Thielert’s Troubles: Criminal Investigations, and Insolvency

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Centurion 2 engine(click to view full) On the face of it, Thielert AG of Hamburg appeared to be a well-positioned company, leveraging respected German engineering to modify a Daimler diesel engine for use in aircraft. The ability to use “heavy” fuel offers light civilian aircraft a convenient, less-expensive option, and can also be an important asset for armies who want a single fuel supply chain for land vehicles and UAVs. That commonality offers lifetime cost savings of its own, less operational risk, and more operational flexibility – which is why the US Army’s flagship MQ-1C SkyWarrior UAV uses Thielert’s 135 hp Centurion engine. By many accounts, the engine itself performs well, though some reports say the engines have some reliability issues and suffer from poor field support. The aero-diesel niche has few competitors at the moment, but several new competitors are expected to unveil products over the next year. Those alternative options have now become a more urgent matter, given recent developments in Germany. In brief, Thielert is facing advanced stage criminal investigations for serious accounting fraud, providing false evidence, and more. The alternative explanation is that a long list of firms including General Atomics, Northrop Grumman, and Lockheed Martin […]
Centurion 2

Centurion 2 engine
(click to view full)

On the face of it, Thielert AG of Hamburg appeared to be a well-positioned company, leveraging respected German engineering to modify a Daimler diesel engine for use in aircraft. The ability to use “heavy” fuel offers light civilian aircraft a convenient, less-expensive option, and can also be an important asset for armies who want a single fuel supply chain for land vehicles and UAVs. That commonality offers lifetime cost savings of its own, less operational risk, and more operational flexibility – which is why the US Army’s flagship MQ-1C SkyWarrior UAV uses Thielert’s 135 hp Centurion engine. By many accounts, the engine itself performs well, though some reports say the engines have some reliability issues and suffer from poor field support. The aero-diesel niche has few competitors at the moment, but several new competitors are expected to unveil products over the next year.

Those alternative options have now become a more urgent matter, given recent developments in Germany. In brief, Thielert is facing advanced stage criminal investigations for serious accounting fraud, providing false evidence, and more. The alternative explanation is that a long list of firms including General Atomics, Northrop Grumman, and Lockheed Martin each left millions of dollars in supplier invoices unpaid for over a year.

Regardless of which explanation is true, Thielert faced financing needs that the firm’s own April 10/08 release described as “an urgent liquidity crisis.” As a first step, the founder tried to sell his entire stake to a Russian hedge fund. Even so, the firm’s own statements confirm that much more cash will be needed, and shareholder lawsuits enabled by German court rulings that have voided their financial reports could drive that figure higher.

The latest developments are three-fold: the dismissal of the CEO and CFO for cause in light of criminal investigations, the collapse of the new investors consortium, and the firm’s filing for bankruptcy. Meanwhile, the US Army says it was unaware of the situation at Thielert, which raises questions concerning its contractor General Atomics’ communications and program risk transparency with the US military.

Situation Summary

Thielert

The investigation against Thielert is currently being pursued in its home town of Hamburg and in Kiel, and court rulings to date have voided the firm’s financial statements from 2003-2005. Nor is this the extent of the possible sanctions. Allegations include the use of ghost invoices (i.e. false orders) to obtain bank credit and pump up the stock’s value for share offerings: “Verdachts des gemeinschaflichen versuchten Betruges in einem besonders schweren Fall [trans. “suspicion of Attempted Joint Fraud, an especially severe case”] under Sec. 283 Abs 1&3; 22 Abs. 1; and 25 Abs. 2. If convicted, the Comrod precedent suggests that the punishment could be as serious as 5-7 years in prison. Another possible consequence is a raft of potential civil lawsuits from shareholders, who could be able to point to false prospectus statements as justification for their claims against the firm.

The Hamburg investigation was kicked off by a package from an unknown whistleblower who obviously had access to corporate documents. That October 2006 complaint placed the total investments by all shareholders at EUR 128.4 million, and others have become investors since then.

Thielert’s response was to submit documentation alleging that their primary whistleblower suspect Marco Hahn, who was also suing Thielert, had not been truthful with prosecutors. Unfortunately, for Thielert, the authorities carefully examined the firm’s submitted documentation, then reached 2 conclusions. One was that Thielert’s allegations were groundless, opening an avenue for a “Verdachts der gemeinschaflichen falschen Verdachtigung” [trans. along the lines of “jointly casting false suspicions on others”] investigation under Sec. 164, 25 Abs. 2 StGB. Worse, they believed that the documents Thielert submitted were themselves false, leading to a second investigation on charges of falsifying evidence, or “Verdachts der gemeinschaflichen Urkundenfalschung” under Sec. 267, 25 Abs. 2 StGB.

In addition to these legal issues, if a substantial amount of Thielert’s orders turn out to be illusory, the company could find itself with a more tenuous cash position. See the Timeline section’s April 10/08 entry for more information.

Meanwhile, competition is beginning to enter the turbo-diesel aviation engine niche. Thielert’s major customer Diamond Aircraft of Austria is designing its own heavy fuel aviation engine (see Nov 7/07 timeline entry); rumors place its formal unveiling at the May 2008 ILA in Berlin. Textron’s Lycoming is also said to be working on a turbo-diesel engine option, and UK small-engine company Cubewano recently released details of a 30cc rotary engine designed to operate on heavy fuels and power unmanned aerial vehicles (UAVs).

DID contacted MQ-1C SkyWarrior manufacturer General Atomics regarding these issues, in hopes of gaining greater clarity re: the firm’s position concerning a supplier facing such serious charges, their allegedly unpaid debts to Thielert, and contingency plans in case legal proceedings or financial issues cut off the supply of engines to the program. Rather than answer these questions, the firm responded by saying only that:

“We’d prefer not to comment… Aircraft engines are still being delivered on time and performing as advertised.”

American Defense Contractors: Unpaid Bills?

old school accounting

According to the 72 page documentation submitted by the original whistleblower to the Hamburg prosecutor’s office, and to Germany’s SdK small investors association, several American defense contractors were among the firms that owed Thielert millions of Euros for invoices that had not been paid in over a year.

The May 2005 report purports to be from the firm’s auditor BDO Deutsche Warentreuhand AG, and was reportedly requested by German banks who had loaned the firm money in October 2004. The SdK initially posted this documentation on their site, but Thielert threatened legal action. The SdK withdrew the document rather than fight the legal case, but went on to issue a December 2006 advisory based on this document and their own investigations. Its figures match the copy of the original whistleblower’s documentation DID received from our sources. According to these reports, major defense contractors with large unpaid bills included:

* General Atomics. BDO does record total payments of EUR 131,351.19 from General Atomics between December 2003 and April 2005. Nevertheless, in December 2003, Thielert apparently invoiced the firm for EUR 2.12 million. This amount remained unpaid by April 2005, and other invoices on Thielert’s books ran the total of unpaid invoices to EUR 2,225,764.31.

CORP_General_Atomics_Logo_BW.gif

DID asked General Atomics about this issue directly. The firm wrote back:

“It is GA-ASI’s normal business practice to pay invoices when billed. Payment can sometimes be delayed slightly if we do not have all required/correct information from the supplier, but I can confirm that all invoices mentioned below were paid in full many years ago.”

The firm refused to provide more detailed information, either to confirm that the amount paid matched the EUR 2+ million claimed, or to explain when these payments were made.

Other firms listed in the BDO and SdK documents included:

* Lockheed Martin. In December 2003, Lockheed Martin was also invoiced, for EUR 1,081,009.92. This amount was never paid, though subsequent invoices in May 2004 and December 2004 amounting to EUR 157,248.66 were both paid within 3 months. Due to fortunate exchange rate shifts between the invoices and payments, Thielert’s unpaid invoices from Lockheed amounted to EUR 1,078,169.56 by April 2005, but this still leaves a reported balance of more than EUR 1 million in debts that were left unpaid for at least a year and a half.

* Northrop Grumman Space & Mission Systems. The BDO report says that Thielert invoiced them for EUR 1,103,247.86 in November 2003, and another EUR 566,897 in March 2004. No payments were received by April 2005, leaving reported balances of EUR 1,670,144.86 for well over a year. Northrop Grumman agreed to look into this issue at DID’s request, and eventually responded with: “We have cooperated with the authorities reviewing this matter and will not speak publicly at this time.”

On the civilian side, the BDO report notes that Thielert invoiced Ford Automotiv Sanayi A.S. for EUR 521,456 in August 2004, and EUR 1,079,379.96 in December 2004. These amounts were never paid, though September 2004 and March 2005 invoices amounting to EUR 74,266 were both paid within a month. A separate email from employees of Ford Turkey, which DID is working to confirm, states that by May 2006, when they stopped working with Thielert, the firm had paid all invoices received. The 3 invoices were detailed, and totaled EUR 109,916.

DID also contacted the Canadian firm 21st Century Airships, who responded:

“We purchased and paid in full for 3 engines from Thielert in 2004. We have never ordered engines for Euro 400,000 from Thielert nor have we received an invoice for that amount. We were recently contacted by a German police officer who is investigating fraud at Thielert. He was asking the same questions.”

Despite these significant discrepancies, BDO continued working as Thielert’s auditor until they were replaced by Ernst & Young in August 2007.

Ernst & Young is now responsible for the 2007 annual report, which has been delayed. Thielert has set the end of April 2008 as the delivery date, and has asked Ernst & Young to look at the 2003-2005 books again in light of a German court ruling that declared them to be void. The key issues to look for in Ernst & Young’s report will be its timely delivery as promised, and whether or not the auditor issues an “unqualified opinion” (i.e. professional certification of the financial statements’ validity, without reservations).

Timeline: Charges & Key Events

MQ-1C

SkyWarrior Block 1
(click to view full)

In order to give readers a better sense of how this situation has developed, the timeline will be presented in sequential order with the oldest item listed first, rather than using DID’s standard “most recent items first” format…

October 2004: Thielert receives EUR 24.3 million in working capital loans from a consortium of banks. Source [PDF].

April 2005: The banks who gave the October 2004 loans want a special report about the receivables. This triggers the request for a report from BDO (see May 27/05). Source [PDF, Deutsch].

May 27/05: Thielert’s auditor BDO Deutsche Warentreuhand AG delivers a report at the CFO’s request. It shows massive discrepancies between the amounts Thielert has booked as invoices to key civilian and defense industry customers, and actual cash received from those customers between January 2003 – April 2005.

Major American defense contractors General Atomics, Lockheed Martin, and Northrop Grumman are all singled out as significant deadbeats by the report, which assumes that all booked invoices are genuine. This is the report whose excerpts later forms the majority of the 72 page whistleblower’s documentation package, which launches the subsequent legal investigations.

The SdK’s December 2006 report later says that only 0.03% of Theilert’s receivables are found to be verifiable, adding that “Thielert stellt den Banken Kreditruckzahlung durch Erlose des Börsengangs in Aussicht.” In other words, the bank’s loan payback requests are stayed by the prospect of an impending IPO in late 2005.

Aug 8/05: General Atomics Aeronautical Systems, Inc. in San Diego, CA wins a $214.4 million cost-plus-incentive-fee contract for research, development, test and evaluation of the Extended Range Multi Purpose Unmanned Aerial Vehicle system (ERMP UAV), which will become the MQ-1C SkyWarrior. The system will use Thielert’s Centurion engine, which is one of the few available aeronautical turbo-diesel rotary engines that can use “heavy fuels.”

This initial contract with General Atomics will buy 17 Sky Warrior aircraft, and 7 One System Ground Control Stations. Total production could rise to 540 aircraft if expected follow-on orders come through after this System Design & Development contract is complete, but there is no commitment to that figure, and the project will eventually end up locked in a tug of war with the US Air Force. See “Warrior ER/MP: An Enhanced Predator for the Army” for the complete story.

The opposing Northrop Grumman consortium that submitted the “Hunter II” design also has some experience with heavy fuel aeronautical engines. A push/pull pair of 3-cylinder, 58 hp heavy fuel engines designed in conjunction with APL of Germany powers their MQ-5B Hunter UAV upgrade, which also includes bigger, fuel-carrying wings, hard points for pylons/weapons like the Viper Strike, and an updated avionics and control suite. The MQ-5B first flew in July 2005, and was deployed to the front lines a year later.

November 2005: IPO, as Thielert AG begins trading on the Frankfurt exchange. The October 2004 bank loans are paid back from the proceeds. Source [PDF, Deutsch].

March 13/06: Thielert AG acquires the PMA and aircraft engine manufacturer Superior Air Parts, Inc. (SAP) based in Coppell near Dallas, Texas, USA. SAP is a leading producer of engine spare parts for small piston-engined aircraft, and also manufactures aircraft engines. Report.

Oct 5/06: Hamburg’s prosecutor receives a 72-page criminal complaint that includes internal company information, and a report from firm auditor BDO. It alleges that the firm has written “ghost invoices” for imaginary orders, in order to raise revenue and profit reports, secure loans, and drive up the share price.

Germany’s SdK small shareholder association receives the same letter on the same day, and makes this letter public on their website. The SDK also issues a press release telling investors to be cautious. SdK release [Deutsch] | Finanz Nachrichten report [Deutsch] | Godmode Trader report [Deutsch].

Germany’s Bilanzpolizei (regulatory/ financial enforcement) stops their investigation of the firm’s annual reports because a criminal investigation is begun by the Hamburg prosecutors’ office Source [PDF, Deutsch].

Oct 23/06: Thielert issues an investor relations release. It says that:

“Thielert AG instructed BDO Deutsche Warentreuhand AG with a reconciliation of the development of trade receivables of 2004 with company books. The reconciliation is now on hand signed by BDO. BDO came to the conclusion that [EUR] 2.296m of the original [EUR] 18.3m Euro trade receivables posted as of December 31, 2004 remain on the books list of up-to-date figures of October 20, 2006. It refers to the value after provisions and excluding percentage of completion* receivables. However, there has been a minor correction of [EUR] 13k compared to the [EUR] 2.309m published two weeks ago…

In accordance with the so-called percentage of completion method prescribed by the International Financial Reporting Standards (IFRS), such products as have been ordered but are still unfinished are to be reported under accounts receivable, despite the fact that no invoice may have been issued yet and, as such, no payment can have been received.”

The SdK’s December 2006 report [PDF] adds that this reconciliation is limited, and is not aimed at verifying the authenticity of the receivables.

November 2006: Hamburg’s prosecutor begins an official investigation of Thielert, on the grounds that the firm attempted to obtain bank loans and stock investors under false pretenses. “Verdacht des Kreditbetruges” translates as “suspicion of bank/credit fraud.” Dow Jones report [Deutsch].

This month, Thielert also goes to the prosecutor’s office in Kiel, claiming that disgruntled investor Marco Hahn submitted false documents and providing them with documentation of their own aimed at proving this allegation. At this time, Mr. Hahn is engaged in a lawsuit against Thielert that seeks EUR 23 million in damages.

December 2006: The German SdK small investors’ association send a report to its members concerning Thielert: Verdacht der Bilanzmanipulation erhartet: Thielert AG [PDF, Deutsch]. It is a summary of SdK’s conclusions, based on the whistleblower documents and their own investigations. The document points to a number of huge discepancies in Thielert’s books, questions the validity of the firm’s financial statements, and sees liquidity problems ahead.

February 27/07: A search warrant is executed against Mr Frank Thielert’s private address, as well as the firm. More than 40 people are involved, and many documents are taken away. Hamburg Abendblatt report [Deutsch].

Spring 2007: Kiel’s prosecutor opens a second investigation against firm founder Frank Thielert and Chairman of the Board Georg A. Witthun, L.LM. See Der Spiegel report [Deutsch]. The legal issues are threefold:

* “versuchten gemeinschaftlichen Betruges” – Joint Attempted Fraud

* “gemeinschaflichen falschen Verdachtigung” – Joint casting of false suspicions [against Marco Hahn].

* “versuchten gemeinschaftlichen Urkundenfalschung” – Joint Attempted Falsification of Evidence, on the grounds that Thielert’s accusation that Marco Hahn falsified documents is not only proven to be untrue, but that the documents provided by Thielert were themselves false.

AIR Cessna 172 IqAF

IqAF Cessna 172
(click to view full)

June 27/07: A deal is announced between Thielert Aircraft Engines GmbH and Cessna Aircraft Co. From mid-2008, Cessna’s popular Skyhawk 172 will have its Turbo-Diesel option fly with Centurion 2.0 engines. Source.

July 11/07: Thielert AG places 1,300,600 shares with “international institutional investors,” at EUR 21.75 per share. This equals 6.5% of ordinary share capital, and net proceeds after issuance costs with Cazenove AG are around EUR 27.5 million. This revenue is “mainly used to repay bank loans and overdrafts and to finance the working capital.” Q3 2007 interim financial report | Thielert release.

Aug 1/07: Thielert holds its annual meeting:

“The SDAX-listed company Thielert AG held its annual general meeting on 01 August 2007 in Hamburg. The 194 shareholders present were able to look back on a successful financial year in 2006, a year that was defined by investments into the future. Nevertheless, the company recorded a growth in turnover of 59.5 percent over the same period. At the vote, the shareholders approved the board of directors and the supervisory board by a very large majority. In addition, Ernst & Young AG, Hamburg was appointed as new financial auditor.”

Aug 15/07: Kiel’s prosecutor’s office secure search warrants for Thielert GmbH, an the private residences of Mr. Frank Thielert, and the offices and private residences of Mr. Georg Wittuhn. Boerse.ARD.DE Sept 6/07 report [Deutsch].

Sept 30/07: The interim financial report issued as of this date places Thielert AG’s cash and cash equivalents at the end of the reporting period at EUR 742,000, sharply down from the EUR 4.5 million a year previous, despite the July 2007 share offering that brought in EUR 27.5 million. Source.

Nov 7/07: Thielert’s big customer Diamond Air announces an effort to build its own turbo-diesel engine. Subsequent reports indicate that it will be unveiled in May 2008 at the ILA event in Berlin, Germany:

“In collaboration with Austro Engine GmbH and Diamond Aircraft Industries, whom both have their Headquarters in Wiener Neustadt, Austria, MB-technology GmbH (MBtech) in Germany and other distinguished partners, a 170 HP Turbo Diesel Engine with a maximum torque of 570Nm has made its initial test flight in a DA40 Diamond Star. Christian Dries, CEO of Diamond Aircraft Industries and Sören Pedersen, Managing Test Pilot at DAI carried out the maiden flight together. They were both enthralled. The engine showed high performance while also being economical. Through consequential implementation of MBtech developed combustion technology, in comparison to ‘normal’ engines, we succeeded in lowering the overall fuel consumption, employing identical performance, by 20%. These results make this engine a very attractive option for unmanned aircraft (UAVs).

As the worlds’ biggest manufacturer of aircraft with diesel engines, it was obvious that Diamond Aircraft Industries would strive to perfect a tried and tested new generation of JetA1 engines for the general aviation.”

Textron’s subsidiary Lycoming is also reportedly working on a turbo diesel aircraft engine.

DA42 MPP

DA42 MPP
(click to view full)

Jan 28/08: The Venezuelan government orders 6 DA42 Multi Purpose Platform aircraft equipped with Polytech Cobalt 350 turret-cams, which include daylight and thermal imagers coupled with the Scotty SATCOM downlink. Diamond’s DA42 TwinStar flies with Thielert Centurion 1.7 engines, though a new version is also available with Lycoming IO-360-M1A engines that use standard aviation fuel. Diamond’s release adds that:

“The aircraft will be delivered ready to fly complete with sensors and certification… Diamond Airborne Sensing already has a long list of potential customers interested in operating this system.”

An “optionally piloted” DA42 reconnaissance variant known as the OPALE is offered on the global market, in conjunction with Rheinmetall Defence. According to Thielert, Israel’s Aeronautics Defence Ltd. also offers the unmanned-only Dominator 2 “strategic” UAV based on this airframe/ engine combination.

Feb 28/08: Thielert press release:

“A shareholder of Thielert AG had filed an action of avoidance and to declare the nullity [Nichtigkeitsfeststellungs- und Anfechtungsklage] against the agenda items & underlying motions and resolutions on the occasion of the shareholders’ meeting of Thielert AG on August 1, 2007. The shareholder turned to the District Court Hamburg because she believed that she had not been informed sufficiently during the shareholders’ meeting. The District Court Hamburg served its decision of February 21, 2008, to Thielert AG on the evening of February 27, 2008. The resolutions of the ordinary shareholders’ meeting of Thielert AG of August 1, 2007, by which the actions of the members of the management board and of the supervisory board for the 2006 were ratified, were declared void. The District Court explained its decision by stating that the “statement of the fact in the form of keywords” was not able to clear all “information deficits”.

Beyond this, the action was dismissed. The entire costs of the legal dispute are to be borne by the suing shareholder herself…”

March 6/08: Thielert issues a press release confirming that a German court has declared the annual reports 2003, 2004 and 2005 to be void, on the grounds that their financial statements are unreliable:

“By decision of March 6, 2008, which the company received during the late afternoon, the District Court Hamburg declared the annual financial statements 2003, 2004, and 2005 of Thielert AG to be void. The court stated a breach of valuation provisions as the reason. Statements of the company in the answer to the complaint were rejected as late. The company was unable to substantiate its statements in time, because evidence is tied up in other proceedings… The company will lodge an appeal against the decision. In parallel proceedings before the District Court Chemnitz, the court extended the company’s deadline to provide statements for substantiation.”

March 12/08: AVweb reports that the American FAA has issued an emergency airworthiness directive (AD 2008-06-52) for Thielert Aircraft Engines GmbH (TAE) model TAE 125-02-99 engines with a serial number from 02-02-1500 through 02-02-2279, installed on some Cessna 172 and (Reims-built) F172 series (STC No. SA01303WI) airplanes and Diamond DA42 airplanes. The fix itself is not extensive, but it follows reports of in-flight engine shutdowns due to excessive vibration, which could crack the high pressure fuel line between the high-pressure pump and the fuel rail.

“Only 2.0 liter engines are affected and they’re in a total of 507 aircraft. Thielert is paying for the fix, which Wentzler said should take only an hour and involves installation of a new bracket on a fuel line.”

March 25/08: Thielert announces that its 2007 financial statements will be postponed to the end of April 2008, in order to allow audits and valuations of the 2003-2005 receivables:

“As a consequence of the declaration of nullity of the annual financial statements for the years 2003 to 2005, the company decided to mandate the accounting firm Ernst & Young AG Wirtschaftsprufungsgesellschaft Steuerberatungsgesellschaft, in addition to the audit of the 2007 annual financial statements, also with an assessment of the valuation of receivables of the previous years. This mandate that was now decided requires that the publication is postponed.”

April 8/08: Textron subsidiary Cessna Aircraft Company says that it is closing in on certification of the Cessna 172 Skyhawk TD, equipped with Thielert’s turbo-diesel engine:

“Once EASA certification is secured, Cessna will pursue type certification from the Federal Aviation Administration. Deliveries are expected to begin by mid-2008. Market interest in the new Skyhawk TD is very high; we plan to increase production in 2009 to meet the demand…”

Burning money

Burn rate concerns

April 10/08: See Sept 30/07 entry, and note the implications for the firm’s cash burn rate. Since banks will generally refuse loans unless a company can present an annual report with an auditor’s unqualified opinion of validity, it isn’t surprising to read in Thielert’s release that “Thielert AG is threatened by an urgent liquidity crisis…”

To resolve this issue, on April 4/08 an investor group of Sputnik Group Ltd., its subsidiary Pogan Invest Corp., Stichting Bewaarbedrijf Guestos (Fund Manager is Amsterdam-based Global Opportunities Capital Asset Management B.V., which has suspended fund redemptions until December 2008), and Butterfield Trust (Bermuda) Limited, and Butterfield Trust managed Drake Associates L.P. purchased all 2,653,552 of Frank Thielert’s shares, through his sole shareholder vehicle Thielert Vermogensverwaltung GmbH (TVV). The shares are bought at EUR 1 per share, rather than their currently traded value of over EUR 3.5. Immediately thereafter, TVV grants Thielert AG a subordinated loan equal to the proceeds of that sale, with repayment due on March 14/08. Frank Thielert/TVV also retains a call option. On March 28/10, he can decide to exercise that option for the sold shares at EUR 8 per share, subject to certain conditions.

To illustrate what that means, imagine that Thielert AG’s stock is trading at EUR 16 on March 28/10. Frank Thielert could exercise the option if the conditions are met, sell half of the shares to pay the option’s cost of EUR 8 per share, and keep about 1.325 million shares. The new investors listed above would make EUR 7 per share on this hypothetical transaction, or about EUR 18.6 million total profit on a EUR 2.65 million investment.

According to Thielert’s Board, however, this EUR 2.6 million cash injection falls far short of the company’s needs. They state that Thielert AG needs EUR 13.6 million just to cover operations until June 30/08. Actions to date and plans underway amount to EUR 9.7-13.6 million, and include:

* EUR 2.6 million loan from TVV/ Frank Thielert
* EUR 5.5 million credit lines from existing banks
* Conditional “stand-still commitments” with respect to existing credit lines
* EUR 1.6 million of bonds bought by the same set of investors that bought TVV’s shares. Another EUR 3.9 million in bonds may follow, subject to certain conditions.

The firm also plans to issue up to 21,192,130 new shares at EUR 1.15 per share (about EUR 24.4 million), with a commitment from the new investor group for 17.391 million shares/ EUR 20 million. The Board states that this would “cover the period until the end of the first quarter of 2009 when the management board expects the Company to generate positive cash flows.”

Frank Thielert is resigning as CEO, but will continue as COO; CFO Ms. Roswitha Grosser will also be replaced, if replacements can be found. Thielert release | Voting rights announcement, which suggests that many of the listed investors are cross-controlled.

April 23/08: Thielert’s AG press release:

“The supervisory board of Thielert AG on April 23, 2008 dismissed the management board members Frank Thielert and Roswitha Grosser for cause and extra-ordinarily terminated their service contracts. Basis are, among other things, explanations of the management board and information received by the supervisory board from the Hamburg Office of Criminal Investigation in connection with preliminary investigations against management board members of the company. It is to be assumed that the annual financial statements for the years 2003, 2004 and 2005 are probably incorrect and possibly void. Investors which had intended to support the company in the implementation of the planned restructuring package under certain conditions, have informed the company on April 23, 2008 that they are no longer willing to provide such support. [DID: emphasis added] The restructuring measures to deal with the company’s liquidity crisis, as mentioned in the disclosure announcement of April 9, 2008, therefore cannot be implemented as planned.”

The investors referred to here are the Russian Sputnik group et. al., mentioned in the April 10/08 entry as committed to buying another EUR 20 million worth of shares..

April 24/08: Thielert files for insolvency. Thielert release [English | Deutsch]:

“Today the executive board of Thielert Aircraft Engines GmbH, Lichtenstein, Saxony/Germany, has filed for the opening of insolvency at the county court Chemnitz concerning the assets of the company due to immediate illiquidity. Thielert Aircraft Engines GmbH is a full subsidiary of Thielert AG… Thielert Aircraft Engines GmbH aims for an insolvency plan proceeding. The insolvency plan shall be presented to the court and all creditors by the new appointed executive board and the interim insolvency administrator until the opening of the insolvency proceeding. A successful continuation of business in the insolvency plan proceeding is required. Only the German version [of this release] is valid for legal purposes.”

See also AvWeb | AvWeb Editorial | Bloomberg | Flight International

April 24/08: Reuters reports that Brig. Gen. Stephen Mundt, director of U.S. Army aviation, said he had been unaware of the situation facing Thielert until asked about it by a reporter at the day’s briefing. The statement raises questions regarding General Atomics communications and risk transparency with its key customer.

May 27/08: Thielert insolvency administrator Dr. Bruno M. Kubler discusses the current situation in a release, including some revelations with implications for customers like General Atomics. The statement notes that attempts are being made to keep Thelert as a an operating concern, with some flexibility shown by creditors and Frank Thielert may not be CEO, but he remains the personal holder of key permits and therefore remains involved. Meanwhile:

* German insolvency law does not permit the assumption of warranties or guarantees free of charge for products and services supplied prior to the declaration of insolvency. Parts supplied after insolvency can be warrantied, but the firm is in no position to do so. Dr. Kubler hopes that aircraft manuaturers will step in.

* Higher prices will be charged for engines and spares.

* Payment in advance is now required, but assurances are made re: delivery once payment is made.

* The firm’s #1 customer, Diamond Aircraft, has pushed for concessions and preferential deals with Thielert, using both private negotiations and public tacics. Relations are deteriorating, but the firms are still negotiating.

May 30/08: In “Diamond Aircraft Reengines Amidst Spat with Thielert,” Aviation Week reports that its biggest customer, Diamond Aircraft, may be looking to defect. Diamond CEO Christian Dries says 72 customer aircraft with Thielert engines sit waiting for parts, as do about 40 in-production aircraft. The insolvency administrator has apparently not helped the situation, and Diamond has now spent more than EUR 40 million to set up a direct competitor in Austro Engines.

AW reports that Austro expects imminent certification for the similar Austro AE300 engine, and has also applied for certification as an engine parts manufacturer – including parts for Thielert Centurion engines. The firm will need to climb some of the same learning curves, but the increased level of control over product quality makes for a very straightforward corporate decision. Diamond’s simultaneous venture into the parts market, while holding a large chunk of the engine-maker’s installed base in the face of poor support, also bodes ill for Thielert.

The sole bright spot for the firm is that General Atomics says Thielert has guaranteed shipments of MQ-1C SkyWarrior powerplants, and is sticking with the manufacturer despite the current allegations and insolvency proceedings.

Additional Readings & Sources

* DID thanks our German-speaking contributors for their help with this story, which has received very little attention thus far in the English language press.

* Leaked documents (September 2006) – Anzeige von Straftaten. Translates as “notice of criminal acts.” Includes BDO report of May 27/05. Not available yet online.

* SdK report (December 2006) – Verdacht der Bilanzmanipulation erhartet: Thielert AG [PDF]. Summary of SdK conclusions, based on the whistleblower documents and their own investigations. Sent to thousands of members in Germany. Authenticity confirmed by SdK.

* German Corporate Governance Codex, 2001. Includes the principal legal regulations for company management and the supervision of societies listed on the stock market. Thielert is listed on the Deutsche Borse’s SDAX, which is traded through the Frankfurt exchange.

* BusinessWeek – Thielert AG Financial Profile. Includes stock charts et. al.

* Thielert – Defence

* Thielert – Centurion Aircraft Engines site

* The Sputnik Group. Appears to be the central investment player among the new investors. As of April 14/08, their stake in Thielert is about 16.34%.

* DID FOCUS Article – Warrior ER/MP: An Enhanced Predator for the Army

* Rheinmetall Defence – Opale – Optional Piloted Surveillance and Reconnaissance System

* Cessna – Skyhawk Turbo Diesel

* Diamond Aircraft Industries. See also Diamond Airborne Sensing web site.

* AvWeb Insider (April 28/08) – Thielert: How Big a Mess and Can Anyone Fix It? Looks at the effect on the aerodiesel market generally, and mentions investigations that claim mechanical and reliability issues with Thielert’s diesels as well. These are reportedly accompanied by poor field support. “I find it difficult to understand how a company that was getting hammered for poor aftermarket support when it was solvent is somehow going to do better while insolvent… There have been reports of cylinder head cracking, unexplained stoppages, unrealistic labor allowances to change engines and parts and short TBO/TBR cycle times.”

* AVWeb Insider (March 14/08) – Are Diesels Really More Economical?.

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