The 'Owners Plan'

The following hit the inbox in the past hour, and I thought it important to bring it to your attention in a prompt manner. The 'translation' from the supplied document format to this blog may have generated some unintended consequences, for which I apologize in advance. Needless to say, I'll correct any that are drawn to my attention as quickly as I can.

Anyway, with that small 'health warning' I'm happy to provide you all with the following, which was dated March 10th:-

THIS DOCUMENT IS INTENDED TO PROVIDE BACKGROUND REGARDING THEFORMATION OF A COOPERATIVE ASSOCIATION OF OWNERS OF ECLIPSE AIRCRAFT AND IS FOR INFORMATIONAL PURPOSES ONLY. THIS DOES NOTCONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUYSECURITIES. THE STATEMENTS CONTAINED HEREIN, INCLUDING POSSIBLEFUTURE COURSES OF ACTION TO BE TAKEN, ARE FORWARD LOOKING BASED ON CURRENT EXPECTATIONS AND BELIEFS AND ARE SUBJECT TO A NUMBER OFFACTORS AND UNCERTAINTIES. YOU ARE ENCOURAGED TO CONSULT YOUR ATTORNEY TO DETERMINE WHAT ACTIONS, INCLUDING THOSE DISCUSSED HEREIN, ARE IN YOUR BEST INTERESTS.

Dear Eclipse 500 Owner:
Most of you have received communications over the past month on the state of the Eclipse bankruptcy process. This memo is intended to both summarize what has been previously communicated and to apprise you of the most recent developments.

We believe that the current situation requires a concerted and organized action on the part of all Eclipse owners to guarantee the continued support and airworthiness of your airplanes at a reasonable cost. The pace of the Chapter 7 liquidation process requires that we prepare immediately for this eventuality. If we wait to see what alternatives emerge, it will be too late to take any of the actions that could improve the outcome for all owners.

Objectives of the Owner’s Group

We’re going to present quite a bit of information on today’s call, but it is important to start with a clear understanding of our mission, as well as our relationship to other groups who may be working to buy the Eclipse assets.

I. Our top priority is to protect the key assets of Eclipse Aviation Corporation, and ensure that they are available to enable the support, upgrades, and continued airworthiness of the Eclipse fleet on as attractive an economic basis as possible.
II. We plan to evaluate all proposed plans on behalf of the owners, and would be delighted to find an organization that plans to purchase the assets and provide owners with support and upgrades on attractive terms.
III. The only thing worse than high priced support would be no support. Since no plan that we are aware of has yet raised the capital likely required to buy the Eclipse assets and commence operations, we believe that it is essential to provide a backstop to all of the proposed plans.
IV. Finally, none of the members of this committee has any economic interest in any plan, other than the desire for access to ongoing service and support for our aircraft.

Bankruptcy Procedure

On Wednesday March 4, the bankruptcy court agreed to convert the Eclipse Chapter 11 case to a Chapter 7 liquidation case. A trustee will be appointed to supervise the liquidation. Most likely the trustee will sell the assets of Eclipse. The note holders will be in a decision making role with respect to whether an auction occurs and its timing. In cases of this type, auctions would typically occur within 7 30 days. We believe all of the assets will most likely be sold to a single buyer.
There is no way to specifically estimate what the noteholders will accept, and it is possible that they might simply hold the assets themselves if the bidding comes in too low. Some of the money a buyer pays for the assets will go to reimburse Al Mann for his $10 million DIP (debtor in possession) loan. We believe ETIRC will likely be forced to forfeit their $10 million DIP loan based upon their failure to close the Chapter 11 reorganization.

Importance of the Eclipse Intellectual Property

We anticipate that all of the assets of Eclipse Aircraft Corporation will be offered at the auction. Among these assets are the Type Certificate and all of the intellectual property required to maintain and upgrade the airplane over time. While some have questioned whether it might be possible to support the aircraft without control of these assets, the Ad Hoc Committee (and other experts whom we have consulted) strongly believes that whoever controls these assets will have a virtual monopoly on the support of the fleet. For this reason, and also from seeing various proposals from groups who propose to bid on the Eclipse assets, the committee is very concerned about the possibility of a group acquiring the assets and charging exorbitant fees for access to service and upgrades.

Some Economic Assumptions

The painful reality of the Eclipse bankruptcy is that everyone involved has been damaged financially. While in some sense the owners are fortunate to have a “hard asset”, many of the things we expect support of the Type Certificate ed from Eclipse, such as upgrades and ongoing, must now be paid for by somebody else, most likely us owners. We are working to minimize those costs because they are substantial.

As part of our work, the committee has investigated what the ongoing requirements are likely to be for any organization that intends to keep the Type Certificate in force. A substantial sustaining engineering organization is needed to respond to technical issues, to source components, to deal with the FAA, and to make ongoing reliability improvements. Our best estimate is that the requirement is approximately 50 engineers, and that the total overhead for such an organization is in the $12M $14M/year range. That assumption appears consistent with some of the projections we have seen from other prospective bidders.

If an existing manufacturer were to purchase the assets, they might well be able to use excess capacity within their own organization to perform these tasks, but we do not believe that any established manufacturer intends to bid. We have had discussions with at least one credible organization that could absorb a major portion of this overhead if they elect to partner with us. Those discussions are ongoing, but certainly not concluded at this point.

Any plan must account for the baseline burden of maintaining the type certificate. These costs must be recaptured in annual fees or through markups on service or other fees. Typical aircraft manufacturers spread these costs over all of their products so that such costs are buried in the price of the aircraft and in the price of parts and service.


Potential Scenarios

Some of the plans we have seen contemplate varying levels of continued manufacturing, ranging from completing the 10 or so aircraft that are well along in the production process to more ambitious plans of ultimately producing up to 100 aircraft per year. A bidder who sees manufacturing as its primary strategy would be incented to keep maintenance and support costs moderate for the existing fleet in order to establish credibility with future potential customers. However the ability of a new entrant to raise the capital required to manufacture new aircraft, and to engage in the level of production engineering required to produce those aircraft at a competitive cost is viewed skeptically by some members of the committee.

More plausible plans involve the purchase of the assets primarily to create a profitable service and support business. The risk in undertaking such a business high return on their it requires will likely dictate that the investors command a very and the capital that investment. Some of the plans that we have seen have contemplated charging on the order of $100,000/year just for access to the service. They also contemplate charging a six figure premium over cost for the upgrades. While these rates look very predatory to an owner, they may well feel like good business to an investor in such an enterprise.

It is worth noting that every additional dollar of upgrade cost likely reduces the current value of your pre upgrade aircraft by a dollar. Similarly, increased ongoing maintenance costs require that the market value of the aircraft be reduced by an amount that makes the total cost of ownership competitive with other alternatives.

Seizing the Initiative

Although some committee members believe that it may still be possible to find investors who will back a production/support plan that would not be considered predatory, time is running out.

The surest way for the Eclipse Owners Group to avoid one of these “predatory” scenarios (or worse yet, no viable scenario of any kind) is to organize as a group and successfully acquire the Eclipse intellectual property in the liquidation. We would do this under the auspices of a non profit corporation (“NEWCO”) set up for this purpose. We are in discussions with a number of existing maintenance and support organizations from which we can choose a partner to undertake the actual engineering and support tasks. NEWCO would employ an executive director and minimal staff to oversee the performance of our service partner. That partner organization could expect to make customary profits on its service and support activities, as opposed to the monopoly level profits that could be demanded by an organization that has gained control of the Eclipse Intellectual Property.

Again, we would be very happy to see a plan emerge that does not require owners to actually put up capital to secure and maintain the type certificate . We are in contact with every potential entrant we are aware of, and will provide you with our evaluation of each of those plans once we have access to them.

However having our own highly visible program in place is the best way to protect owners’ interests and influence the plans of other providers. Sitting back passively will leave us captive to whoever prevails at the auction – a scenario that is unlikely to produce a satisfactory outcome.

Structure and Mechanics

It is difficult to say exactly what bid will be required to prevail at the auction. If we have not endorsed any of the competitive plans prior to the auction, we will likely have made it more difficult for some of those plans to raise the capital needed to bid. This could potentially lower the required bid. For now, let’s assume that the bid range is $10M $20M. In addition, unless we find a partner who can perform the sustaining engineering by using their own idle capacity, we feel that it is prudent to raise the first year’s overhead of$12M $14M as well. This implies a total requirement of up to $35M. It is possible that $10M of this could be supplied by convincing Al Mann to roll his $10M in DIP financing into our bid, in which case we would need to pay him over time. That is not a “done deal” however.

We would like each owner to invest $150,000 per aircraft in the non profit corporation organized to purchase the Eclipse Assets. While this is a significant sum of money, you would likely save more than this just in the cost of the Garmin/FIKIupgrade of your aircraft. Additionally, your ongoing costs are likely to be considerably lower than any proposal we have seen to date.

For owners that are unable to contribute $150,000, we have set $100,000 as the minimum level. To offset any such under contributions, we will offer (and encourage) other owners to purchase interest bearing notes in amounts of $50,000 and up in addition to their base $150,000 contribution. These notes will be secured by the assets of the corporation, and will offer an attractive interest rate. We have not pegged this rate yet, but it will likely be in the 15% 20% range. Those who have contributed less than $150,000 will pay that interest rate on the difference between their contribution and $150,000. Those who have contributed more through the note purchase will receive that interest.

To summarize, the $150,000 contribution will buy you ownership in the Eclipse IP, and support and upgrades at prices that we negotiate on your behalf with our service partner. We will still need to collectively support the annual sustaining engineering(Type Certificate maintenance) costs. The cost per aircraft for that support could be as high as $60,000 $70,000 per year if we have to shoulder the entire burden, or as low as 15 20% of that amount if we can cement a partnership with the right support partner. Upgrades will be performed with parts supplied at cost plus a modest handling charge, and labor for the upgrades will be charged at traditional shop rates. Owners who have contributed less than $150,000 will also likely be required to bring their contribution up to $150,000 at upgrade time, which will enable us to pay off note holders.

We are asking all owners who are capable of doing so to commit $200,000 to the effort, with our commitment that we will develop a fair method, as described above, of compensating you for your increased commitment. You will have the opportunity of reviewing and agreeing to our proposal before your money is released from escrow, so we are not asking you to commit without complete disclosure. However, the larger our “war chest” the more strength we will have in our group.

To summarize the anticipated economics for a $150,000 contributor:
1. $150,000 investment before the Chapter 7 auction. This buys ownership in NewCo, as well as access to the service and support program.

2. Maintenance performed at typical labor rates.

3. Parts supplied at the cost paid to suppliers plus handling charge.

4. Upgrades under similar terms to maintenance.

5. Additional annual expense per aircraft to support the sustaining engineering and type certificate. This could range from $15,000 per aircraft per year in the most favorable assumptions to $70,000 per year under less favorable assumptions.

6. Should you elect to sell your airplane at any point, the ownership would transfer to the new owner of your aircraft, who would enjoy the same status. This should increase the value and salability of your aircraft.


This leaves the question of what to do about owners who choose not to participate at even the $100,000 level. Our guiding principle here is fairness to those owners who do participate. One of the biggest risks this plan faces is securing adequate participation of the owner group, and any owner who does not participate raises the required initial investment and per airplane overhead costs of those who do. For that reason, any owner who declines to participate will need to invest prior to receiving access to the program, and will pay a higher price than those who participated prior to the auction.

The board of directors of NEWCO will ultimately determine that premium, with input from the participating owners. We don’t know today what that group will decide, but least some owners have already expressed the view that late entrants should pay a 2 3x multiple of the pre auction price. Other owners express the view that the premium should be more moderate. Late owners will also be responsible for interest on the $150,000 “par” investment amount, since their non participation likely generates the need for us to raise that amount through the issuance of notes.

One final point on structure is that the $150,000 outlay is an investment rather than a fee. That investment buys pro rata ownership in the Eclipse assets, which have ongoing value. If a profit making venture were to purchase those assets, it would need to build in incremental charges to generate a significant return on that investment. If the owners buy those assets, the return we receive is the absence of those incremental charges as well as the guarantee of ongoing support.

Interim Expenses

All of us understand the value (and cost) of quality professional help. In today’s environment, that help is extremely expensive. The committee has done all of its work on a volunteer basis, but we anticipate the need to spend at least $200,000 between now and the auction for outside legal and financial advice, including forming the non profit corporation, complying with securities regulations, negotiating with partners, etc. We ask that $2,500 of your contribution be used for that purpose. All other monies will be held in escrow as outlined below. There is potentially a need for a second expense tranche, but this will not occur until you have approved the final investment documents and fully committed your contribution.

It is also important t recognize those of you who contributed $4,500 to the original ad hoc committee. The work of that committee formed the foundation for the efforts of the owners group, and those who contributed will be credited with $5,000 toward your full investment amount.

Escrow

Because of the very short timeline on which all of this must occur, we are creating an escrow account with very investor friendly provisions. We ask that you decide on a contribution level and then send 10% of that amount to the escrow agent. The escrow agreement, as well as the formation agreement for the entity, will be emailed to you within the next 24 48 hours. Any money in that escrow account (less $2,500 for interim expenses) must be returned to you unless you approve and sign the detailed final investment documents. The 10% deposit is simply a good faith gesture on your part so that we can gauge the level of funding that we have committed from the group at large. We will need the full amount deposited, (and the final documents signed) before we can bid at the auction. Since this auction is likely to occur in the next 7 30 days, we are on an extremely tight timeline.

Conclusion

We would like to leave you with these key messages:
I. This plan is intended to insure that a funded, viable, customer-friendly bidder shows up at the Eclipse Chapter 7 auction. We do not consider any of the plans we are aware of to have demonstrated all of those characteristics yet.
II. While the initial financial commitment is significant, your $150,000-$200,000 investment may well make the difference between your airplane being worth $1M+ or being nearly worthless.
III. The annual expenses are also significant, primarily because the fleet size is modest. However any plan must deal with that reality. Promises to significantly grow the fleet though new manufacturing are tempting but much more challenging to fund and execute than the creation of a service and support program for the current fleet.
IV. We continue to seek information on alternative plans, and would happily throw our support behind any plan that we believe would be beneficial to the owners.
V. The owners committee does not claim to be qualified to run a service and support company, but will partner with highly qualified and experienced providers.
VI. By controlling the Eclipse intellectual property, we maximize our options not just today, but well into the future. For example, if we were to later learn of a plan or organization that we think could do this better than we can, but which was unable to succeed in the auction, our Board of Directors would still have the flexibility to work with that group. They could even sell some or all of the assets to that group, and distribute the proceeds back to our members, as long as that is consistent with the our mission of maximizing the value of our aircraft and the availability of service and support.

We would like to offer each of you an opportunity to speak one on one with a member of the Ad Hoc committee to address any questions or concerns that you may have with this plan. If you have not sent your contact info to eclipseownersgroup@gmail.com please do so, and we will contact you and arrange a time for a call.

Sincerely yours,

Randall Sanada, David Green, Ron Lebel, Ken Meyer, Mike Boich for the Eclipse Owners Group