Eric B. Benson, et al. - Page 16

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               (c) Payment for Increased Baffle Production                            
               One of ERG’s principal customers was Hercules.  During the             
          years at issue, ERG produced a baffle system on behalf of                   
          Hercules with respect to the Trident II D-5 U.S. Navy Fleet                 
          Ballistic Missile Program.14  At some point, Hercules requested             
          an increase in the production of baffle sets.  ERG, through                 
          Burton, indicated that to increase production ERG would require             
          additional equipment and materials.                                         
               On or about November 22, 1989, Hercules and ERG entered into           
          a memorandum of agreement (MOA), whereby Hercules agreed to pay             
          $483,098 as an add-on cost to increase production of the baffle             
          sets delivered by ERG.15  The MOA was unique because it called              
          for Hercules to “facilitize” or fund ERG’s plant and equipment,             
          the cost of which is normally paid for by the owner of the plant            
          and equipment.  Attached to the MOA is “schedule 1", which lists            
          the equipment and their associated prices as contemplated by the            




               14The baffles were made from ERG’s foam metal.                         
               15Under the MOA, the add-on cost was spread over the                   
          invoicing of the baffle sets delivered.  The MOA states in                  
          pertinent part:                                                             
               The add-on cost per Baffle per year will be the sum of                 
               the seven year double declining schedule amount for                    
               that particular year plus the Cost Accounting Standards                
               cost of money, * * * evenly divided among the number of                
               Baffles that are scheduled to be delivered within that                 
               year. * * *                                                            





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