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, 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.
------------------------------
(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 651-227-7515
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, 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 September 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 1 Legal Proceedings 11
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
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1998 1997
------ ------------ ------------
(Unaudited) (Note)
(000's omitted, except share data)
<S> <C> <C>
CURRENT ASSETS
- --------------
Cash and Cash Equivalents $ 12 $ 117
Accounts Receivable, net 4,979 4,767
Costs and Estimated Earnings in
Excess of Billings on Uncompleted
Contracts 7,384 8,341
Inventories:
Materials and Supplies 585 592
Projects in Process 494 422
Prepaid Expenses 56 114
Deferred Income Tax Benefit 484 484
Income Tax Receivable 100 100
------------ ------------
Total Current Assets 14,094 14,937
LONG TERM ASSETS
- ----------------
Land 486 486
Buildings 3,025 3,025
Furniture, Fixtures, & Equipment 6,580 6,371
Wind Tunnels & Instrumentation 2,712 2,658
Building Improvements 1,331 1,304
------------ ------------
14,134 13,844
Less Accumulated Depreciation 9,062 8,237
------------ ------------
Property, Plant, and Equipment, net 5,072 5,607
Non-Compete Agreement, net 8 31
------------ ------------
Total Long Term Assets 5,080 5,638
------------ ------------
Total Assets $ 19,174 $ 20,575
============ ============
</TABLE>
<PAGE>
Page 4
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsuis Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)
<TABLE>
<CAPTION>
September 30, December 31,
LIABILITIES 1998 1997
----------- ------------ ------------
(Unaudited) (Note)
(000's omitted, except share data)
<S> <C> <C>
CURRENT LIABILITIES
- -------------------
Current Maturities of
Capital Lease Obligations $ 117 $ 138
Current Maturites of Long-Term
Debt to Affiliated Companies 400 800
Notes Payable 6,861 6,135
Accounts Payable:
Trade 2,036 4,716
Affiliated Companies 780 720
Billings in Excess of Costs and Estimated
Earnings on Uncompleted Contracts 766 229
Accrued Warranty and Losses 681 675
Accrued Salaries and Wages 739 664
Income Taxes Payable 2 5
Other Accrued Liabilities 1,508 1,026
------------ ------------
Total Current Liabilities 13,890 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 252 333
Commitments and Contingencies
STOCKHOLDERS' EQUITY
- --------------------
Common Stock - Authorized 10,000,000 Shares
of $.20 Par Value; Issued 3,827,573 on
9- 30-98 and 2,551,717 on 12-31-97 766 510
Additional Contributed Capital 261 517
Retained Earnings 3,521 3,223
------------ ------------
Total Stockholders' Equity 4,548 4,250
------------ ------------
Total Liabilities and Stockholders' Equity $ 19,174 $ 20,575
============ ============
</TABLE>
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.)
Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited, 000's omitted)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Earned Revenue $ 5,982 $ 7,325 $ 19,531 $ 16,476
Cost of Earned Revenue 4,587 6,092 15,302 13,275
----------- ----------- ----------- -----------
Gross Profit 1,395 1,233 4,229 3,201
Operating Expenses 1,039 897 3,278 3,391
----------- ----------- ----------- -----------
Operating Profit (Loss) 356 336 951 (190)
Other Income (Expense)
Interest Expense (220) (199) (656) (595)
Other (4) 53 3 15
----------- ----------- ----------- -----------
(224) (146) (653) (580)
----------- ----------- ----------- -----------
Income (Loss) Before Income Taxes 132 190 298 (770)
Income Tax Expense (Benefit) -- -- -- --
----------- ----------- ----------- -----------
Net Income (Loss) $ 132 $ 190 $ 298 $ (770)
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE $ 0.04 $ 0.05 $ 0.08 $ (0.20)
=========== =========== =========== ===========
Dividends per Share None None None None
</TABLE>
<PAGE>
Page 6
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,
1998 1997
-------------------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 298 $ (770)
Adjustment to reconcile net income (loss)
to net cash provided (used) by operating activities:
Depreciation and Amortization 848 810
(Increase) Decrease in Assets:
Accounts Receivable (212) 422
Cost and Estimated Earnings in Excess of
Billings on Uncompleted Contracts 957 (3,400)
Inventories (65) 73
Prepaid Expenses 58 73
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses (2,060) 2,953
Billings in Excess of Costs and Estimated Earnings
on Uncompleted Contracts 537 698
---------- ----------
Net Cash Provided (Used) by
Operating Activities 361 859
CASH FLOW FROM INVESTING ACTIVITIES:
Capital Expenditures (290) (186)
---------- ----------
Net Cash Used in Investing Activities (290) (186)
CASH FLOW FROM FINANCING ACTIVITIES:
Net Borrowings under Line of Credit Agreement 726 150
Principal Payments under Capital Lease Obligations (102) (93)
Principal Payments on Borrowings From Affiliates (800) (800)
---------- ----------
Net Cash Provided (Used) by Financing Activities (176) (743)
---------- ----------
NET CHANGE IN CASH (105) (70)
CASH AT BEGINNING OF YEAR 117 135
---------- ----------
CASH AT END OF QUARTER $ 12 $ 65
========== ==========
</TABLE>
<PAGE>
Page 7
AERO SYSTEMS ENGINEERING , INC. -- CONSOLIDATED
(Subsidiary of Celsius Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, 000's omitted)
September 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 nine-month period ending September 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:
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
------------ ------------
<S> <C> <C>
Costs Incurred on Uncompleted Contracts $ 42,034 $ 24,371
Estimated Earnings Thereon 10,235 6,877
------------ ------------
Total Earned Revenue on Uncompleted Contracts 52,269 31,248
Less Billings Applicable Thereto 45,651 24,961
------------ ------------
$ 6,618 $ 6,287
============ ============
Included in Accompanying Balance Sheet
Under Following Captions:
Costs and Estimated Earnings in Excess of
Billings on Uncompleted Contracts $ 7,384 $ 7,377
Billings in Excess of Costs and Estimated
Earnings on Uncompleted Contracts 766 1,090
------------ ------------
$ 6,618 $ 6,287
============ ============
</TABLE>
NOTE C - CONTINGENCIES AND COMMITMENT
Guarantees of approximately $ 8,711,500 were outstanding on September 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 2,551,717 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.
(Subsidiary of Celsius Inc.)
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
Financial Condition
Third quarter 1998 (All dollar amounts are in thousands.)
Worldwide revenue for the third quarter 1998 totaled $5,982, which was an 18%
decrease from $7,325 the third quarter of last year. Net Income for the third
quarter was $132 as compared to a third quarter income of $190 last year.
The revenue decrease was attributable to the timing of project activities, with
several projects near completion in third quarter 1998 as compared to third
quarter 1997. Several new projects became active at the end of the third quarter
1998, which will provide additional revenue and margin in the fourth quarter and
beyond.
Backlog of orders as of September 30, 1998 was $31,131 as compared with $14,278
and $19,498 as of December 31, 1997 and September 30, 1997, respectively. This
118% increase from year-end was related to several significant orders signed
during the third quarter, which were the result of the heavy proposal activities
during the first half of 1998. The backlog as of September 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. There
continues to be significant ongoing proposal activity, which should result in
additional bookings this year.
Cost of earned revenue for the third quarter, which includes manufacturing and
engineering costs, was 77% as compared to 83% during the same period of last
year. For the total year, the Company expects margins to be comparable to
September 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 $874 were 15% of revenues during
the third quarter of 1998 as compared to $724 and 10% during the same period of
last year. This increase of $101 or 14% was primarily related to increased
investments in marketing and certain administrative functions.
Research and development expenses were $165 during the third quarter 1998 as
compared to $173 in the same period in 1997. During 1998, additional R & D will
be incurred for continued enhancements to the ASE2000 in order to maintain a
leadership role in the marketplace.
<PAGE>
Page 9
AERO SYSTEMS ENGINEERING , INC.
(Subsidiary of Celsius Inc.)
Capital expenditures for year-to-date 1998 were $290 as compared to $186 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.
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 $300 for the purchase of new hardware,
software, and installation costs that will be capitalized and $50 that will be
expensed as incurred. To date, the Company has incurred little of this cost
since it is currently completing the vendor selection phase. The Company expects
to complete the selection phase and begin implementation activities by fourth
quarter 1998, and complete the implementation phase by mid 1999. 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. In addition to the Year 2000 issues relating to the computer systems,
the Company has begun testing its non-IT systems for any other potential Year
2000 issues, and is communicating with business partners and suppliers to
determine if their Year 2000 compliance status will impact the operations of the
Company. Any issues that are identified as a result of this process will be
corrected by mid-1999.
Interest expense of $220 was incurred during the quarter as compared to $199
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 during the third quarter is slightly higher than the third quarter
of last year.
Accounts receivable at the end of the third quarter was $4,979 as compared with
the year-end 1997 balance of $4,767. This increase of $212 was due mainly to
invoice timing on several large contracts.
Accounts payable and accrued expenses at the end of the third quarter decreased
$1,523 or 19% as compared to the year-end 1997 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 $6,861 as compared to the year-end 1997 balance of
$6,135, which is an increase of $726 or 12%. This increase 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 third quarter decreased $957 or 11%, to $7,384 as compared with
the year-end 1997 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.
<PAGE>
Page 10
AERO SYSTEMS ENGINEERING , INC.
(Subsidiary of Celsius Inc.)
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.
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 management 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, 1998, $6,861 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 continue to put pressure on the margins of
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 large backlog at the end of
the third quarter and the ongoing proposal activities should allow continued
profitability in 1998 and a strong backlog position and improved profitability
in 1999.
<PAGE>
Page 11
AERO SYSTEMS ENGINEERING, INC.
(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 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 September 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: October 29, 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
<CIK> 0000002589
<NAME> AERO SYSTEMS ENGINEERING INC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 12
<SECURITIES> 0
<RECEIVABLES> 4,979
<ALLOWANCES> 0
<INVENTORY> 1,079
<CURRENT-ASSETS> 14,094
<PP&E> 14,134
<DEPRECIATION> 9,062
<TOTAL-ASSETS> 19,174
<CURRENT-LIABILITIES> 13,890
<BONDS> 0
0
0
<COMMON> 766
<OTHER-SE> 261
<TOTAL-LIABILITY-AND-EQUITY> 19,174
<SALES> 19,531
<TOTAL-REVENUES> 19,531
<CGS> 15,302
<TOTAL-COSTS> 15,302
<OTHER-EXPENSES> 3
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 656
<INCOME-PRETAX> 298
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 298
<EPS-PRIMARY> .08
<EPS-DILUTED> 0
</TABLE>
