Project Nature: Lost Profits Litigation (Plaintiff)
SIC: 5013 (Motor Vehicle Supplies and New Parts)
Company Size: $8.2 million in sales
Assignment Issues: The client company had sustained a severe loss of sales, after building to a 55% annual sales growth rate. Plaintiff attorneys attributed the losses to a component part malfunction, which was supplied by the defendant. The defense argued that market demand for our client’s products had fallen, without respect to the malfunctions, thus accounting for the loss in sales. We provided a detailed market share and cost analysis of the client, its industry and of each of its major competitors. Our exhibits clearly showed that the client’s sales volume drop was only partially the result of the modest decline in market demand. Our independent analysis substantiated our claimed damages for lost profits related primarily to the subject part’s malfunction , including loss of capital asset value. Our client successfully obtained a large pre-trial settlement with negotiations beginning within a few days after our final work product was submitted to defense counsel.
Project Nature: Lost Profits Litigation (Defense)
SIC: 3053, 5085 (Rubber Gaskets, Seals and Industrial Supplies)
Company Size: $4.3 million in sales
Assignment Issues: Working with defense attorneys for a major aircraft company and selected suppliers, we were engaged to examine lost profits damage claims by the business whose owner/operators were injured in a private plane accident, causation of which was claimed / attributed to failure of a component part of the downed plane
Plaintiff’s CPA-produced financial statements clearly showed multiple years’ sub-standard results, including losses, immediately following the accident, with eventual return to pre-accident profit levels. However, by digging through past contract documents boxed away in plaintiff’s office basement, we discovered a non-disclosed accounting aberration.
Plaintiff’s major income source was not commercial sales as originally represented. Instead, they had turned to pursuit of large government contracts. These were accounted for on a completed contract basis. That is, start-up and production costs were expensed as incurred, but income was paid and recognized only upon final contract deliveries, which were often made very long after costs were incurred.
We found that the plaintiff had been awarded a new, large government contract just prior to the accident, but the actual start-up of the contract’s actual funding advances and related productdeliveries had been delayed for a year or so. Plaintiff had decided to gear-up and produce in anticipation of the formal contract start-up, thus incurring large amounts of costs, without matching revenues. These pre- delivery costs showed as” losses” initially, but were eventually recovered (plus profit and overhead reimbursements) when the major deliveries were made in subsequent years at the end of the contract. In fact, the injuries to plaintiff’s owner/employees had not had a measurable negative effect on profits.
After our preliminary report of findings and conclusion, a total settlement of about 20% of the initially-claimed $multi-million total damages amount was agreed upon, with virtually no amounts allocated to business lost profits.