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 June 30, 1997
( ) 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 June 30, 1997, 2,551,717 shares of common stock, par value $.20
per share, were outstanding.
<PAGE>
AERO SYSTEMS ENGINEERING, INC.
(Subsidary of Celsius, Inc.)
Form 10-Q
Quarter Ended June 30, 1997
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
Item 3 Not applicable
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 11
Signatures 11
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius, Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
ASSETS 1997 1996
--------- ---------
(Unaudited) (Note)
(000's omitted, except share data)
CURRENT ASSETS
Cash and cash equivalents $ 20 $ 135
Accounts Receivable, net 4,772 5,139
Costs and Estimated Earnings in
Excess of Billings on
Uncompleted Contracts 4,908 3,977
Inventories
Materials and Supplies 624 685
Projects in Process 329 407
Prepaid Expenses 0 96
Deferred Income Tax Benefit 467 467
Income Tax Receivable 100 100
--------- ---------
Total Current Assets 11,220 11,006
LONG TERM ASSETS
Land 486 486
Buildings 3,025 3,025
Furniture, Fixtures, & Equipment 6,250 6,131
Wind Tunnels & Instrumentation 2,650 2,591
Building Improvements 1,298 1,298
--------- ---------
13,709 13,531
Less Accumulated Depreciation 7,876 7,363
--------- ---------
Property, Plant, and Equipment, net 5,833 6,168
Investments 0 496
Non-Compete Agreement, net 57 84
--------- ---------
Total Long Term Assets 5,890 6,748
Total Assets $ 17,110 $ 17,754
========= =========
<PAGE>
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsuis, Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)
June 30, December 31,
LIABILITIES 1997 1996
--------- ---------
(Unaudited) (Note)
(000's omitted, except share data)
CURRENT LIABILITIES
Current Maturities of
Capital Lease Obligations $ 129 $ 126
Current Maturites of Long-Term
Debt to Affiliated Companies 800 800
Notes Payable - Banks 4,888 5,436
Accounts Payable:
Trade 1,112 1,260
Affiliated companies 105 63
Billings in Excess of Costs and Estimated
Earnings on Uncompleted Contracts 1,869 392
Accrued Warranty and Losses 693 691
Accrued Salaries and Wages 673 797
Income Taxes Payable 0 5
Other Accrued Liabilities 1,476 899
--------- ---------
Total Current Liabilities 11,745 10,469
OTHER LIABILITIES
Deferred Revenue 0 496
Deferred Income Taxes 467 467
Long Term Debt to Affiliated Company,
Less Current Maturities 800 1,200
Capital Lease Obligations,
Less Current Maturities 407 471
STOCKHOLDERS' EQUITY
Common Stock - Authorized 3,000,000
Shares of $.20 Par Value; Issued
2,551,717 on June 30, 1997
and December 31, 1996 510 510
Additional Contributed Capital 517 517
Retained Earnings 2,664 3,624
--------- ---------
Total Stockholders' Equity 3,691 4,651
--------- ---------
Total Liabilities and
Stockholders' Equity $ 17,110 $ 17,754
========= =========
Note: The balance sheet at December 31, 1996 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.
<PAGE>
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited, 000's omitted)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
------- ------- ------ --------
<S> <C> <C> <C> <C>
Earned Revenue $ 5,508 $ 5,196 9,151 $ 11,123
Cost of Earned Revenue 4,198 4,065 7,183 8,234
------- ------- ------ --------
Gross Profit 1,310 1,131 1,968 2,889
Operating Expenses 1,285 1,780 2,494 3,324
------- ------- ------ --------
Operating Profit(Loss) 25 (649) (526) (435)
Other Income (Expense)
Interest Income -- 2 -- 4
Interest Expense (204) (178) (396) (374)
Other (57) (45) (38) (54)
------- ------- ------ --------
(261) (221) (434) (424)
------- ------- ------ --------
(Loss) Before Income Taxes (236) (870) (960) (859)
Income Tax Expense (Benefit) -- -- -- --
------- ------- ------ --------
Net (Loss) $ (236) $ (870) (960) $ (859)
======= ======= ====== ========
NET LOSS PER SHARE $ (0.09) $ (0.34) (0.38) $ (0.34)
======= ======= ====== ========
Dividends per Share None None None None
</TABLE>
<PAGE>
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, 000's omitted)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1996
------- -------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (960) $ (859)
Adjustment to reconcile net income (loss)
to net cash provided (used) by
operating activities:
Depreciation and Amortization 540 525
(Increase) Decrease in Assets:
Accounts Receivable 367 3,409
Cost and Estimated Earnings
in Excess of Billings on
Uncompleted Contracts (931) 306
Inventories 139 154
Prepaid Expenses 96 183
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses 344 (1,543)
Billings in Excess of Costs and
Estimated Earnings on
Uncompleted Contracts 1,477 (654)
------- -------
Net Cash Provided (Used) by
Operating Activities 1,072 1,521
CASH FLOW FROM INVESTING ACTIVITIES:
Capital Expenditures (178) (478)
------- -------
Net Cash Used in Investing Activities (178) (478)
CASH FLOW FROM FINANCING ACTIVITIES:
Net Borrowings under Line of
Credit Agreement (548) (580)
Payment of Note Payable (127)
Principal Payments under Capital
Lease Obligations (61) (36)
Principal Payments on Borrowings
From Affiliates (400) (400)
------- -------
Net Cash Provided (Used) by
Financing Activities (1,009) (1,143)
------- -------
NET CHANGE IN CASH (115) (100)
CASH AT BEGINNING OF YEAR 135 141
------- -------
CASH AT END OF QUARTER $ 20 $ 41
======= =======
</TABLE>
<PAGE>
AERO SYSTEMS ENGINEERING, INC. -- CONSOLIDATED
(Subsidiary of Celsius, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, 000's omitted)
June 30, 1997
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 six-month period ending June
30, 1997 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1997. 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, 1996.
NOTE B - CONTRACTS IN PROCESS
Information with respect to contracts in process follows:
June 30, June 30,
1997 1996
------- -------
Costs Incurred on Uncompleted
Contracts $25,995 $31,150
Estimated Earnings Thereon 9,582 8,714
------- -------
Total Earned Revenue on
Uncompleted Contracts 35,577 39,864
Less Billings Applicable thereto 32,538 33,810
------- -------
$ 3,039 $ 6,054
======= =======
Included in Accompanying Balance
Sheet Under Following Captions:
Costs and Estimated Earnings
in Excess of Billings on
Uncompleted Contracts $ 4,908 $ 7,372
Billings in Excess of Costs
and Estimated Earnings on
Uncompleted Contracts 1,869 1,318
------- -------
$ 3,039 $ 6,054
======= =======
NOTE C - CONTINGENCIES AND COMMITMENT
Letter of Credit
Standby letters of credit totaling $ 5,462,188 were outstanding
on June 30, 1997 to various customers in exchange for advance
payments or warranty performance bonds on contracts.
In August, 1993 the Company entered into a subcontract with
Opron Inc.("Opron"), a Quebec company which was the prime
contractor on a jet engine test cell project. Late in 1995, a
dispute arose between the Company and Opron, which has resulted
in a potential withdrawal against an existing CDN$ 872,042
Letter of Credit. The Company Believes that Opron's claims are
excessive. In addition, this claim is partly offset by
unpaid subcontract costs. Management does not expect this
dispute to have a material adverse effect on the business,
assets, financial conditions, results of operations or
prospects of the Company.
<PAGE>
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius, Inc.)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Financial Condition
Second quarter 1997 (All dollar amounts are in thousands)
Worldwide revenue for the second quarter 1997 totaled $ 5,508 which was a 6%
increase from $ 5,196 in the second quarter of last year. Net loss after taxes
for the second quarter was $ 236 which was an improvement of $ 634 as compared
to second quarter loss of $ 870 last year.
The revenue increase was attributable to the commencing of new projects awarded
in 1997. The decrease of the loss is a result of a higher gross margin on
projects and a decrease in operating expenses as compared to the second quarter
of 1996.
Year to date worldwide revenue for 1997 totaled $9,151 which was a 18% decrease
from $11,123 year to date revenue for the first half of 1996. Net loss after
taxes for the first six months was $ 960 as compared to a loss of $ 859 for the
same period in 1996.
The revenue decrease was attributable to a low volume backlog from year end.
Projects awarded in 1997 are just commencing and have had a minimal impact on
revenue.
Backlog of orders was $ 21,063 as compared with $ 9,457 and $ 13,542 as of
December 31, 1996 and June 30, 1996, respectively. The 123% increase from year
end relates to additional new orders of $ 20,759 through the second quarter of
1997. The investment in proposal efforts in late 1996 and in the first quarter
of 1997, along with improved market conditions have resulted in increased
contract awards.
Cost of earned revenue for the second quarter, which includes manufacturing,
engineering and installation costs, was 76% as compared to 78% during the same
period of last year. The decrease is a result of a heavy workload with
associated decreased indirect costs.
Cost of earned revenue for the first six months, which includes manufacturing,
engineering and installation costs, was 78% as compared to 74% during the same
period of last year. The increase is a result of lower negotiated project
margins, and additional costs incurred to complete projects. For the total year,
the Company expects margins to be comparable to 1996 year to date margin of 78%.
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 $ 924 were 17% of revenues
during the second quarter 1997 as compared to $ 1,651 and 32% during the same
period of last year. This decrease of $ 727 or 44% was due to the changed
approach to contract proposal preparations.
<PAGE>
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius, Inc.)
Research and development expenses were $ 361 during the second quarter as
compared to $ 129 in the same period in 1996. This increase of $ 232 or 180% is
a result of concentrated effort to enhance the ASE2000. During 1997, additional
R & D will be incurred for additional enhancements to the ASE2000 in order to
maintain a leadership role in the marketplace.
Capital expenditures were $ 76 as compared to $ 419 for the same period of last
year. This is a decrease of $ 343 as compared to the same period as last year.
It is expected that for the remainder of 1997, additional capital expenditures
will be used to complete the enhancement at the AeroTest Laboratory and
additional equipment will be purchased for R & D projects, engineering
departments and the completion of the computer network.
Interest expense of $ 204 was incurred during the quarter as compared to $ 178
from the same period in the prior year. The average rate of interest on
short-term borrowings has had little change and the average amount of borrowings
outstanding has increased during the second quarter as compared to the second
quarter of last year.
Accounts receivable at the end of the second quarter was $ 4,772 as compared
with the year end balance of $ 5,139. This decrease of $ 367 was the result of
collecting several large receivables.
Accounts payable and accrued expenses at the end of the second quarter increased
$ 344 or 9% as compared to the year end balance. This was primarily due to an
increase in material being ordered for the start of new projects during the
second quarter.
Notes payable to banks balance was $ 4,888 as compared to the year end balance
of $ 5,436 which is an decrease of $ 548 or 10%. This decrease is primarily the
result of new projects getting started and the ability to invoice and collect
payments per contract terms.
Costs and estimated earnings in excess of billings on uncompleted contracts at
the end of the second quarter increased $ 931 or 23%, to $ 4,908 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 increase since year end
is due to start up of new contracts and billings related to the 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 with banks 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
<PAGE>
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius, Inc.)
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 June 30, 1997 $ 4,888 was used and $ 1,112 available balance
was remaining. 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.
In August, 1993 the Company entered into a subcontract with Opron Inc.("Opron"),
a Quebec company which was the prime contractor on a jet engine test cell
project. Late in 1995, a dispute arose between the Company and Opron, which has
resulted in a potential withdrawal against an existing CDN$ 872,042 Letter of
Credit. The Company believes that Opron's claims are excessive. In addition,
this claim is partly offset by unpaid subcontract costs. Management does not
expect this dispute to have a material adverse effect on the business, assets,
financial condition, results of operations or prospects of the Company.
Highly competitive market conditions have minimized the margins on new
contracts. Productivity improvements and cost reduction programs are being
initiated to increase margins. The Company has received ISO9001 certification,
an international quality systems standard. This is expected to enhance our
marketing effort on an international basis.
Looking ahead throughout the remainder of 1997, the upturn in new orders started
in the first quarter of 1997 is expected to continue. The backlog increased from
$9,457 to $17,010 during the first quarter, and increased further to $21,063
during the second quarter. It is expected that the backlog will increase further
during the third quarter. These new orders will provide increased earned margins
in the second half of the year.
<PAGE>
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 ) filed as part of this
Report.
(b) No current reports on Form 8-K were filed during the quarter
ended June 30,1997.
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: Aug. 14, 1997 /s/ Leon Ring
----------------------------------
Leon Ring
(President)
<TABLE> <S> <C>
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 20
<SECURITIES> 0
<RECEIVABLES> 4,772
<ALLOWANCES> 0
<INVENTORY> 953
<CURRENT-ASSETS> 11,220
<PP&E> 13,709
<DEPRECIATION> 7,876
<TOTAL-ASSETS> 17,110
<CURRENT-LIABILITIES> 11,745
<BONDS> 0
0
0
<COMMON> 510
<OTHER-SE> 517
<TOTAL-LIABILITY-AND-EQUITY> 17,110
<SALES> 9,151
<TOTAL-REVENUES> 9,151
<CGS> 7,183
<TOTAL-COSTS> 7,183
<OTHER-EXPENSES> 38
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 396
<INCOME-PRETAX> (960)
<INCOME-TAX> 0
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