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, 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.
(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
-----------------------------------------------------------
(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 ___
The number of shares of common stock, par value $.20 per share, outstanding
as of June 30, 1999, was 4,401,625.
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AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius Inc.)
Form 10-Q
Quarter Ended June 30, 1999
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 4 Submission of Matters to a Vote of Security Holders 11
Item 5 Other Items 11
Item 6 Exhibits and Reports on Form 8-K 12
SIGNATURES 12
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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>
June 30, December 31,
ASSETS 1999 1998
------ ----------- -----------
(Unaudited) (Note)
(000's omitted, except share data)
<S> <C> <C>
CURRENT ASSETS
- --------------
Cash and Cash Equivalents $ 66 $ 16
Accounts Receivable, net 7,329 7,241
Costs and Estimated Earnings in
Excess of Billings on Uncompleted
Contracts 7,547 6,711
Inventories:
Materials and Supplies 517 613
Projects in Process 749 793
Prepaid Expenses 60 51
Deferred and Prepaid Income Taxes 580 580
----------- -----------
Total Current Assets 16,848 16,005
PROPERTY, PLANT AND EQUIPMENT
- -----------------------------
Land 486 486
Buildings 3,025 3,025
Furniture, Fixtures, & Equipment 7,435 7,028
Wind Tunnels & Instrumentation 2,702 2,702
Building Improvements 1,338 1,338
----------- -----------
14,986 14,579
Less Accumulated Depreciation 9,641 9,104
----------- -----------
Property, Plant, and Equipment, net 5,345 5,475
Total Assets $ 22,193 $ 21,480
=========== ===========
</TABLE>
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AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsuis Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)
<TABLE>
<CAPTION>
June 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 5,704 6,699
Accounts Payable:
Trade 2,315 3,778
Affiliated Companies 761 654
Billings in Excess of Costs and Estimated
Earnings on Uncompleted Contracts 5,106 1,416
Accrued Warranty and Losses 709 703
Accrued Salaries and Wages 904 595
Income Taxes Payable 1 1
Other Accrued Liabilities 1,954 1,506
----------- -----------
Total Current Liabilities 17,527 15,851
OTHER LIABILITIES
- -----------------
Deferred Income Taxes 480 480
Capital Lease Obligations,
Less Current Maturities 201 234
Commitments and Contingencies
STOCKHOLDERS' EQUITY
- --------------------
Common Stock - Authorized 10,000,000 Shares
of $.20 Par Value; Issued 4,401,625 on
June 30, 1999 and December 31, 1998 880 880
Additional Paid-in Capital 900 900
Retained Earnings 2,205 3,135
----------- -----------
Total Stockholders' Equity 3,985 4,915
----------- -----------
Total Liabilities and Stockholders' Equity $ 22,193 $ 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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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
1999 1998 1999 1998
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Earned Revenue $ 8,715 $ 6,495 $ 15,111 $ 13,549
Cost of Earned Revenue 7,645 5,127 13,080 10,715
----------- ----------- ----------- -----------
Gross Profit 1,070 1,368 2,031 2,834
Operating Expenses 1,336 1,065 2,556 2,239
----------- ----------- ----------- -----------
Operating Profit (Loss) (266) 303 (525) 595
Other Income (Expense)
Interest Expense (206) (217) (409) (436)
Other 20 10 14 7
----------- ----------- ----------- -----------
(186) (207) (395) (429)
----------- ----------- ----------- -----------
Income (Loss) Before Income Taxes (452) 96 (920) 166
Income Tax Expense (2) -- (10) --
----------- ----------- ----------- -----------
Net Income (Loss) $ (454) $ 96 $ (930) $ 166
=========== =========== =========== ===========
NET INCOME ( LOSS) PER SHARE $ (0.10) $ 0.02 $ (0.21) $ 0.04
=========== =========== =========== ===========
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>
Six Months Ended
June 30,
1999 1998
-------------------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (930) $ 166
Adjustment to reconcile net income (loss)
to net cash provided (used) by operating activities:
Depreciation and Amortization 537 566
(Increase) Decrease in Assets:
Accounts Receivable (88) (1,287)
Cost and Estimated Earnings in Excess of
Billings on Uncompleted Contracts (836) 2,307
Inventories 140 (37)
Prepaid Expenses (9) 114
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses (593) (1,683)
Billings in Excess of Costs and Estimated Earnings
on Uncompleted Contracts 3,690 544
---------- ----------
Net Cash Provided (Used) by
Operating Activities 1,911 690
CASH FLOW FROM INVESTING ACTIVITIES:
Capital Expenditures (407) (150)
---------- ----------
Net Cash Used in Investing Activities (407) (150)
CASH FLOW FROM FINANCING ACTIVITIES:
Net Borrowings under Line of Credit Agreement (995) (139)
Principal Payments under Capital Lease Obligations (59) (67)
Principal Payments on Borrowings From Affiliates (400) (400)
---------- ----------
Net Cash Provided (Used) by Financing Activities (1,454) (606)
---------- ----------
NET CHANGE IN CASH 50 (66)
CASH AT BEGINNING OF YEAR 16 117
---------- ----------
CASH AT END OF QUARTER $ 66 $ 51
========== ==========
</TABLE>
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AERO SYSTEMS ENGINEERING, INC. -- CONSOLIDATED
(Subsidiary of Celsius Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, 000's omitted)
June 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 six-month period ending June 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:
June 30, June 30,
1999 1998
---------- ----------
Costs Incurred on Uncompleted Contracts $ 50,276 $ 38,930
Estimated Earnings Thereon 11,667 9,529
---------- ----------
Total Earned Revenue on Uncompleted Contracts 61,943 48,459
Less Billings Applicable Thereto 59,502 43,198
---------- ----------
$ 2,441 $ 5,261
========== ==========
Included in Accompanying Balance Sheet
Under Following Captions:
Costs and Estimated Earnings in Excess of
Billings on Uncompleted Contracts $ 7,547 $ 6,034
Billings in Excess of Costs and Estimated
Earnings on Uncompleted Contracts 5,106 773
---------- ----------
$ 2,441 $ 5,261
========== ==========
NOTE C - CONTINGENCIES AND COMMITMENT
Guarantees of approximately $8,811,795 were outstanding on June 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 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.
(Subsidiary of Celsius Inc.)
Item 2. Management's Discussion and Analysis of Financial Condition And Results
of Operations
Financial Condition
Second quarter 1999 (All dollar amounts are in thousands.)
Worldwide revenue for the second quarter 1999 totaled $8,715, which was a 34%
increase from $6,495 in the second quarter of last year. Net loss for the second
quarter was $454 as compared to second quarter income of $96 last year.
The revenue increase was mostly attributable to the impact of one large project
achieving the revenue recognition threshold during the second quarter, recording
revenues for work completed from the fourth quarter 1998 through the second
quarter 1999. Also, there was significantly higher backlog going into 1999
compared to the backlog at the start of 1998. The loss in the second quarter was
mostly attributable to higher than expected costs on a major turnkey project and
the recording of additional costs related to the final settlement of a long
outstanding legal dispute.
Backlog of orders as of June 30, 1999 was $24,372 as compared with $26,518 and
$11,151 as of December 31, 1998 and June 30, 1998, respectively. This 8%
decrease from December 31, 1998 was related to delays in customer decisions on
several major outstanding proposals during the first half of 1999. The backlog
as of June 30, 1999 does not include the NASA second quarter 1998 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 proposal activity continues to be
strong for data acquisition systems and turnkey projects.
Cost of earned revenue for the second quarter, which includes manufacturing and
engineering costs, was 88% as compared to 79% during the same period of last
year. The increase during this period is related to the higher than expected
costs incurred on the one major turnkey project and the recording of additional
reserves relating to the outstanding legal dispute.
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 $1,074 were 12% of revenues
during the second quarter of 1999 as compared to $987 and 15% during the same
period of last year. This increase of $87 or 9% was primarily related to
increased outside legal and administrative expenses in second quarter 1999.
Research and development expenses were $262 during the second quarter as
compared to $78 in the same period in 1998. This increase of $184 was a result
of increased efforts on specific ASE2000 projects. During 1999, additional R & D
will be incurred for continued enhancements to the ASE2000 in order to maintain
a leadership role in the marketplace.
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AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius Inc.)
Capital expenditures for the second quarter were $161 as compared to $87 for the
same period of last year. It is expected that for the remainder of 1999,
additional capital expenditures will be used to complete 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 $650,000, which includes $600,000 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 $550,000 of the Year 2000 project costs, consisting of most of the
acquisition costs, and approximately two-thirds of the implementation costs.
The Year 2000 project is estimated to be completed by late September 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 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 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 September 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 $206 was incurred during the second quarter of 1999, as
compared to $217 from the same period in the prior year. The average rate of
interest on short-term borrowings and the average amount of borrowings
outstanding are slightly lower during the second quarter of 1999 as compared to
the second quarter of last year.
Accounts receivable at the end of the second quarter was $7,329 as compared with
the year end balance of $7,241. This increase of $88 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 second quarter increased $836 or 12%, to $7,547 as compared with
the balance at December 31, 1998. 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 the timing of 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.
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Page 10
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius Inc.)
Notes payable balance was $5,704 as compared to the year end balance of $6,699,
which is a decrease of $995 or 15%. This decrease is primarily the result of
timing of project expenditures as compared to invoicing milestones.
Accounts payable and accrued expenses at the end of the second quarter decreased
$593 or 8% 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.
Billings in excess of costs and estimated earnings on uncompleted contracts
increased $3,690 during the second quarter to $5,106. 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 fee is paid through
Celsius Inc.
The Company currently has bank lines of credit which enable it to borrow up to a
total of $6,000. As of June 30, 1999, $5,704 was used, with $296 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%. 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
the Company's marketing effort on an international basis.
Looking ahead throughout the remainder of 1999, improved margins are expected as
the engineering phase of the new projects are completed. This plus the high
backlog gives us 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 the
period between June 30, 1999 to the date of this filing, the
final settlement of this legal matter occurred.
Item 4: Submission of Matters to a Vote of Security Holders
(a) The Company held its annual meeting on June 2, 1999.
(b) The Company solicited proxies for the annual meeting pursuant to
Regulation 14 under the Securities Exchange Act of 1934. There
was no solicitation in opposition to management's nominees as
listed in the Company's Proxy Statement prepared for the
meeting, and all such nominees were elected.
The nominees consisted of all directors serving as such at the time of
the annual meeting, and all such nominees were re-elected as directors.
The directors elected consisted of Christer Persson, Dr. Leon E. Ring,
Robert A. Davis, A. L. Maxson and Richard A. Hoel. The votes cast for,
against and withheld (if any) with respect to each director, and the
number of broker non-votes with respect to each such director, were as
follows:
Number of Votes
----------------------------- Number of
Name of Director For Against Withheld Broker Non-Votes
---------------- --- ------- -------- ----------------
Christer Persson 4,109,912 0 5691 0
Dr. Leon E. Ring 4,109,912 0 5691 0
Robert A. Davis 4,109,912 0 5691 0
A. L. Maxson 4,109,912 0 5691 0
Richard A. Hoel 4,109,912 0 5691 0
Item 5: Other Items
(a) In April 1999 the Company received notification from Nasdaq that
its securities will continue to be listed on the Nasdaq SmallCap
Market. Nasdaq had previously notified the Company that its
stock was subject to delisting for not meeting the market value
public float requirement.
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AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius Inc.)
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, 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: August 5, 1999 /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> 7-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 66
<SECURITIES> 0
<RECEIVABLES> 7,329
<ALLOWANCES> 0
<INVENTORY> 1,266
<CURRENT-ASSETS> 16,848
<PP&E> 14,986
<DEPRECIATION> 9,641
<TOTAL-ASSETS> 22,193
<CURRENT-LIABILITIES> 17,527
<BONDS> 0
0
0
<COMMON> 880
<OTHER-SE> 900
<TOTAL-LIABILITY-AND-EQUITY> 22,193
<SALES> 15,111
<TOTAL-REVENUES> 15,111
<CGS> 13,080
<TOTAL-COSTS> 13,080
<OTHER-EXPENSES> 14
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 409
<INCOME-PRETAX> (920)
<INCOME-TAX> 10
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