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 March 31, 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
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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 ___
The number of shares of common stock, par value $.20 per share,
outstanding as of March 31, 1999, was 4,401,625.
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Page 2
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius Inc.)
Form 10-Q
Quarter Ended March 31, 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 6 Exhibits and Reports on Form 8-K 11
Signatures 11
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Page 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
ASSETS 1999 1998
------- -------
(Unaudited) (Note)
(000's omitted, except share data)
CURRENT ASSETS
Cash and cash equivalents $ 123 $ 16
Accounts Receivable, net 4,701 7,241
Costs and Estimated Earnings in
Excess of Billings on Uncompleted
Contracts 8,457 6,711
Inventories:
Materials and Supplies 574 613
Projects in Process 1,478 793
Prepaid Expenses 9 51
Deferred and Prepaid Income Taxes 580 580
------- -------
Total Current Assets 15,922 16,005
PROPERTY, PLANT AND EQUIPMENT
Land 486 486
Buildings 3,025 3,025
Furniture, Fixtures, & Equipment 7,274 7,028
Wind Tunnels & Instrumentation 2,702 2,702
Building Improvements 1,338 1,338
------- -------
14,825 14,579
Less Accumulated Depreciation 9,373 9,104
------- -------
Property, Plant, and Equipment, net 5,452 5,475
Total Assets $21,374 $21,480
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AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsuis Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)
March 31, December 31,
LIABILITIES 1999 1998
------- -------
(Unaudited) (Note)
(000's omitted, except share data)
CURRENT LIABILITIES
Current Maturities of
Capital Lease Obligations $ 81 $ 99
Current Maturites of Long-Term
Debt to Affiliated Companies 0 400
Notes Payable 7,157 6,699
Accounts Payable:
Trade 3,995 3,778
Affiliated Companies 697 654
Billings in Excess of Costs and Estimated
Earnings on Uncompleted Contracts 1,829 1,416
Accrued Warranty and Losses 709 703
Accrued Salaries and Wages 823 595
Income Taxes Payable 1 1
Other Accrued Liabilities 945 1,506
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Total Current Liabilities 16,237 15,851
OTHER LIABILITIES
Deferred Income Taxes 480 480
Capital Lease Obligations,
Less Current Maturities 218 234
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Common Stock - Authorized 10,000,000 Shares
of $.20 Par Value; Issued 4,401,625 on
March 31, 1999 and December 31, 1998 880 880
Additional Paid-in Capital 900 900
Retained Earnings 2,659 3,135
------- -------
Total Stockholders' Equity 4,439 4,915
------- -------
Total Liabilities and Stockholders' Equity $21,374 $21,480
======= =======
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)
Three Months Ended
March 31,
1999 1998
------- -------
Earned Revenue $ 6,396 $ 7,054
Cost of Earned Revenue 5,435 5,588
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Gross Profit 961 1,466
Operating Expenses 1,220 1,174
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Operating Profit(Loss) (259) 292
Other Income (Expense)
Interest Expense (203) (219)
Other (6) (3)
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(209) (222)
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Income (Loss) Before Income Taxes (468) 70
Income Tax Expense (8) --
------- -------
Net Income (Loss) $ (476) $ 70
======= =======
NET INCOME (LOSS) PER SHARE $ (0.11) $ 0.02
======= =======
Dividends per Share None None
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AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, 000's omitted)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
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<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (476) $ 70
Adjustment to reconcile net income (loss)
to net cash provided (used) by operating activities:
Depreciation and Amortization 269 283
(Increase) Decrease in Assets:
Accounts Receivable 2,540 (2,191)
Cost and Estimated Earnings in Excess of
Billings on Uncompleted Contracts (1,746) 969
Inventories (646) (82)
Prepaid Expenses 42 35
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses (67) 148
Billings in Excess of Costs and Estimated Earnings
on Uncompleted Contracts 413 267
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Net Cash Provided (Used) by
Operating Activities 329 (501)
CASH FLOW FROM INVESTING ACTIVITIES:
Capital Expenditures (246) (63)
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Net Cash Used in Investing Activities (246) (63)
CASH FLOW FROM FINANCING ACTIVITIES:
Net Borrowings under Line of Credit Agreement 458 930
Principal Payments under Capital Lease Obligations (34) (33)
Principal Payments on Borrowings From Affiliates (400) (400)
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Net Cash Provided (Used) by Financing Activities 24 497
------- -------
NET CHANGE IN CASH 107 (67)
CASH AT BEGINNING OF YEAR 16 117
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CASH AT END OF QUARTER $ 123 $ 50
======= =======
</TABLE>
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AERO SYSTEMS ENGINEERING , INC.
(Subsidiary of Celsius Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, 000's omitted)
March 31, 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 three-month period ending
March 31, 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:
March 31, March 31,
1999 1998
------- -------
Costs Incurred on Uncompleted Contracts $43,858 $34,911
Estimated Earnings Thereon 10,293 8,829
------- -------
Total Earned Revenue on Uncompleted Contracts 54,151 43,740
Less Billings Applicable thereto 47,523 36,864
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$ 6,628 $ 6,876
======= =======
Included in Accompanying Balance Sheet
Under Following Captions:
Costs and Estimated Earnings in Excess of
Billings on Uncompleted Contracts $ 8,457 $ 7,372
Billings in Excess of Costs and Estimated
Earnings on Uncompleted Contracts 1,829 496
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$ 6,628 $ 6,876
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NOTE C - CONTINGENCIES AND COMMITMENT
Guarantees of approximately $7,828,856 were outstanding on March 31,
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 this 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
First quarter 1999 (All dollar amounts are in thousands.)
Worldwide revenue for the first quarter 1999 totaled $6,396, which was a 9%
decrease from $7,054 in the first quarter of last year. Net loss for the first
quarter was $476 as compared to first quarter income of $70 last year.
The revenue decrease was attributable to the timing of the completion of several
major projects at the end of 1998, and customers delaying the start on several
new projects early in the first quarter 1999. The net loss for the quarter was
mostly attributable to those delayed starts. Also, first quarter included a
significant amount of work expended on one major contract that is not expected
to meet the revenue and gross margin recognition threshold until second quarter.
The costs incurred on this contract are carried in projects in process
inventory, which accounts for the majority of the increase in this asset
account.
Backlog of orders as of March 31, 1999 was $27,012 as compared with $26,518 and
$12,040 as of December 31, 1998 and March 31, 1998, respectively. This 2%
increase in the first quarter from December 31, 1998 is the result of winning
several of the major proposals outstanding at the start of the year. The new
proposal activity continues to be strong with a significant amount of proposals
outstanding.
Cost of earned revenue for the first quarter, which includes manufacturing and
engineering costs, was 85% as compared to 79% during the same period of last
year. This increase is a result of the reduced revenues experienced in the first
quarter available to absorb fixed operational costs, and contract
cost-to-complete adjustments.
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
adjustments 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 $998 were 16% of revenues during
the first quarter 1998 as compared to $1,126 and 16% during the same period of
last year. This decrease of $128 is mostly related to the lower bid and proposal
expenses in the first quarter of 1999.
Research and development expenses were $222 during the first quarter as compared
to $48 in the same period in 1998. This increase of $174 or 362% was the result
of accelerating the efforts on several R&D projects to improve the functionality
of the ASE 2000 Data Acquisition and Control System. 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.
(A Subsidiary of Celsius Inc.)
Interest expense of $203 was incurred during the quarter as compared to $219
from the same period in the prior year. The average rate of interest on
short-term borrowings has had little change while the average amount of
borrowings outstanding has increased in the first quarter as compared to the
first quarter of last year.
Capital expenditures were $246 as compared to $63 for the same period of last
year. This increase of $183 is attributed to the purchase of equipment related
to the new ERP software package that was acquired at the end of 1998. Additional
capital expenditures will be used to complete the enhancement at the Aerotest
Laboratory, and additional equipment will be purchased for R & D projects, and
desktop upgrades.
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 $500,000, which includes $450,000 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 the
majority of the acquisition costs, and about one-third of the implementation
costs, which in total amounts to about $400,000.
The project is estimated to be completed by July 31, 1999, which is prior to any
anticipated impact on its operating systems. 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 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 mid-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.
Accounts receivable at the end of the first quarter was $4,701 as compared with
the year end balance of $7,241. This decrease of $2,540 was due mainly to the
collection of several large invoices outstanding at the end of 1998.
Costs and estimated earnings in excess of billings on uncompleted contracts at
the end of the first quarter increased $1,746 or 26%, to $8,457 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 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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AERO SYSTEMS ENGINEERING, INC.
(A Subsidiary of Celsius Inc.)
Accounts payable and accrued expenses at the end of the first quarter decreased
$67 or 1% as compared to the year end balance. This was primarily due to the
decreased procurement expenditures in the early phases of new contracts.
Notes payable balance was $7,157 as compared to the year end balance of $6,699,
which is an increase of $458 or 7%. This increase is primarily the result of
timing of project expenditures as compared to invoicing milestones.
The Company operates on a global basis and during an average year, 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 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 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 March 31, 1999 $7,157 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 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
our marketing effort on an international basis.
Looking ahead throughout the remainder of 1999, the contracts won in the first
quarter of 1999 and the strong proposal activity is expected to result in a
significant backlog increase and provide a solid base for the remainder of 1999.
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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 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 March 31, 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: May 6, 1999 /s/ Leon E. Ring
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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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 123
<SECURITIES> 0
<RECEIVABLES> 4,701
<ALLOWANCES> 0
<INVENTORY> 2,052
<CURRENT-ASSETS> 15,922
<PP&E> 14,825
<DEPRECIATION> 9,373
<TOTAL-ASSETS> 21,374
<CURRENT-LIABILITIES> 16,237
<BONDS> 0
0
0
<COMMON> 880
<OTHER-SE> 900
<TOTAL-LIABILITY-AND-EQUITY> 21,374
<SALES> 6,396
<TOTAL-REVENUES> 6,396
<CGS> 5,435
<TOTAL-COSTS> 5,435
<OTHER-EXPENSES> 6
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 203
<INCOME-PRETAX> (468)
<INCOME-TAX> (8)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (476)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> 0
</TABLE>
