<PAGE> 1
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, 2000
[ ] 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 June 30, 2000, 4,401,625 shares of common stock, par value $.20
per share, were outstanding.
<PAGE> 2
Page 2
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius Inc.)
Form 10-Q
Quarter Ended June 30, 2000
<TABLE>
<CAPTION>
Page
----
<S> <C>
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 4 Submission of Matters to a Vote of Security Holders 11
Item 6 Exhibits and Reports on Form 8-K 11
Signatures 11
</TABLE>
<PAGE> 3
Page 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius Inc.)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 2000 1999
------ ------------------- ------------------
(Unaudited) (Note)
(000's omitted, except share data)
<S> <C> <C>
CURRENT ASSETS
--------------
Cash and cash equivalents $ 39 $ 48
Accounts Receivable, net 6,496 8,305
Costs and Estimated Earnings in
Excess of Billings on Uncompleted
Contracts 5,193 4,768
Inventories:
Materials and Supplies 1,005 842
Projects in Process 387 249
Prepaid Expenses 300 116
Deferred and Prepaid Income Taxes 724 727
------------------- ------------------
Total Current Assets 14,144 15,055
PROPERTY, PLANT AND EQUIPMENT
-----------------------------
Land 486 486
Buildings 3,025 3,025
Furniture, Fixtures, & Equipment 7,956 7,832
Wind Tunnels & Instrumentation 2,978 2,967
Building Improvements 1,338 1,338
------------------- ------------------
15,783 15,648
Less Accumulated Depreciation 10,604 10,019
------------------- ------------------
Property, Plant, and Equipment, net 5,179 5,629
Total Assets $ 19,323 $ 20,684
=================== ==================
</TABLE>
<PAGE> 4
Page 4
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsuis Inc.)
CONDENSED BALANCE SHEETS
(continued)
<TABLE>
<CAPTION>
June 30, December 31,
LIABILITIES 2000 1999
----------- ------------------ -------------------
(Unaudited) (Note)
(000's omitted, except share data)
<S> <C> <C>
CURRENT LIABILITIES
-------------------
Current Maturities of
Capital Lease Obligations $ 69 $ 79
Notes Payable 4,522 3,647
Accounts Payable:
Trade 2,826 916
Affiliated Companies 97 8
Billings in Excess of Costs and Estimated
Earnings on Uncompleted Contracts 2,612 5,238
Accrued Warranty and Losses 806 793
Accrued Salaries and Wages 888 847
Income Taxes Payable 0 0
Other Accrued Liabilities 2,684 4,093
------------------ -------------------
Total Current Liabilities 14,504 15,621
OTHER LIABILITIES
Deferred Income Taxes 623 623
Capital Lease Obligations,
Less Current Maturities 142 171
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Common Stock - Authorized 10,000,000 Shares
of $.20 Par Value; Issued 4,401,625 on
June 30, 2000 and December 31, 1999. 880 880
Additional Paid-in Capital 900 900
Retained Earnings 2,274 2,489
------------------ -------------------
Total Stockholders' Equity 4,054 4,269
------------------ -------------------
Total Liabilities and Stockholders' Equity $ 19,323 $ 20,684
================== ===================
</TABLE>
Note: The balance sheet at December 31, 1999 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> 5
Page 5
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius, Inc.)
CONDENSED STATEMENTS OF EARNINGS
(Unaudited, 000's omitted)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
-------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Earned Revenue $ 8,078 $ 8,715 $ 14,838 $ 15,111
Cost of Earned Revenue 6,246 7,645 11,613 13,080
-------------- -------------- -------------- --------------
Gross Profit 1,832 1,070 3,225 2,031
Operating Expenses 1,466 1,336 3,224 2,556
-------------- -------------- -------------- --------------
Operating Profit (Loss) 366 (266) 1 (525)
Other Income (Expense)
Interest Expense (119) (206) (220) (409)
Other 4 20 4 14
-------------- -------------- -------------- --------------
(115) (186) (216) (395)
-------------- -------------- -------------- --------------
Income (Loss) Before Income Taxes 251 (452) (215) (920)
Income Tax Expense - (2) - (10)
-------------- -------------- -------------- --------------
Net Income (Loss) $ 251 $ (454) $ (215) $ (930)
============== ============== ============== ==============
NET INCOME (LOSS) PER SHARE $ 0.06 $ (0.10) $ (0.05) $ (0.21)
============== ============== ============== ==============
Dividends per Share None None None None
</TABLE>
<PAGE> 6
Page 6
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius Inc.)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited, 000's omitted)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
-------------------------------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (215) $ (930)
Adjustment to reconcile net income (loss)
to net cash provided (used) by operating activities:
Depreciation and Amortization 585 537
(Increase) Decrease in Assets:
Accounts Receivable 1,809 (88)
Cost and Estimated Earnings in Excess of
Billings on Uncompleted Contracts (425) (836)
Inventories (301) 140
Prepaid Expenses (181) (9)
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses 644 (593)
Billings in Excess of Costs and Estimated Earnings
on Uncompleted Contracts (2,626) 3,690
-------------- --------------
Net Cash Provided (Used) by
Operating Activities (710) 1,911
CASH FLOW FROM INVESTING ACTIVITIES:
Capital Expenditures (135) (407)
-------------- --------------
Net Cash Used in Investing Activities (135) (407)
CASH FLOW FROM FINANCING ACTIVITIES:
Net Borrowings under Line of Credit Agreement 875 (995)
Principal Payments under Capital Lease Obligations (39) (59)
Principal Payments on Borrowings From Affiliates - (400)
-------------- --------------
Net Cash Provided (Used) by Financing Activities 836 (1,454)
-------------- --------------
NET CHANGE IN CASH (9) 50
CASH AT BEGINNING OF YEAR 48 16
-------------- --------------
CASH AT END OF QUARTER $ 39 $ 66
============== ==============
</TABLE>
<PAGE> 7
Page 7
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius Inc.)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited, 000's omitted)
June 30, 2000
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed 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 June
30, 2000 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000. For further information,
refer to the financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31,
1999.
NOTE B - CONTRACTS IN PROCESS
Information with respect to contracts in process follows:
<TABLE>
<CAPTION>
June 30, June 30,
2000 1999
------------------ ------------------
<S> <C> <C>
Costs Incurred on Uncompleted Contracts $ 43,506 $ 50,276
Estimated Earnings Thereon 9,446 11,667
------------------ ------------------
Total Earned Revenue on Uncompleted Contracts 52,952 61,943
Less Billings Applicable thereto 50,371 59,502
------------------ ------------------
$ 2,581 $ 2,441
================== ==================
Included in Accompanying Balance Sheet
Under Following Captions:
Costs and Estimated Earnings in Excess of
Billings on Uncompleted Contracts $ 5,193 $ 7,547
Billings in Excess of Costs and Estimated
Earnings on Uncompleted Contracts 2,612 5,106
------------------ ------------------
$ 2,581 $ 2,441
================== ==================
</TABLE>
NOTE C - CONTINGENCIES AND COMMITMENT
Guarantees of approximately $689,311 were outstanding on June 30, 2000
to various customers as bid bonds or in exchange for down payments or
warranty performance bonds.
<PAGE> 8
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 2000 (All dollar amounts are in thousands.)
Worldwide revenue for the second quarter 2000 totaled $8,078, which was a 7%
decrease from $8,715 in the second quarter of last year. Net income for the
second quarter was $251 as compared to second quarter net loss of $454 for the
same period last year.
Backlog of orders as of June 30, 2000 was $36,063 as compared with $18,759 and
$24,372 as of December 31, 1999 and June 30, 1999, respectively. This 92%
increase from December 31, 1999 was related to the receipt in June 2000 of a $23
million dollar order for a wind tunnel in Singapore. The proposal activity
continues to be strong for data acquisition systems and turnkey projects.
The decrease in revenue from Second Quarter 1999 was mostly attributable to the
fact that during the Second Quarter of 1999, a major wind tunnel project had
achieved the percentage of completion required for revenue recognition, which
resulted in recording revenues in 1999 for work completed from the fourth
quarter 1998 through the second quarter 1999. The second quarter of 2000 did not
include a similar event. The net income of $251,000 in the second quarter of
2000 was mostly attributable to the impact of increased project activity and
corresponding margin related to the new orders received early in the year.
Cost of earned revenue for the second quarter, which includes manufacturing and
engineering costs, was 77% as compared to 88% during the same period of last
year. The decrease during this period is related to the second quarter of 1999
having included higher than expected costs incurred on the one major turnkey
project and the recording of additional reserves relating to the outstanding
legal dispute, whereas the second quarter of 2000 did not include similar
events.
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 $1,116 were 14% of revenues
during the second quarter of 2000 as compared to $1,074 and 12% of revenues
during the same period of last year. This increase of $42 or 4% was primarily
related to increased bid and proposal activities related to several larger
turnkey proposals.
Research and development expenses were $350 during the second quarter of 2000 as
compared to $262 in the same period in 1999. This increase of $88 was a result
of increased efforts on specific ASE2000 projects. During 2000, additional
research and development expenses will be incurred for continued enhancements to
the ASE2000 in order to maintain a leadership role in the marketplace.
<PAGE> 9
Page 9
AERO SYSTEMS ENGINEERING, INC.
(A Subsidiary of Celsius Inc.)
Capital expenditures for the second quarter of 2000 were $75 as compared to $161
for the same period last year. The second quarter 1999 included capital
expenditures related to the new ERP system the Company implemented during 1999.
It is expected that for the remainder of 2000, additional capital expenditures
will be used to complete enhancements at the Aerotest Laboratory, to purchase
additional equipment for research and development projects, engineering
departments, and building improvements at our facilities.
Interest expense of $119 was incurred during the second quarter of 2000, as
compared to $206 from the same period in the prior year. The average amounts of
borrowings outstanding were lower during the second quarter of 2000 as compared
to the second quarter of last year.
Accounts receivable at the end of the second quarter 2000 was $6,496 as compared
with the year end 1999 balance of $8,305. This decrease of $1,809 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 of 2000 increased $425 or 9%, to $5,193 as
compared with the balance at December 31, 1999. 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.
Notes payable balance representing working capital advances was $4,522 at the
end of the second quarter 2000 as compared to the year end balance of $3,647,
which is an increase of $875 or 24%. This increase 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 increased
$644 or 10% as compared to the year end balance. This was primarily due to the
increased procurement expenditures related to the new contracts starting in the
second quarter.
Billings in excess of costs and estimated earnings on uncompleted contracts
decreased $2,626 or 50%, to $2,612 as compared with the balance at December 31,
1999. The decrease 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.
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 should have 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 Saab AB, a Swedish corporation. Celsius Inc., a United States
corporation, is
<PAGE> 10
Page 10
AERO SYSTEMS ENGINEERING, INC.
(A Subsidiary of Celsius Inc.)
a wholly owned subsidiary of Saab AB. Celsius Inc. owns approximately 80% of the
outstanding shares of common stock of the Company. A first security interest in
all assets of the Company has been granted to Celsius Inc., and a fee is paid
through Celsius Inc.
Prior to the first quarter 2000, Celsius Inc., a U.S. company, was a wholly
owned subsidiary of Celsius AB, a Swedish company, but is now ultimately owned
by Saab AB, also a Swedish company. During the fourth quarter of 1999, Saab AB
commenced a tender offer to acquire all of the outstanding shares of Celsius AB.
Saab AB completed the acquisition of Celsius AB during March 2000.
The Company currently has bank lines of credit, which enable it to borrow up to
a total of $6,000. As of June 30, 2000, $4,522 was used, with $1,478 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 continue
to enhance the Company's marketing effort on an international basis.
Looking ahead throughout the remainder of 2000, the contracts awarded to the
Company in the first half of 2000 and the significant increase in backlog should
provide a solid base for the remainder of the year.
<PAGE> 11
Page 11
AERO SYSTEMS ENGINEERING, INC.
(Subsidiary of Celsius Inc.)
PART II - OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders
(a) The Company held its annual meeting on May 31, 2000.
(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, Charles H. Loux,
Richard A. Hoel, A. L. Maxson and Dr. Leon E. Ring. 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:
<TABLE>
<CAPTION>
Number of Votes Number of
------------------------------------
Name of Director For Against Withheld Broker Non-Votes
---------------- --- ------- -------- ----------------
<S> <C> <C> <C> <C>
Christer Persson 4,081,803 0 5921 0
Charles H. Loux 4,081,803 0 5921 0
Richard A. Hoel 4,081,803 0 5921 0
A. L. Maxson 4,081,803 0 5921 0
Dr. Leon E. Ring 4,081,803 0 5921 0
</TABLE>
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, 2000.
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: July 31, 2000
/s/ Charles Loux
--------------------------------------------
Charles Loux, President and CEO
/s/ Steven R. Hedberg
--------------------------------------------
Steven R. Hedberg, Chief Financial Officer
