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, 1999
( ) 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
------------
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, 1999, 4,401,625 shares of common stock, par value
$.20 per share, were outstanding.
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AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius Inc.)
Form 10-Q
Quarter Ended September 30, 1999
Page
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PART I - FINANCIAL INFORMATION
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 11
Item 6 Exhibits and Reports on Form 8-K 11
Signatures 11
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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 1999 1998
------ ------------- ------------
(Unaudited) (Note)
(000's omitted, except share data)
<S> <C> <C>
CURRENT ASSETS
- --------------
Cash and Cash Equivalents $ 60 $ 16
Accounts Receivable, net 5,144 7,241
Costs and Estimated Earnings in
Excess of Billings on Uncompleted
Contracts 6,480 6,711
Inventories:
Materials and Supplies 537 613
Projects in Process 830 793
Prepaid Expenses 122 51
Deferred and Prepaid Income Taxes 580 580
------------ ------------
Total Current Assets 13,753 16,005
PROPERTY, PLANT AND EQUIPMENT
- -----------------------------
Land 486 486
Buildings 3,025 3,025
Furniture, Fixtures, & Equipment 7,744 7,028
Wind Tunnels & Instrumentation 2,702 2,702
Building Improvements 1,338 1,338
------------ ------------
15,295 14,579
Less Accumulated Depreciation 9,880 9,104
------------ ------------
Property, Plant, and Equipment, net 5,415 5,475
Total Assets $ 19,168 $ 21,480
============ ============
</TABLE>
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AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsuis Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)
<TABLE>
<CAPTION>
September 30, December 31,
LIABILITIES 1999 1998
----------- ------------- ------------
(Unaudited) (Note)
(000's omitted, except share data)
<S> <C> <C>
CURRENT LIABILITIES
- -------------------
Current Maturities of
Capital Lease Obligations $ 73 $ 99
Current Maturites of Long-Term
Debt to Affiliated Companies 0 400
Notes Payable 4,667 6,699
Accounts Payable:
Trade 1,474 3,778
Affiliated Companies 138 654
Billings in Excess of Costs and Estimated
Earnings on Uncompleted Contracts 3,818 1,416
Accrued Warranty and Losses 610 703
Accrued Salaries and Wages 894 595
Income Taxes Payable 1 1
Other Accrued Liabilities 2,443 1,506
------------ ------------
Total Current Liabilities 14,118 15,851
OTHER LIABILITIES
- -----------------
Deferred Income Taxes 480 480
Capital Lease Obligations,
Less Current Maturities 196 234
Commitments and Contingencies
STOCKHOLDERS' EQUITY
- --------------------
Common Stock - Authorized 10,000,000 Shares
of $.20 Par Value; Issued 4,401,625 on
September 30, 1999 and December 31, 1998 880 880
Additional Paid-in Capital 900 900
Retained Earnings 2,594 3,135
------------ ------------
Total Stockholders' Equity 4,374 4,915
------------ ------------
Total Liabilities and Stockholders' Equity $ 19,168 $ 21,480
============ ============
</TABLE>
Note: The balance sheet at December 31, 1998 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.
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Page 5
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
1999 1998 1999 1998
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Earned Revenue $ 7,841 $ 5,982 $ 22,952 $ 19,531
Cost of Earned Revenue 5,991 4,587 19,071 15,302
------------ ------------ ------------ ------------
Gross Profit 1,850 1,395 3,881 4,229
Operating Expenses 1,292 1,039 3,848 3,278
------------ ------------ ------------ ------------
Operating Profit (Loss) 558 356 33 951
Other Income (Expense)
Interest Expense (165) (220) (574) (656)
Other (1) (4) 13 3
------------ ------------ ------------ ------------
(166) (224) (561) (653)
------------ ------------ ------------ ------------
Income (Loss) Before Income Taxes 392 132 (528) 298
Income Tax Expense (3) -- (13) --
------------ ------------ ------------ ------------
Net Income (Loss) $ 389 $ 132 $ (541) $ 298
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE $ 0.09 $ 0.03 $ (0.12) $ 0.07
============ ============ ============ ============
Dividends per Share None None None None
</TABLE>
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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,
1999 1998
-----------------------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (541) $ 298
Adjustment to reconcile net income (loss)
to net cash provided (used) by operating activities:
Depreciation and Amortization 776 848
(Increase) Decrease in Assets:
Accounts Receivable 2,097 (212)
Cost and Estimated Earnings in Excess of
Billings on Uncompleted Contracts 231 957
Inventories 39 (65)
Prepaid Expenses (71) 58
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses (1,677) (2,060)
Billings in Excess of Costs and Estimated Earnings
on Uncompleted Contracts 2,402 537
------------ ------------
Net Cash Provided (Used) by
Operating Activities 3,256 361
CASH FLOW FROM INVESTING ACTIVITIES:
Capital Expenditures (716) (290)
------------ ------------
Net Cash Used in Investing Activities (716) (290)
CASH FLOW FROM FINANCING ACTIVITIES:
Net Borrowings under Line of Credit Agreement (2,032) 726
Principal Payments under Capital Lease Obligations (64) (102)
Principal Payments on Borrowings From Affiliates (400) (800)
------------ ------------
Net Cash Provided (Used) by Financing Activities (2,496) (176)
------------ ------------
NET CHANGE IN CASH 44 (105)
CASH AT BEGINNING OF YEAR 16 117
------------ ------------
CASH AT END OF QUARTER $ 60 $ 12
============ ============
</TABLE>
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AERO SYSTEMS ENGINEERING , INC. -- CONSOLIDATED
(Subsidiary of Celsius Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, 000's omitted)
September 30, 1999
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, 1999 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1999. 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, 1998.
NOTE B - CONTRACTS IN PROCESS
Information with respect to contracts in process follows:
September 30, September 30,
1999 1998
------------- -------------
Costs Incurred on Uncompleted Contracts $ 37,325 $ 42,034
Estimated Earnings Thereon 7,589 10,235
------------ ------------
Total Earned Revenue on Uncompleted Contracts 44,914 52,269
Less Billings Applicable Thereto 42,252 45,651
------------ ------------
$ 2,662 $ 6,618
============ ============
Included in Accompanying Balance Sheet
Under Following Captions:
Costs and Estimated Earnings in Excess of
Billings on Uncompleted Contracts $ 6,480 $ 7,384
Billings in Excess of Costs and Estimated
Earnings on Uncompleted Contracts 3,818 766
------------ ------------
$ 2,662 $ 6,618
============ ============
NOTE C - CONTINGENCIES AND COMMITMENT
Guarantees of approximately $9,915,069 were outstanding on September
30, 1999 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 fifteen percent (15%) stock dividend during
March, 1999. This resulted in the number of outstanding shares
increasing from 3,827,573 to 4,401,625 shares during that period. The
financial information in this report has been restated to reflect this
stock dividend.
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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 1999 (All dollar amounts are in thousands.)
Worldwide revenue for the third quarter 1999 totaled $7,841, which was a 31%
increase from $5,982 in revenue for the third quarter of last year. Net income
for the third quarter was $389 as compared to a third quarter income of $132
last year.
The revenue increase was mostly attributable to the impact of a large project
that achieved revenue recognition threshold during the second quarter and the
impact of performing several Year 2000 computer system upgrades for customers.
Backlog of orders as of September 30, 1999 was $18,096 as compared with $26,518
and $31,131 as of December 31, 1998 and September 30, 1998, respectively. This
32% decrease from year-end was related to slower order intake during the first
three quarters of 1999 and the conversion of backlog into revenue for one large
wind tunnel project. The backlog as of September 30, 1999 does not include the
NASA task order contract awarded in the second quarter 1998 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 proposal activity continues to be strong in all areas of the business.
Cost of earned revenue for the third quarter, which includes manufacturing and
engineering costs, was 76% as compared to 77% during the same period of last
year. This improvement is primarily a result of improved project margins. The
third quarter improvement over the first half of the year is related to the
inclusion in the first half of 1999 cost of earned revenue additional reserves
for the settlement of a long outstanding lawsuit and higher than expected
construction costs on one major contract.
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 is 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 $1,165 were 15% of revenues
during the third quarter of 1999 as compared to $874 and 15% during the same
period of last year. This increase of $291 or 33% was primarily related to
increased bid and proposal activities.
Research and development expenses were $127 during the third quarter of 1999 as
compared to $165 in the same period in 1998. During 1999, 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 third quarter 1999 were $309 as compared to $290
for the same period of last year. It is expected that for the remainder of 1999,
additional capital expenditures will be used to complete
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AERO SYSTEMS ENGINEERING, INC.
(A Subsidiary of Celsius Inc.)
the enhancement at the Aerotest Laboratory, to purchase additional equipment for
R & D projects, engineering departments, and to complete the replacement of the
main computer system.
The Company has completed an assessment and is modifying or replacing portions
of its 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 $800,000, which includes $750,000 for the purchase of
new hardware, software and implementation costs that will be capitalized and
$50,000 that will be expensed as incurred. To date, the Company has incurred
approximately $730,000 of the Year 2000 project costs, consisting of all of the
acquisition costs, and approximately ninety percent of the implementation costs.
The Year 2000 project which is over 90 percent complete will be completed by the
end of November 1999, which is prior to any anticipated impact on the Company's
operating systems. Should the Company be unable to acquire and implement new
systems and software prior to January 1, 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 on a timely basis, 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 is testing its non-IT systems for any other potential Year 2000 issues,
and it 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 are expected to be
corrected by the end of November 1999.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved, and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
Interest expense of $165 was incurred during the third quarter of 1999 as
compared to $220 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 lower than the third
quarter of last year.
Accounts receivable at the end of the third quarter was $5,144 as compared with
the year-end 1998 balance of $7,241. This decrease of $2,097 was due mainly to
invoice timing on several large contracts.
Costs and estimated earnings in excess of billings on uncompleted contracts at
the end of the third quarter decreased $231, or 3%, to $6,480 as compared with
the year-end 1998 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
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AERO SYSTEMS ENGINEERING, INC.
(A Subsidiary of Celsius Inc.)
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.
Notes payable balance was $4,667 as compared to the year-end 1998 balance of
$6,699, which is a decrease of $2,032 or 30%. This decrease is primarily the
result of improved project cash flows and increased customer down payments.
Accounts payable and accrued expenses at the end of the third quarter decreased
$1,677 or 23% as compared to the year-end 1998 balance. This was primarily due
to several projects nearing completion, with all equipment previously shipped
and installed, therefore reducing vendor commitments. The new projects are now
moving into the procurement phase, which will increase vendor commitments.
Billings in excess of costs and estimated earnings on uncompleted contracts at
the end of the third quarter increased $2,402 to $3,818 compared to the year-end
1998 balance of $1416. Most of this increase is attributable to down payments
and invoicing terms on two large contracts.
The Company operates on a global basis, and during an average year, it generates
approximately 50% 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 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 to
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, 1999, $4,667 was used, with a $1333 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 10.75 per annum. 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 continues to enhance
the Company's marketing effort on an international basis.
Looking ahead throughout the remainder of 1999, improved margins should continue
as the engineering phase of the new projects are completed and the procurement
phase begin. This, plus the high backlog, gives the Company a solid base for the
rest of 1999.
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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. During the second quarter, additional
reserves were established in anticipation of a settlement of
this matter. During July 1999 the final settlement of this
legal matter occurred.
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, 1999.
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: November 2, 1999
/s/ Charles Loux
-------------------------------------------
Charles Loux, President and CEO
/s/ Steven R. Hedberg
-------------------------------------------
Steven R. Hedberg, Chief Financial Officer
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<NAME> AERO SYSTEMS ENGINEERING INC
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<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
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