Analysis: Complex Legal Documents Seem To Suggest More Questions Than They Answer

ANN is poring through over an inch thick stack of documents sent to shareholders of the Cirrus Aircraft program in the last few days. The deal, claiming a purchase price of "$210,000,000" sounds impressive until wading through over 100 pages of associated documentation to note that the $210M figure is 'minus the estimated "Net Debt", which means an amount equal to the difference between:'

• an amount equal to the sum of:
  • the current portion of long-term debt, plus
  • short-term notes payable, plus
  • long-term debt, plus
  • certain capital lease obligations, plus
  • certain accrued expenses, plus
  • any amounts owed to the Parent and Sellers' Representative pursuant to pre-Closing funding of the Company's working capital;

minus

• the aggregate amount of cash and cash equivalents of the Company Group,

as each of the above is reflected in the relevant balance sheet prepared in accordance with the Merger Agreement,

• minus the estimated "Specific Deductibles", which means an amount equal to:
  • the unfunded product liability of the Company (accrued product liability minus restricted cash and short-term investments), plus
  • certain customer deposits, plus
  • certain accounts payable, plus
  • certain accrued expenses, plus
  • the proceeds to be paid under the Company's liquidity bonus plan and the Company's supplemental bonus plan, plus
  • all past due rent, penalties, and interest as of the date on which the Closing occurs (the "Closing Date") under the amended lease by and between the City of Grand Forks, North Dakota, Dakota Aircraft Corporation, and the Company;
• minus the estimated "Outstanding Transaction Expenses", which means the legal, accounting, financial advisory, and other third-party advisory or consulting fees and expenses incurred by the Company Group or the Sellers' Representative in connection with the Merger Agreement and the transactions contemplated thereby (including any Outstanding Transaction Expenses that will become payable after the Effective Time with respect to services performed or actions taken prior to the Effective Time) to the extent not paid at or prior to the Closing.

Get all that? For those of you not familiar with this level of financial discourse, simply put, while the deal's value (overall) may encompass a total of $210M... the actual monies paid forth could be significantly less... once all applicable debts are satisfied, though we've been told that no matter the outcome, the parties likely to be made the most "whole" are those associated with the Majority Shareholder, Arcapita... while the Minority Shareholders may be less than satisfied with how the deal affects them (or so we are being told--by some Minority Shareholders). 

ANN is taking additional time to render additional examination and judgment of the documents and will be relying on those with financial expertise for an overall evaluation and observations as to how "good" a deal this may be.

But in the meantime, a number of glaring issues have been observed in these docs. While we've oft been told that there are "lies, damned lies and statistics", the Cirrus docs show a pattern of poor performance at the company that appears to show it reaching a potentially tragic impasse that also appears to have been forestalled by the deal with CAIGA... as to how desperate Cirrus became to 'make a deal, any deal' in order to forestall bankruptcy, that is yet to be seen/determined -- but the documents prove that this was a company drowning in debt -- and one that owes extraordinary sums of money to its long-suffering vendors and suppliers -- among others. Various aspects of the doc suggest that the company owed some $30M (as of September 30th, 2010) to a number of suppliers with other outstanding, larger debts spelled out as individual liabilities... such as $1.018 Million to the City of Grand Forks, $1.15 Million to Arcapita for a "Management Fee" (about which one Shareholder noted, upon reviewing the company's poor 2008-2010 performance, that he 'wanted his money back...' for said management), $22.265M to depositors for the moribund Cirrus Jet program, and so forth.

'Current Liabilities (as of September 30th, 2010) were listed as $122.602 Million, and Total Liabilities tallied to $174.931 Million. It is not a pretty picture. The report admits that the company lost a lot of money in 2008, as well as a considerable amount of money in 2009 (though the amounts vary according to the type/nature of report and accounting variables).

The result is a picture which strongly suggests that Cirrus had been managed into a corner for which a financial suitor (and just about any suitor we would expect), should have been able to suggest very favorable terms in order to get the company off the Arcapita balance sheets. The question is... was the Cirrus deal with CAIGA a "Fire Sale?" And yet, we have heard that some potential investors were ignored by Arcapita, in favor of the China deal.... if so, why?

One aspect of the docs that has created a buzz amongst those with access to same is a page in which the deal proposes to offer nearly $4 Million in Bonuses for the closing of the sale! Worse than that, the names of the parties who would received said bonuses have, literally, been blacked out. Mind you, this is a Shareholder's report... and we're not quite sure how anyone with a financial interest in this deal should not be privy to such ponderous details. Think about it... The company was carrying an amazing debt load, and pretty much admits that it was in a lot more trouble than they have otherwise admitted publicly. I am rather puzzled as to how a company that was led to such poor results (with full acknowledgement of the ponderous economic issues surrounding us) would propose to offer nearly $4 million in various bonuses ($2,953,863 under the terms of a 'Liquidity Bonus Plan' and $886,159 listed as part of a 'Supplemental Bonus Plan' -- all with the names of the recipients BLACKED OUT) and feel that this was a proper use of their limited funds. And yet, that is but one of a number of questions are arising and complicating an already difficult story to write.

Nearly $4M In Bonuses...
With Names Physically Blacked Out 

In addition to all this, information continues to pour into ANN about the difficulties that vendors, suppliers, customers and associates of Cirrus have encountered since the latter part of 2008 (when Wouters was in the process of jockeying for control of the company).

ANN has interviewed a number of parties that allege a pattern of deception, late (very) payments, broken promises, 'unfair' business practices, contractual breaches, and other questionable activities involving Wouters, Vice President of Marketing Todd Simmons, COO Pat Waddick, and Co-Founder Dale Klapmeier. Additional details about recent legal actions and actions that are anticipated suggest that even with a sale on the horizon, that Cirrus' difficulties may be far from over.

The sale has a deadline (that may be extended by mutual agreement) of July 30th, 2011... but still must pass muster by the continued inspection of representatives of CAIGA as well as possible Federal oversight... which may be more difficult than Wouters has alleged. At least four lawmakers (Two Senators, Two Congressmen) have indicated some level of interest in examining details of this sale/merger... which may delay a sale or make it impossible to conclude... especially in regards to some recent ITAR/Tech Transfer issues that have been raised in recent days with IP that Cirrus may attempt to sell to CAIGA -- and for which its original inventor/manufacturer reports that Cirrus may not have the right, regardless of Federal issues, to do so.

ANN continues to attempt to engage Cirrus on these and other issues to no avail. The most recent attempt resulted in Cirrus notifying ANN that they would not be honoring the maintenance plan for our airplane (the same plan confirmed positively the day before with applicable personnel... UNTIL the matter was reportedly discussed with CEO Brent Wouters), until ANN agreed to "all of Mr. Wouters' terms." Sadly, this is not the worst of the actions taken against ANN since this investigation got underway in earnest last year. Regardless; ANN remains firm in our belief that the ultimate arbiter of whether or not the Cirrus/CAIGA merger/sale is a good or bad deal will depend heavily on how honestly and ethically the company (Cirrus) has been in the years leading up to the sale with its critical partners and suppliers -- and how honest they have been in communicating all this to their counterparts at CAIGA.

Much more info to follow...

FMI: www.cirrusaircraft.com, www.pmddtc.state.gov/regulations_laws/itar_official.html