peter w. carpi | Oshkosh Airshow 2007 | Industry Update


~The Show|The Crew|Adam & Epic|Citation & Pilatus|Embraer & Bell Agusta|Eclipse|Glasair & Vans|Piper & Diamond|Evolution & Hondajet|Crazy Others|Industry Update~





Eclipse

The Eclipse 500 parked at the 2007 Oshkosh Airshow

Eclipse spent ~$1 billion dollars in designing, developing, certificating, producing and selling 259 Eclipse 500 aircraft. Then the money ran out.

By the time founder Vern Rayburn resigned, Roel Pieper, once CEO of Tandem Computer Corp., had gravitated to the chairmanship of ETIRC, a European distributor and servicer of Eclipse 500s, based in Luxemburg or Belgium. ETIRC was also said to be the largest single shareholder in Eclipse and, no doubt, a creditor. When the money runs out, the top shareholders and creditors get together to devise a workout plan (Chapter 11 bankruptcy) or to split up the assets and liquidate (Chapter 7).

Nobody wanted to see the company disintegrate so stakeholders pursued chapter 11 protection. Shareholders and creditors felt that Pieper was the best prospect to pick up the reins. So he effectively moved to Albuquerque to do just that but it was apparent that new capital was essential for resumption of operations. As a bankruptcy auction approached, Pieper asserted that he had raised $130 million from Europe to buy the assets and get back into production. And he said that another $20 to $70 million might be forthcoming if needed.

The Trustee chose ETIRC as the stalking horse bidder in what is called a 363 bankruptcy sale, and ETIRC's bid prevailed in the bankruptcy auction. But over the course of three weeks it became apparent that ETIRC was having trouble gathering the capital they thought they had lined up so the trustee reauctioned the assets, and the winning bidder was a group of four investors led by Mason Holland Jr.Mason Holland of South Carolina, who offered $40 million ($20 million in cash, the remainder in paper from their new company). From the outset Mason made it clear that his new company would focus on upgrading the existing fleet and arranging sales for owners desiring to sell. That is exactly what the new Eclipse Aerospace has done at the former factory facility in Albuquerque, and at a new facility in Chicago. Resumption of Eclipse 500 production has been mentioned only as a remote possibility someday.

In early 2011 Sikorsky Aircraft made an investment in Eclipse, presumably to help migrate the company back into production.

*The original stalking horse bid was rumored to be funded through banks in Spain, but ultimately was Russian money, or I should say was a lack of Russian money.

Upgrading Eclipse 500s

A goal for most parties interested in the assets of Eclipse was to upgrade the existing 260 or so flying Eclipse planes for both known icing and avio-navigation packages. The upgrades cost roughly $120K per plane, mostly for known icing rather than navigation. This upgrade would allow the planes to be commercially operated. Albuquerque and Chicago are the two centers where they are upgrading planes, the other facilities have been closed.

Newco Economics

It doesn't take a rocket scientist to figure out that even with a healthy 15% margin on a $120k upgrade, your whole market potential is less than $5M. So how Holland plans to get a return on his $20M (or $40M) investment is unclear. Re-establishing material flows, getting FAA approval for the facility, etc. will be very difficult, even though the Eclipse 500 is certificated as was the Albuquerque facility. The Albuquerque license was lost as production ceased, however, and will need to be re-evaluated by the FAA prior to Eclipse being allowed to inspect their own finished planes.




Epic

An Epic LT in flight


The People

Rick Schrameck - Former Epic CEO and partner in ER1 real estate company

Ed Nigro - Schramek's partner in ER1

Doug King, Daryl Ingalsbe, and Rich Lucibella - Owners of un-finished Epic planes, representing the LT Builders Group

Phil Friedman - CEO of Harlow Aerostructures, bid for the assets of Eclipse as well as Epic. Initially Harlow was the stalking horse bidder with $2M and rumored to have bid as high as $4M for the Epic assets.

Ken Eiler - Trustee of Epic estate in bankruptcy

Randall Dunn - Judge for the 9th Circuit bankruptcy appellate panel

Rich Lucibella - Head of Epic creditors committee, member of LT Builders Group, and owner of Blue Sky Avgroup

Organizations

Epic Aircraft - The original company producing, marketing, and selling Epic kit planes. The planes were paid for up-front in three phases by their future owners. The owners then came to the Epic plant in Bend, Oregon, to build the planes with the assistance of Epic staff. When complete the FAA inspected each plane and gave it the ok. If the plane design and facility were certificated by the FAA then the owners would not have had to build the planes themselves. Epic helped builders complete ~26 planes before filing for bankruptcy protection, leaving a number of unfinished planes in their Bend facility.

Aircraft Investor Resources - Parent company to Epic Aircraft, which manufactured the kits, and Epic Completion Services, which helped owners build the kits.

LT Builders Group - A group of seven pilot/owners who paid for Epic planes but were locked out of the Bend facility when Epic filed for bankruptcy protection. These builders formed a loose group to bid on the assets in hopes of finishing construction of thier planes.

Harlow Aerostructures - A Kansas company led by Phil Friedman, Harlow was an active bidder for the assets of Epic, but ultimately came away empty handed.

Aviation Industry General Aircraft Co. Ltd., also known as China Aviation Industry Corp. (AVIC) - A large Chinese aviation company that bid on the assets of Epic, in part to gain access to Epic's intellectual property around composite materials. These technologies were also rumored to be in secret designs for an unmanned refueling plane for the US Navy. Ultimately, AVIC won Epic's IP and development rights for international use.

Blue Sky Avgroup - Owned by Rich Lucibella, one of the airplane owner-builders, Blue Sky sued Epic last June, claiming his plane's engine hadn't been delivered and exposing Epic's shaky finances.

Tbilaviamsheni Ltd. - A Tbilisi, Georgia based firm that allegedly put up ~$5M to build a prototype Epic Elite, which it currently possesses. Production was done through a joint-venture with Epic called TAM-Air.

Bidding

Initially there were three bidders; LT Builders Group, which had questionable financial backing for a $6.5M bid that included $4M of assumed debt; AVIC, which had very clear financial backing for a $4.3M all-cash bid, but was a Chinese organization potentially acquiring sensitive technology; and Harlow Aerostructures, who bid ~$2M.

Ultimately, it appears that Judge Dunn will allow the LT Builders Group and AVIC to jointly take possession whereby AVIC gets rights to the technology and to develop the planes outside the US, and the LT Builders Group gets the physical assets remaining in the US, rights to the technology, and rights to continue operations in the US only. The combined winning bid was for $4.3M, but it is unclear how much is coming from each party.

Epic shared design work on their LT model with UK firm Farnborough Aricraft. This firm is now named Kestrel, and will be operating out of an old naval air base in Brunswick, ME to produce their version of the LT.

Themes

Ponzi Scheme - Schrameck has been accused of running a "ponzi scheme." This is likely due to the working capital cycle at Epic in which planes are paid for before the owners start construction. This means the company takes cash in before the cash goes out to pay for the materials and labor associated with making the planes. This is a typical business practice, especially for smaller companies that don't have easy access to working capital lines of credit. An alternative, but similar, form of financing is to BILL the owners in advance but only COLLECT either as work is completed or after work has been completed. Companies that use this method of billing often sell their receivables to factoring agents who give them 90 or 95% of the amount owed up-front as cash and keep the rest to cover profits and expected bad debts. Although ultimately some builders were left with useless, already paid for work in progress inventory when the company filed for bankruptcy protection, there wouldn't have been a problem if the company were able to generate sufficient profits to stay in business. What might have caused more concern around the ponzi scheme was another typical business practice that Schrameck engaged in on the real estate side....

Real Estate Deal - Often entrepreneurs will set up new ventures with complex legal structures to segment liability risk. This was the case with Epic and the multiple corporations involved, including Epic Aircraft and Aircraft Investor Resources. However, Schrameck also hedged himself by creating a related but independent, 3rd party real estate holding co that he, and alleged partner Ed Nigro, owned. This company purchased the real estate in Bend, Oregon that Eclipse ultimately chose to locate their business on. It's no coincidence that Schrameck was the CEO of Epic at the time and had the ability to make that real estate decision for the company. Where this become tricky is that this is a related party transaction loaded with conflicts of interest - most particularly that, as is often the case, Schrameck charged well above-market rent to Epic, enriching himself at the expense of Epic shareholders and creditors. ER1 is the name of the company that Nigro and Schrameck established to lease space to Epic. It is rumored that the FBI is investigating this, as well as other financial "irregularities" surrounding Schrameck's managerial decisions.

Military Secrets - It has been rumored that the US Navy was working in partnership with Epic to develop an unmanned refeuling plane designed, at least in part, around the advanced fiber composite structures that Epic was using in their designs. Speculation surrounds the Chinese bid from AVIC, whether that was an attempt to gain military secrets or simple commercial use is unknown and would be difficult to prove.

Conflicted Parties - The fact that the head of the creditors committee, Rich Lucibella, is also a builder is a clear conflict of interest. A creditors committee is established to represent the rights and interests of all parties claiming to be owed money from a bankrupt entity. As such, Licibella's primary concern should be to retreive as much as possible from the bankruptcy estate, i.e. get the HIGHEST bid possible from the auction. However, Lucibella was also one of the builders who wasn't able to finish his plane, and thereby became a member of the LT Builders Group that was bidding for the assets. In that role his primary concern was getting the LOWEST price in the auction. Since ultimately the LT Builders Group won what they wanted, other creditors could have a reason to complain.

Related Articles

Airport Journals coverage of Epic in 2007
Podcast of Schrameck at Oshkosh from AVWeb
Aviation Week story on bankruptcy proceedings
Blue Sky lawsuit against Epic

Later Updates - July 2011

Even though I put this page up a few years ago, after my last Oshkosh visit, I am still getting plenty of web traffic, so I figured I'd put occasional updates and links so readers do not get confused by stale information.

Eclipse Sikorsky took an equity ownership position in Eclipse with the intent of eventually bringing the Eclipse 500 back into production. In the mean time a reasonably healthy business in upgrading the original 260 Eclipse 500s has sustained the company through the economic doldrums.

Epic still taking kit orders for LT, Escape, and Victory models.

Alan Klapmeier, the co-founder of Cirrus Aircraft, is breathing new life into the Kestrel (a variant of the LT) by trying to get certificated at the New Brunswick Naval Air Station, which recently was decommissioned.

Comp Air is having success selling their CA12, which is essentially the PC 12 from Pilatus.

Later Updates - June 2012



Epic is going to try to certify the LT. Has moved to Superior, Wi, from Maine.

Comp Air is now going for certification of their CA12 and have moved to Melbourne.

Cirrus is going to try to certify their SF50 or Vision - one of the few single engine light jets out there.

Eclipse has gotten their production certificate from the FAA to produce an updated 500, now called the 550.


~The Show|The Crew|Adam & Epic|Citation & Pilatus|Embraer & Bell Agusta|Eclipse|Glasair & Vans|Piper & Diamond|Evolution & Hondajet|Crazy Others|Industry Update~




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June 7th, 2012

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