Simmonds Precision Products, Inc. v. United States (640 F.2d 292, 1980)

OPINION

PER CURIAM:

This case is before the court on plaintiff’s and defendant’s exceptions to findings of fact and recommended decision dated September 28, 1979, and submitted by Trial Judge Colaianni in accordance with Rule 134(h). The petition was for redetermination de novo of a unilateral determination by the former Renegotiation Board under 50 U.S.C.App. §§ 1212-18, as amended. Universal Industries, Inc. is called “plaintiff” and was the contractor. Simmonds Precision Products, Inc. prosecutes this case as its successor. The board ordered elimination of excessive profits on defense contracts and subcontracts, received or accrued by plaintiff’s predecessor in interest, Universal Industries, Inc., of $250,000 for its fiscal (calendar) year 1966, and $550,280 for its short fiscal year ended August 15, 1967, both figures before adjustment for state taxes measured by income, and subject to the applicable credit, if any, for federal income taxes. Plaintiff filed a bond in this court to stay collection of the board order and defendant counterclaims for $800,000.

Upon consideration of the briefs and oral argument of the parties, the court agrees with the said recommended decision, as hereinafter set forth. It affirms and adopts the said decision, as modified by the trial judge in his supplemental opinion of October 1, 1979, as the basis for its judgment in the case. However, some comment by us is in order to respond more specifically to some of the arguments made by the parties to us.

The trial judge recommends and we agree, that plaintiff should be determined to have realized no excessive profits in its 1966 year and but $183,762 in 1967, allowing as nonexcessive a percentage of profit to sales of 20 percent. The principal renegotiable product both years was a stamped aluminum magazine, a component of the famous M-16 rifle. In the review years this gun was proprietary with Colt Industries, Inc. and plaintiff was its sole subcontractor for the magazine. It was the first such rifle magazine made of aluminum, adding greatly to the superiority of the rifle, and was produced by plaintiff after overcoming in earlier years production difficulties that baffled other potential subcontractors. Before renegotiation, the ratio of sales to profit for the two prior years, 1964 and 1965, and the review years was:

A break down of per unit cost of goods sold (magazine only) was included in plaintiff’s exhibit 67, the report of plaintiff’s expert, Mr. Ahlberg.

But this impressive showing of cost decrease as volume increased was not matched by unit price reductions. Prices to Colt per unit were (Finding 61):

The 1966 and 1967 prices are adjusted from 97 cents by 4 cents, the cost of an added packaging requirement. For 1965, one order only was $1.01, 96 cents being the figure for all the others.

While defendant (through Colt) got some price concessions doubtless related to volume, plaintiff, at the end of its 1967 year, August 15, when it merged with Simmonds, was pocketing the major part of the benefits in the form of a rapidly rising margin of the unit price over the cost of sales, reaching almost 30 cents per unit. This was a situation renegotiation could not ignore. As we said in Butkin Precision Mfg. Corp. v. United States, 211 Ct.Cl. 110, 121, 544 F.2d 499, 505 (1976)—

* * * That the high volume orders were more profitable to fill, than low volume orders, is precisely the situation Renegotiation was invented to deal with. Experience in several wars has shown the tendency for unit prices not, to decline as fast as the volume increase would justify. * *

It is clear that part of the cost savings were due to efficiency, not mere volume, but defendant cannot be denied all the benefits even from efficiency. And this is not all. We also pointed out in Butkin that the value added ratio was the key consideration in application of the Character of Business factor. 211 Ct.Cl. at 129, 544 F.2d at 509-10. See also Tool Products Co. v. United States, 218 Ct.Cl. 486, 589 F.2d 506 (1978) where we showed from a board decision the correct method of determining the value added ratio and drawing conclusions from it. Compare Carey Industries, Inc. v. United States, 222 Ct.Cl. -, 614 F.2d 734 (1980) where a value added of but 2 percent was held to be “stunningly minimal” and requiring an adverse consideration under the Character of Business factor. A glance at the figures in this case excerpted from exhibit 67, supra, will show that in 1967 the material component was to the whole cost of sales as .3803 to .6331, labor and overhead, the components reflecting the addition of value being combined, but .2527. The totals in finding 64 show the same thing: in renegotiable business in 1967 out of a total cost of goods sold of $2,644,766 the material component was $1,662,815. This is a much lower value added ratio than in Tool Products, supra, but far better than in Carey. Mr. Kaitz, defendant’s expert, exclaims about the low value added in his testimony, tr. 1138 and ff, and furnishes support he was well qualified to give for our conclusion that the value added was on the low side. This requires to be carefully considered before one awards the contractor a substantial bonus under the Character of Business factor. However, Mr. Kaitz determined that the raw material was worth only about 7 cents a unit, the remainder of the material component being added by subcontractors under plaintiff, and care must be taken not to apply the factor in a way to penalize plaintiff for subcontracting with small business.

Plaintiff argues for a clearance for 1967 on the theory that this case was tried well after Major Coat Co. v. United States, 211 Ct.Cl. 1, 543 F.2d 97 (1976); that the opinion in Major Coat laments the absence of comparisons with other contractors in the same line of work that it deems necessary to an informed and reasoned determination; decries the reliance of the government on IRS consolidated data; and forecasts that in cases to be later tried, the court would not try to squeeze a decision out of other facts of lesser probative value, but would boldly hold against the party having the burden of persuasion, the defendant. This theme is also sounded in later opinions, e. g., Tool Products Co., supra; American Diversified Corp. v. United States, 221 Ct.Cl. -, 609 F.2d 442 (1979); Blue Bell, Inc. v. United States, 213 Ct.Cl. 442, 450, 556 F.2d 1118, 1124 (1977). Major Coat, however, was not written to prescribe use of one single method of proving excessive profits and bar all others. See comments on denial of motion for rehearing in Major Coat, starting at 211 Ct.Cl. 50, 543 F.2d 97. In Carey Industries, Inc., supra, also tried after Major Coat, we held it not possible to clear a contractor for lack of comparative data when its operation was unique. In the present case the plaintiff was the sole supplier of the aluminum magazine, a unique component, of an end product then obtained only from Colt. Contemporary suppliers of different components to different end products no doubt could have been dredged up and the already lengthy trial further prolonged by inquiries into their operations and their similarities and differences to the operation under review. The outcome hardly could have added much to what the trier of fact already knew from the experts of both sides, i. e., that subcontract component suppliers of hardware such as plaintiff normally expected to earn about 10 percent on sales. (Plaintiff denies its expert said this, but the transcript shows he did.) An effort was made to use for comparison an operation of Adventure Line Mfg. Co. that on December 31,1969, long after the period under review, bid 65 cents a unit on 2.4 million M-16 magazines, but failed in quality miserably. See findings 71-79. Plaintiffs plant continued to produce the magazines with financial and quality success through 1970, after becoming a division of the Simmonds company and being under its control. The significance of this in renegotiation is not readily ascertained. The trial judge had the benefit of comparisons with plaintiff’s renegotiable operations of 1965 and earlier years, as well as with its commercial operations, to some extent, though neither party showed him what those operations were.

The court’s criticisms of the government’s mode of sustaining its burden of proof in the cited cases tried before Major Coat also has focused on the inadequacy of the opinion testimony offered. It would still seem as we stated in the Tool Products case, that those with actual prior experience with renegotiation could give the best expert aid to the court and there must be hundreds still alive who would meet that description, seeing that renegotiation functioned almost continuously from 1942 to its recent demise. Mr. Kaitz (formerly dean of Georgetown Business School: he prefers not to be called Dr. Kaitz now) the government witness in this case, has repeatedly qualified as an expert, as he did here, but he never had touched a renegotiation case from any angle before his initiation as a witness to tell us how to do it. He has taken frequent lumps from this court, partly due to his own modesty in not claiming ability to advise the court on the techniques it must employ in the informed and reasoned weighing together of not less than all the statutory factors. He purports to be, and is, a qualified financial analyst. The reviewing judge who takes the trouble to read his testimony will find frequent valuable insights, but will remain obliged to adjudicate without the help of expert testimony on many important points where expertise is needed. However, he is better aided than was this court in the very first renegotiation case it adjudicated: Mason & Hanger-Silas Mason Co. v. United States, 207 Ct.Cl. 106, 518 F.2d 1341 (1975) where a majority of the court felt qualified to, and did determine excessive profits with no help from expert testimony.

The absence of comparison evidence is adequately explained, therefore, in this case tried post Major Coat, but the previously noted deficiencies in the expert testimony remain uncorrected. However, the differences between one expert witness and another are matters of degree, not kind, and in view of the unrepudiated Mason & Hanger precedent, this court assuredly never intended to say it would grant a clearance in face of indications of excessive profits obvious even to a nonexpert, as a kind of sanction for deficiencies in the government expert testimony. Accordingly, we reject plaintiff’s insistence on a clearance for its 1967 short fiscal year, and its exceptions to the trial judge’s conclusion that profits received or accrued in that year over 20 percent on sales were excessive.

The defendant, in support of its exceptions, says correctly that the experts on both sides used 10 percent as the “starting point” on the statutory “normal earnings” in factor analysis. The trial judge used 12 percent because of the excess of the commercial ratio of profit to sales over the military ratio, and thus his figure, unlike that of the experts, reflects consideration of plaintiff’s performance in the civilian economy. Defendant says the trial judge had already held he knew from the record little or nothing about the commercial business, so how could he assume it was sufficiently similar to justify considering it in determining “normal earnings?” The excess of the profit ratio in commercial business is a somewhat dubious fact as plaintiff did not have a cost accounting system adequate to measure the cost of the individual items in the plaintiff’s product lines. The allocation of other costs in accordance with the allocation of direct labor produced the unusual result of the commercial profit level appearing the greater. The defendant attacked this method of allocation and the trial judge sustained it. The parties did not rehash the issue before us and we take it as given that the commercial profit ratio was greater. The law sanctions the consideration of “peacetime products” in determining “reasonableness of cost and profits.” 50 U.S.C. App. § 1213(e)(1); Camel Mfg. Co. v. United States, 215 Ct.Cl. 460, 572 F.2d 280 (1978). If in this case the “peacetime products” were so different as to deprive the comparison of significance, it was for defendant, with the burden of persuasion, to show it. This is a clear case where defendant perhaps suffers because of inadequacies of proof it could easily have corrected.

On “normal earnings” of 12 percent, the trial judge’s upward adjustment of 8 percent appears to us to be within the zone of reasonableness, particularly since, even in cases tried before Major Coat, the effect of inadequacies in defendant’s proofs has been to widen that zone, the court being unwilling to resolve uncertainties against the contractor. Tool Products, supra. We agree that the losses suffered by Simmonds in its Universal Division after 1970 are mostly, so far as the record shows, write-offs of the stepped up capitalization resulting from the terms of the purchase effective August 15, 1967. If Universal had continued as it was, without such a step up, we agree with Mr. Kaitz that its losses surely would have been materially less and its reconversion to “peacetime products” could have been effected without catastrophic or perhaps any loss. As it was, Simmonds rejoiced in the continuance of a high military demand through 1970. Where, as in Tool Products, catastrophe happened to the same company and sooner after the years under review, the risk factor played a large part in factor analysis. We pointed out that it was applied to actual results by hindsight, being conceived of in the board regulations as in part a mitigation of the rigidities of fiscal year renegotiation. Here, even with the aid of hindsight, the risk factor cannot be made to play so large a part. It is clear, however, that the rate of return on renegotiable business was low in 1964 and 1965 and reflected learning and start-up costs in production of the M-16 magazine. A sum or sums must be taken off the profit in the first year where such profit was otherwise excessive, 1967, and in factor analysis reallocated to 1964-65. The amounts that would be necessary to raise the renegotiable profit for those years to 12 percent can readily be computed and are $124,738. However, the corresponding figure suggested by plaintiff’s expert was, for both years, $97,864; for an expert hired by a party, his testimony was conservative. Neither figure is very large related to 1967 renegotiable sales.

Under the capital and net worth factor, it is notable as in Butkin, supra, that the contractor leased its plant from its stockholders and it is suggested again, as in Butkin, that to construct meaningful capital and net worth data, it would have been necessary to consolidate all the assets used in the business, which was not done. Contractor’s favorable recognition for absence of government or customer furnished financing or material would offset the unfavorable effect of a high ratio of profit to net worth. Defendant cannot and does not complain because the factor was treated as neutral. The other elements in factor analysis are well set forth by the trial judge and we would not be certain that enough weight had been given them if an allowable profit of under 20 percent had been proposed. Plaintiff was outstanding in efficiency and in contribution to the war effort and low recognition of these factors would penalize it for its achievements. Therefore, we reject defendant’s exceptions to the proposed decision just as we do plaintiff’s.

Our conclusions summarize as follows:

It would be enlightening, for comparison, to state the board’s figures but, except for the refunds it ordered, they cannot be found in the record. Cf. the summaries in Dynasciences Corp. v. United States, 214 Ct.Cl. 643, 657 (1977); Tool Products Company, supra, 218 Ct.Cl. at 503, 589 F.2d at 514.

The trial judge’s findings of fact are adopted by the court but are not printed as they have been furnished to the parties. Statements of fact in the foregoing per curiam opinion may be taken as additional findings by the court if they have no counterpart in the trial judge’s findings.

The trial judge’s opinion, modified to reflect his correction thereof on October 1, 1979, now follows:

OPINION OF TRIAL JUDGE

COLAIANNI, Trial Judge: Plaintiff has come to this court seeking a de novo review of a unilateral determination by the Renegotiation Board that its predecessor in interest, Universal Industries, Inc. (Universal), realized excessive profits from contracts subject to the Renegotiation Act. On October 3, 1973, the Board found that Universal’s profits were excessive by $250,000 in 1966 and $550,000 in the period January 1—August 15, 1967. Plaintiff, which purchased Universal on August 15, 1967, paid the full amount assessed, less credits for federal and state taxes, and brought timely suit under Section 108 of the Renegotiation Act of 1951, as amended, 50 U.S.C.App. § 1218 (Supp. V, 1975). Plaintiff asks the court to find that Universal realized no excessive profits within the meaning of the Act for the periods in question. The Government requests that I find that the excessive profits were even greater than the amounts found by the Board: $352,000 in 1966 and $563,000 in 1967.

Universal was founded in 1945 as a small family owned metal fabrication business. From this modest beginning, the company grew and prospered as a direct result of the efforts of its family owner-operators. It gradually acquired something of a reputation as a specialty fabrication firm, accepting difficult or unusual jobs that other companies were reluctant to bid on. By 1958 the company, though still small, was doing well.

In that year Colt Industries, Inc. (Colt), approached Universal with a subcontracting proposal. Colt had just acquired the manufacturing rights in the Fairchild AR-15 rifle. This rifle, later renamed the M-16, gained fame during the Vietnam conflict. Colt was interested in recruiting manufacturers to fabricate several of the component parts for the AR-15, the most important and difficult of these being an unprecedented aluminum magazine. Universal agreed to try.

Between 1959 and 1963, Universal designed methods for the manufacture of the magazine and of the other components. The technical problems encountered in fabricating an aluminum magazine (all previous magazines had been made of steel) were considerable, but by 1964 Universal solved most of the problems and had the theoretical know-how to begin manufacturing the aluminum magazine.

Meanwhile, the United States Armed Forces were beginning to show an interest in the new rifle. In 1963, Colt received a contract from the Air Force for the purchase of 8500 rifles. Late in 1965, the military services officially adopted the rifle as a standard weapon, renamed it the M-16, and ordered 104,000 rifles. As the exigencies of the Vietnam War increased, Government demand rose rapidly and over the next 3 years the number of components manufactured and sold by Universal to the Government soared. Several important improvements were made to the component manufacturing processes over this period. In addition, Universal expanded its manufacturing facilities during the 1963-65 period.

On August 15, 1967, in the thick of wartime demand, the family owner-operators of Universal sold their entire business to plaintiff, a conglomerate with diversified interests. The Universal Division, as it became known, continued to prosper until, in 1970, the war demand began to diminish. By that time the Universal Division had become almost completely dependent on M-16 subcontracts, and when no new orders were forthcoming, the business was liquidated and sold at a loss.

The above is a general outline of the history of the company whose profits I am now asked to evalúate. The Renegotiation Board determined that large amounts of excessive profit were realized during the heavy demand years of 1966 and 1967. By bringing the case to this court, plaintiff has entitled itself to a complete de novo determination of the existence and amount of excessive profits for those years. A full trial was held to assist this court in making that determination.

Our case law has divided the burdens of proof for the various issues arising in suits brought under the Renegotiation Act. Since the plaintiff-contractor institutes the suit, it has the burden of pleading and proving a prima facie case. To meet this burden, the plaintiff-contractor must go forward with proof as to the statutory factors upon which it relies. In addition, there is also placed upon the plaintiff-contractor the burden of proving the accuracy of any disputed financial data. Once the plaintiff has met his burdens, the defendant is given the burden of persuasion on the ultimate issue of the existence and the extent of excessive profits. Lykes Brothers S.S. Co., Inc. v. United States, 198 Ct.Cl. 312, 459 F.2d 1393 (1972).

My analysis of the issues presented follows the same approach set forth in the recent decisions of this court in the renegotiation field, including, Camel Mfg. Co. v. United States, 215 Ct.Cl. 460, 469-71, 572 F.2d 280, 285 (1978). As this and other cases have pointed out, attention initially focuses on two important accounting determinations, i. e., the dollar amount of plaintiff’s total profits for the periods under review, and those profits expressed as a percentage of plaintiff’s sales. The plaintiff normally bears the burden of proof in these areas. The next step of the analytical process calls for a determination of whether the profits established in the first step are excessive. This requires an examination of the standards of comparison to be applied to the plaintiff, and a step-by-step evaluation of plaintiff’s performance of its contracts under each of the statutory factors which Congress has mandated for consideration. This blueprint for action leads to the final disposition of all the issues in the case.

I. Accounting Determinations

A. Total dollar profits. Little dispute exists over plaintiff’s financial data for the years under consideration here. The parties have agreed to almost all of the cost, expense, and sales figures. Only two issues remain for my determination.

The first concerns the proper allocation of indirect expenses between renegotiable and non-renegotiable business. The defendant argues in its brief that Universal’s method of allocation, a method basing all allocations on a ratio determined by direct labor costs, while permissible in some contexts, is misleading in the case at bar because it results in a heavier allocation of costs to renegotiable business. The net result, says the defendant, is to make Universal’s renegotiable business look more costly than it in fact was.

Clearly the best evidence to support such an allegation would be some showing that Universal’s renegotiable business was more labor-intensive than its non-renegotiable commercial business. If labor costs were proportionately equal for the two sides of the company, then the cost allocation method chosen by Universal should be reasonable. If, on the other hand, labor accounted for a significantly higher percentage of renegotiable costs than of commercial costs, the allocation of non-labor costs to renegotiable business would be inflated and unreasonable. But defendant introduced no such evidence, and under these circumstances, the allocation on the basis of labor costs, which were the largest single cost item for Universal, appears reasonable.

The Government, instead of submitting evidence regarding the direct labor costs of Universal’s business, pointed to the relative profit rates of Universal’s commercial and renegotiable business. Since, by the figures of either party, the net return on sales was higher for commercial business than for renegotiable business, the defendant assumed the costs must be misallocated. Defendant further bolstered this argument by noting that Universal’s rate of return on commercial sales grew faster than on its renegotiable sales. This last assertion is not quite true. Using defendant’s figures, the profit rate on renegotiable business was 1.6 times bigger than the rate on commercial business in 1964, and 2.4 times bigger in 1965, but only 2.2 times bigger in 1966 and 1.2 times bigger in 1967.

However, even setting aside these discrepancies, defendant’s argument is unpersuasive. The record is almost completely barren of clues to what plaintiff’s commercial business consisted of. It surely would have been a simple matter for defendant to have introduced some evidence of the nature of Universal’s commercial business if it wished to contest an admittedly reasonable method of cost allocations. Furthermore, both the Renegotiation Board and defendant’s auditors accepted the plaintiff’s allocation without demur.

Under the burden assignments of Lykes Brothers, supra, and Camel Mfg. Co., supra, it is the responsibility of the plaintiff to justify its allocation of expenses between commercial and renegotiable business. However, where (as here) the defendant admits that the plaintiff’s allocation method is “not impermissible” and offers no alternative allocation scheme to replace it; where the defendant’s auditors made no objection to the allocation basis in pretrial proceedings; and where the basis for allocation seems reasonable to the court on the record as a whole, the plaintiff has met its burden. The allocation of indirect costs based on direct labor costs appears, under the circumstances of this case, both correct and proper.

The second accounting issue is one of the chief bones of contention in this case, and is somewhat more troublesome to resolve. Universal was a small, closely held family corporation which reported its income each year until 1967 as a Subchapter S business. As far as can be ascertained from the record, all the stockholders worked for the company, and so received salaries. In addition to their regular salaries, each received a yearly bonus. The basis on which these substantial bonuses were calculated has not been shown. Plaintiff claims that the full amount of these bonuses should be allowed as a cost of doing business, i. e., as officer compensation. Defendant, on the other hand, claims that the size of the bonuses paid to the officer-shareholder group precludes any thought that the bonuses were intended as compensation, and accordingly maintains that most of the bonuses should be included in Universal’s profits.

The determination of reasonable compensation for officer-shareholders in a closely held business is frequently troublesome. The inquiry is almost purely factual. This court has in A. C. Ball Co. v. United States, 209 Ct.Cl. 223, 531 F.2d 993 (1976), a renegotiation case, previously faced this very same problem. In that case, the court concluded:

The rule of decision for the issue of reasonable compensation is therefore the same as in tax cases under Internal Revenue Code, § 162(a)(1), namely, that “reasonable and true compensation,” to be determined on all the facts, no one of which is controlling, is only such amount as would ordinarily be paid for like services by like enterprises under like circumstances.

Id. at 242, 531 F.2d at 1003.

In A. C. Ball the Government based its computation of reasonable compensation on the income tax returns of the company under renegotiation. The court, however, gave little weight to this method, and proceeded to determine reasonable compensation by more directly relevant standards. But even the frail guidepost that was relied on by the Government in A. C. Ball is unavailable to me in this instance. Since Universal was a Subchapter S corporation until 1967, its tax returns would not make the kind of distinction which would be useful.

Instead, defendant apparently bases its compensation arguments on three separate grounds. First was the testimony of its financial expert, Mr. Edward M. Kaitz, who stated that he allowed “generous” or “liberal” amounts of compensation to the officers, based on his knowledge of similar businesses at the time. Second, defendant introduced hundreds of corporate-officer “help wanted” advertisements from the Wall Street Journal, all of which listed salaries well below the total compensation given to the officer-shareholders of Universal. Finally, defendant seems to appeal to the common sense of the court, arguing that officers of the kind involved in this case just were not being paid such high compensation in 1966 and 1967.

The first of these grounds appears weak. Mr. Kaitz admitted freely that he was not an expert in the field of executive compensation. He could not name companies, with which he was familiar at the time, whose executives could be compared with those of Universal, and, furthermore, his selection of reasonable compensation was based, not on the duties and responsibilities of each officer, but on their job titles. His bald opinion, unbuttressed by specific facts or records of actual companies, would be questionable even if he had been qualified as an expert in this field—and he had not.

The second ground is scarcely more helpful. The newspaper advertisements (the reproductions of which supplied to the court were, incidentally, almost illegible) are entitled to little weight. It was not shown that they were at all representative, or that no higher salary figures were offered in other advertisements. It was not shown that any of the salaries advertised were actually paid. It was not shown what fringe benefits, if any, accompanied the positions offered. Most importantly, it was not at all clear that the companies doing the advertising were similar to Universal, or that the positions required comparable performance. Most of the company descriptions in the advertisements were too sketchy to afford any real basis for comparison. The size and sales volume of the companies rarely appeared with definition, and positions offered in a newspaper advertisement might well be less demanding than jobs in a closely held family business. The advertisements should be given even less weight than the bare statistical industry averages repeatedly criticized as inadequate by this court. See Major Coat Co. v. United States, 211 Ct.Cl. 1, 30-34, 543 F.2d 97, 114-15 (1976); Butkin Precision Mfg. Corp. v. United States, 211 Ct.Cl. 110, 118-19, 544 F.2d 499, 504 (1976); Gibraltar Mfg. Co. v. United States, 212 Ct.Cl. 226, 229, 546 F.2d 386, 388 (1976).

We think, however, that there is merit in the defendant’s third argument that officers in small businesses ordinarily do not make extravagant salaries, and that large amounts of compensation must be examined with a suspicious eye. Such a jaundiced eye can find plentiful grounds for suspicion in the following table, which sets forth the compensation to the officer-shareholder group during the middle of the 1960’s:

Plaintiff offered little justification for these extraordinary amounts of compensation. Its defense of them consisted of showing that Mr. Kaitz was unqualified, by his experience or by information at his disposal, to criticize them. But this is not enough. Plaintiff has, at this stage of the case, the burden of going forward with evidence to prove its financial data, Lykes Brothers S.S. Co., supra; Camel Mfg. Co., supra. Plaintiff must make a “modest showing of probable cause” to demonstrate that it has acted responsibly in invoking the processes of the court, Instrument Systems Corp. v. United States, 212 Ct.Cl. 99, 108, 546 F.2d 357, 362 (1976), and this small burden is not met when the plaintiff introduces, without explanation, such improbable figures as these. Universal’s total sales did not exceed $5,000,000 in either of the review years, and were considerably less in the years immediately before. Plaintiff must justify, to some extent at least, paying $131,000 to a man in charge of shipping and receiving less than $5,000,000 worth of products.

Plaintiff’s only justification is that the officers worked long hours and devoted themselves selflessly to the welfare of the company. This is not to be doubted—nor is it to be wondered at, since these officers, as shareholders, were the company. It appears inescapable that part of the money paid to these persons was a distribution of corporate profits, not a reasonable compensation for services.

This conclusion leaves the court with the problem of ascertaining what was, in fact, a reasonable compensation for these officers and shareholders.

Defendant’s expert argued that $300,000 was the maximum reasonable salary that should be attributed to the officers of Universal. However, he was not an expert in executive compensation. Moreover, his opinion was based on the newspaper advertisements already found to be unreliable. The opinion of defendant’s expert is therefore of little value in resolving this issue.

Plaintiff argues that Universal’s officers were deserving of the entire amount of compensation received because of the long hours and hard work they put into the company. Plaintiff, in effect asks this court to rule that the year-end bonuses paid to Universal’s officer-shareholders was “just compensation” and not profit. I feel, however, that the inferences to be drawn from the cumulation of evidence, combined with the caveat that the plaintiff is vested with the burden of persuasion on this issue, dictates a contrary result.

As a general matter, the court takes note of the fact that in 1966 officer compensation totaled $902,110; $295,462 was in salary, $606,648 in bonuses. In 1967 the annualized executive compensation was $357,576, a drop of over 60%. No explanation was given for the downgrading of salaries; with business booming, logic would dictate salary increases.

The discrepancy between 1966 and 1967 is due primarily to Universal’s failure to pay its officers bonuses in 1967. From the evidence presented, there appears only two possible reasons for this failure. The first is Universal’s election on May 24, 1967, to terminate, retroactive to January 1, 1967, its Subchapter S status. Under Subchapter S it made no tax difference whether the owners of Universal drew money out of their company as executive compensation or as dividends. However, once Subchapter S status was terminated, and Universal was taxed as a corporation, it became critical that Universal distinguish between reasonable salaries and profits. Salary distributions are deductible by the corporation, profit distributions are not. The inference can be drawn that Universal paid no bonuses in 1967 because these bonuses were, in fact, dividends, and once Universal was no longer a Subchapter S corporation, dividends could not be distributed to shareholders under the guise of salaries.

A second potential reason for Universal’s failure to pay bonuses in 1967 was the August 15,1967, sale of Universal to the plaintiff. If the bonuses truly were compensation, it would seem that the officers of Universal would have received their pro rata shares. They did not, however, and without further explanation, this may be as clear an indication as exists that the bonuses were never considered to be compensation.

I have not overlooked the possibility that the officer’s pro rata shares may have been paid to them in the form of an increase in the purchase price for Universal, or somehow taken into account in the negotiations leading to the sale. However, if that were the case, plaintiff would have introduced proof of the matter. It was certainly in plaintiff’s interest to do so. Such proof, if adopted by the court, would have increased Universal’s 1967 expenses and thus reduced its profit.

Thus, for all of the foregoing reasons, it is concluded that the bonuses distributed to the officers of Universal in 1966 were distributions of profit, and that the base salary for each of the review years represents a reasonable compensation for the officers of Universal.

Having resolved these two accounting issues, it becomes a simple matter to calculate Universal’s total dollar profit. As detailed in the findings of fact, Universal made a net profit of $1,083,612 in 1966, of which $658,692 was allocable to renegotiable business, and a net profit of $1,198,802 in the first 7V2 months of 1967, of which $940,920 was allocable to renegotiable business.

B. Profit as a percentage of sales. The plaintiff’s sales figures are uncontroverted. Universal showed the following rates of return during the review periods:

II. Excessiveness of Profits

A. Appropriate standards of comparison. Before examining the statutory factors to determine how much, if any, “extra” profit Universal might be entitled to, we must establish standards of comparison to determine what a normal profit for Universal would be. This procedure is, in effect, an effort to reconstruct a competitive environment in which Universal’s prices would be determined by the demands of a normal market unaffected by Government procurement. Mills Mfg. Corp. v. United States, 215 Ct.Cl. 536, 544, 571 F.2d 1162, 1166 (1978). The reconstruction, if accurate, ensures that a contractor will not be required to give up profits that he could have made without the imbalances caused by Government intervention in the marketplace, and at the same time assures the Government that it has paid no more than a fair, competitive price for its product. By postulating a normal environment, it becomes possible to see how the contractor under consideration compares with other similarly situated contractors. The application of the statutory factors of comparison then determines how the contractor’s rate of return should compare with those of the other contractors. See Aero Spacelines, Inc. v. United States, 208 Ct.Cl. 704, 730, 530 F.2d 324, 340 (1976).

This court has endorsed three methods for reconstructing a normal competitive environment for a contractor under renegotiation. The contractor’s performance can be compared with his own performance in prior years (the so-called “base years” approach), as was done in Gibraltar Mfg. Co., supra, 212 Ct.Cl. at 234-35, 546 F.2d at 391. The contractor’s renegotiable business can be compared with his commercial business during the review periods. Camel Mfg. Co., supra. Finally, the contractor can be compared with other contractors in a position similar to his. Major Coat Co., supra.

There are, of course, difficulties with, and objections to, each of these approaches. There will always be obstacles to the accurate reconstruction of an economic marketplace that never existed. Nevertheless, the variety of acceptable methods is in itself one safeguard against arbitrariness, and “the greater the number of useful comparisons we can make, the closer we can come to estimating what a normal business environment might be.” Camel Mfg. Co., supra, 215 Ct.Cl. at 493, 572 F.2d at 298. Attention next focuses on determining the number of useful comparisons that can be made in the case at bar.

Looking first at the “base years” method of computation, I note that plain-

tiff’s sales and profits during the 2 years immediately preceding the review period were as follows:

The Government points to these low rates of return (lower, at least, than those achieved by Universal during the review periods) as evidence that Universal’s profits were substantially inflated during the review periods. Plaintiff argues that these figures are misleading, because Universal experienced high start-up costs during 1964 and 1965—costs which were to inure to the benefit of the Government in 1966 and 1967.

The importance of non-recurring costs on the profit history of a company has been long recognized. For example, the regulations of the Renegotiation Board provide that:

Where it can be established that deficient profits * * * resulted from nonrecurring costs on renegotiable sales in the early stages of production which relate to production in the year under review, the Board will take this into account in reviewing the contractor’s renegotiable business in the year under review * * *. RBR § 1460.10(b)(5). See Butkin Precision Mfg. Corp., supra, 211 Ct.Cl. at 124, 544 F.2d at 507. The evidence discloses that Universal probably did experience such non-recurring costs during 1964 and 1965.

It will be remembered that during these years Universal was solving the problems presented by mass production of the aluminum magazine. Most of these problems were technical, requiring technical solutions and capital investment. Universal determined by experiment the precise magnesium content needed to prevent distortion during heat treating of the aluminum used in the magazine tube. New dies were built and changed, and had to be cleaned and sharpened frequently. New welding equipment was purchased when the welding was brought in-house (it had been subcontracted during the early stages of development). A special welding tip was developed to withstand the high temperatures necessary to weld aluminum. Mandrels for holding the magazines in place were purchased. One-fifth of the magazines were destroyed in a costly testing procedure required by Colt during the developmental stages. Universal built heat treatment furnaces, and solved a plethora of problems created by the heat treatment and aging steps. A technology for hardcoating the aluminum was created by Universal. Universal and a subcontractor perfected a new design for the magazine follower spring and changed the material of the follower itself.

It is not possible to determine from the record exactly when many of these developments took place. Universal was developing the process from 1959 to 1965. About all that can be said is that Universal spent the years until 1963 researching the technical and theoretical difficulties, and the years 1964 and 1965 developing the manufacturing technique. Many of the costs claimed by plaintiff as contributing to the deficient profits in 1964 and 1965 may or may not have fallen in those years. It is probable, though, that some did.

The dollar amount of these non-recurring costs, as well as the portion of them which occurred during 1964 and 1965, cannot be established with certainty. This lack of financial definition weakens plaintiff’s argument, since it was free to introduce cost figures to show by exactly how much Universal’s profits fell short of being normal during those years. Plaintiff’s expert analyzed the data provided to him by the company and recommended that $34,330 and $43,534 be added to plaintiff’s deficient profits for the years 1964 and 1965 respectively, but I am unable to divine a reasonable ground for choosing these amounts. I am told that they represent 1% of sales for those years, but no reason is given for this allocation. All that can be said from the record is that, for the purposes of comparison, plaintiff’s rate of return on renegotiable business was lower than normal in 1964 and 1965.

The second possible comparison that can be made is between Universal’s renegotiable business and its commercial business during the review years. Universal did almost one million dollars’ worth of commercial business during each of the two review periods, and its rate of return on these sales is still another yardstick that could be applied to its renegotiable profit returns. For such a comparison to be valuable, some similarity between the two aspects of the business must be shown.

There is little concrete evidence in the record to demonstrate the nature of Universal’s commercial business. The company manufactured precision parts for several large and well-known corporations, but the record does not disclose what those parts were or how difficult they were to manufacture. This comparison is, accordingly, of little value.

Finally, it is appropriate and relevant to compare the plaintiff’s performance to that of contractors whose position in the market was similar to Universal’s to determine where in the industry’s hierarchy of profits Universal falls. This is difficult, since no one else in the world was manufacturing aluminum magazines for the M-16 rifle. Universal was the only producer, and Colt, the owner of exclusive proprietary rights in the rifle, was the only buyer. The situation resembles that in Aero Spacelines, supra, where plaintiff was the only company to offer the particular service involved. The Aero case can, however, be distinguished from this case in that Aero was concerned with the services of a unique and specially built airplane, whereas in this instance the magazine may have been unique, but the processes required to produce it were not. The absence of useful comparative data (such as profit figures from other precision metal fabrication companies) is nettling. Since the Government bears the burden of proof in this area, it “necessarily fares worse than does plaintiff for lack of this information.” Aero Spacelines, supra, 208 Ct.Cl. at 730, 530 F.2d at 341. The best that' can be said is that the parties have unwittingly disposed of part of this problem by agreement. Specifically, both plaintiff and defendant stated in the briefs that a metal fabrication contractor might ordinarily expect to enjoy about a 10% return on sales.

The parties have also suggested two other possible contractors with which Universal could be compared. One was Universal Division of Simmonds Industries, Universal’s successor in interest. The other was the Adventure Line Manufacturing Company, which began manufacturing M-16 components in 1970, 3 years after the review periods ended. I find neither comparison particularly enlightening. Simonds/Universal, immediately after its acquisition of Universal, was operating under the Universal contracts, and so provides no meaningful standard of comparison. Later, when new contracts were awarded, and when Adventure Line entered the business, it was not shown that the market was similar or that the state of the manufacturing art was in the same position it had been in during the years of Universal’s production. This last factor is decisive, since improvements were being made to Universal’s processes right up to the time of its acquisition by plaintiff. In sum, this record reveals no contractor with enough economic similarities to Universal to permit a useful comparison to be made.

I am left, then, with two sets of figures from which to draw a standard of normal competitive profitability. The first is Universal’s “base year” profits on renegotiable sales, which (as I noted above) were probably on the low side for those years because of start-up, research, and tooling costs. This rate of return was about 6.7%. The second, for what it is worth, is the parties’ agreement that a rate of return of 10% for a metal fabrication contractor during this period is not unreasonable. Plaintiff’s rate of return on renegotiable business was 18.46% in 1966 and 23.70% in 1967.

I feel that the “base year” rate of return, suitably adjusted upwards, is the comparison most likely to be useful in this case. In passing, it is noted that Universal’s rate of return on commercial business during the base years was 13.8%. The parties’ suggested figure of 10% falls midway between Universal’s base year renegotiable return and its base year commercial return. It is my opinion that a rate of return in the 12% range could be regarded as a normal competitive profit in this industry for the period of time covered by the review years. Universal’s profits are higher than this norm.

As a final note, recent cases have suggested taking a “sideway’s glance” at the Renegotiation Board’s final adjustment as a way of further confirming a chosen starting point. Bata Shoe Co. v. United States, 219 Ct.Cl. -, 595 F.2d 9, 13 (1979). Here, the Board would have allowed Universal a 15.2% return on sales. The 15.2% return, of course, incorporates whatever credits the Board allowed Universal under the statutory factors, and it cannot, therefore, be used directly to certify the 12% rate that has been determined to be the normal competitive profit in this instance. Nonetheless, it is helpful here, as it was to the court in Bata Shoe, to give added assurance that the rate established as a normal competitive profit for the industry appears to be reasonable. In Bata Shoe the Board’s allowance of 12.7% implied to the court that the Board would consider a 10-11% rate of return to be normal. It follows, therefore, that the Board, having allowed 15.2% in this case, would consider 12% rate of return to be a reasonable “starting point.” Accordingly, a “sideway’s glance” has added some credibility to the starting point selected.

B. Statutory factors. All that now remains is to assess Universal’s performance under each of the statutory factors to determine whether its profits in excess of normal profits can be defended or justified so that they are not “excessive” within the meaning of that term in the Renegotiation Act. Some of the factors are strictly comparative, while others lend themselves to a more objective determination. It is, of course, necessary to examine them all to reach a just determination: “No single fact or factor is determinative. All of the facts must be taken into account, all the statutory factors considered.” Mason & Hanger-Silas Mason Co. v. United States, 207 Ct.Cl. 106, 118, 518 F.2d 1341, 1348 (1975).

Renegotiation Act § 103(e)(5): Nature of the Business

1. Character of the company. John Ardolino and his family founded Universal Industries in 1945. The company began modestly, operating in a leased plant of only 1500 sq. ft. Universal incorporated in 1947 and expanded its plant to 5000 sq. ft., and more members of the family were brought into the organization at that time. By the middle of the 1950’s the company was doing well, having expanded its plant to about 50,000 sq. ft.

From its inception Universal partook of all the characteristics of a small, family-owned business. The owner-operators, dedicated to the success of the company, worked long hours, and devoted more effort and energy to their jobs than ordinary employees would have. The success of the company was due largely to their industry and skill. These persons worked well together.

Universal grew into the business of fabricating fairly complex metal parts for its customers. It produced special dies for IBM, a unique camera for American Safety Razor Company, and a variety of products for Xerox, High Standard Manufacturing Company, and Mettler Brothers. Universal often accepted jobs that other companies were reluctant to take because of difficulty or risk, and gradually acquired an excellent reputation.

In 1958, and perhaps as a result of this reputation, Colt Industries approached Universal. Colt had acquired exclusive proprietary rights in the AR-15 rifle and it asked Universal to develop manufacturing techniques for several of its unusual components, perhaps the most novel of these being a magazine made entirely of aluminum. The AR-15’s chief selling point was its light weight. It was 2V2 lbs. lighter than the M-14, the standard rifle for the United States Armed Forces. Thus, the AR-15’s components had to be made from aluminum and other lightweight materials, materials which were more difficult to work than ordinary steel. The design of the rifle presented new technological problems for component fabrication.

Universal successfully met the challenge. Between 1959 and 1963 the company solved most of the theoretical problems presented by the aluminum magazine and the other components. These developments, outlined above in the discussion of base-year profit deficiencies, need not be repeated here. Suffice it to say that they were substantial contributions to AR-15 technology, and many of them required high skill and expertise.

Of course, the development cost money. Some of the family were opposed to the work because it was too risky, and because it placed too great a strain on the resources of the company. Financing was difficult to obtain because Colt could give Universal no assurance that there would ever be a large market for the rifle anywhere in the world. Colt itself gave no financial assistance, nor did the Government or any other outside source. The money came from the owners, and from whatever loans they were able to obtain on the strength of other credit.

In 1964 and 1965 Universal developed production technology for the AR-15 components. Renegotiable sales for these years totaled about two million dollars. Finally, late in 1965, the Army adopted the AR-15 as its official weapon, and changed its designation to the M-16. As a result, component demand soared. Because of its previous investment of time, skill, and money, Universal was prepared to meet that demand. Renegotiable sales totaled between three and four million dollars for each of the review periods. In response to the spiraling orders, Universal expanded its plant, increased its work force, and demanded even more from its officers during this period to achieve the sharp increase in production.

Much of Universal’s success in component manufacture can be attributed to the hard work and skill of its family owners—that is, to the character of the business. Our cases recognize the principle that the peculiarities of a small company operation often permit success in difficult fields of production where a larger company might fail. See, e. g., Butkin Precision Mfg. Corp., supra, and A.C. Ball Co., supra. The regulations of the Renegotiation Board also provide that “characteristics inherent in the operation of a small company” may be taken into consideration in determining excessive profits. RBR § 1460.8(b). Universal deserves favorable consideration for its success in applying its more intimate style of operation to the problems presented by novel manufacturing techniques.

2. Complexity of manufacturing technique. A contractor is entitled to favorable consideration under this subfactor if he performs well a complex manufacturing operation. The Government contends that the manufacture of the components of the M-16 rifle was “uncomplicated.” There is no support for the Government’s contention. The standard for determining complexity was set forth in Butkin Precision Mfg. Corp., supra, 211 Ct.Cl. at 129, 531 F.2d at 509:

In general, the proper test is value added. How much value did plaintiff add to the raw materials and services it purchased?

And while it is true that mere difficulty per se does not necessarily imply complexity, difficulty of manufacture may add significantly to the cost of production and hence to the value added to the raw materials. A careful review of the record dictates the conclusion that Universal’s manufacturing technique was complex.

The manufacturing process for the aluminum magazine was the subject of extensive proof at trial. The magazine was a precision component that had to be manufactured to exacting specifications. The magazine had to be able to feed cartridges into the M-16 firing chamber at the rate of 800 rounds per minute, and even the smallest irregularity in the feed lips of the magazine would cause a malfunction. Other linear dimensions were equally critical.

The most difficult part of the magazine to manufacture was the outer casing (also called the tube or box). Because light weight was always a goal, the tube was manufactured from aluminum instead of steel. Universal originally used T-0 6061 heat-treatable sheet aluminum, but found that the magazine tube distorted out of specification when this substance was heat treated. By trial and error, Universal found that aluminum with a magnesium content between 1.0% and 1.2% would hold its shape during heat treating, and found with difficulty an aluminum supplier able to deliver aluminum which consistently met this specification. Each shipment was inspected when it entered the Universal plant. The aluminum was then chemically analyzed to determine the magnesium content, and it was tested with a micrometer to insure a thickness of .04 in., ± .001.

The aluminum was then run through a series of 15 individual die-stamping operations. The dies used in these operations quickly wore to the point where they would no longer produce acceptable tubes. The dies thus required constant cleaning and sharpening. After the die-stamping operation, the tube was folded and formed.

The specifications for the magazine designated many dimensions as critical. The distance between the tube window and the magazine lips had to be held constant within .003 in. The tube rib dimensions had to be held within .002 in. The width between the tube lips, where accuracy was essential to prevent malfunction, had to be held within .001 in. However, even if each of the individual tolerances were successfully complied with, the finished magazine would often be unacceptable because of the error that resulted from the accumulated tolerances. Thus, Universal was forced to tighten its operational tolerances beyond those called for by the specifications, and, as a result, some dies and equipment had to be changed.

After the tube was. formed, it was vapor cleaned in preparation for welding. Each magazine required five spot welds, applied in an area % in. wide and 37/8 in. long. Originally Universal subcontracted the welding, but because the subcontracting cost was so high (25$ per weld) the company purchased its own welding machines and brought the welding in-house. Universal worked with its welding tip supplier to develop an electrode tip that could withstand the high temperatures necessary to weld aluminum. Universal also devised a staggered welding sequence to minimize shunting and began using steel mandrels to hold the tube in place.

Colt specified, during the early years of development, that one magazine in every five should be destruct-tested for weld defects. The test required the seam of the magazine to be peeled back and the weld pried apart. A magazine so tested was destroyed and had to be sold as scrap; it was useless for any other purpose. By 1964, only about 1% of the welds so tested proved to be defective.

Heat treating the aluminum tube created several problems. The treatment was necessary to bring the metal to a proper state of hardness. After an unsuccessful search for a subcontractor that could perform the treatment effectively, Universal built its own heat treating furnaces. The heat treating had to be controlled within 25°. While temperatures too hot caused melting and distortion, temperatures too low failed to achieve the desired hardness. The furnaces were constantly monitored to guard against these dangers.

Universal also developed special stainless steel mandrel racks that could, without themselves becoming distorted, brace the tube during heating. After some experimenting, Universal decided to form the tube slightly out of specification so that during the heat-treating process it would expand into specification. After treatment, the tube was artificially “aged” in an atmosphere created by Universal.

The next step in the manufacturing process, hardcoating, was subcontracted out. However, Universal worked with the subcontractor to develop an effective hardcoating technique.

Universal also manufactured the base plate and the retainer spring of the magazine; the follower and the follower spring were subcontracted. Universal worked with both subcontractors to improve these components, supplying tooling and drawings.

Universal’s quality control system for the entire magazine manufacturing operation was extensive. Over 100 individual inspections occurred at various stages of the procedure. Every magazine produced was inspected, although not all received a complete inspection.

There can be little doubt of the complexity of the manufacturing process just described. Colt’s specifications were exacting, the tolerances tight. The material was difficult to work with, but after both heat treatment and hardcoating, i