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, 1998
[ ] 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.
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(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 651-227-7515
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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, 1998, 3,827,573 shares of common stock, par value $.20
per share, were outstanding.
<PAGE>
Page 2
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius Inc.)
Form 10-Q
Quarter Ended June 30, 1998
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
<PAGE>
Page 3
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 1998 1997
------- -------
(Unaudited) (Note)
(000's omitted, except share data)
CURRENT ASSETS
Cash and Cash Equivalents $ 51 $ 117
Accounts Receivable, net 6,054 4,767
Costs and Estimated Earnings in
Excess of Billings on Uncompleted
Contracts 6,034 8,341
Inventories:
Materials and Supplies 591 592
Projects in Process 460 422
Prepaid Expenses 0 114
Deferred Income Tax Benefit 484 484
Income Tax Receivable 100 100
------- -------
Total Current Assets 13,774 14,937
LONG TERM ASSETS
Land 486 486
Buildings 3,025 3,025
Furniture, Fixtures, & Equipment 6,494 6,371
Wind Tunnels & Instrumentation 2,658 2,658
Building Improvements 1,331 1,304
------- -------
13,994 13,844
Less Accumulated Depreciation 8,787 8,237
------- -------
Property, Plant, and Equipment, net 5,207 5,607
Non-Compete Agreement, net 15 31
------- -------
Total Long Term Assets 5,222 5,638
------- -------
Total Assets $18,996 $20,575
======= =======
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Page 4
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsuis Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)
June 30, December 31,
LIABILITIES 1998 1997
------- -------
(Unaudited) (Note)
(000's omitted, except share data)
CURRENT LIABILITIES
Current Maturities of
Capital Lease Obligations $ 138 $ 138
Current Maturites of Long-Term
Debt to Affiliated Companies 800 800
Notes Payable 5,996 6,135
Accounts Payable:
Trade 2,761 4,716
Affiliated Companies 780 720
Billings in Excess of Costs and Estimated
Earnings on Uncompleted Contracts 773 229
Accrued Warranty and Losses 681 675
Accrued Salaries and Wages 743 664
Income Taxes Payable 3 5
Other Accrued Liabilities 1,155 1,026
------- -------
Total Current Liabilities 13,830 15,108
OTHER LIABILITIES
Deferred Income Taxes 484 484
Long Term Debt to Affiliated Company,
Less Current Maturities 0 400
Capital Lease Obligations,
Less Current Maturities 266 333
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Common Stock - Authorized 10,000,000 Shares
of $.20 Par Value; Issued 3,827,573 on
June 30, 1998 and December 31, 1997 766 510
Additional Contributed Capital 261 517
Retained Earnings 3,389 3,223
------- -------
Total Stockholders' Equity 4,416 4,250
------- -------
Total Liabilities and Stockholders' Equity $18,996 $20,575
======= =======
Note: The balance sheet at December 31, 1997 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>
Page 5
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited, 000's omitted)
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
-------------------- ---------------------
Earned Revenue $ 6,495 $ 5,508 $ 13,549 $ 9,151
Cost of Earned Revenue 5,127 4,198 10,715 7,183
-------- -------- -------- --------
Gross Profit 1,368 1,310 2,834 1,968
Operating Expenses 1,065 1,285 2,239 2,494
-------- -------- -------- --------
Operating Profit (Loss) 303 25 595 (526)
Other Income (Expense)
Interest Expense (217) (204) (436) (396)
Other 10 (57) 7 (38)
-------- -------- -------- --------
(207) (261) (429) (434)
-------- -------- -------- --------
Income (Loss) Before Income Taxes 96 (236) 166 (960)
Income Tax Expense (Benefit) -- -- -- --
-------- -------- -------- --------
Net Income (Loss) $ 96 $ (236) $ 166 $ (960)
======== ======== ======== ========
NET INCOME ( LOSS) PER SHARE $ 0.03 $ (0.06) $ 0.04 $ (0.25)
======== ======== ======== ========
Dividends per Share None None None None
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Page 6
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,
1998 1997
------- -------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 166 $ (960)
Adjustment to reconcile net income (loss)
to net cash provided (used) by operating activities:
Depreciation and Amortization 566 540
(Increase) Decrease in Assets:
Accounts Receivable (1,287) 367
Cost and Estimated Earnings in Excess of
Billings on Uncompleted Contracts 2,307 (931)
Inventories (37) 139
Prepaid Expenses 114 96
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses (1,683) 344
Billings in Excess of Costs and Estimated Earnings
on Uncompleted Contracts 544 1,477
------- -------
Net Cash Provided (Used) by
Operating Activities 690 1,072
CASH FLOW FROM INVESTING ACTIVITIES:
Capital Expenditures (150) (178)
------- -------
Net Cash Used in Investing Activities (150) (178)
CASH FLOW FROM FINANCING ACTIVITIES:
Net Borrowings under Line of Credit Agreement (139) (548)
Principal Payments under Capital Lease Obligations (67) (61)
Principal Payments on Borrowings From Affiliates (400) (400)
------- -------
Net Cash Provided (Used) by Financing Activities (606) (1,009)
------- -------
NET CHANGE IN CASH (66) (115)
CASH AT BEGINNING OF YEAR 117 135
------- -------
CASH AT END OF QUARTER $ 51 $ 20
======= =======
</TABLE>
<PAGE>
Page 7
AERO SYSTEMS ENGINEERING , INC. -- CONSOLIDATED
(Subsidiary of Celsius Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, 000's omitted)
June 30, 1998
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, 1998
are not necessarily indicative of the results that may be expected for the
year ended December 31, 1998. 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, 1997.
NOTE B - CONTRACTS IN PROCESS
Information with respect to contracts in process follows:
June 30, June 30,
1998 1997
------- -------
Costs Incurred on Uncompleted Contracts $38,930 $25,995
Estimated Earnings Thereon 9,529 9,582
------- -------
Total Earned Revenue on Uncompleted Contracts 48,459 35,577
Less Billings Applicable Thereto 43,198 32,538
------- -------
$ 5,261 $ 3,039
======= =======
Included in Accompanying Balance Sheet
Under Following Captions:
Costs and Estimated Earnings in Excess of
Billings on Uncompleted Contracts $ 6,034 $ 4,908
Billings in Excess of Costs and Estimated
Earnings on Uncompleted Contracts 773 1,869
------- -------
$ 5,261 $ 3,039
======= =======
NOTE C - CONTINGENCIES AND COMMITMENT
Guarantees of approximately $ 8,702,668 were outstanding on June 30, 1998
to various customers as bid bonds or in exchange for down payments or
warranty performance bonds.
NOTE D - Earnings Per Share
The Company completed a three-for-two stock split during March ,1998. This
resulted in the number of outstanding shares increasing from 2,557,717 to
3,827,573 during this period. The financial information in this report has
been restated to reflect this stock split.
<PAGE>
Page 8
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
Second quarter 1998 (All dollar amounts are in thousands.)
Worldwide revenue for the second quarter 1998 totaled $6,495, which was a 15%
increase from $5,508 the second quarter of last year. Net Income for the second
quarter was $96 as compared to a second quarter loss of $236 last year.
The revenue increase was attributable to the improved backlog going into 1998
compared to the low backlog at the start of 1997.
Backlog of orders as of June 30, 1998 was $11,151 as compared with $14,278 and
$21,063 as of December 31, 1997 and June 30, 1997, respectively. This 22%
decrease from year-end was related to lower order receipts during the first half
of 1998. The backlog as of June 30, 1998 does not include the NASA second
quarter task order contract award with a potential value of $38 million over
five years. As the firm definitive task orders are issued under this contract,
they will be included in the backlog calculation. The first and second quarter
experienced significant proposal activity, which will result in a third quarter
backlog improvement.
Cost of earned revenue for the second quarter, which includes manufacturing and
engineering costs, was 79% as compared to 76% during the same period of last
year. For the total year, the Company expects margins to be comparable to June
1998 year-to-date margin of 21%.
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 $987 were 15% of revenues during
the second quarter of 1998 as compared to $924 and 17% during the same period of
last year. This increase of $63 or 7% was primarily related to significant bid
and proposal activity in the first and second quarter 1998.
Research and development expenses were $78 during the second quarter as compared
to $361 in the same period in 1997. This decrease of $283 or 72% was a result of
project work consuming much of the available technical resources. During 1998,
additional R & D will be incurred for continued enhancements to the ASE2000 in
order to maintain a leadership role in the marketplace.
Capital expenditures for the second quarter were $87 as compared to $76 for the
same period of last year. It is expected that for the remainder of 1998,
additional capital expenditures will be used to complete the enhancement at the
AeroTest Laboratory, additional equipment will be purchased for R & D projects,
engineering departments, and replacing the main computer system.
<PAGE>
Page 9
AERO SYSTEMS ENGINEERING, INC.
(A Subsidiary of Celsius Inc.)
The Company has completed an assessment of the impact of the Year 2000 on its
computer systems and is planning on replacing certain systems and software so
that its computer systems will function properly with respect to dates in the
year 2000 and thereafter. The total Year 2000 project cost is estimated at
approximately $350, which includes $225 for the purchase of new hardware and
software that will be capitalized and $125 that will be expensed as incurred. To
date, the Company has incurred little of this cost since it is currently in the
vendor selection phase. Should the Company be unable to acquire and implement
new systems and software prior to the year 2000, it will modify current systems
and software to function properly with respect to dates in the year 2000. The
Company believes that with modifications to existing software and conversions to
new software, the Year 2000 issue will not pose significant operational problems
for its computer systems. However, if such modifications and conversions are not
made, or are not completed timely, the Year 2000 issue could have a material
impact on the operations of the Company.
Interest expense of $217 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 second quarter as compared to the second
quarter of last year.
Accounts receivable at the end of the second quarter was $6,054 as compared with
the year end balance of $4,767. This increase of $1,287 was due mainly to
invoice timing on several large contracts.
Accounts payable and accrued expenses at the end of the second quarter decreased
$1,683 or 22% as compared to the year end balance. This was primarily due to
several projects nearing completion with all equipment previously shipped and
installed therefore reducing vendor commitments.
Notes payable balance was $5,996 as compared to the year end balance of $6,135,
which is a decrease of $139 or 2%. This decrease is primarily the result of
timing of project expenditures as compared to invoicing milestones.
Costs and estimated earnings in excess of billings on uncompleted contracts at
the end of the second quarter decreased $2,307 or 28%, to $6,034 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 achieving billing milestones 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 having maturates 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.
<PAGE>
Page 10
AERO SYSTEMS ENGINEERING, INC.
(A Subsidiary of Celsius Inc.)
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 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, Inc., 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, 1998 $5,996 was used with no available balance
remaining. Although the line of credit has a $6,000 limit, Celsius Inc. has
allowed the Company to exceed this limit for short periods of time. The portion
over $6,000 is assessed a higher interest rate of 11.5%. 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 margins on new
contracts. Productivity improvements and cost reduction programs are continually
being initiated to increase margins. The Company received ISO9001 certification
in 1997, an international quality systems standard. This is expected to enhance
our marketing effort on an international basis.
Looking ahead throughout the remainder of 1998, the proposals submitted in the
first and second quarters of 1998 are expected to result in a significant
backlog increase during the third quarter. This should allow continued
profitability in 1998, and a strong backlog position going in to 1999.
<PAGE>
Page 11
AERO SYSTEMS ENGINEERING, INC.
(A Subsidiary of Celsius Inc.)
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
(a) 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 resolution of this dispute to
have a material adverse effect on the business, assets,
financial condition, results of operations or prospects of the
Company.
Item 4: Submission of Matters to a Vote of Security Holders
(a) No items were submitted to a vote of the security holders during
this period.
Item 6: Exhibits and Reports on Form 8-K
(a) No exhibits are included in this filing.
(b) No current reports on Form 8-K were filed during the quarter
ended June 30, 1998.
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 thereto duly authorized.
Date: August 11, 1998 /s/ Dr. Leon Ring
-------------------------------------------
Dr. Leon Ring, President and CEO
/s/ Steven R. Hedberg
-------------------------------------------
Steven R. Hedberg, Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 51
<SECURITIES> 0
<RECEIVABLES> 6,034
<ALLOWANCES> 0
<INVENTORY> 1,051
<CURRENT-ASSETS> 13,774
<PP&E> 13,994
<DEPRECIATION> 8,787
<TOTAL-ASSETS> 18,996
<CURRENT-LIABILITIES> 13,830
<BONDS> 0
766
0
<COMMON> 0
<OTHER-SE> 261
<TOTAL-LIABILITY-AND-EQUITY> 18,996
<SALES> 13,549
<TOTAL-REVENUES> 13,549
<CGS> 10,715
<TOTAL-COSTS> 10,715
<OTHER-EXPENSES> 7
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 436
<INCOME-PRETAX> 166
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<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 166
<EPS-PRIMARY> .04
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