had not been prepared by Mr Smith (the MALUK CFO) and sent to E&Y UK until a few working days before the legal deadline of 31 October 2006 for the public filing of those financial statements with the UK Companies Registry. This was some seven months after the public filing of the MAC Group financial statements in March 2006 in Toronto for the same financial year. As a UK Director with equal legal responsibility for such statutory filings in the UK I asked Mr Smith about this on 17 August 2006 and he and others again on 8/16 November 2006, until I was removed as a UK Director on 17 November 2006.

Also it seems that MALUK Directors Board matters of substance/ importance to ALL the Directors of MALUK were held without Notice and in legal breach of the MALUK Articles of Association para 16.5    “Notice of every meeting of the directors shall be given to each director and his alternate, including directors and alternate directors who may for the time being be absent from the United Kingdom and have given the Company an address within the United Kingdom for service”  by the “Finance/ Company Secretary  –only”  Directors.   Following my instant dismissal on 18 September 2006 one MALUK Board meeting took place on the 29 September 2006 (factoring sale of Airbus Debtors to BNP – finally implemented at end of December 2006) and the other on 18 October 2006 (Issue of Share Capital and Conversion of a £10m loan from MAC to equity) whilst I remained a MALUK Director until 17 November 2006 in both cases the ONLY attendees were Mr Dekker (MAC CFO and Corporate Secretary) and Mr Smith (MALUK CFO and Company Secretary).  Minutes document ref: 20\20920346.1/LA04.    PinsentMasons confirmed in August 2007 correspondence/documents disclosure that Mr Neill (MAC President and CEO) and Mr Underwood (MALUK resident director with functional responsibility for manufacturing operations) also did not receive the legally required para 16.5 Notice of either of these MALUK Board Meetings in September and October 2006 as “No Notice had been issued to MALUK Directors”.

What is also noteworthy is that the Tribunal ordered (Request 22) in CMD4/June 2007 the disclosure of the relevant documents “All Notices to Directors convening and minutes of Magellan Aerospace UK Board meetings between January 2004 and 17 November 2006”  for disclosure during July 2007.  As these documents were being compiled in June/July 2007 PinsentMasons would / ought to be aware of the content of these Request 22 Ordinary and Special Resolutions at the “MALUK Board” on 18 October 2006, whilst they were being concurrently, on 11 July 2007, being requested by their client to certify “identical”  resolutions in documents (see below) for MALUK Directors and E&Y for the statutory FY2005 financial statements as at 28 April 2005.  

Mr Dekker (MAC CFO and Corporate Secretary) was to flout or disregard proper company or legal processes (like Mr Neill and Ms Ball on UK employment law above) by misleading and being untruthful when he had PinsentMasons LLP certify written MALUK Ordinary and Special  Resolutions for the  MALUK business on 18 October 2006 as a “True and Complete Copy of the Original”  resolutions for crucial MALUK Board business matters on loan and share capital that it is wrongly stated by Mr Dekker took place on 28 April 2005. (minutes ref 20\21315831.1/MKA).  No MALUK Board meeting took place by the Directors to resolve an increase in MALUK share capital as per Note 17 and the concurrent conversion of £10m debt to equity Special Resolution on 28 April 2005 was untruthful -  as several contemporaneous  documents in the court bundle demonstrate.  Factually  – the MAC loan to MALUK as at 28 April 2005 was for less than £10m  – it only reached £10m in mid August 2005 after further funds of £406K were received from Canada (doc 1014A-C).  Unsurprisingly no contemporaneous documentary evidence from a  MAC Board Resolution, MAC Weekly Staff meeting or from Mr Dekker of any such communications of these MALUK Ordinary and Special Resolutions or business changes took place with or within MALUK in April 2005 have been provided by Magellan, despite requests.

PinsentMasons have since acknowledged this “very serious allegation against Mr Dekker”  and told me, what we interpret, as their firm/solicitor having no legal duty or ethical/professional responsibility regarding any due diligence on such matters, even when they are relevant to my case in this litigation.  They stated that “ It seems to us that you may have misunderstood the purpose and effect of a Certified Copy stamp.  All that the stamp indicates is that the document with that stamp upon it is a copy, and that it is warranted by the Firm or Solicitor signing it that it is a faithful reproduction of the original.  In practical terms, it means that the Solicitor who affixed and completed the Certified Copy stamp had the original document in their possession and is confirming that the copy is identical to the document that the copy was taken from.  That is all that the Certified Copy stamp can, and does, indicate.  It does not for example indicate (as you suggest) that any checks were carried out as to the contents of the document, or that any representations needed to be made about it by our client before completion of the certification, or that such solicitor was "signing off" the factual contents of the document.  Affixation of a Certified Copy stamp means is that the document is identical to the document that it was copied from - and nothing more.”   

Mr Dekker then arranged to have Mr Phil Underwood (MALUK Company Secretary on 28 April 2005) retrospectively sign and submit via PinsentMasons a Notice of increase in Nominal Capital form (123) dated 28 April 2005 to the Companies Registry on 12 July 2007, shortly after MALUK had received a “query” letter from the Companies Registry on these matters.  As you can read the Companies House printed Annual return (dated 16 September 2006) showed that the public record was for £6.1m in equity in section 4 and NOT £16.1m. with a concurrent swop of the £10m MAC loan to MALUK into ordinary shares.  As a result clearly the position of trade creditors to MALUK under UK law (vis-à-vis Magellan as equity) would be substantially different in any “doubtful solvency” or insolvency processes and any proper consideration of same by MALUK Directors.

PinsentMasons had previously confirmed through correspondence in mid 2007 (relating to the Court Ordered disclosure of MALUK Notices and Minutes of Board meetings –Request 22)  and then following a December 2008 Tribunal Order for Request 4 that a Board Notice and Minutes of a Board meeting on 28 April 2005 did NOT exist – as there was No Board meeting on that date.   It would seem that the shareholders (Mr Dekker only - issued two Resolutions) and that same PinsentMasons “True and Complete Copy of the Original certification” dated 11 July 2007, of the written MALUK Board Ordinary and Shareholder Special Resolutions on 28 April 2005, was then wholly relied upon by E&Y for the accounting, information and notes to the MALUK FY2005 statutory financial statements when signed off and released on the same day, 11 July 2007 – See point 2A. This was despite the fact that E&Y could see that the contemporaneous internal MALUK Board minute book and MALUK accounting records did NOT support either of those Resolutions or transactions.   As a result the draft MALUK FY2005 statutory financial statements submitted by Mr Smith in October 2006 for the E&Y statutory audit for FY2005  were then amended ……

The reader will note that the Note 17  Share Capital  : “On 28th April 2005 the directors resolved to increase the authorized share capital to 36,100,001. On the same date 10,000,000 ordinary shares were allotted to the parent company. These shares were issued on 18 October 2006”   n Note 13  Creditors : The amounts owed to fellow group undertakings was reduced by £10m  and instead now recorded at only £120K.  The amounts owed to fellow group undertakings is a loan due to the ultimate group undertaking. The loan is non-interest bearing and has no fixed repayment date. This loan became interest bearing in 2006 at a rate of 6%.  The directors have deemed the loan to be repayable within one year.”

Furthermore, as my leading Counsel Mr Andrew Stafford QC stated in his Aide Memoire on 19 January 2009, and immediately before my Evidence-in-Chief in the UK, at paragraphs 12 and 13

12. In relation to the E&Y representation letter that document records that specific representations were sought from directors (and given by them) in relation to both bonus accruals and overheads. For an auditor to seek specific representations is akin to saying “there is no evidence to support this but if you give me your solemn word we will accept that”. Bearing in mind the heavy reliance which the Respondents place on the accounts audited by E & Y, those accounts are now revealed to have been in part a series of self-serving statements emanating from MALUK MAC. The true position is not (as the Respondents have been arguing) “We rely on the accountants whose audit lends weight to our position”. Rather this late disclosure reveals the true position as “the accountants rely on us.”

13. Bear in mind that this is a case in which the Claimant has consistently complained about the accuracy and reliability of accounting treatment, in which the Respondent has placed reliance upon the audited accounts, in which the personnel involved include directors – precisely those people responsible for the companies accounts – and in which there have been serial orders for disclosure against the Respondents. It is truly astonishing that this document should have remained undisclosed until now.”

< UPDATED 18 JULY 2010 – In an email on 18 July 2010 I asked Mr Dimma about this subject matter – see below. As yet no response or documentation has been forthcoming..

“ You will recall your public evidence on Doubtful solvency / Statutory Supplier Payment Policy (Website Part M.5.B.2.)   Also at the website at Part A  Points2A and 2B I refer to the £10m MALUK debt for equity swop and its significant implications for trade creditors and Directors duties and responsibilities in the event of MALUK “Doubtful solvency”  or insolvency.    You will know that Ms Barbara Hadfield has now retired from E&Y UK in June 2009 and you I think are aware that I worked on a part-time consultancy basis for E&Y UK from 1997 – 2001.

There is no doubt that a number of the statements made in the MALUK  FY2005 statutory accounts were wrong and not supported by MALUK Board minutes or the contemporary MALUK management accounts . Mr Dekker represented to PinsentMasons on 11 July 2007 that Resolutions had been made on 28 April 2005 and on that basis, without any due diligence, they “Certified to be a True and Complete Copy of the Original dated this 11th day of July 2007 “  .   E&Y (UK) relied solely on that solicitors certification before Ms Hadfield approved the FY2005 statutory accounts later that day.

As this is a significant transaction for MAC and MALUK I would expect that there would be written / minuted MAC Board approvals, a record within the contemporary MAC weekly staff meetings or other written records of that MAC decision and transaction.  From all the evidence available to date they do not exist.   At some point in the future I will apply (as PinsentMasons have stated and aware) for the documents disclosure which might add further evidence to that available.  In the meantime you may wish to consider and investigate this carefully as it was clearly an important component in my MALUK solvency considerations in FY2006.   As I was a UK Director at the relevant time my MP intends to write to some of the UK national regulatory agencies on these matters during the summer recess of Parliament.

“ Although a director of MALUK from early 2004 (and should have been fully involved/legally aware), as you know I did not join MAC as a Senior Officer until May/June 2005,

QUESTION 3 :   Were you aware and did you approve this 28 April 2005 Board / Shareholder Resolution (doc 506) before the MAC re-financing was completed at the end of May 2005?   Can you provide for disclosure to me (directly or via PinsentMasons) any contemporaneous documents in April / May 2005 provided by Mr Dekker which would underpin your involvement and approval on 28 April 2005 of those resolutions/ accounting transactions within MAC?”

UPDATED NOVEMBER  2010 :  After several months you may note that my Member of Parliament, Mr James Shannon MP, has since written to Mr Dimma on 17 November 2010 on this and the A340 subject of PwC findings of fact(Q1). The paper copy of these letters were received and signed for in Toronto on 30 November 2010.  No response has been forthcoming, yet>

2B   UK Court evidence/submissions, Late disclosure of Auditors letter from  Ernst & Young UK  to Magellan UK Directors regarding the statutory Financial Statements for MALUK for FY2005 dated 11 July 2007,MALUK Director Representation to E&Y, Engineering Management Bonus Letters from Mr J Butyniec & Ms J Ball

3. Canada Globe and Mail – 16 April 2008 by Brent Jang
Article :  Will Edwards stand by Magellan?         -  in which Magellan disclosed my name within Canada/globally. (PDF)

Selected Quote “ But 2007 was a particularly rough year for Magellan, when fourth-quarter “accounting errors and misstatements in accounted receivable” related to alleged fraud contributed to its $11.3 million loss, compared with an $8.1million loss in 2006.

Separately, during the first quarter of 2007, Magellan wrote down $2-million in fees to investigate allegations levelled by former executive Brian Little, who claimed that there were accounting irregularities.

Magellan hired PricewaterhouseCoopers to probe Mr Little’s allegations, which were unrelated to the fourth quarter accounting overstatements. PwC experts examined Magellan’s books in early 2007 and “have not found anything that would undermine the integrity or accuracy of the corporations’ financial statements,”  Magellan reported”

4. Aviation Week and Space technology - 18 / 25 August 2008 (doc 3509-3510) by R. Wall and D. Barrie:
Article: Exhaustive Debate - Canadian and French subcontractors haggle over A340 components work. (PDF)

Selected Quote “ .. The Toronto based company is providing the exhaust nozzle for the Rolls Royce Trent 500 nozzle until 2012. The A340 work is an important element of Magellan’s overall business ; non-recurring costs on the program are believed to be roughly $40m.

Giving evidence at a tribunal hearing, John Dekker, Magellan’s vice president for finance, said the company had made a significant investment in the A340, and there was a “risk” if the aircraft’s production run did not meet initial expectations…

Airbus currently has orders for 140 A340-500/600s: 31 aircraft still have to be delivered. Some of the remaining balance may not come to fruition. Out of the total order, 38 are for the -500 and 102 are for the -600. A340 orders had already been lagging under competition with the Boeing 777 ……..  ..   Kingfisher Airlines recently reduced its commitment to the four-engine wide body transport. Virgin Atlantic still has to take its final A340-600’s out of its original order for 20, although there are suggestions that delivery of the remaining aircraft has been “suspended indefinitely.”

Some companies have publicly acknowledged that they  may not break even on the A340-500/600 program.   Matthews (MAC VP Sales)  would not comment on whether Magellan would recover its investment in the A340-500/600.   He suggests that the company was cautious on the original projections, but admits that sales of the aircraft could have been a lot better. When Magellan won the A340 -500/600 business in 1998, orders and options for the type stood at 130.  At the time, it was expected that sales of the aircraft would likely exceed 300.  Delivery of the type began in late 2002.”

5. Canada Globe and Mail - 1 April 2009 (doc 4093-4094) by Eric Reguly
Article : Magellan accused of inflating project size - (PDF)

Selected Quote “ At a hearing in Bristol, England, Brian Little told Mr Edwards – the company’s chairman and one of Canada’s  richest men – that he thought Magellan management “had misrepresented and misled”  the company’s auditors about  the project. ……..

Magellan expected about S40-milion in development costs related to the A340 project and, in 2006, according to Mr Little, estimated some 275 + of the planes would be bought by airline customers (meaning four times as many exhaust systems would be built, because the A340 had four engines).  Mr Edwards called the contract “a major project”.

Mr Little, however, said he doubted that Airbus would sell that many A340’s.  At the time, the plane was losing market share to the Boeing 777, which was favoured by the airlines because it has two fewer engines and is cheaper to fly.  In his witness statement, Mr Little said that, in early 2006, Airbus’s own internal estimates for A340 program “were for just 75 sales from that time.”   He said he made his skepticism known to Mr Edwards and other Magellan officials.     (G&M referenced BL witness statement para 200 refers as example to email doc 1437 to Edwards et al in Feb 2006).

Airbus’s website says the company has orders for 139 of the new A340 aircraft. Magellan’s own revised sales estimate for the plane, if it has one, is not known, nor is the number of “spares” (replacement parts) it expects to build after the initial production run……

Bill Dimma the Magellan director who is chairman of the audit committee, concluded there was “no substance to the purported concerns” of Mr Little, Magellan said in its respondents’ statement. Magellan then commissioned PricewaterhouseCoopers to conduct an internal probe. Magellan said that the audit concluded the alleged complaints were “without foundation.”….”

6. Canada National Post - 12th May 2009 (doc unlisted) by Scott Deveau
Article : Magellan sails into rough seas - stock pops, former executive threatens action - (PDF)

Selected Quote  “  … 

There will certainly be a lot to discuss at the annual general meeting of Magellan Aerospace Corp. in Mississauga , Ontario, today. Not only have shares in aerospace-parts maker quadrupled in the past month, but the company’s finances have finally been stabilized by a sizable investment by its chairman and controlling shareholder, Calgary oil-sands mogul Murray Edwards , and the Edco Corp last week.

“This is a company that didn’t make money during the peak of the aerospace cycle, and now we’re heading into leaner years” said Cameron Doerkson, Versant Partners analyst, who has a “sell” rating on the stock. “That has to be a cause for concern”.  

Moreover, one of the company’s former top executives , who has been locked in a wrongful dismissal suit , told the Financial Post yesterday he intends to file documents with security regulators and the Royal Canadian Mounted Police by mid-June that he alleges show the company misrepresented to its auditors the value of one of its main programs to supply exhaust nozzles for Airbus’s A340 aircraft.

Brian Little, who headed the company’s European operations until he was fired in 2006 alleges the company ignored his requests for a writedown on a portion of the value of C$40m in deferred costs tied to future sales when it became apparent Airbus would not hit its projected sales targets.

…………..John Dekker, the company’s vice president of finance, pointed to a PricewaterhouseCoopers report commissioned to investigate Mr Little’s accusations that he said “had not found anything that would undermine the integrity or accuracy of the company’s financial statements.” 

(May 2010 Update/Observation;  Mr Edwards did not attend this Magellan AGM in May 2009 -   see Part H. of the website for the Q&A.  The files were not passed to relevant Canadian authorities as further documentary and oral evidence was obtained in the meantime.    My recent ill-health has postponed this further – see Part G on website at E&Y Open Letter etc.)

7. Updated 5th May 2011 UK   Daily Telegraph – 4 May 2011 by Rowena Mason

PwC faces probe over removing client criticism from report

PriceWaterhouseCoopers has been reported to the accounting regulator, after agreeing to remove criticisms about its client from a £1.5m independent report into allegations made by a whistleblower

Mr Shannon's intervention comes at a critical time for PwC, since it is under scrutiny over its "independent inquiry" into the Royal Bank of Scotland's collapse. 

Jim Shannon, MP, has written to the Financial Reporting Council asking them to investigate a report prepared by PwC in 2007.

The MP's intervention comes at a critical time for PwC, since it is under scrutiny over its "independent inquiry" into the Royal Bank of Scotland's collapse. The "big four" - Deloitte, KPMG, PwC and Ernst & Young - have also been criticised by MPs for "dereliction of duty" during the financial crisis.

Mr Shannon's concerns relate to an independent report that PwC was hired to write for Magellan Aerospace Corporation, a Canadian aircraft parts company. PwC's brief was to look into a whistleblower's claims that Magellan's order book had been inflated.

However, criticism of Magellan's "poor" accounting was left out of PwC's final version – at the request of the client's audit committee.
The MP raised concerns on behalf of the whistleblower, Brian Little, the former head of Magellan's UK operations. ..etc “

Background:
December 2010  - FSA’s report into RBS merely seals the Regulators fate
FSA’s refusal to publish RBS report <£7.7m forensic report by PwC> just shows how out of touch it is

Mr Tyrie MP, Chairman of the House of Commons Treasury Select Committee 13 Dec. letter to FSA
RBS says it has “no objection to public scrutiny….
“Lord Turner has been criticised for continuing to with-hold the official report conducted by Pricewaterhouse Coopers. The PwC report, which is at the regulator says is protected by confidentiality agreements, has been at the center of a two week row.”

Mr Shannon MP 19 Jan.2011 letter to Mr Andrew Tyrie MP on “independent forensic investigations”

Mr Shannon MP 7 February 2011 letter with six action points from Mr Tyrie MP meeting on 2 February.

Mr Andrew Tyrie MP 14 March 2011 letter to Mr Shannon MP

1 May 2011 FSA fails to publish report into Royal Bank of Scotland collapse      (Computer File extract PwC/Dimma letter - 20 June 2007)

5 May 2011 TSC Press release :  Independent Review of Financial Services Authority Report (forensic investigation by PwC) on RBS

Andrew Tyrie warns FSA not to repeat RBS mistakes with HBOS

UPDATED 25 MAY 2011:  E-mail from Mr Shannon MP to Mr Ian Powell (PwC Chairman and Senior Partner) , Mr Richard Sexton (PwC Head of Reputation), Copy  Ms Rowena Mason (DT journalist) 

TSC publishes terms of reference for Review of FSA’s report into the failure of RBS

Independent Review of Financial Services Authority’s report on the Royal Bank of Scotland – Terms of Reference

Lord Turner letter to Mr Andrew Tyrie dated 28 March 2011 (2 weeks after Mr Tyrie MP letter to Mr Shannon MP)

The RBS report could fatally undermine the FSA’s leadership

8. Canada Globe and Mail – 25 May 2011 by Eric Reguly
Article :  Brian Little’s turbulent battle with Magellan Aerospace

Brian Little’s battle with Magellan Aerospace (MAL-T) has not been kind to the Canadian company’s former senior vice-president in Britain.

Mr. Little, 54, says he has been in a physical, mental and financial nosedive since Magellan, controlled by Calgary billionaire Murray Edwards, fired him as he stepped off a plane at the Toronto airport on Sept. 18, 2006.

To fund his wrongful dismissal case, which accuses Magellan and its auditors of “forensic deceit” in relation to a crucial contract awarded by Airbus, he sold his family’s 400-year-old estate in Northern Ireland for £1.7-million ($2.7-million) in 2008. Unable to afford a lawyer, he has represented himself at hearings in the Employment Tribunals in Bristol, England, where Magellan’s British operations are based. With no courtroom experience, his cross-examinations were often clumsy, even though his files were meticulously prepared.

The proceedings were suspended last year, after the self-described whistleblower had a psychological breakdown akin, he said, to “post-traumatic stress disorder.” His illness made him black out in court three times and kept him out of commission for months.

Now somewhat rehabilitated, the tall, beefy Irishman is preparing to relaunch his fight. “My agenda was to prove that I had reasonable belief that I was right,” he said in an interview in London.

Mr. Little claims he was fired because he accused Magellan of inflating the value of its contract to supply exhaust systems to the Airbus A340 (Series 500/600) long-range passenger jet. Magellan’s lawyers say the A340 program had nothing to do with his firing; he was let go because he was “impossibly rude and disruptive to colleagues,” and sent “abusive e-mails” to employees.

Magellan dismisses Mr. Little’s version of events, and the company’ s auditors say the A340 program estimates were valid. Bill Dimma, the Magellan director who heads the board’s audit committee, said in an interview that “none of his allegations has merit.”

Mr. Edwards, vice-chairman of oil sands giant Canadian Natural Resources Ltd. and co-owner of the Calgary Flames, first invested in Magellan in 1995, when it was called Fleet Aerospace. He is now Magellan’s chairman and, through direct share ownership and convertible debentures, effectively controls two-thirds of the company’s shares. The A340 contract, one of its biggest, helped to secure Magellan’s role as a significant supplier to the top aerospace players.

Mr. Edwards is rebuilding Magellan after a bruising couple of years that saw the share price plunge from $16 to pennies during the financial crisis. It now trades at just under $5, giving the Mississauga company a market value of about $90-million. In 2008, Magellan estimated that the cost of dealing with Mr. Little’s wrongful dismissal claim was $3.5-million, which included the price of an independent PricewaterhouseCoopers (PwC) forensic report into Magellan’s Airbus program. The figure has not been publicly updated.

Mr. Edwards last appeared in the Bristol Employment Tribunals hearing, by video link from Calgary, two years ago, when he said “I take some offence” to Mr. Little’s allegations, arguing that he had trusted the company’s auditors, Ernst & Young and PwC, to provide fair analysis of Magellan’s projects.

Mr. Little studied business and accounting at Ulster University, and ran Mayflower Aerospace, a British aerospace component maker that was bought by Magellan in 2003. He stayed on and soon found himself questioning Magellan’s Airbus contract.

According to summaries produced by Magellan subsidiary Aeronca at the end of 2006, Magellan expected to ship 827 exhaust systems, including spares and repairs, for the A340 jet between 2008 and 2021. The bulk of the production would come between 2008 and 2012, and the total estimated revenue over those years was $176-million (U.S.).

Since an A340 has four engines, the contract implied that well more than 200 of the planes (Series 500/600) would be built. Before he was fired, Mr. Little said he told Magellan the figure was unrealistically high. At the time, four-engine jets were falling out of favour because of their relatively high fuel and maintenance costs. In tribunal testimony, Mr. Little said sales for the plane from 2005 would amount to no more than 150.

Since Magellan would commit more than $50-million (Canadian) in development and labour training expenses related to the A340 project, a significant shortfall in expected sales would mean that the program might not cover its costs. If that were to happen, Magellan would face a writedown

As it turned out, the A340 sold poorly. According to the Airbus website, the 500/600 series generated only 133 orders (of which 129 have been delivered). Airbus spokesperson Marcella Muratore confirmed that no A340s are under construction, though the model could be revived if new orders come in. “It’s a build-to-order program,” she said.

Magellan’s defence is that the A340 program was thoroughly audited by both Ernst & Young, and later by PwC. The conclusion of both auditors was that the A340 program estimates were valid and that Mr. Little’s allegations were unfounded. But Magellan’s finance chief, John Dekker, admits “it’s too early to say” whether the A340 program will be profitable because of its “heavy investment.”

Bruce Gowan, a member of Magellan’s audit committee, said Mr. Little seems to have underestimated the market for exhaust system spares and their repairs. “There is a huge replacement market for these parts,” he said, adding that, so far, Ernst & Young has not recommended a program writedown.

A June, 2007, PwC letter to Magellan’s audit committee examined Mr. Little’s allegations. The letter’s existence was reported in a May 4 story in the London Daily Telegraph and has been obtained by Mr. Little.

While PwC had dismissed Mr. Little’s allegations about A340 program inflation, the letter did say that Magellan’s financial control “in the areas we examined is poor and needs to be improved.” It went on to say that individual projects, which it did not name, suffered from inadequate accounting control. “Project sales volumes, revenues and costs were not reviewed with sufficient frequency or vigour,” it said. The PwC letter also said Magellan had “a lack of awareness of the program accounting requirements under either Canadian GAAP [generally accepted accounting principles] or U.K. GAAP.”

Mr. Dekker said the letter was not included in the final report because it was not relevant to the specific accounting matters that PwC was instructed to review. Its contents, however, were contained in the cover letter that went with the report. “The audit committee received all the information in the final report, including the cover letter on opportunities for improving accounting systems and processes,” he said, adding that “the recommendations were helpful and [accounting] improvements have been made.”

In spite of the publication of the critical PwC letter, Magellan appears to have no intention of settling with Mr. Little and plans to let the Employment Tribunal decide which side has the better case. “We’ve nothing to hide,” Mr. Dekker said.

WHAT THEY SAY

“My agenda was to prove that I had reasonable belief that I was right.”

Brian Little

Former senior vice-president, Magellan Aerospace Corp., about the wrongful dismissal case he has brought against the company.
----------

“We’ve nothing to hide.”

John Dekker

Vice-president, finance, Magellan
----------
“Project sales volumes, revenues and costs were not reviewed with sufficient frequency or vigour.”

Letter from PricewaterhouseCoopers to Magellan’s audit committee. The letter was not part of the final report, though its contents were included in the report’s cover letter

Part B : Brian Little and Magellan Aerospace Corporation

Through this website I am publishing my own account and experiences for the first time, having informed MAC and its advisors that I would do so and having sent them drafts on which they have opted not to comment.

6. Brian Little A340.ON.THE.RECORD.FINAL REPORT 15TH DECEMBER 2009 (PDF)

I asked another detached observer to assess for you the structure of the material so, in his words, this is what now follows:

Foreword

“This account is at once personal, narrative, analytical, and evidential. It is tightly argued in content and aimed at a broad readership, ranging from those who know nothing about the situation, or, indeed, the aerospace industry, to those who were principally involved as main players.  As such, it is set out in levels to allow the reader to be selective or all-embracing, depending on his or her interest in the subject matter, and designed to allow each reader to measure the facts.  It is therefore presented in five sections.

Following Brian Little’s Introduction (Section 1) is the Evidence in Detail (Section 2), supported by a series of attachments (Section 3). This includes witness evidence from the relevant public UK court notes, some documents and then Question & Answer notes from the Magellan AGMs in May 2008 and 2009.

Section 4 provides views from 15 people from all walks of life, who were provided with Sections 2 and 3, and recently asked by Mr Little to review the evidence.                                                                                                          
Finally, Section 5 is a document he created as a Supplementary Witness Statement 2 (SWS2) in January 2009 to provide his perspective on the UK case and its implications for his wider family and this “Director with Character.”

Now finally my initial public response following my AGM May 2009 remarks

Critically, most of the evidential material has in fact already been examined by an outside agency. MAC eventually asked PricewaterhouseCoopers , on PinsentMasons recommendation - at a cost of C$3m+, - to undertake an "independent forensic investigation" into MAC's actions regarding the A340 contract in the light of my protected disclosures.

Although we asked for an invitation to comment on the factual accuracy and conclusions in the PwC Final Draft report, the product of a four month of the seven month exercise undertaken by PwC as a direct response to my whistleblower claims, I was advised that PwC was of the view that this was unnecessary and that Mr Dimma and “the Audit Committee is confident that PwC’s investigation was thorough and competent, and is prepared to rely on PwC’s conclusions.”  PwC failed to record in their Final Report that they had not invited me to make any comments, despite my offer to do so. In contrast unlike the PwC final draft report Brian Little provided Magellan via Mr Dimma (Chairman of its Audit Committee), PwC UK and Canada - instructed on the C$3m+ "independent forensic investigation" report and Ernst & Young Canada (E&Y) their public auditors with an invitation to comment on the factual accuracy and omissions on the contents of this On-the-record A340 Report for some four to six weeks - no response was received from Mr Dimma, PwC or E&Y.

However MAC has asserted, on 26 November 2009 through their UK Solicitors, that there are "many inaccurate and incorrect statements" in my A340 report. Although I immediately invited them to list those inaccurate and incorrect statements, for our proper consideration, some three weeks later all I can say is that they have neither provided a list as a whole or indeed the substantive factual errors or omissions. If you wish you should ask them directly - email : wdimma@brookfield.com - for that detailed page by page list and / or assess for yourselves the credibility of the evidence and analysis contained herein and from your own experience, analysis and research. I will add that Magellan have produced no evidence or contemporary documentation to support those assertions, and simply persist in stating they rely on PwC and E&Y as the experts. As an example please re-read the Canada Globe and Mail's 1st April 2009 coverage in part B.5 above.

I repeated this offer in an email to the MAC CFO and Corporate Secretary Mr Dekker and their UK solicitors in an exchange in April 2010  in which they responded  -   “As you note yourself, we have previously stated to you our position on your so called "Final A340 report" and our position on it has not changed.  We will not be debating your conclusions and opinions on that matter for reasons already stated. “   To which I replied “For the record I specifically stated that I did NOT ask you to debate the “conclusions and opinions” on my 15 December 2009 A340 Report. I asked that you advise me in a simple list of any of the factual information in the Report which Magellan have determined to be inaccurate and incorrect and provide the relevant contemporaneous documentation to support that assessment or show me where I am wrong from other hitherto non-disclosed documentation.  Perhaps you could provide only from your assessment a list of the identified “inaccurate and incorrect statements” for the Detailed Report in Section 2 from Pages 23 – 52 so as to provide a focus on the matters.  It is important to remember that it is the Respondents position and that of their legal team, which moved from a position on 3 May 2007 (doc 3196) “At situation is that, at present , there is no issue that arises as to “reasonable belief”,  to the changed position in the Respondents PD schedule of November 2007 by relying on a flawed PwC report/mindset and that despite multiple opportunities since then you continue to oppose (rather than concede and accept as in May 2007)  MY mindset on “reasonable belief” on PD22, PD23 and PD24 on A340 with the consequences on costs, time and your client’s reputation. 

I repeated for the final time this offer in an email which I sent on 18 July 2010 to Mr Dimma in which I asked at Q1 and 2 on A340

QUESTION 1 :   I formally ask you, for the final time, will you and Magellan Aerospace Corporation provide a proper list of what Magellan consider to be factual errors in my attached A340 Final report rather than hide behind legalistic “many inaccurate and incorrect statements” in my A340 report, as recorded by PinsentMasons and included in my website – copy below?

Can you please arrange to provide this by return (say by the end of July)  given that it must have been readily available to you and Magellan Canada to enable PinsentMasons to legitimately underpin such an important assertion.  This opportunity for input is of course not what you/PwC did in my case – in a professional  breach of “independence”.    As I said in the concluding paragraph of my email above, if having considered all the factual evidence now available you wish to seek the recovery of £1m + from PwC for MAC shareholders I remain committed, on this final occasion, (when my health fully recovers) to support such a process undertaken by Magellan.

Please advise me formally if you wish to take up my offer of support to Magellan on behalf of all the MAC shareholders?.

UPDATED  NOVEMBER 2010  :  No response was received from Mr Dimma so I sent my email dated 17 September 2010 in which I concluded

“I will not follow up this email MYSELF any further directly with you, as it is now a matter of public record on my website. I will now leave it for you to determine what actions you should now personally take/record.  At the very least it would seem to be logical to disclose any documents which would address my concerns in Q2./A340 Protected Disclosures PD22,PD23 and PD24  and Q3. but that is of course a matter for you personally as a further record of your actions/inactions since September 2006.

You, of course given your extensive experience of corporate governance, also fully understand the scope, terms and purposes under which PwC were engaged in your instructions to them on 5 February 2007 and those consequences.

After two months you may note that my Member of Parliament, Mr James Shannon MP, has since written to Mr Dimma on 17 November 2010. The paper copy of these letters were received and signed for in Toronto on 30 November 2010.  No response has been forthcoming, yet.

QUESTION 2 :   To your knowledge was Mr Butyniec’s 11 /14 August 2006 BAFO settlement pricing proposal discussed and/or approved by you or any other member of the MAC Audit Committee or non executive Director?  Was its proposed pricing settlement implications with regard to the A340 unit pricing that had been used by all of us in the Q2.2006 A340 EAC explained to any of you,   in relation to the $5.3m Gross loss etc?

UPDATED 2 AUGUST 2010   As yet no reply has been received from Mr Dimma to my 18 July 2010 email asking these two questions  nor after I sent a further email after the Farnborough Airshow on 23 July 2010 to Mr Dimma in which I asked a further Question 4  (Read Receipt 23 July 2010);

“For the record

Mr Dimma

Farnborough Airshow 2010 – As part of a three day Pearl wedding celebration holiday/visit to London earlier this week I attended for 1.5 days the Farnborough Airshow. During which time I met a large number of people – including two of my usual reliable senior Airbus sources. Substantively the position I stated in my A340 report.15.December.2009  and mid January 2010 and 18 July 2010 website updates has been verified.  I have revised the 18 July 2010 website section B to now include some of the data from elsewhere in the website re E&Y and PwC as a result of some reader initial feedback. The additions will be readily apparent to that sent to you last Sunday evening.

In my email below last Sunday evening I also included a

“Point 3

Since my mental/nervous breakdown in early February 2010 naturally some of my local friends at Bombardier in Belfast have learned of my ill-health. An indirect consequence of that is that as Bombardier were part of International Nacelle Systems until 1997 - a joint venture between Hurel and Bombardier/Belfast - a former senior member of Hurel-Hispano (the predecessor to Aircelle) who I knew reasonably well in the early 1990's has got in touch. It seems he is well aware and was involved in the A340-500/600 exhaust system with Airbus and Magellan from the outset. He tells me it all started at Paris Airshow 1997 when a HH colleague met Rich Neill, who offered to provide a A340-500/600 exhaust system proposal from Magellan/Aeronca.   At the time HH had only one commercial proposal from Astech (now GKN) for $142K per engine unit in 1997 terms.  Magellan/Aeronca then provided its bid for circa $80K. 

We have set a time to meet now and he promises me "chapter and verse" on his perspective on the historical story before my promotion and appointment as Senior Officer in Magellan in June 2005 and the eventual March 2005 Settlement Agreement,  following the legal injunctions in Canada and USA against Magellan in late 2004.   I propose to add some of this Aircelle perspective in due course to my A340 report/website as further prior history in due course.  No action required until I compile this and then of course I will provide you with a draft and  the opportunity for input and where  you can credibly demonstrate that I am factually wrong I will modify it accordingly.

I met and talked to this former HH/Aircelle senior manager too.  It will take a while to compile a summary of that information but I can say now that the Aeronca bid was for $85K (versus the $142K from Astech. No bid was sought from Rohr/Goodrich as they had lost the total nacelle bid as their direct competitor).   Shortly after receipt of the Aeronca bid  Hurel Hispano people (including a member of his staff)  visited Aeronca and met with a Mr Jim Stine? and Mr Brian Latz to enable them to carefully consider their “low bid” and provide the opportunity to uplift it based on relevant information.   These two gentlemen from Aeronca did not take that opportunity and instead stated their confidence in Aeronca/Magellan being able to contract on that basis. He believes from memory (to be checked) that there were minimal , if any, changes to the commercial contract terms finally approved by Magellan and signed by Mr Stein.

New Point 6  :  A340 Anonymous whistleblower in 2002 

Arising from Mr Furbay’s termination by Mr Dekker, immediately after his visit to Toronto, on the 23 June 2010, I have received a copy of a letter/information sent by an Anonymous Whistleblower on the A340 Project in  2002 to Mr Edwards – when he was Chairman and CEO/President  of Magellan Aerospace.   Please find attached a scanned copy of the covering letter.  As you can read it sets out this Magellan/Aeronca “whistleblower’s” view  on the A340 -500/600 project :

“Dear Mr Edwards

It is this writers belief that Magellan Aerospace Corporation has a significant long term financial exposure on an A340 contract – stateside – see attached.

The subject contract was grossly underbid. At last count it was also grossly under-costed. I can find no mention of the potential impact anywhere in your financial reporting.  

A conservative estimate of that level of exposure could be $50 Million U.S,

This writer recommends that you task Mr William A. Dimma with an audit of the subject A340 Estimate at Completion (EAC) at your U.S. Subsidiary.,,,,,,,,,,”

QUESTION 4  Can you please confirm when , in your role as Chairman of the Audit Committee, you received a copy of this “whistleblowing”  letter from Mr Edwards?  When you carried out your investigation, at his request, where can we see the public record of the financial implications of that in the public accounts of Magellan since FY2002 or is there none?

As before I look forward to a response to my four questions (and four supplementaries) by the end of July 2010.” 

Mr Dimma  (Mr Dekker as a finance employee and the Fleet-Operations-dismissed Mr Butyniec) are no strangers to whistleblowing within their career/organisations.   A former work colleague in the mid-1980’s in Shorts/Bombardier in Belfast, who subsequently worked in Operations for the Fleet Aerospace Corporation ( the predecessor / founder company of Magellan Aerospace in 1995), on recently learning of my ill-health, sent me a website link to a Canadian public news link ( the Spectator in September 15 / 17 - 1990 headlined “Blowing the Whistle”  by Dave Kewley.). I can see why he considered it very relevant as this is a fascinating article with many substantial similarities in our “whistleblowing” and would have been familiar to Mr Dekker, Mr Butyniec  and Mr Dimma’s experiences.

Nor are “whistleblowers” a new experience elsewhere for Mr Edwards.   I have recently learned that a Canadian “friend” and former CFO within another of Murray Edwards “publicly traded” companies is also involved in litigation in Mr Edwards hometown in  Calgary, Alberta for “a hostile work environment” which was creating a bullying and intimidating approach towards finance, leading to “aggressive revenue recognition”.   He has also suffered serious health problems as a consequence.  PwC have been and are the external auditors of this Calgary-based “public company”.    Naturally the parallels to A340-500/600  “Revenue Recognition Policy” and senior management actions will be apparent to the reader. As I understand it this case will come to a public trial in Calgary within the next 12 months – UPDATED 18 January 2011 -   I now understand that this case has been the subject of an out-of court settlement. 

The following provides you with a series of quick access links to crucial parts of the story contained in my A340 report and the broader situation. I am now moving to the section of my account in which I set out, through various links, my own Public Witness Statements and various pieces of external evidence. However, I would ask you to note, while reading these, that the Magellan Aerospace Corporation Annual Report for FY2006 at page 14 (MD&A/AIF.p12) states

"The Corporation relies on customers' delivery projections as well as external market forecasts to determine the number of units over which to amortize non-recurring costs. Should deliveries not reach the number projected, any unamortized balance that remains would then need to be charged to cost of revenues which could have a material adverse impact on the Corporation."

This was approved by a Resolution of the MAC Audit Committee on 16 March 2007 and a MAC Board Resolution on 30 March 2007 at which the E&Y lead auditor, Mr Don Linsdell, was present.

“Industry Overview

The aerospace supplier industry differs from traditional manufacturing industries in a number of material respects.
An aerospace manufacturer develops relatively small quantities of highly specialized products on a contract basis.
Accordingly, an aerospace manufacturer is more like a contractor, hired to complete a very customized and
specialized project to the specifications of a customer. The up-front costs in developing such products that are
incurred prior to the completion of the first production unit are significant. Up-front costs generally include
engineering, design and manufacture of tooling, and test units required for certification. These up-front costs of
developing products are borne by the manufacturer, and are recovered when the project reaches the production
phase, usually on an amortization basis over the projected program life. See "Risks Inherent in Magellan's Business
– Customer unit deliveries may not reach the number projected when the basis for amortization of non-recurring
costs is established"  - FY2005, 2007, 2008 and 2009 stated below -

Customer unit deliveries may not reach the number projected when the basis for amortization of non-recurring
costs is established.
The Corporation relies on customers' delivery projections to determine the number of units over which to amortize
non-recurring costs. Should deliveries not reach the number projected, any unamortized balance that remains would
then need to be written off which could have a material adverse impact on the Corporation.

Changes in estimates used in accounting for long term contracts could adversely affect the Corporation's future
results.
Accounting for long term contracts require judgment related to assessing risks, estimating contract revenues and
costs and making assumptions for schedule and technical issues. Due to the size and nature of the Corporation's
contracts, average unit cost for products produced is determined based on the estimated total production costs for a
predetermined program quantity. Program quantities are established based on management's assessment of market
conditions and foreseeable demand at the beginning of the production stage for each program, taking into
consideration both customer supplied and independent data. Management conducts regular reviews of its cost
estimates and program quantities, however, changes in underlying assumptions, circumstances or estimates
concerning quantities or change in the market conditions, along with not realizing estimated total production costs,
may adversely affect future financial performance.”>

UK Court Case: My Public Witness Statement (A340 - 500/600 - Pages 61 - 79, paragraphs 187 - 227) (PDF) attached
External Market Reports - para 224.2

(BL Note : My attached public witness statement was amended for the Tribunal with the documents disclosed by the Respondents following the December 2008 Court Order and before my evidence-in-chief in January and March 2009.  However subsequently further crucial documents were disclosed (substantively those requested in Request 16 for CMD4 (see Part K : Current status of UK court/tribunal case: 2) documents disclosure ) in which the Respondents counsel  Mr Lynch QC initially persuaded the Tribunal/Ms Christiansen that these documents would be “more appropriate for a full scale forensic accountancy enquiry”  which was already underway with PwC.  On that basis these documents were not disclosed in June 2007 and before my initial witness statement could deal with these.  A number of these documents were then disclosed from March 2009 and subsequently-  and on which Mr Neill and Mr Dekker gave their evidence –see later.   As the UK legal  test is a threshold of “my reasonable belief”  (see Part K : Current status of UK court/tribunal case) I was not required by the Tribunal to give any further written evidence on these new documents.  So in addition to my attached written witness statement I explain the relevance of these contemporaneous documents in my A340 detailed report and Section C and D of this website.)

My Public Supplementary Witness Statement 1 (my ET-limited 30 page response to their "56" allegations) (Word Doc) attached

(BL Note : I am unable to attach publicly a copy of my initial 235- page Supplementary witness statement 1 - which provided my evidence on the further 46 unpleaded misconduct allegations not included in the ET3  Magellan defence - as it was not admitted as evidence to the court, as the Tribunal considered it too comprehensive etc, and instead asked for my limited evidence for each allegation for a max. of 30 pages as above. Also my Supplementary Witness Statement 2 -  SWS2 dated 15 January 2009 - 3904/3919-  is not included here , which dealt with some of my evidence in support of my Rule 34 Costs claim has not been admitted or heard yet in Court and in any event requires further update following the further March 2009 and subsequent document disclosures.)

3600 - Airbus delivery projections for wing deliveries 2007 - 2009, dated 6th February 2007 (to 135 a/c) (PDF)
Mr Steve Vandersteen, a senior Airbus UK Procurement Manager, and one of his colleagues advised Magellan UK that the A340 600 program was “Trashed” on 15 September 2006 (doc 2291)

2992/3 Published Teal Group/Richard Aboulafia - April 2006 A340 ten year market forecast (total build 135 ac)  (PDF) confirmed typo of 163 Total Aircraft Build "Airbus's Tragic Quadjet"

2998/9 Aboulafia - "DEAD PLANE FLYING"          - April 2007 A340 ten year market forecast (total build 139 a/c)  (PDF)

4083    Aboulafia -  "DEAD PLANE FLYING"         - April 2009 A340 ten year market forecast (total build 132 a/c)  (PDF)

4084 "THE AIRBUS 340 PROGRAMME IS WINDING DOWN"     Published Forecast International Inc. report entitled "Airbus A340", Forecast Rationale and 10 year market forecast dated April 2009      (total build 133 a/c)  (Word Doc)

Aboulafia –  “DEAD PLANE FLYING “ -  March 2010 A340 ten year market forecast (total build 130 a/c) (PDF) 

Latest Information Available

Latest Orders and Deliveries schedule at Airbus.com

<BL Observations - 132 aircraft - Iberia Airlines have 2  A340-600 aircraft from their sales option conversion in 2007- which were delivered by Airbus since mid 2009 - of their 15 A340 600 aircraft fleet in storage at Lourdes Airport. These 2 stored aircraft will replace in service A340-300 aircraft on 1 June and 1 August 2010. The remaining Airbus A340 600 order book for 2 aircraft for Iberia are now scheduled for delivery from Airbus to Iberia – MSN1079 (March 2010) -  and MSN1122 (delayed to Sept 2010).   The cancellation of the A340-500 aircraft order from Kingfisher Airlines of India above – since mid 2008 – leaves a further 2 completed aircraft in storage/inventory and they remain the subject of Kingfisher/Airbus resale efforts.  This leaves the 3 remaining sales orders for A340-500   VIP aircraft. Two of which are for the Kuwait Government - MSN1091 (delivery June 2010) and MSN1102 (delivery October 2010).  That third VIP aircraft emanates from an Asian customer order which was placed in Q1.2007 but as yet has not been scheduled for final assembly in Toulouse during 2010 or 2011.>

In fact, Airbus VP-Marketing Andrew Shankland expressed during the Speednews Commercial Aviation annual conference in Los Angeles in March 2009 when he stated that “The A340 is pretty much built to order” while noting “it has found a niche as a VIP airplane”. >

<BL Observation – the new A350 XWB aircraft (500 orders), launched by Airbus in July 2006 at Farnborough Air Show, records the A350 -1000XWB – 75 sales orders - and A350 “Prestige” – 8 sales orders - (VIP).  Virgin Atlantic Airways have 2 of their 19 A340-600 aircraft in storage at Lourdes Airport which are available for sale/dry lease since July 2009, Qatar Airways would like to sell /lease their 4 A340-600 aeroplanes and Thai Airways continue to try and sell/lease their 4 A340-500 aircraft without success since June 2008.>

{BL – UPDATED 16 JULY 2010 :  As above Airbus have now delivered the planned A340-500 - MSN1091 to the State of Kuwait on 15 June 2010 for storage/VIP completion and the final A340 600 - MSN1122 was delivered today to Iberia Airlines.  See also latest Airbus O & D website above.   The Airbus assembly delivery projections schedule for 2010 – 2014  has now been formally adjusted  to 2 aircraft in 2010   (the assembly of that Iberia MSN1122 and the State of Kuwait  second A340-500 aircraft - MSN1102 and the last A340-500 complete assembly and scheduled for delivery by October 2010.)   

As the reader can see the Airbus delivery projections schedule has also had the two A340 -500 VIP aircraft in FY2012 removed from my “adjusted”  January 2010 Airbus plan of 4 a/c above and therefore Airbus at present do not plan any further Assembly of A340-500/600 aircraft. This now leaves the two A340-500 (ex cancelled Kingfisher aircraft MSN886 at TLS /MSN894 at LDE assembled in early 2008)  which Airbus are continuing their endeavours to resell – my latest information is to Sonair.  I expect there may be an occasional A340-500 VIP aircraft sold in the next period (largely out of primary parts inventory already within Airbus) but fundamentally the mid-2006/early2007 estimate of approximately 135 A340-500/600 production deliveries and series production cessation in 2010 has come to pass.  For completeness I had not foreseen the A340-500 April 2006 order cancellation by Kingfisher Airlines of India in August/September 2006.  

This effectively reinforces the conclusions of

1. the aerospace specialist press   -e.g
   Flight International : 1 August 2006 : Airbus offers Emirates A350/A380 mix in place of A340 -600s (discussed/given to Mr Neill by me  – PwC (e)  “Data from other publications” file ?)
   “Habib Fekih, President Airbus Middle East, concedes that the A340 600 order is a casualty of Emirates’ new fleet plan, and he told Flight International , his preferred option is for it to be  replaced by a mix of A380’s and A350s”,     i.e the cancellation of their  18 aircraft after the A350-1000 XWB launch and A340-500/600 “Enhanced” study was dropped by Airbus/RR.
   
   
2. and in the  General Press – e.g. 
   UK Times : 28 October 2006 – Ends looms for Airbus A340 as Emirates cancels $4bn orders (to MAC Directors, E&Y and PwC – DIR44 with my 4 Dec 2006 letter)
   and their conclusion that “ The move effectively kills off the A340”.    Ms Barbara Hadfield of E&Y UK confirmed to us that she had also read this article in a 7 November 2006 meeting.Which was in turn provided to E&Y (Canada) and PwC and each individual MAC Director in December 2006.
   
   
3. and Airbus UK Procurement
   (Airbus UK’s Senior Procurement Manager  Mr Vandersteen’s “A340 600 – “Trashed”  noted briefing/conclusion to my former colleague Mr Phillip Underwood on 15 September 2006)
   (In his evidence Mr Underwood told the Tribunal that PwC discussed various matters raised by me on tape with him during their early 2007 investigation  ---    Not in A340 PwC report) The next three-year production delivery projections provided to Magellan by Airbus UK also showed declining A340-500/600 production rates (also given by MAC/me to PwC and E&Y -  e.g.doc 3600 link above)
   
   
4. and  six out of seven external market forecasters
   (e.g. Richard Aboulafia of Teal Group – March 2006 above  –  “Airbus’s Tragic Quadjet” with his A340-500/600 market forecast of 135 a/c . By the time of the PwC investigation all six forecasters had released their forecasts to a total A340-500/600 Production Build of between 130 a/c – 150 a/c with a consensus of circa 135 a/c.  Richard Aboulafia had now entitled his annual summary update for the A340-500/600 – see link above - as “Dead Plane Flying”.  Both of his Teal Reports on A340 were available within PwC (Mr Hoon Lee) via their annual subscription to Teal Group Aerospace publications.  I expect that PwC forensic staff would also have had access through their Global Knowledge Management internal processes to some of the other external forecasts too, though none of these are referenced or Exhibited either in their seven month investigation/Report.)
   
   
5. AND my own “reasonable belief” / A340-500/600 Protected Disclosures < (PD22,PD23 and PD24) / Q2.2006 EAC and quarterly certification qualification / Butyniec’s  BAFO pricing settlement 11/14 August 2006 letter to Aircelle > within Magellan to Mr Neill, Mr Edwards and Mr Dekker in August and September 2006. These followed  the crucial Airbus decisions made before and announced at or shortly after the Farnborough Airshow 2006 -  all months before Magellan’s Q4.2006 EAC for A340-500/600 was compiled using  the quantities specified in the updated “gross margin breakeven” representations to E&Y and PwC’s “Forensic investigation” in 2007 commissioned by  Mr Dimma– see also Parts C, D ,E and F on this website. As recently as yesterday I read an email following Magellan instructions in which they still do NOT concede my reasonable belief again on these A340-500/600 aspects of the case.

As you will read later in the website at Part K - the Respondents (Magellan) position was on the record from Mr Lynch QC in the UK court/tribunal on 16/19 November 2007, as “It is right to say that, prior to the receipt of the PWC report, the Respondents envisaged that the issue of reasonable belief might not be a live issue. PWC concluded that the view adopted by the Respondents as to the treatment of those costs and likely sales of the A340 formed no basis for criticism.” As the reader will recall earlier in this website the UK court-ordered disclosed report from PwC also stated on this subject matter at para 2.40 “that Financial Control in MAC was Poor and at 4. Poor control over individual projects from an accounting perspective. Project sales volumes, revenues and costs are not reviewed with sufficient frequency or rigour."

As one would reasonably expect,  the MAC FY2006 Annual report clearly sets out its reliance on customers’ delivery projections and external market forecasts for the amortization and recovery of NRC assets. Despite this and in the face of all the “available” oral, written and public evidence available to the “Number 1 global auditing firm”, PwC,  went on to independently calculate, at para 8.75, that a further    2040      A340-500/600 exhaust system units would be required for production (468 - to a total Airbus production series build of 220+  A340-500/600 aircraft, far exceeding the 130 - 150  total aircraft build series from six of the seven external market forecasters ) and full replacement spares (and repairs, which were not appropriate for accounting NRC recovery as per PwC para 8.72) from FY2007- FY2021.

For completeness, Magellan have stated in May 2009 that MAC"s public auditors Ernst & Young (E&Y) were "satisfied" with the quantities of 833 by FY2012 in Magellan's submission/representation in their Q4.2006 EAC during their year-end audit testing.  It used a quantity of 701+ units  for future aircraft production (a total Airbus production series build of 284 – 291  A340-500/600 aircraft) and Spares / Repairs of 92 - 172 units (about 10% of the 31 December 2006 “estimated” production volumes / typical aerospace “norms”)   from January 2007 to December 2012, which at that time was the end of the current commercial contract with Aircelle.

I have also recently learned that Mr John Furbay (the Magellan/Aeronca CFO, including the A340-500/600 EAC accounting role) was dismissed by Mr Dekker and escorted off the Aeronca site by the General Manager at the end of June 2010/Q2.2010.  In the same 2007-2009/2010 calendar period as Airbus reliably predicted in their customer delivery projections documents above those 32 + 2 aircraft deliveries (136 production nacelle unit deliveries) Aeronca/Magellan delivered some 121 production AND spares units. This compares with Magellan submissions to E&Y and to PwC of 366+ production/spares and the use of 439 units in the CFO/Finance Program EAC used by E&Y for their Q4.2006 audit testing for the same 42-month period from January 2007. An increased Magellan factory A340-500/600 production rate totaling 296 was then estimated in the remaining 18 months for production and spares (H2.2010 and FY2011) for that Magellan strategic 5 year planning period. 

A further example of that misleading representation to PwC and E&Y.  For this current year (FY2010) MAC had projected in the documentation provided to E&Y and PwC – in diametric opposition in mid-2006/2007 to the “known documented reality” (a production rate of about 10 a/c per year and an identical MAC production budget for FY2007)  of reducing Airbus-customer delivery projections AND a declining Airbus A340 order book and airline sales campaigns -   that some 30+ aircraft (127/116 units - doc 3605,3605C/D) AND 80 Spares and Repairs (doc 3605H) would be built in Aeronca in FY2010 – a total of approximately 200  A340-600 exhaust system units in FY2010.

I believe that those “quantities” representations would NEVER have been allowed to happen if Larry Winegarden AND I had led, in my MAC strategic planning SVP functional role as planned, those FY2007-FY2011 4 day strategic planning sessions within hours of my no-warning firing on arrival in Toronto Airport by Mr Neill on Monday 18 September 2006. For me, and us, to enable and permit that would have been basic professional negligence and a fraudulent representation of the realistic/most likely A340-500/600 outcome in meeting our MAC business/legal obligations.

in effect, as I stated earlier, “A340-500/600 was and is vitally important to MAC. The A340-500/600 project investment/asset was the single largest financial number (>C$40m asset in FY2006) and failure to fully realize the value of the project would, inter alia, bring about the triple consequences of

(1) an overstatement in the project / non-recurring costs/engineering development assets of > C$40m .

(2) a program gross margin “breakeven” to actual financial losses and

(3) create a future cash deficiency / non-recovery in the internal and public reporting (MAC 5 year strategic planning base - Sales revenues / cash projections of C$150m +)”

Although, obviously by comparison a secondary matter, after the normal cycle/flow time adjustment this lower actual -121 - Magellan delivery number (-15) to that - 136 - properly and credibly planned in Airbus/Aircelle in that 42-month period is not surprising. I believe this difference was largely because I witnessed in FY2006 the COO Mr Butyniec pressing his Operations staff in Bristol/Aeronca for more A340 deliveries to Aircelle than budgeted (to achieve 80 versus the budget of 64 units). In large part this was because he was trying to improve the factory overhead recovery rate to meet the approved MAC 2006 budget  (although this action was at the detriment to his Aircelle 14 August BAFO settlement letter with a lower price for FY2006/Q2.2006 EAC) and therefore Aircelle are likely to have had a surplus of perhaps 10-16 completed exhaust system units at “2006” prices in their inventory/stock by December 2006.  On all the evidence and industry experience I doubt whether MAC will even deliver / sell another 15   A340-500/600 exhaust system units for replacement spares in the next 18 months / by the end of that five-year strategic planning period in FY2011.

Notably, and only very reluctantly disclosed by Magellan in December 2008/2009, as a result of almost continuous UK Tribunal/court intervention at my QC and my request, the A340-500/600 production delivery and spares projections / other documents (3605/3597 series) which provided the A340 quantities stated for the 42- month period above, and which the senior Magellan management represented to their auditors E&Y and PwC on 1/14/22 and 29 March 2007 (for the audit of MAC FY2006 financial statements and the PwC C$3m+ “independent forensic investigation” ), have belatedly been the subject of some further oral evidence in the UK by the MAC Vice-Chairman, Mr Neill (July 2009) and MAC CFO, Mr Dekker (June 2009) and is recorded/addressed at this website parts C,D,E & F

{BL – UPDATED 18 JANUARY 2010:
Oral evidence of Mr Neill (President & CEO) in UK court in November 2007 (p.437+)

So I am now in the process (slowly) of preparing a three part Application to the UK Tribunal to again seek Affidavits (previously 2 July 2007:Tribunal CMD5) from the Directors of Magellan – Mr Edwards and Mr Dimma.

My Application for an Affidavit on this occasion will request that Mr Edwards and Mr Dimma certify

1. The A340 quantities produced and delivered by MAC in the four year period from 1 January 2007 – 31 December 2010.   
   Quantity of XXX units   ( Factually I believe 121 exhaust units)
   
   
2. Given that MAC will also have considered and approved their FY2011 budget for A340 the budget quantity for FY2011 should be stated   Quantity of Y? ? units   (with document)                                            ( I believe 8 units in FY2011. On 1 and 14 March 2007 MAC projected 198 units (P=108 and S=90) for 2011.  2011 would have been the final year of the five year MAC strategic plan  which I was/would have been responsible for coordinating from September 2006  -  i.e FY2007 – 2011.)  
   
   
3. The MAC FY2011-FY2015 strategic plan will also have been produced and submitted to the MAC Board in late 2010. The Spares quantity – not repairs- which is stated and has been included in that MAC five year plan from FY2011 – FY2015 should be stated.  
   Quantity of ZZ? ?  units

( My forecast was and is for approximately 58 replacement  spare units of the 100 by FY2021 will be required from 2011 – 2015.  MAC projected 379 units would be required for Spares, (886+ by FY2021) in their 14 March 2007 schedule,  as to quote Mr Neill in his email (doc 3597) dated 29 March 2007, “To attempt to explain the terminology “Spares and Repairs” generally if an exhaust achieves its predicted and recommended life it will be taken out of service and a new one will replace it”.

As you can see these are all simple requests and readily available within the MAC senior management.

The fourth element (d) of the Application for an Affidavit will be from Mr Dimma and if granted would require him to obtain from PwC the documents log / index produced by PwC during the period January 2007 – August 2007 disclosing which documents PwC received, obtained and considered in producing their findings of fact and conclusions on A340 in their 2007 report. As you can read in Part D of my website ONLY 5 documents were Exhibits in both of the PwC A340 reports.  This log and document index record should be part of the PwC internal Guidance procedures to underpin the minimum operating standard practices for Investigative and Forensic Accounting engagements in Canada (CICA.IFA) in order to protect the public published in November 2006.

Part C  Magellan documents referred to by Magellan in their oral evidence and in their March 2007 Representations (Mssrs Neill, Butyniec, Dekker and Furbay) to Ernst and Young {external auditors} and PricewaterhouseCoopers {independent “forensic” investigation} 

MAC A340 forecasts - Aeronca Inc Aircelle A340 Program - Actual / Estimated Quantities
          (Engine Sets) - 1 March 2007 (UK document 3605B/D to E&Y for FY2006 audit)
                                   (and to PwC for "independent forensic investigation" - 3605 E/G) - Disclosed 8th June 2009
                                   see also A340 my On the Record Document pages 98 - 99

1 March 2007    - (MAC Projected sales and build of almost 300 production A340 -500/600 aircraft through to FY2016: of which the MAC Production Plan for 2010 = 29 aircraft or 116 engine exhaust systems) . The lower schedule (1831A) is the representation made by MAC to E&Y in the Q4.FY2006 Estimate at Completion (EAC). As per the PwC report para 8.61 “The Q4 FY2006 EAC was also used by EY for year-end audit testing purposes.”  The Estimate at Completion (EAC) process/documents are the MAC management  “most reasoned view and likely outcome – oral evidence :Dekker”  and showed in this Q4.2006 EAC submission to the auditors E&Y and PwC an improvement over Q2.2006 to a miniscule  $0.1m gross profit on $250m program revenues. 

Quantities specified in the updated “Q4.2006 gross margin breakeven”  as the A340:Summary of Best Information Available for Production and Spares/Repairs at 31 December 2006.   The column on the right are the quantities (and prices) used in the Q4.2006 EAC. whilst  the reader will observe in Mr Dekker’s schedule under the left hand column heading  % of Units Justification  the “identical” quantities  information from FY2007-FY2021  for Trent 500/A340  Production of  60 + 661 = Sub-total = 721   and Spares and Repairs =   6 +166 = Sub-total = 172  to that contained and submitted to PwC and E&Y  in the Aeronca document 3605 dated 16 February 2007 referred to above was then to appear in May 2009 (See my A340 Written and oral evidence at Report:P79-80 in April 2008 and further A340 document (doc3605A) – in May 2009 – with a comment from the Magellan UK solicitors in which they state………

PinsentMasons, on behalf of Mr Dekker, the MAC Chief Financial Officer described this document /schedule for production and spares on 5 May 2009 as
“At a glance the assessment that would have been carried out by the auditors in order to satisfy themselves that the accounting on this matter was appropriate.”

MAC A340 forecasts - Aeronca Inc Aircelle A340 Program - Actual / Estimated Quantities
       - 14 March 2007 with inflated spares prediction (PwC for "forensic" investigation - 3605H - Disclosed 27th Aug 2009
       see also A340 my On the Record Document 3597 / p. 67 and Attachments C & D pages 56 - 97.
14 March 2007 – (MAC projections of a likely minimum of 886 “spares”  (replacement parts) - based on 40,000 flying hours exhaust useful life, which was to provide a margin of safety in those estimates by Mr Neill , the current Vice Chairman- through to FY2021: of which the MAC Spares Plan for 2010 = further 81 engine exhaust systems)

<BL Observation – Despite their centrality neither of these documents are Exhibits in the PwC report. Based on these crucial March 2007 documents therefore the manufacturing volumes projected for 2010 in Magellan’s plant Aeronca Inc was now for some 116 production (reduced from 127 as at 31 Dec.2006/page 3)  and 81 spares (was 8)= 197 engine units (or almost 50 aircraft sets).   As the contracted pricing was identical for production and spare engine exhaust systems the A340 program revenue projections for 2010 would be for some C$47m–C$50m with the attendant NRC and cash recoveries in the MAC strategic planning and financial budgeting/reporting processes.  I believe it was predictable then, and will actually be now, some 90%+ lower i.e less than C$4m. MAC publicly reports these Revenues through its Aeronca facility and the United States line in their quarterly earnings statements - see example extract in the Q4.2009 from MAC Earnings statement.   The historical position reported by MAC from 2006 -2009 is --   

You will note in Part G, and specifically in my 27 November 2009 letter to the MAC Directors before their December 2009 MAC Board meeting, that each Director has been invited to look at these very carefully for the FY2009 financial audit by E&Y and when reviewing the FY2010 MAC budgets for approval at that December Board meeting – you will see this in part of my letter when I said:

“Part of my team role, as both a MAC Senior Officer and with functional responsibility for coordinating the MAC strategy, was to identify these major matters and have them addressed by us all within management.  Mr Dekker’s comment to the Judge that I had simply a different point of view about the A340 -500.600 in August 2006/September 2006 is very far removed from the truth.   This week you will be approving the MAC budgets for 2010.  Look specifically at what those MAC budgets include for the A340 production units and spares.

As you know from my MAC Board May 2006 presentation, there is a typical three year lead time from aircraft wide body sales campaign to delivery.  MAC represented in March 2007 to PwC and E&Y that in 2010 some 116 units/28 production aircraft (1 March 2007: doc 3605B/D to E&Y and 3605E/G to PwC) would be built and projected a Spares build of 81 units (14 March 2007: doc 3605H/red Tab page 68) – a total manufacturing requirement in Aeronca of some 200 x A340 units in FY2010.

My view, by February 2007, was that we would be more likely to be facing the production case shown by MAC at document 3605H dated 14 March 2007 /Page 68 (total production build of 135 aircraft) whilst back in Aug /September 2006 MAC would be lucky to still be building at a rate of 10 aircraft per year by 2010 with the termination of meaningful series production of the A340-500/600 very probably imminent. Even now Mr Neill would, it would appear; based on his July 2009 evidence to the court does not admit that.

I believe instead you will read in those submitted MAC budgets for 2010 A340 production = 0 and Spares (rotables and replacements) of 8 – 10 units.  This was predictable and indeed predicted by six external market forecasters, and almost everyone else with experience in the industry from mid 2006/early 2007, except those MAC Senior Officers on this the largest cash recovery/asset in the MAC Balance Sheet/Strategic Plan.  I understand that the Program EAC is not just about volumes, prices and costs matter too, and those were and have been carefully considered then and now by me. See my A340.On the Record.Final.Report.”

As further background the former President and CEO Mr Neill in his written evidence to the UK court (RAN20) stated that Brian “was an experienced operator in the aerospace industry, with excellent links with key figures (such as Ken Brundell – should be Brundle – and indeed many others) …and (RAN22) “It was clear to me that the Claimant had lots of experience and knowledge of the industry. He had a good technical understanding of the issues, a good grasp of contractual issues (which led me to believe he would be a strong negotiator) and a sound strategic approach” but, for the first time in my life read (RAN55) and heard that Mr Neill believed that Brian  ”operated badly on points of detail…..“

Mr Neill :  Extracts of Witness Evidence on A340 Att C pages 57 - 64 and D p 72 -78 and then Attachment J

Former President and CEO Mr R Neill (now Vice Chairman) - his oral evidence on 14 November 2007 (p436+)

     and then in Mr Neill’s oral evidence on “A340 Spares and Repairs”  -  27 July 2009 (p112+)

earlier in evidence (p60+)

Part D : and now the ONLY (5) A340 Document Exhibits from PwC C$3m+ Final Draft and Final Reports via Canada Disclosure

Part E : Aerospace Industry /Aircelle and expert insights and views - Mark Bobbi - Engine Nacelles

August 2007 report (UK document 3015-3025) - Jan - March 2009 report (UK doc 3890 - 3890XX)

“In August 2007, I performed a study of the A340-500/600 for Mr. Brian Little.  The results of that study are found in the referenced document 3015-3025.  The essence of that report was that the A340-500/600 was a market failure, generating far less orders than anticipated in the 1990s by its maker, Airbus.  In fact, total orders and options for the A340-500/600 were unlikely to exceed 130-135 which, as I am now aware, is approximately 150 /175 less than MAC’ amortization figure for the A340 NRC…….

……Therefore, I find it impossible to believe MAC’ spares/repairs forecast is based on any rational market assessment and runs completely counter to my and others career-long experience together with the detailed communications I undertook with the maintenance people in the airlines flying the -600 aircraft”

MARK BOBBI - WITNESS STATEMENT (W/S) TO UK COURT - EVIDENCE GIVEN ON 8 JUNE 2009

UK Court oral evidence – 8 June 2009.  Transcript/Notes of the UK public hearing by WordWave International Ltd (A Merrill Communications Company)  - Official Shorthand Writers to the UK Court of Appeal
            

4184 / 4183 : MARK BOBBI EMAIL AND REPLY (24 JUNE 2009 FROM AIRCELLE - MAC'S CUSTOMER - RE A340/T500 EXHAUST LIFE "40,000 hour or less replacement requirement ...WE BELIEVE THE WHOLE THING IS A HOAX....."

4185 / 4186 and 4186A: Email from Aircelle (23 June 2009) to Etihad Airways regarding A340/T500 exhaust system life / certification "...There is no specific life limitation for the T500 exhaust system…….”

and in Mr Neill’s oral evidence on 27 July 2009 (p105+)

Note as Mr Bobbi and I had already seen and determined the Aircelle Component Maintenance Manual for T500 Exhaust nozzle and plug – sample 3625S – refers, and had always done so, to “FACTORY REPAIRS” by the manufacturer – Aircelle in the operating airlines.  Magellan and their own advisors (PwC) recognise that “due to the unpredictability of repair work” Factory Repairs (for On Condition Maintenance components) should not be included when recovering NRC assets.  They are also subject to contractual MTBUR and Guaranteed Direct Maintenance Cost (DMC) values of much less than a $1 per flying hour with Aircelle/Airbus (doc 3525). 

In part, this accounting treatment is because other companies, such as the global number 1 supplier of engine nacelles/exhaust systems, Goodrich (also audited by E & Y), provide a Repair & Overhaul service for the A340/Trent 500 engine Exhaust plug and nozzle to the airlines. A summary table of the flight cycles and flying hours to December 2010 on the A340-500/600 aircraft in service can be viewed here (doc 4240B-1).

<BL Observation – You will also note that the Magellan FD&T report in 2003 provided for the A340-500/600 Aircraft Type certification of the nacelle to Aircelle/Airbus and thence to EASA/CAA refers to a fatigue design life goal of 20000 flight cycles with an approximate 8 hours flight time/fatigue mission – or circa 160,000 flight hours.  Please note that Aircelle (part of the Safran Group), as Magellan’s customer for the A340-500/600 exhaust system were asked by me in late 2009 (and again in late July 2010) whether they wished to add any further comments on the factual accuracy or omissions in the Report. No additional comments were made. No changes have been made to the Maintenance plans or documentation in the airlines possession. Professor Ghonem, a global expert on BETA21S material, also commented to Mr Little on some of the assumptions made in the Magellan “technical report” disclosed at Exhibit 8.5 and referred to his October 2004 research>

Part F : Chief Executive Officer (CEO) - Mr J Butyniec and Chief Financial Officer (CFO) - Mr J Dekker - legal and regulatory quarterly and annual certifications of MAC financial statements.

<As we worked more closely together from mid-2005 and as time progressed I became more aware that Mr Butyniec’s strengths did not lie in financial/numerical  literacy and the reader/listener can hear an audio tape later in website Part G during my interview (2812) with PwC in January 2007 in which I state “ I think you just need to ask yourself that this man is due to retire (Mr Neill) , he wants to go up the way to whatever, he doesn’t want a balance sheet that effectively is going to get write –offs.  He and Mr Dekker and I have got to face into that because that’s what’s going to happen.  That’s not fair to Mr Butyniec to be taking over a balance sheet that isn’t right” > 

President and CEO - Mr Butyniec -  His oral evidence in January 2008 (p162) : A340 report P81 including   <Mr Butyniec was not interviewed by PwC>

(BL Observation : The reader should note my written evidence (Website Part B : para 205) which states “.. In a conversation at Farnborough Airshow in July 2006 with Mr Butyniec, held after he had met Aircelle representatives to try and progress the commercial negotiations on the application of the pricing escalation formula , he said he too was concerned about MAC/Aeronca ever recovering its NRC investment on the A340-500/600.” Mr Butyniec and/or the Respondents counsel Mr Lynch QC never challenged this evidence in court.

Mr Butyniec had explained that he was skeptical (perhaps even cynical) about pressing for the arbitration route in Europe – they had not done so in their prior March 2005 amended commercial settlement (see history in Part D : Exhibit 8.1 document)  which brought into existence this escalation formula. I was the only Magellan person with prior experience of European arbitration via Shorts/Bombardier and it was really only Mr Furbay (Aeronca CFO) and myself who were convinced we needed to do this to get a proper overall pricing settlement for FY2006 etc and appropriate and relevant price escalation arrangements for the future.   I was also conscious of the limitations of the current escalation formulae in the medium- long term for a MAC perspective (the 0.31 fixed limit for BETA21 materials escalation. Prior to the MAC Board meeting on 8 August 2006 the MAC Directors were provided with a Gross Margin analysis document which showed that the “Operational Efficiencies” across the MAC units reporting to Mr Butyniec were some (C$7460K) below the approved FY2006 budget. Whilst price changes/increases across MAC were a net C$1856K ahead of the FY2006 budget for the Aeronca business (A340 & A380) some C$1036K in price increases had not yet been definitively secured. In part, and as a result of these deteriorating FY2006 results, Mr Butyniec produced his Best and Final Offer (BAFO) commercial letter proposal for settlement immediately following the MAC Board on 11/14 August 2006 with the approval of Mr Dekker , Mr Neill and Mr Edwards – see website Part D (c ) CD2 extracts with the relevant contemporaneous documents and sent it to Aircelle.  It was not discussed or approved at the MAC Board in the minutes or whilst I attended it throughout.

In the event Magellan filed for Arbitration but before those proceedings commenced they renegotiated with Aircelle and MAC reported in Q3/2008 (3481) “As noted in Note 5 “Inventories” in the Corporation’s 2007 (BL :and 2006) audited financial statements, due to the long term nature of the Corporation’s contracts , the Corporation may be in negotiation with its customers over amendments to pricing or other terms. During the third quarter of 2008, the Corporation concluded its negotiations in respect to one such long-term contract with a European customer and as a result recorded one-time retroactive price adjustments totaling $10.4 million, which was a direct increase to both of the Corporation’s revenue and EBITDA in the third quarter of 2008.” These price changes would have been for both the A340-500/600 AND A380 programmes as the planned arbitration was on the pricing for both of these products. My information from reliable Safran and Magellan sources is that this was settled by Aircelle before any Arbitration / hearings commenced with Mr Don Boitson and Mr John Furbay.

Magellan reported this settlement / price adjustment  in their Earnings webcast call in Q3.2008  (against the NRC Amortisation in FY2008 financial statements)

“Mr Jim Butyniec – Magellan Aerospace - President, CEO
Now we are open for Q&A.

Mr Cameron Doerkson -  Versant Partners – Analyst
I have a few questions here. First, the price adjustment that you’ve announced here, are you able to tell us what customer that was or what program that was predominantly associated with?

Jim Butyniec -  Magellan Aerospace – President, CEO
We haven’t disclosed that information “ …

Mr Cameron Doerkson -  Versant Partners – Analyst
On the depreciation line, it looks like depreciation jumped fairly significantly for Q3 from previous quarters , is there an explanation for that?

John Dekker – Magellan Aerospace – VP Finance
It relates in part to the amortization of Deferred costs, of the deferred development costs that were moved down to long term assets as a result of the 3031 inventory section adoption at January1,2008

Mr Cameron Doerkson -  Versant Partners – Analyst
Okay, so is that sort of CDN9 million number what you would anticipate quarterly depreciation to be going forward?

John Dekker – Magellan Aerospace – VP Finance
That is correct

<For information the MAC Q1.2008 and Q2.2008 earnings release did not show a separate line recording any Amortisation of Deferred Developments costs whilst the Q3.2008 financial statements showed Q3.2008 C$3095K and C$7185K for the nine months to 30,September 2008. This was in the same period as the C$10.4m retro price adjustment settlement with Aircelle.  Q4.2008 Financial statements would show amortization of deferred development costs of C$7289K for the fourth quarter and an annual C$14474 for FY2008.  Added April 2010  In FY2009 the audited results would record C$7360K were expensed as amortization of deferred costs on all programmes.>

And then (p11/12)

Mr Chris Murray – CIBC World Markets – Analyst
And John, I guess the next question I’ve got is on the CDN10.4m adjustment, could you explain why year to date the release adjusted to only CDN4.9 million?

John Dekker – Magellan Aerospace – VP Finance
Yes, if you take a look at the retroactive price adjustment , a portion of it related to 2007 and a portion related to 2006. So when we take the perspective of just the quarter we really look at the retroactive piece that was from June 30 back all the way to the beginning of 2006.  But when we take up the nine- month perspective we take the position from December 21,2007 and back so there is a difference relating to the first – the amount of adjustments that related to the first two quarters of this year.

Mr Chris Murray – CIBC World Markets – Analyst
Okay and that was with one particular client. Do you have discussions ongoing with other customers that we may see some of these benefits in the future?

John Dekker – Magellan Aerospace – VP Finance
Actually there are ongoing discussions and have been over the past number of years and we have alluded to them in the conference calls quite regularly. This one was fairly significant , as you can see, so it certainly warranted special disclosure. But there are discussions continuing as we speak, there are negotiations underway with other customers as well.

And then in the final Market analyst question (p14)

Mr Claude Proulx – BMO Capital Markets Analyst
It’s Claude Proulx, from BMO. Just some clarification on the CDN10.4 million pricing adjustment. If we were to just for the sake of having better understanding of your past results to analyze current results , where would that money – when should  - sorry – when should you have booked revenues in terms of quarter – on a quarterly basis? Is there any way for you to give some indication?

John Dekker - Magellan Aerospace – VP
Let me take an action on that and look to see what sort of detail we can provide and we will post that

Mr Claude Proulx – BMO Capital Markets – Analyst
Okay. That’s all, thanks.”

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. 

With the A380 effectively at a standstill in supplier deliveries in the first half of FY2008 (due to the assembly problems at Airbus in 2006/2007) I cannot compute or understand why the retroactive pricing for A340 in the first half of FY2008 for 25 units would equate to C$5500K … if attributed to only A340 this would be a price uplift of C$220K (or approximately doubling) for every unit delivered by Aeronca in 2008.!!? – see page 14 below. As regards the C$4900K published by MAC for FY2006 and FY2007 what is certain is that even if all of it was attributed to the 126 units delivered in these two years then less than 50% of that C$4900K sum would have been obtained on the basis of the approved final counter offer to Aircelle from Mssrs Butyniec , Edwards and Dekker without MAC Board /Audit Committee Approval on 12 – 14 August 2006. And that 50% + reduction is before any portion of that C$4900K is actually recognised for the “justifiable” price increases due for the A380 deliveries despatched in FY2006 /FY2007 from Aeronca prior to and since my termination!!

Mr Edwards then proceeded in his oral evidence to the UK court on 31 March 2009 to state that “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.” A document supporting that assertion was not disclosed by Magellan and was certainly totally inconsistent with his “approved final counter-offer” on 12 August 2006.

Mr Neill also spoke about this in his evidence on 27 July 2009 page 68/69

It would seem from my knowledge, experience and logic (recognising that this settlement would also 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.   I set this out in a spreadsheet showing the Q4.2006 EAC, the C$10.4m retroactive revenues and the Deferred Development costs recorded in the MAC audited Annual Reports as expensed for all projects in FY2008 and FY2009.

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 A340 NRC. This approach would be consistent with the example of the Boeing 737 systems kits from Ellanef also examined by PwC - and which is set out in Point 2) below - 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” see <below>,  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“.

For information : Magellan Aerospace Corporation used only a fixed amortization amount of $30,000 per exhaust unit in FY2006  – which if continued at $30000 per exhaust unit would lead to only 65% recovery of the circa C$40m+  (USD 38.25M) inventory on the December 2006 MAC Balance Sheet.  PwC  set this out further in their para 8.117 : Current production costs per unit are such that at present the pre-amortisation margin generated per unit is not sufficient to absorb an amortization of USD 30,000 per unit and still break-even. In order for MAC to report an overall breakeven position, while at the same time amortising NRC inventory, it has been capitalizing that amount of production costs that is necessary to achieve the break-even position each year.  For this reason , “production inventory” for the A340 programme has been increasing”.  If MAC were to maintain the amortization at $30,000 per exhaust system, as in FY2006, only $3.30 million would have been reduced from the total A340 programme asset for the 110 units delivered by MAC in the three years between January 2007 and the end of December 2009/FY2009. (Updated 18 January 2011: With aircraft production exhaust units now all delivered a total of 110 production – to 131 A340-500/600 - production aircraft and 11 spares were delivered by MAC in the four years between January 2007 and the end of December 2010/FY2010, or equivalent to $3.63m).  PwC continues at para 8.118 “PwC believes that MAC’s NRC and production inventories should be considered collectively (for a total inventory of USD 38.2 million) and then amortised from this basis onward. Aeronca should also review the NRC amortization factor.  We believe that this factor should vary with the profitability of each unit.  As increasing labour and material cost efficiencies are realized in the production process, furthermore, the amortization rate should increase.” 

This policy does not appear to be a logical and mathematically sound approach on A340 as PwC recognised earlier in their report at PwC 8.94 – 8.95 that the current escalation formula – under any interpretation – would not  lead to increased profitability per unit once BETA21S materials costs exceeded 31% of the cost.  Those relevant PwC paragraphs are

8.94  The price escalation formula currently in effect (as per the SA dated 11 March 2005 between Aeronca, MAC and HH) directs that the total sales price for exhaust system units will increase by 0.31% for every 1% increase in the cost of Beta 21S.  In effect, MAC is protected for increases in the cost of Beta 21S, providing that the cost of Beta 21S per unit remains equivalent to or below 31% of the total cost of production per unit.

8.95  Given the volatility in the cost of Beta 21S (a titanium compound), there is a risk that in future years the cost of beta 21S could exceed 31% of the total cost of production. Indeed taking into account the existing assumptions in the EAC model , the cost of Beta 21S per unit would represent approximately 35% of the total cost of production per unit by FY2012.

This rising profit/contribution year on year subject is dealt with in some detail at website Exhibit 8.1. PwC failed to apparently integrate and challenge themselves, E&Y and MAC on this varying profit per unit policy in its specific implications for A340 amortisation with the escalation formula in place. I should also add that it has not been my experience elsewhere that such an approach was countenanced either by  management or auditors.

As above MAC continued to add Labour learning costs – after 400+  A340 nacelle sets/5 years of production to production inventory (and E&Y as their auditors accepted the further US $1.5m to US $8.63 million added in the FY2006 Balance sheet to sustain the “break-even” ) whilst the Inventories Exposure Draft (3031) which would end this capitalisation was issued by the CICA in August 2006.   The subsequent introduction of that Canadian Accounting Inventories Standard  3031 in MAC from 1 January 2008 permitted some C$40m of inventory assets to be written off against retained earnings (approx C$10m of which was for these A340 -500/600 program labour learning costs) and the reader can see Mr Dekker’s opening comments at Page 2 and then in his answer to questions regarding Magellan inventory and the new accounting standards from Mr Cameron Doerkson of Versant Partners (p6) and in more detail again by Mr Claude Proulx at Page 8 of the published transcript of that May 2008 webcast for Q1/2008 Earnings.>

Claude Proulx - BMO Capital Markets - Analyst
Thank you, good morning. Just again on that accounting change, if we look going forward, it seems to me conceptually that because you wrote off a cost that your margins will be improved going forward. But at the same time, when you start delivery and probably you brought up like a bonus for the Joint Strike Fighter or 787 or the Airbus A350, the margins will be depressed.  So when we look going forward, like for the rest of 2008, that C$550,000, is that something that we could put in our model for each of the [next three] quarters or – Dekker interrupts

John Dekker - Magellan Aerospace Corporation - VP-Finance
..I guess there is a couple of comments, Claude. First of all, the fact that we had to take that charge against retained earnings does not mean that those were not valuable costs and not anticipated costs. Those were costs that we had anticipated when the programs were originally bid, and we will still get recovery of those costs going forward.  As we sit here at this point in time, very few of our programs going forward will require learning curves with the current programs……

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. PwC correctly recorded in the Final Draft report at para 8.61 that “Brian Little stated in the E&Y presentation that his concerns regarding the treatment of the A340 NRC were raised following Q2.2006.” and as you can hear on the audio tapes (Tape recording - Part 1 (16 minutes) and Part 2 (7 minutes) and Part 3 (24 minutes) and Part 4 C (20 minutes) and Part 5 C (29 Minutes). I stated “And the fundamental issue here which we have to come to terms with is that this product is a product that has not only got a cost/price problem but it’s now also got a programme volume one!”

Ordinary MAC Shareholders will also recall that on Friday 26 January 2007  MAC shares were at a “new peak”, equivalent to C$16.25 + per ordinary share.  In fact that “new MAC share price peak” had risen since the week following the Q2.2006 earnings webcast on 15 August 2006 by some 50%.     It was also evident to Magellan Directors/Senior Officers, PwC and me that this C$16.25 share price coincided with Magellan filing their defences (ET3) to my whistleblowing claims on A340 etc (ET1) in the UK case and concurrently Mr Dimma instructing PwC to undertake their  7 month/C$3m+ investigation to August 2007 under his Chairmanship. 

Most Magellan ordinary shareholders before and since Q2.2006/14 August 2006  will also know only too well that the MAC Market Capitalisation value of C$300M +  on the Toronto Stock Exchange (TSE)  (broadly equivalent to its publicly reported Balance Sheet value) and their own ordinary share values has fallen very substantially since that last seven days in January 2007 -   See TSE – click 5 and 10 year MAC Company chart history.

plus his further UK court evidence on 10 June 2009 – in particular pages 133-160.
Transcript/Notes of the UK public hearing by WordWave International Ltd (A Merrill Communications Company)    Official Shorthand Writers to the UK Court of Appeal

Chair of MAC Audit Committee - Mr Dimma -  His oral evidence at Report in June 2008 :P100-114 including

(BL note

1.  As we heard it Mr Dimma asserted in his evidence that effectively he relied on Mr Dekker and PwC. However he stated that the Audit Committee looked at the draft and final PwC report very, very carefully.  As ONE example we cannot understand why Mr Dimma or his colleagues (or indeed anyone at MAC) did not see the obvious “basic logic and simple maths” errors, which alone inflated their calculated demand by several hundred units or $100M+ revenues, made by PwC (“forensic deceit”) when they calculated a potential demand for A340 Spares and Repairs of “1572” units by FY2021. This was only one of those from our list of factual errors and omissions which we were denied the opportunity to provide to PwC or the MAC Audit Committee by Mr Dimma and his legal advisors from TORYS LLP before the Final Report was issued in late August 2007.

UPDATED JULY 2010 -   in an email which I sent on 18 July 2010 to Mr Dimma I asked at Q.2 on A340

QUESTION 2 :   To your knowledge was Mr Butyniec’s 11 /14 August 2006 BAFO settlement pricing proposal discussed and/or approved by you or any other member of the MAC Audit Committee or non executive Director?  Was its proposed pricing settlement implications with regard to the A340 unit pricing that had been used by all of us in the Q2.2006 A340 EAC explained to any of you,   in relation to the $5.3m Gross loss etc?”

<The Respondents UK legal team moved their position to opposing my “reasonable belief” as at August/September 2006 -  in documents presented to the UK court in November 2007 - based solely on a reliance on the PwC Final Report – see further information at Part K. Although there were multiple electronic and people sources within Magellan from which these documents and information could have been obtained by PwC they were in any event given these relevant August 2006 pricing documents (CD2) by me BUT EXCLUDED from their “findings of fact” , Report and Exhibits.  This Mr Butyniec FINAL counter-offer for settlement to Aircelle on 11/14 August 2006 - before the public release of the Q2.2006 earnings statements -  had the written approval of Mr Edwards and Mr Dekker, which included, as you can see, A340 pricing which was lower than that MAC had used in the Q2.2006 EAC and consequentially would mean even greater  “Gross losses” than the $5.3m in the Q2.2006 EAC -  which were also NOT recorded in the accounting by Mr Neill (CEO) and Mr Dekker (CFO) in the Q2.2006 Earnings statement release to the TSE.>

2.  For completeness readers will have observed that the Q2.2006 quarterly certificate (doc 2006) also refers to Boeing 737 – Integrator Kits.  In the Dossiers I provided to Mr Dimma (Folder B4/32 pages) in September 2006 were on this Boeing 737 accounting concern <Protected disclosure- PD19 and PD20>.  Mr Neill and Mr Dekker engaged in “management over-ride”  of the Ellanef submitted financial accounts for Q2.2006 . Despite the information which follows below Mr Dimma failed to intervene in the Q3.2006 quarterly financial statements and ensure this USD800K /C$904K adjustment was made to the published Q3.2006 MAC financial statements, as it failed the basic revenue recognition test.  Indeed PwC record (para9.42) that he Ellanef CFO also included himself an exception with respect to the Boeing accrual in his quarterly certificate letter for Q3.2006 on 1 November 2006 to Mr Dekker and Mr Neill (after my termination) but before a recommendation for approval by Mr Dimma and the Audit Committee on to the MAC Board approval.

UK evidence – Mr Neill and Mr Dekker

In your 14 November 2007 re-examination you told Mr Lynch QC about the Mr Little’s Q2.2006 quarterly certificate on document 2006 – on 9 August 2006

Can I also refer to the transcript of oral evidence in April 2008 for Mr Dekker

Extracts from some paragraphs in PwC report – Section 9 – on Boeing 737 Integrator kits.

re 737   

The MAC Q4.2006 quarterly results were then reduced by the USD800K and published accordingly.
MAC’s 2006 yearend financial statements were issued on 2 April 2007.

Subsequently, on 1 June 2007 MAC and Boeing reached agreement in writing with respect to price adjustments and an extension of the contract from 2009 to 2012. This agreement included the payment of higher pricing on a one-off basis for those units delivered by MAC from 1 June 2007 to 31 December 2007 and MAC accounted for this in revenue recognition terms appropriately for deliveries in Q2.2007, Q3.2007 and Q4.2007 earnings statements.

When the Selling price/gross margins review was presented by Mr Groot and I on December 2005 (MAC Board 151-156) it was accepted that we needed, as a minimum, to target on the Boeing 737 System Integrator kits (circa $30m revenue per year) the re-negotiation out of the contracted discounts from the MAC Board approved 5 year contract signed in 2004.

The new June 2007 contract for the Boeing 737 system integrator kits prices to be paid by Boeing (in this new extended MAC agreement:doc 2964-2968) for FY2011 and FY2012 are contracted to be lower than the “discounted prices” for the deliveries throughout the 2005- 2009 original contract.  As I am no longer directly involved I can only comment that, on the face of it, this acceptance by MAC management and its Chairman and Board of Directors of this new “lower” pricing for these Boeing 737 system integrator parts seems very odd.  This is particularly so after the natural disappointment and comments/discussions following the  total MAC/Boeing sales contracts and poor actual/projected gross margins through to FY2009 presentation made in December 2005 to the MAC Board  by myself.  We set out to achieve the MAC Board and Corporate strategy objective of a  minimum 15% EBIT across all the Boeing revenues.  Mr Neill stated a 15% EBITDA target (EBIT?) in a question from Richard Stoneman during the Q3.2006 MAC Earnings webcast call (p8/p9) which followed a similar question on EBITDA from Richard during the Q2.2006 MAC Earnings webcast call re FY2007 (p19/20).  Certainly from a commercial and financial perspective, given its importance to MAC in its Revenues from the Boeing Commercial Aircraft Company, this extended contract AND LOWER pricing is inconsistent with the MAC Board threshold targets discussed with all the MAC Directors in December 2005 and prior to my dismissal.

In my functional strategy and senior sales and marketing role I would not have suggested or recommended to the MAC Board, in accordance with the MAC Corporate Bid/ Contract approval process and financial documentation from Mr Dekker, that we accept LOWER pricing than the $103,765 per aircraft set in FY2005.  It would seem that this new agreement (doc. 2964-2968) will have provided enhanced revenues and gross profits of approximately $1.9m from June - December 2007, to maintain the equivalence of that FY2005 price,  to the end of FY2007 but for the following five years from FY2008 will mean less Magellan revenues and gross profits of approximately $10m.   In fact the Boeing 737 Integrator kit aircraft set price to be paid by Boeing in FY2012 will have reduced by 7.4% / USD $7657  to that paid to MAC seven years earlier in FY2005. 

I am surprised and disappointed, as a former Senior Officer with functional responsibility for these matters (and an ordinary shareholder), that Mr Butyniec and Mr Dekker did propose this to the Magellan Aerospace Corporation Board for approval.  Furthermore I was shocked to learn from Mr Edwards , for the first time, in his witness statement (Para 11)  that he had been told by Mr Butyniec that he considered my efforts in explaining the needs to Boeing for improved contract pricing, to help justify capital investments in Ellanef alongside MAC land sales,  as being “reckless behaviour”.   To me this is truly astonishing for a Chairman and a major investor in MAC.  Mr Edwards never raised the subject with me.   Obviously now when this contract comes up for renewal again in FY2012 the follow-on contract discussions for FY2013 + with Boeing will also start from that much “LOWER PRICING BASE” for any future period – and I consider it is very probable that the Boeing 737 Single aisle aircraft will be in series production in Seattle for another decade.

3. Although Mr Neill was the President and CEO from 2002-2006, and MAC reported net losses in every year from 2002 – 2007, Mr Neill stated to the UK court (RAN11) “Far from being a financially dubious or badly or carelessly managed group, Magellan was and is a solid performer in an extraordinarily challenged market backed by major shareholders who are both involved and patient”. Shortly after Mr Neill’s retirement as CEO and Several months after PwC completed their Final Report MAC announced on 31 March 2008 for FY2007 “Accounting errors and mis-statements in accounts receivable were uncovered at one of the Corporation’s divisions during the course of an ongoing process to collect outstanding accounts receivable on a timely basis. This prompted an internal investigation that uncovered the overstatement of various assets on the balance sheet resulting from improper accounting and also discovered unsupported and unrecorded transactions. This  was for a sum of C$7m + and took place over the period when Mr Neill was President and CEO ( Mr Dekker CFO)  from 2003 -2007.

As a result of the accounting irregularities that occurred from 2003 – 2007  ……… Although the amounts of the restatements relating to the individual years prior to 2007 were not likely material, the Corporation has restated those periods as the cumulative irregularities was material in 2007” )

During Mr Dimma’s oral evidence on 4 June 2008

Mr Little      In April 2008, Magellan disclosed a “fraud” position of C$7m+ in British Columbia?
Judge         What’s the relevance?
Mr Little      They have had another “fraud” allegation, commentary on the overall Company culture
Judge         We wouldn’t widen our considerations

<BL observation : Although I am not aware of MAC ever disclosing which business unit or jurisdiction these accounting errors and mis-statements took place in, I believe it can only be one of the two business units in Canada in which I had no day-to-day functional responsibility within MAC.  That is I was instructed by Mr Neill (the former President and CEO and my superior) to leave Aerotech / MATS and the Power Generation Division outside of my functional scope.  

I say this for two reasons.   One I believe I would have had a sense of the magnitude of any such activities within the businesses in which I had a strategic and functional sales and marketing involvement and secondly in briefly looking at the financial numbers for the extent of overdue debtors greater than 90 days in Aerotech (in Langley , British Columbia), as part of my MAC general reviews for the other businesses, I thought the financial numbers seemed much higher than would be typical of the “norms” in that type of business.  I believe there was one occasion when I made such an observation to a Toronto Head Office finance person in the summer of 2006.   I did not pursue that any further and I of course I may, perhaps, be simply wrong.   

More concerning, and unclear to me, is why in the Ernst & Young (Canada)  public audits at MAC year end FY2003 to FY2006 were these accounting errors not discovered by E &Y in their year-end audit processes and testing , or by my former MAC senior management colleagues  -  Mr Dekker and Mr Neill – in their governance and cash management routines.

4. PwC also report (para 5.22/5.23) that they uncovered in their investigation an email from Mr Dekker to Mr Groot dated 5 November 2005 entitled “life is full of opportunities”  in which John Dekker suggests a number of possible positive accounting adjustments (doc 1099) for Q3/2005 and then in para 5.23

“ We asked John Dekker what he meant by the phrase “life is full of opportunities”.

He told us that it was an ironic, light hearted phrase, designed to recognise that the trading performance of MAC had been well below industry trends for some time and that this would continue for a further 12 – 18 months.  He stated that it was his practice to look at adjustments that might be made at the end of each quarter, regardless of whether the impact on earnings would be positive or negative.”     The reader will observe in doc 1099 above that Mr Dekker’s list of opportunities are all positive adjustments to Magellan’s short-term financial and cost reporting.

PwC and I can comment on two of these items in Mr Dekker’s Q3.2005 email as I was functionally responsible for these  (they reduced MAC’s  publicly reported Q3.2005 net loss by approx - 50%) 

1. -       consider if 266 GBP reserve can come in
2. -       consider capitalizing overhead burden into engineering inventory

- consider if 266 GBP reserve can come in.   I learned after the Q3.2005 earnings results were published to the TSE in mid November 2006 that Mr Dekker had unilaterally included the release of this reserve in the MAC Q3.2005 earnings.  MALUK correctly had not reported its release in their engineering or MALUK accounts.  I had advised Mr Dekker and Mr Neill on various occasions that whilst I had secured agreement in Airbus UK on commercial terms, which would permit the release of that £266K reserve, we had NOT yet obtained the written authority from Airbus Toulouse to properly release that £266K reserve to Magellan earnings.  Mr Archer and I in MALUK did finally achieve that written agreement in January 2006 and therefore the Q3/2005 financial statements were overstated , Q4.2005 was under-stated and obviously the audited FY2005 MAC financial statements for FY2005 were correct.  Mr Neill and Mr Dekker had also released the other substantial part of this reserve (£200K) at the end of 2003.  As I state in the website at Part K the commercial agreement and payment by Airbus for the related activity was only concluded shortly before, during and after my termination in September 2006 by me with the Airbus UK MD – see his and Mr Renson’s witness statements in Part J.   The ultimate irony is that the inclusion of that £200k profit in the MALUK accounts and hence in the Q3.2006 MAC quarterly earnings meant that MAC reported its first quarterly profit in many quarters.

- consider capitalizing overhead burden into engineering inventory     PwC record at Para 5.25 of their Reports “A document titled “Magellan Aerospace Corporation Eliminating and Adjusting Entries Index September 30,2005 (exhibit 5.10) shows an adjustment made by Corporate for the quarter ending 30 September 2005 for CAD 107,000 which is described as “To adjust overheads on Engineering inventory (UK) – Q3. “  Shawn Smith (Magellan UK CFO) stated in interview that he was unaware that this adjustment had been posted by Corporate and expressed surprise that it had been done. We have identified no e-mail communication that would indicate that any MALUK employees were consulted on the adjustment.”   In para 5.48 PwC also state that in their experience of SSAP 9 the inclusion of non-productive costs and office administration – as Magellan had done - are not generally absorbed into inventory.  PwC also record at para 5.62 that no review concerning net realizable value of WIP and loss provisions had been carried out.  A similar accounting approach was taken in the Q4/2005 earnings and Magellan Aerospace Corporation FY2005 audited accounts.  In due course the MALUK statutory accounts for FY2005 had a C$100K+  downwards adjustment – which I and the MALUK Engineering Accountant still believe was insufficient.

Although in additional to my functional roles I had the business/legal duties and responsibilities of a MALUK director and MAC Senior Officer (with a first class honours in Business Studies, specializing in Finance and Accounting) Mr Neill it would appear from contemporary court evidence had been told that I was impeding the ability to achieve compliance with costing and reporting systems.   He never discussed this with me.   Elsewhere in PwC’s  Executive Summary at para 2.36  “We have sought to set out the relevant facts and circumstances in relation to the five accounting issues that the Audit Committee of MAC has asked us to investigate.  The Audit Committee and its legal advisors will wish to consider whether there has , or has not, been “financial engineering” as alleged by Brian Little”.   

Correctly PwC  note also that materiality considerations are not driven solely by the size of an adjustment or transaction , as is often misunderstood by many business /lay people and some accounting professionals,  CICA Assurance and Related Services guideline AuG 41 sets out the Concept of Materiality.  This point was and remains consistent with what I had learned from the Director Training on directors duties and responsibilities provided by the Institute of Directors in the UK>

Part G   The Corporate Framework

As a former Senior Officer and Senior Vice President of MAC and as a whistleblower, I have sought to discharge my legal, business, ethical and moral responsibilities and in doing so, provide greater transparency for the stakeholders surrounding the inherent culture and financial framework within MAC. This objective of transparency is seemingly in conflict with the board of directors and is the key reason why I have sought to highlight these concerns in public by now implementing my suggested proposals at this year’s AGM - see part H - with the publication of this information.

“Magellan Aerospace Corporation Board of Directors General Guidelines

The fundamental responsibility of the Board of Directors is to appoint a competent executive team and to oversee the management of the business, with a view to maximizing shareholder value and ensuring corporate conduct in an ethical and legal manner via an appropriate system of corporate governance and internal control.”

The MAC Board fundamental responsibility  -

1. appoint a competent executive team and to oversee the management of the business
2. with a view to maximising shareholder value      -    MAC Shareholder.5 year.share performance from the Management Information Circular ;April 2010.  No dividend policy. 
3. ensuring corporate conduct on an ethical and legal manner     -    MAC website 
4. via an appropriate system of corporate governance and internal control  - attach  Mr Dimma – November 2006 report and letter .   Also note multiple letters to each individual Director.

Three Letters from Brian Little to each MAC Director

Example - Mr Edwards - Chairman    7 November 2006    :    4 December 2006    :    27 November 2009
                (A340 Oral evidence Report P82-89)

Similar letters were sent to :