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, 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
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(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
358 East Fillmore Avenue, St. Paul, Minnesota 55107
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(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, 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 September 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
September 30, December 31,
ASSETS 1997 1996
------ ----------- -----------
(Unaudited) (Note)
(000's omitted, except share data)
CURRENT ASSETS
Cash and cash equivalents $ 65 $ 135
Accounts Receivable, net 4,717 5,139
Costs and Estimated Earnings in
Excess of Billings on
Uncompleted Contracts 7,377 3,977
Inventories
Materials and Supplies 562 685
Projects in Process 457 407
Prepaid Expenses 23 96
Deferred Income Tax Benefit 467 467
Income Tax Receivable 100 100
----------- -----------
Total Current Assets 13,768 11,006
LONG TERM ASSETS
Land 486 486
Buildings 3,025 3,025
Furniture, Fixtures, & Equipment 6,258 6,131
Wind Tunnels & Instrumentation 2,650 2,591
Building Improvements 1,298 1,298
----------- -----------
13,717 13,531
Less Accumulated Depreciation 8,133 7,363
----------- -----------
Property, Plant, and Equipment, net 5,584 6,168
Investments 0 496
Non-Compete Agreement, net 44 84
----------- -----------
Total Long Term Assets 5,628 6,748
Total Assets $ 19,396 $ 17,754
=========== ===========
<PAGE>
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsuis, Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)
September 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 5,586 5,436
Accounts Payable:
Trade 3,616 1,260
Affiliated companies 819 63
Billings in Excess of Costs and Estimated
Earnings on Uncompleted Contracts 1,090 392
Accrued Warranty and Losses 682 691
Accrued Salaries and Wages 639 797
Income Taxes Payable 0 5
Other Accrued Liabilities 912 899
---------- ----------
Total Current Liabilities 14,273 10,469
OTHER LIABILITIES
Deferred Revenue 0 496
Deferred Income Taxes 467 467
Long Term Debt to Affiliated Company,
Less Current Maturities 400 1,200
Capital Lease Obligations,
Less Current Maturities 375 471
STOCKHOLDERS' EQUITY
Common Stock - Authorized 3,000,000
Shares of $.20 Par Value; Issued
2,551,717 on September 30, 1997
and December 31, 1996 510 510
Additional Contributed Capital 517 517
Retained Earnings 2,854 3,624
---------- ----------
Total Stockholders' Equity 3,881 4,651
---------- ----------
Total Liabilities and
Stockholders' Equity $ 19,396 $ 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 Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Earned Revenue $ 7,325 $ 4,680 16,476 $ 15,803
Cost of Earned Revenue 6,092 4,026 13,275 12,260
----------- ----------- ----------- -----------
Gross Profit 1,233 654 3,201 3,543
Operating Expenses 897 1,461 3,391 4,785
----------- ----------- ----------- -----------
Operating Profit(Loss) 336 (807) (190) (1,242)
Other Income (Expense)
Interest Income -- 1 -- 5
Interest Expense (199) (204) (595) (578)
Other 53 -- 15 (54)
----------- ----------- ----------- -----------
(146) (203) (580) (627)
----------- ----------- ----------- -----------
Income (Loss) Before Income Taxes 190 (1,010) (770) (1,869)
Income Tax Expense (Benefit) -- -- -- --
----------- ----------- ----------- -----------
Net Income (Loss) $ 190 $ (1,010) (770) $ (1,869)
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE $ 0.07 $ (0.39) (0.30 $ (0.73)
=========== =========== =========== ===========
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>
Nine Months Ended
September 30,
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (770) $ (1,869)
Adjustment to reconcile net income (loss)
to net cash provided (used) by
operating activities:
Depreciation and Amortization 810 788
(Increase) Decrease in Assets:
Accounts Receivable 422 2,048
Cost and Estimated Earnings
in Excess of Billings on
Uncompleted Contracts (3,400) 2,824
Inventories 73 200
Prepaid Expenses 73 161
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses 2,953 (1,432)
Billings in Excess of Costs and
Estimated Earnings on
Uncompleted Contracts 698 (1,775)
---------- ----------
Net Cash Provided (Used) by
Operating Activities 859 945
CASH FLOW FROM INVESTING ACTIVITIES:
Capital Expenditures (186) (490)
---------- ----------
Net Cash Used in Investing Activities (186) (490)
CASH FLOW FROM FINANCING ACTIVITIES:
Net Borrowings under Line of
Credit Agreement 150 421
Payment of Note Payable (127)
Principal Payments under Capital
Lease Obligations (93) (61)
Principal Payments on Borrowings
From Affiliates (800) (800)
---------- ----------
Net Cash Provided (Used) by
Financing Activities (743) (567)
---------- ----------
NET CHANGE IN CASH (70) (112)
CASH AT BEGINNING OF YEAR 135 141
---------- ----------
CASH AT END OF QUARTER $ 65 $ 29
========== ==========
</TABLE>
<PAGE>
AERO SYSTEMS ENGINEERING, INC. -- CONSOLIDATED
(Subsidiary of Celsius, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, 000's omitted)
September 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 nine-month period ending
September 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:
September 30, September 30,
1997 1996
---------- ----------
Costs Incurred on Uncompleted
Contracts $ 24,371 $ 24,119
Estimated Earnings Thereon 6,877 8,011
---------- ----------
Total Earned Revenue on
Uncompleted Contracts 31,248 32,130
Less Billings Applicable thereto 24,961 27,473
---------- ----------
$ 6,287 $ 4,657
========== ==========
Included in Accompanying Balance
Sheet Under Following Captions:
Costs and Estimated Earnings
in Excess of Billings on
Uncompleted Contracts $ 7,377 $ 4,854
Billings in Excess of Costs
and Estimated Earnings on
Uncompleted Contracts 1,090 197
---------- ----------
$ 6,287 $ 4,657
========== ==========
NOTE C - CONTINGENCIES AND COMMITMENT
Letter of Credit
Standby letters of credit and performance bonds totaling
$10,181,935 were outstanding on September 30, 1997 to various
customers in exchange for advance payments or warranty
performance bonds on contracts.
In August, 1993 the Company entered into a subcontract with
Opron Inc.("Opron"), a Quebec company which was the prime
contractor on a jet engine test cell project. Late in 1995, a
dispute arose between the Company and Opron, which has
resulted in a withdrawal against an existing CDN$ 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.
(A Subsidiary of Celsius, Inc.)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Financial Condition
Third quarter 1997 (All dollar amounts are in thousands)
Worldwide revenue for the third quarter 1997 totaled $ 7,325 which was a 57%
increase from $ 4,680 in the third quarter of last year. Net income after taxes
for the third quarter was $ 190 which was an improvement of $ 1,200 as compared
to third quarter loss of $ 1,010 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 third quarter
of 1996.
Year to date worldwide revenue for 1997 totaled $16,476 which was a 4% increase
from $15,803 year to date revenue for the first nine months of 1996. Net loss
after taxes for the first nine months was $ 770 as compared to a loss of $1,869
for the same period in 1996.
The year to date increase in revenue reflects the low level of backlog entering
1997, offset by strong revenue growth in the third quarter.
Backlog of orders was $ 19,498 as compared with $ 9,457 and $ 11,973 as of
December 31, 1996 and September 30, 1996, respectively. The 106% increase from
year end relates to additional new orders of $ 26,518 through the third 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 third quarter, which includes manufacturing,
engineering and installation costs, was 83% as compared to 86% 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 nine months, which includes manufacturing,
engineering and installation costs, was 81% as compared to 78% 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 $ 724 were 10% of revenues
during the third quarter 1997 as compared to $ 1,350 and 29% during the same
period of last year. This decrease of $ 626 or 46% was due to the changed
approach to contract proposal preparations.
<PAGE>
AERO SYSTEMS ENGINEERING, INC.
(A Subsidiary of Celsius, Inc.)
Research and development expenses were $ 173 during the third quarter as
compared to $ 111 in the same period in 1996. This increase of $ 62 or 56% 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 year to date were $ 186 as compared to $ 490 for the same
period of last year. This is a decrease of $ 304 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 $ 199 was incurred during the quarter as compared to $ 204
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 third quarter as compared to the third
quarter of last year.
Accounts receivable at the end of the third quarter was $ 4,717 as compared with
the year end balance of $ 5,139. This decrease of $ 422 was the result of
collecting several large receivables.
Accounts payable and accrued expenses at the end of the third quarter increased
$ 2,953 or 79% 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
third quarter.
Notes payable to banks balance was $ 5,586 as compared to the year end balance
of $ 5,436 which is an increase of $ 150 or 3%. This increase 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 third quarter increased $ 3,400 or 85%, to $ 7,377 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.
(A 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 September 30, 1997 $ 5,586 was used and $ 414 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 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.
<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 September 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: November 13, 1997
/s/ Leon Ring
-------------------------------------
Leon Ring
(President)
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000002589
<NAME> AERO SYSTEMS ENGINEERING
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 65
<SECURITIES> 0
<RECEIVABLES> 4,717
<ALLOWANCES> 0
<INVENTORY> 1,019
<CURRENT-ASSETS> 13,768
<PP&E> 5,584
<DEPRECIATION> 8,133
<TOTAL-ASSETS> 19,396
<CURRENT-LIABILITIES> 14,273
<BONDS> 0
0
0
<COMMON> 510
<OTHER-SE> 517
<TOTAL-LIABILITY-AND-EQUITY> 19,396
<SALES> 16,476
<TOTAL-REVENUES> 16,476
<CGS> 13,275
<TOTAL-COSTS> 16,666
<OTHER-EXPENSES> (15)
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<INTEREST-EXPENSE> 595
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</TABLE>
