FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ___________ to ___________
Commission file number 0-7390
Aero Systems Engineering, Inc.
(Exact name of registrant as specified in its charter)
Minnesota 41-0913117
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
358 East Fillmore Avenue, St. Paul, Minnesota 55107
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 612-227-7515
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No ____
As of September 30, 1996, 2,551,717 shares of common stock, par value $.20 per
share, were outstanding.
AERO SYSTEMS ENGINEERING, INC.
(Subsidary of Celsius, Inc.)
Form 10-Q
Quarter Ended September 30, 1996
Page
----
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis
of Financial Condition and Results
of Operation 8
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 11
Signatures 11
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius, Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
ASSETS 1996 1995
------ ------------- ------------
(Unaudited) (Note)
(000's omitted, except share data)
CURRENT ASSETS
Cash $ 29 $ 141
Accounts Receivable, net 5,326 7,374
Costs and Estimated Earnings in
Excess of Billings on
Uncompleted Contracts 4,854 7,678
Inventories
Materials and Supplies 691 780
Projects in Process 520 631
Prepaid Expenses 22 183
Deferred Income Tax Benefit 502 502
Income Tax Receivable 103 103
------- -------
Total Current Assets 12,047 17,392
LONG TERM ASSETS
Land 486 486
Buildings 3,025 3,025
Furniture, Fixtures, & Equipment 6,107 5,577
Wind Tunnels & Instrumentation 2,595 2,270
Building Improvements 1,294 1,255
------- -------
13,507 12,613
Less Accumulated Depreciation 7,178 6,431
------- -------
Property, Plant, and Equipment, net 6,329 6,182
Investments 465 465
Non-Compete Agreement, net 96 137
------- -------
Total Long Term Assets 6,890 6,784
Total Assets $18,937 $24,176
======= =======
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsuis, Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)
September 30, December 31,
LIABILITIES 1996 1995
----------- ---------------------------
(Unaudited) (Note)
(000's omitted, except share data)
CURRENT LIABILITIES
Current Maturities of
Capital Lease Obligations $ 90 $ 27
Current Maturites of Long-Term
Debt to Affiliated Companies 800 800
Notes Payable - Banks 5,351 4,930
Notes Payable 0 127
Accounts Payable:
Trade 1,567 2,878
Affiliated companies 194 118
Billings in Excess of Costs and Estimated
Earnings on Uncompleted Contracts 197 1,972
Accrued Warranty and Losses 708 702
Accrued Salaries and Wages 846 765
Income Taxes Payable 3 3
Other Accrued Liabilities 1,170 1,454
------- -------
Total Current Liabilities 10,926 13,776
OTHER LIABILITIES
Deferred Revenue 465 465
Deferred Income Taxes 502 502
Long Term Debt to Affiliated Company,
Less Current Maturities 1,200 2,000
Capital Lease Obligations,
Less Current Maturities 535 255
STOCKHOLDERS' EQUITY
Common Stock - Authorized 3,000,000
Shares of $.20 Par Value; Issued
2,551,717 on June 30, 1996
and December 31, 1995 510 510
Additional Contributed Capital 517 517
Retained Earnings 4,282 6,151
------- -------
Total Stockholders' Equity 5,309 7,178
------- -------
Total Liabilities and
Stockholders' Equity $18,937 $24,176
======= =======
Note: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
<TABLE>
<CAPTION>
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited, 000's omitted)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
------------------------- -------------------------
<S> <C> <C> <C> <C>
Earned Revenue $ 4,680 $ 7,178 $ 15,803 $ 17,613
Cost of Earned Revenue 4,026 5,684 12,260 13,514
-------- -------- -------- --------
Gross Profit 654 1,494 3,543 4,099
Operating Expenses 1,461 1,439 4,785 4,264
-------- -------- -------- --------
Operating Profit(Loss) (807) 55 (1,242) (165)
Other Income (Expense)
Interest Income 1 6 5 48
Interest Expense (204) (98) (578) (510)
Other (2) (54) (3)
-------- -------- -------- --------
(203) (94) (627) (465)
-------- -------- -------- --------
(Loss) Before Income Taxes (1,010) (39) (1,869) (630)
Income Tax Expense (Benefit) -- -- -- --
-------- -------- -------- --------
Net (Loss) $ (1,010) $ (39) $ (1,869) $ (630)
======== ======== ======== ========
NET LOSS PER SHARE $ (0.39) $ (0.02) $ (0.73) $ (0.25)
======== ======== ======== ========
Dividends per Share None None None None
</TABLE>
<TABLE>
<CAPTION>
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, 000's omitted)
Nine Months Ended
September 30,
1996 1995
------------------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (Loss) $(1,869) $ (630)
Adjustment to reconcile net income (loss)
to net cash provided (used) by
operating activities:
Depreciation and Amortization 788 769
(Increase) Decrease in Assets:
Accounts Receivable 2,048 (83)
Cost and Estimated Earnings
in Excess of Billing on
Uncompleted Contracts 2,824 (693)
Inventories 200 (48)
Prepaid Expenses 161 63
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses (1,432) (722)
Billings in Excess of Costs and
Estimated Earnings on
Uncompleted Contracts (1,775) 104
------- -------
Net Cash Provided (Used) by
Operating Activities 945 (1,240)
------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital Expenditures (490) (528)
Payment Received on Note Receivable -- 77
------- -------
Net Cash Used in Investing Activities (490) (451)
------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Net Borrowings under Line of
Credit Agreement 421 2,256
Payment of Note Payable (127)
Principal Payments under Capital
Lease Obligations (61) (21)
Principal Payments on Borrowings
From Affiliates (800) (800)
------- -------
Net Cash Provided (Used) by
Financing Activities (567) 1,435
------- -------
NET CHANGE IN CASH (112) (256)
CASH AT BEGINNING OF YEAR 141 310
------- -------
CASH AT END OF QUARTER $ 29 $ 54
======= =======
</TABLE>
AERO SYSTEMS ENGINEERING , INC. -- CONSOLIDATED
(SUBSIDIARY OF CELSIUS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, 000'S OMITTED)
SEPTEMBER 30, 1996
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting solely of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine-month period ending
September 30, 1996 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1996. For further
information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K
for the year ended December 31, 1995.
NOTE B - CONTRACTS IN PROCESS
Information with respect to contracts in process follows:
September 30, September 30,
1996 1995
------------- -------------
Costs Incurred on Uncompleted
Contracts $24,119 $34,384
Estimated Earnings Thereon 8,011 9,925
------- -------
Total Earned Revenue on
Uncompleted Contracts 32,130 44,309
Less Billings Applicable thereto 27,473 37,745
------- -------
$ 4,657 $ 6,564
======= =======
Included in Accompanying Balance
Sheet Under Following Captions:
Costs and Estimated Earnings
in Excess of Billings on
Uncompleted Contracts $ 4,854 $ 7,416
Billings in Excess of Costs
and Estimated Earnings on
Uncompleted Contracts 197 852
------- -------
$ 4,657 $ 6,564
======= =======
NOTE C - CONTINGENCIES AND COMMITMENT
Letter of Credit
Standby letters of credit totaling $ 5,838,592 were outstanding
on September 30, 1996 to various customers in exchange for down
payments or warranty performance bonds.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Financial Condition
Third quarter 1996 (All dollar amounts are in thousands)
Worldwide revenue for the third quarter 1996 totaled $ 4,680 which was a 35%
decrease from $ 7,178 in the third quarter of last year. Net loss after taxes
for the third quarter was $ 1,010 which was an increase of $ 971 as compared to
the third quarter loss of last year. Net loss for nine months was $ 1,869 as
compared to the loss of $ 630 for last year.
The revenue decrease was attributable to a decrease in new orders during the
year from airlines research institutions, and government agencies. Additionally,
the cancellation of a major contract by the U. S. Governmental agency NASA
during the first quarter reduced revenues expected for 1996.
Backlog of orders was $ 11,973 as compared with $ 31,973 at the end of the third
quarter of the previous year. This 63% decrease was related to a cancellation of
a large wind tunnel contract in February 1996 by NASA, and that additional new
orders have not materialized during 1996.
Cost of earned revenue for the third quarter, which includes manufacturing and
engineering costs, was 86% as compared to 79% during the same period of last
year. The increase is a result of lower project margins, several project
overruns, and additional costs which were incurred to complete projects. For the
nine month period, cost of earned revenue was 78% as compared to 77% for the
same period of last year.
The Company recognizes revenue using the percentage of completion method for its
long-term contracts. Estimates of revenues earned and expenses to be incurred to
complete the contracts are made in conjunction with the preparation of the
quarterly financial statements. However, final determination of the
profitability of the contracts are subject to settlement of any final claims
which may develop at the time the completed contract is accepted by the customer
as well as risks inherent in estimates which are made during the course of the
contract work.
Selling, general and administrative expenses of $ 1,461 was 31% of revenues
during the third quarter as compared to $ 1,439 and 20% during the same period
of last year. This increase of $ 22 or 1.5% was due to a slightly higher level
of marketing activity and contract proposal preparations. For the nine month
period, selling, general and administrative expenses were 30% of revenues as
compared to 24% for the same period of last year.
Research and development expenses were $ 111 during the third quarter as
compared to $ 269 in the same period in 1995. This decrease of $ 158 or 59%
reflects that during 1995, a higher level of expenditures were necessary to
initially develop the new ASE2000 data acquisition computer system. For the nine
month period, research and development expenses were $ 333 as compared to $ 731
for the same period of last year. During the remainder of 1996, R&D will be used
for additional enhancements to the ASE2000 in order to maintain a competitive
and leadership role in the marketplace.
Capital expenditures were $ 490 as compared to $ 528 for the same period of last
year. In addition, the Company entered into several capitalized leases during
the quarter aggregating $90 for the quarter and $404 for the nine month period.
It is expected that for the remainder of 1996, additional capital expenditures
will be used to enhance the AeroTest Laboratory capabilities.
Interest expense of $ 204 was incurred during the quarter as compared to $ 98
from the same period in the prior year. The average rate of interest on the
borrowings has increased slightly and the average amount of borrowings
outstanding has increased during the third quarter as compared to the first six
months of the year. For the nine month period, interest expense was $ 578 as
compared to $ 510 for the same period of last year.
Accounts receivable at the end of the third quarter was $ 5,326 as compared with
the year end balance of $ 7,374. This decrease of $ 2,048 was the result of
collecting several large receivables and many of the smaller outstanding
receivables.
Accounts payable and accrued expenses at the end of the third quarter decreased
$ 1,432 or 24% as compared to the year end balance. This was primarily due to
reduced amounts owed to vendors on current projects because of the lower number
of projects being worked on.
Notes payable to banks balance was $ 5,351 as compared to the year end balance
of $ 4,930 which is an increase of $ 421 or 9%. This increase is primarily the
result of a lower level of new projects that generated cash to support repayment
of long term debt.
Costs and estimated earnings in excess of billings on uncompleted contracts at
the end of the third quarter decreased $ 2,824 or 37%, to $ 4,854 as compared
with the year end balance. The Company recognizes profit on long-term projects
on the percentage of completion basis, which permits earned revenue to be
recognized prior to the time that progress payments are billed. When this
occurs, amounts are added to this asset account for the recognition of earned
revenue prior to the billing of progress payments. The decrease since year end
is due to completion of contracts and final billings related to the completed
contracts. Billings are a function of contract terms and do not necessarily
relate to the percentage of completion of a project.
The company operates on a global basis and during an average year, generates 50%
- - 65% of its revenues from international customers. This trend has continued for
the last five years as foreign airlines and government agencies purchase
products that ASE designs and produces. Most of the Company's contracts are
denominated in U.S. dollars, however a few of them are denominated in the
customer's local currency. Therefore, the company has entered into several
foreign exchange forward contracts having maturities within the next eighteen
months. The face amounts represent U.S. dollar equivalents of a non-U.S. dollar
denominated forward contract. The amounts at risk are not material and the
company has the financial ability to generate cash flows to offset the expected
gain or losses when the contracts mature.
The Company has consistently relied upon bank credit lines during recent years
as a source of its working capital resources and liquidity. Funds under these
lines of credit are actually provided by Celsius, Inc. and ultimately are
guaranteed by AB Celsius Finance, the financial division of Celsius AB, a
Swedish corporation. Celsius, Inc., a United States corporation, is a
wholly-owned subsidiary of Celsius Invest which is wholly-owned by Celsius AB.
Celsius, Inc. owns approximately 80% of the outstanding shares of common stock
of ASE. A first security interest in all assets of ASE has been granted to
Celsius AB and a fee is paid through Celsius, Inc.
ASE currently has bank lines of credit which enable it to borrow up to a total
of $6,000. As of September 30, 1996 $ 5,351 was used and $ 649 was available.
The Company believes that these bank lines of credit, along with cash flows from
continuing operations, are adequate to support the Company's cash needs for the
immediate future.
Highly competitive market conditions have minimized the effect of inflation on
both the contract prices and the cost of the Company's purchased materials.
Productivity improvements and cost reduction programs have largely offset the
effect of inflation on other costs and expenses.
Looking ahead throughout the remainder of 1996, the marketplace has been weak
during the year and the company has not been successful in winning new projects.
However several commercial aircraft test projects are expected to be contracted
during the remainder of 1996 and early 1997 as international airlines invest in
facilities to support new aircraft purchases. ASE has also continued its ongoing
productivity and process improvements in order to lower operating costs. ASE has
initiated the process of becoming ISO 9001 certified and the majority of this
effort will be concluded during the next six months.
AERO SYSTEMS ENGINEERING, INC.
(A Subsidiary of Celsius, Inc.)
PART II - OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) No current reports on Form 8-K were filed during the quarter
ended September 30,1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 7, 1996
/s/ Charles L. Rooks
Charles L. Rooks
(Chief Financial and Accounting Officer)
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 29
<SECURITIES> 465
<RECEIVABLES> 5,326
<ALLOWANCES> 0
<INVENTORY> 1,211
<CURRENT-ASSETS> 12,047
<PP&E> 6,329
<DEPRECIATION> 7,178
<TOTAL-ASSETS> 18,937
<CURRENT-LIABILITIES> 10,926
<BONDS> 0
0
0
<COMMON> 510
<OTHER-SE> 517
<TOTAL-LIABILITY-AND-EQUITY> 18,937
<SALES> 15,803
<TOTAL-REVENUES> 15,803
<CGS> 12,260
<TOTAL-COSTS> 17,045
<OTHER-EXPENSES> 49
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 578
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