Saturday, August 05, 2006

Money Money Money Money Money Moneeeeeee

"For the love of money
People will lie, Lord, they will cheat
For the love of money
People don't care who they hurt or cheat
I know money is the root of all evil
Do funny things to some people
Give me a nickel, brother can you spare a dime
Money can drive some people out of their minds,"

Donald Trump's theme song - could be Vern Raburn's as well.

Trump likes to flaunt money, Vern likes to spend it.

It was probably no coincidence that on the day they were awarded a Provisional Type Certificate, Eclipse announced receipt of another $225 million in funding and a new board member. The new director is an investment banker and the funds from an investment banking group, probably some linkage here as well.

Eclipse stated the total funds raised now exceeds $600 million. I thought they had $475m committed previously and the $225m would bring the total to $700 million. Six hundred or seven hundred million, it doesn't matter. The numbers are so large there is no way the company could pay the debt service (principal & interest) plus the premium for risk by delivering airplanes and applying the full profit margins towards the indebtedness. Some of this debt is probably six years old and the obligation of accrued interest and risk premium would raise the debt load to something over a billion dollars.

A clue to Vern's game plan is in the July 27 press release. The $225m was brought in as a pre-IPO (initial public offering) convertible debt, "...a loan that can be converted into equity at a later date." Here is how that kind of a scenario would work:

Eclipse authorizes $1.5 billion in stock:

$1.2 billion of the paper goes to the investors to repay the loans, back interest and risk premium.

$50 million in paper is set aside for employee (including Vern) stock awards

$250 million is sold to John Q. Public with funds paid to the company.

Then the trick will be for Vern to keep the stock prices up at least as high as the initial offering while he and the original investors bail out at a slow enough rate so as not to depress stock prices.

These are magnanimous people who would like to share their wealth and opportunities with the public. If all this seems too far fetched, consider how executives and other insiders have cashed out of companies by selling their stock in the period between July 2004 and July 2006:

Google $7.2 billion (with a "b")
Carnival $1.2 billion (also with a "b")
Nike $939.2 million
Oracle $881.7 million
Qualcomm $503 million

Source, Business Week Magazine, August 7, 2006, p.11.

18 comments:

flight guy said...

Can you say "Dot.Bomb?!!!"

I wouldn't want to be a public investor left holding this bag of doo doo after an IPO.

Stormy said...

Cessna put out a press release today that they have started the F&R testing which is usually the last thing before TC. I never did hear anything about an F&R on Eclipse? Did they ever publicize that testing or do they even have to do that? Wonder what happens to this financial situation at Eclipse if Cessna can start delivering airplanes that can do more than taxi around the tarmac. Unless their TC is provisional too. it seems like the Eclipse customers would have to be getting antsy about the status of the plane. Certified but if they dare to take delivery they have a million dollar artifact in their hangar.

Looking forward to your next blog.

Niner Zulu said...

Good info, Stan! I found your blog in a google search looking for information that wasn't tainted by someone trying to sell an Eclipse position. It's hard to find any writing anywhere which presents anything other than the Elipse-approved regurgitated hype. Anyway, I have heard 2 other things which I would appreciate your comments on:
1) in level flight at FL410 the Eclipse is only able to maintain 305 kts, and this requires a 7 degree nose-up attitude, and
2) one spec buyer has purchased approximately 100 Eclipse positions and is feeding them out to the market 1-2 positions at a time, making a $240k profit on each position.
These may just be rumors - have you heard anything about this?

Stan Blankenship said...

flightguy,

Several months ago, a writer for a major business magazine suggested I short the stock if I felt Eclipse was misrepresenting the company's financial potential. I had asked if he would recommend the stock to his favorite aunt who might call for investment advice. Never got an answer.


stormy,

Good question. I dug thru the FAR's and found Part 21.35 which covers the issue. Paragraph (a)(3) says the airplane must be a conforming aircraft. One would assume they would need all of the cockpit instrumentation bought off before they could declare the aircraft in conformity. Vern says one TSO is holding that up.

Paragraph (f)(1) & (2) says that if the engine(s) are used on a previously certified airplane, the F&R (Functional & Reliability) tests are 150 hours. If not, 300 hours. So both Eclipse and the Mustang would need 300 hrs of F& R.

By the way, these hours are usually logged by the flight test group who I have heard take their families to visit relatives in far off places or Las Vegas or Miami or.... Most of the pilots have put in long hours to get the TC; they and their families deserve this little perk .

But now with an apparent race between Eclipse and Cessna, each will be flying 24/7. The test is 300 hrs on one airframe, not 30 hrs on 10 airplanes.


9-Z,

Starting with Vern Raburn, you could find a lot of people who would tell you this blog is tainted. Probably is, but we are having fun along the way.

Regarding your questions:

1) Previous posts mentioned the fact that no writers had flown above FL 320, Eclipse removed the flight profiles from their website showing a direct climb and cruise at FL 410. So your comment that the airplane is barely making FL 410 does not suprise me. Vern can still claim 41,000 ft capability.

2) Had not heard this before but did a google search for "eclipse delivery position for sale" and found one site with 22 positions available providing you are willing to pay the initial buyer a premium for the privilege.

Since we don't know the size of the initial deposit or contract price, it is hard to tell how large of a premium they are asking.

Don said...

Stan Blankenship - I don't know what your interest is in Eclipse and particularly in Vern Rayburn. I suggest that you may like to get some basic education in the investment and startup business. This would prevent you from making a series of howlers in your comments. Just a few examples:

1. The authorization of 1.5 billion in shares does not mean that they are or ever will be issued.

2. Investment of $600 million or $700 million does not mean that it is all debt on which interest would accrue - it would probably be mainly equity.

3. For a growing company, the share value should increase over the long term after an IPO as the sales and profits rise.

4. Your comments about the anticipated profit or loss of eclipse based on their prices and production volume are sheer guesswork based on no facts.

5. Your strange assumption that a man (Vern) who has already been successful in life would spend 8+ years of his life promoting a scam instead of building a real business which would enhance his reputation (and fortune) further, smacks of sour grapes.

What is your reason for being so negative without bothering to collect all available facts?


Don

Don said...

Stan Blankenship - I don't know what your interest is in Eclipse and particularly in Vern Rayburn. I suggest that you may like to get some basic education in the investment and startup business. This would prevent you from making a series of howlers in your comments. Just a few examples:

1. The authorization of 1.5 billion in shares does not mean that they are or ever will be issued.

2. Investment of $600 million or $700 million does not mean that it is all debt on which interest would accrue - it would probably be mainly equity.

3. For a growing company, the share value should increase over the long term after an IPO as the sales and profits rise.

4. Your comments about the anticipated profit or loss of eclipse based on their prices and production volume are sheer guesswork based on no facts.

5. Your strange assumption that a man (Vern) who has already been successful in life would spend 8+ years of his life promoting a scam instead of building a real business which would enhance his reputation (and fortune) further, smacks of sour grapes.

What is your reason for being so negative without bothering to collect all available facts?


Don

flight guy said...

I didn't hear any comments about profitability and the market actually being there. That is the point that many are trying to make. Charter service has been around for many years. Stan made the point that the actual operating costs for the Eclipse based upon the numbers were not drastically reduced to cause a paradigm shift in the industry as boasted by Vern. Hope runs eternal for those who want to believe along with the risk.

Having a startup business and funding doen't make it profitable for the shareholders.

Stan Blankenship said...

Don,

Thanks for your comments, I don't have a problem with civil discourse.

There are a lot of people in the General Aviation industry who could write this blog but are not able to because of company policies. I own my own companies and don't have that kind of restraint. I can assure you however, I have talked to some who have stronger views than mine.

As far as start up companies, I have been involved in a few. In 1980, I was involved in the start up of a small kit airplane program. We had less than $900,000 invested in the program when I went to the major investor, Jack DeBoer (yes the same guy who took symbolic delivery of the "provisionally certified" Beech Horizon see August 2 post, Oshkosh Report) and told him the airplane had serious problems and we needed to kill the program. Jack contacted his friend Linden Blue (Spectrum Aeronautical www.spectrum.aero)they decided to go forward with the program without me and spent over $6 million before concluding the aircraft had problems.

Like Kenny Rogers sings, "You got to know when to hold em, know when to fold em."

In terms of your probable superior knowledge of investment issues:

1. The post clearly stated it was a scenario, and intended to point out the most likely way the company could pay back original investors. It was a rough hack at the numbers, authorize a billion and a half and issue a billion and a half.

2. Using interest for the example was the simplest way to recognize a dollar invested in 2006 does not have the same value as a dollar invested in 2001. The risk factor was higher in 2001 plus the money has been tied up for five more years.

3. You are assuming the company can operate in the black, we disagree. My views stated in the May 7 post.

4. The current price is $1.52 million. If we take Vern at his previous word, he has hundreds of orders booked at under a million and for many of these, he has already spent the deposit money.

This will severely impact the bottom line, severely impact cash flow.

5. Vern probably started the project with altruistic objectives but many of them have gone by the wayside. Like fuel costs tripling and a selling price nearly twice the original objective, development costs tripling, performance shortfalls. Now, he can't get off the train and the train does not back up.

On sour grapes and the negative position. Keep in mind, this is a blog. One purpose of a blog is for people to obtain information that may not be available anywhere else. Remember Dan Rather.

When I started this blog, I only had a handful of issues to write about and they all went in the first post. Most of the others followed in response to statements coming out of Eclipse.

The August 12 post is a recap of the previous 18. Looking back, everything was pretty well on target predicting a lot of the back peddling long before Eclipse fessed up.

Stan Blankenship said...

flight guy

Was responding to Don when your post went up, but you have touched on a subject that I am working on for my next post.

The News Article section of the Eclipse web site had a reprint of the July 25 New York Times article on small jet taxi's and mostly writing on the Eclipse, DayJet and Linear.

I went in to pull it off their site and it was gone...had to pay NYT $4.95 to get a reprint. But I am guessing Eclipse read it closer and did not like all of the content. Specifically, Richard Aboulafia of the Teal Group. His comments mirror yours:

quote

This is one of the most promising aviation markets in years. But are the economics of these new planes revolutionary compared to what is out there? Absolutely not.

...projections by Eclipse that more than 500 new planes could be absorbed a year, primarily by an air taxi industry, are overly optimistic, in large part because not that many travelers will want to pay a premium for the service.

The air travel consumer is a very fickle beast. He is eager to complain but yet he is more cost-sensitive than ever.

unquote.

Stripping it off their website is another example of the "transparency lost" syndrome.

Don said...

1. You basically conceded my point.

2. Eclipse does not owe any huge amount of accrued interest as you imply.

3. "You are assuming the company can operate in the black, we disagree." I am not assuming, I have more factual information. I can just say that the investment funds would not have invested $225 million unless they saw all the financials and were convinced after due diligence that the company will be profitable.

4. "The current price is $1.52 million." YES, BUT YOU HAVE TO ADD OPTIONS AVERAGING AT LEAST $100,000 AND the CPA ADJUSTMENT. SO THE PRICE NEXT YEAR WILL BE $1,670,000. "If we take Vern at his previous word, he has hundreds of orders booked at under a million" MOST OF THE ORDERS ARE AT HIGHER PRICES AND YOU MUST ADD OPTIONS COST. "and for many of these, he has already spent the deposit money." THIS IS A MEANINGLESS STATEMENT. WHETHER THE INVESTORS MONEY IS SPENT OR THE DEPOSITS ARE SPENT, THE COMPANY HAS CASH ON HAND FAR GREATER THAN THE DEPOSITS. (REMEMBER THE $225 MILLION)

"This will severely impact the bottom line, severely impact cash flow." NOT CORRECT, IF YOU DON'T KNOW, WHY JUST GUESS!

5. "Vern probably started the project with altruistic objectives but many of them have gone by the wayside. Like fuel costs tripling and a selling price nearly twice the original objective, development costs tripling, performance shortfalls. Now, he can't get off the train and the train does not back up."
NOT WORTH A COMMENT.

"On sour grapes and the negative position. Keep in mind, this is a blog. One purpose of a blog is for people to obtain information that may not be available anywhere else. Remember Dan Rather." THE OPERATIVE WORD IS 'INFORMATION'. JUST GUESSING AND MAKING ALLEGATIONS IS NOT 'INFORMATION'.

I ADMIT YOU FINALLY GOT TO ME. DAN RATHER HAD THE RIGHT STORY AND THE FACTS ARE THAT BUSH GOT INTO THE TEXAS AIR NATIONAL GUARD BECAUSE OF FAMILY INFLUENCE, AND THEN DIDN'T FINISH HIS OBLIGATION, BUT WAS "EXCUSED" TO HELP IN A POLITICAL CAMPAIGN IN ANOTHER STATE. I WONDER HOW MANY WHO WERE DRAFTED OR ENLISTED TO FIGHT IN VIETNAM WOULD HAVE LIKED TO HAVE BEEN "EXCUSED AT SOME POINT" BUT COULDN'T. OUR BRAVE LEADER!!!

AS YOU SAID, THIS IS A BLOG.

Stan Blankenship said...

Don

OK, you win. Eclipse does not owe a lot of interest. But outsiders have invested a lot of money and will expect a significant return. Call it what you want but the numbers are there and how they are paid back is the question.

You say you are not assuming because you have more access to the facts.

We could get into an esoteric discussion because the only facts are things that occured before today. Things happening after today are projections and these projections are based on assumptions.

We diasagree on the assumptions.

One of the Eclipse assumptions as flight guy said, there would be a paradigm shift in the air taxi business. Richard Aboulfia in the NY Times article provides some sound reasoning why the Eclipse expectations for the air taxi market are unreasonable. And neither of these guys mentioned the fragile financial condition of the typical air taxi operator.

What happens to all of the other Eclipse assumptions that are dependent on this segment when you take a more realistic view of the air taxi market potential?

Another initial assumption was that the aircraft would be priced at under a million, and now you are talking over $1.6 million.

Eclipse is climbing up the economic demand curve and the higher you get, the lower the demand unless I missed something in my Economics 101 class.

You want to talk options, they come at a price as well. Some will require certification, most will add weight and they can bugger up your production line as well.

In the late 70's Learjet was producing as many airplanes as Garrett could produce engines. Management got the idea to increase sales volume by selling more otional equipment. So they brought in Al Lott and put him on a commission. Once a sales guy booked the order, Al would come in and sell options. Did such a good job, he damn near shut the production line down. Management sent Al packing.

The father of mass production Henry Ford understood the problem over 100 years ago when he said, "you can have any color you want, as long as it is black."

So you think $225 million is a lot of money to start production? What kind of assumptions exist here for how fast the production line might spool up? Both Adam and Swearingen have been certified for awhile. You can count Adam deliveries on one hand. For Swearingen, you can count the fingers on a fish.

My recollection of the Dan Rather incident; while he had the story right, he used a bogus document to prove his point and was caught by a blogger.

Griper said...

Whew, Don

THAT'S A LITTLE PASSIONATE. SEEMS LIKE YOU'RE TAKING THIS PRETTY PERSONAL. MAKES ONE WONDER WHAT YOUR INTEREST IS IN ECLIPSE AND VERN RABURN.

TAKE A CHILL PILL BUDDY AND STOP YELLING AT PEOPLE. YOU'RE GOING TO MAKE US ALL TEARY EYED.

Face it Don. There are a lot of valid questions that Stan raises about Eclipse; both the product and the viability of the company. He is exactly right that there are a lot of people out there that have a lot more doubts about this company and due to their relationships with different companies or federal agencies can't speak out. Eclipse may turn out to be a very successful and stable product but anyone with any experience in the aircraft development and certification business are rightly questionable of the claims made by Mr. Raburn.

Lighten up pal and engage in "civil discourse" or start your own blog.

flight guy said...

Don,

Your comments are most welcome in the debate. I noticed some were a bit opinionated on what Eclipse will do in the future with an IPO. Do you have some inside information we don't have or are you making assumptions?

Stan,

Thanks for taking the time and making an effort to take an objective look from the inside of an airframe manufacturer as it goes through the challenges of certification. Those experiences are priceless in knowledge. If Eclipse took advantage of that knowledge about 8 years ago we would not be discussing these issues.

Look forward to the next posting. I know alot of Part 135 operators who started with a big pile of money only to have a smaller pile. Where's the paradigm shift in the numbers and cost? Show me the MONEY!!!!

Stan Blankenship said...

flight guy,

Or as they say, "you can make a small fortune in aviation by starting with a large one."

flight guy said...

Flight International Interview: Vision of Eclipse Aviation's Vern silences the sceptics (1/3/06)

Title: Eclipse Aviation founder Vern Raburn explains why he still dreams of making business jet travel accessible to millions.

In the last paragraph of the article,

He (Vern) does not believe any competition will come from larger competitors, who would not be able to make the production leap necessary to make a lower-cost small VLJ. “Cessna cannot come after us,” he says. Whether Raburn himself is around to see that new family is uncertain. He hopes to organise an IPO in the next few years to pay back his equity investors. “I need to be the guy who takes Eclipse public,” he says. “But whether I continue to be the chief executive of a company employing three, four, five thousand people...probably not. It’s not my skillset.”

To reply to Don's comment, the key points that I noted in the article is that it sounds like that this leader (Vern)is considering to be excused after an IPO. Sound like Vietnam? Is he going to take the money and run?

Also interesting, it stated that Vern doesn't seem to be in competition with Cessna. Although ironically, they may have an actual type certificate in hand for a VLJ before Eclipse.

Griper said...

Don, Don wherefore art thou Don??
or something like that....
Come on back, pal. You provide some good input to the discussion; just lighten up a little. And I know that Stan brought up the whole political thing but I don't think anyone here wants to talk that junk. There are other blogs out there for that boring, sad ol' stuff. Come on back and talk airplanes and the fun stuff. We can disagree about each other's opinions and still get along can't we?

Bob said...

Hello Stan, I was referred to your Eclipse blog from an online forum, and am glad to see that there has not been some sudden magic belief in the infinite scalability of turbine engines.

Could you describe the situtaion at Learjet in the late 70's you mentioned in an earlier reply? My understanding is that the production volume was effectively limited by the number of engines that could be supplied and the direction chosen to increase revenue from selling an aircraft was with additional cost items (optional equipment). I didn't make the connection between offering more options on an aircraft and causing a production line to nearly shut down.

In what context does optional equipment become an undesirable thing?

Stan Blankenship said...

griper,

Don's views probably reflected those of a lot of Eclipse employees.

To them the project represents an investment in their future careers, financial growth and all the good things that come with a successful program. Probably most of them have put in a lot of hours and sacrificed their home life.

I would be p.o.'d too, if some jackass (which is how I am probably viewed in Albuquerque) just sat there and took pot shots at my boss and their dreams.

Maybe we shouldn't burst their bubbles.


flightguy,

I especially like your comment to the August 4 "Cinderella's Magic Slipper" post. It details a Flight International interview with Vern. He bares his soul a bit then tells us his "market differentiator" is programming in the avionics suite, and it won't be ready for another 6 - 12 months.

That elusive carrot just keeps dangling out there in front of us!


bob,

Thanks for stopping by. Even though just writing this blog is a bit of a catharsis, it is nice to know there are one or two readers.

On small engines, the difference between the Mustang engine and Eclipse engine is just a couple of inches and 50% more thrust. I have been looking for fuel specifics for both engines without success. Would like to know if there is a significant difference.

On Learjet options, the problem was that there was a lot of engineering that had to be done for each A/C coming down the line. Wiring diagrams, installation drawings, certification write offs etc.

There were no CAD systems and all of the paper work was done by hand. Then production had to build configurations that had never been built and often engineering was not 100% correct and everything bogged down.

For Eclipse or any other company to build at unprecedented production levels, the more they can standardize, the better.