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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, 2001
[ ] 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
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As of September 30, 2001, 4,401,625 shares of common stock, par value $.20
per share, were outstanding.
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AERO SYSTEMS ENGINEERING, INC.
Form 10-Q
Quarter Ended September 30, 2001
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 9
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 12
Signatures 12
Page 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AERO SYSTEMS ENGINEERING, INC.
CONDENSED BALANCE SHEETS
September 30, December 31,
ASSETS 2001 2000
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(Unaudited) (Note)
(000's omitted, except share data)
CURRENT ASSETS
Cash and Cash Equivalents $ 37 $ 48
Accounts Receivable, net 7,484 6,361
Costs and Estimated Earnings in
Excess of Billings on Uncompleted
Contracts 4,068 4,997
Inventories:
Materials and Supplies 964 1,103
Projects in Process 598 380
Prepaid Expenses 117 58
Deferred Financing Costs 84 0
Income Tax Receivable 0 96
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Total Current Assets 13,352 13,043
PROPERTY, PLANT AND EQUIPMENT
Land 486 486
Buildings 3,025 3,025
Furniture, Fixtures, & Equipment 8,639 8,325
Wind Tunnels & Instrumentation 3,100 2,978
Building Improvements 1,489 1,489
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16,739 16,303
Less Accumulated Depreciation 11,985 11,119
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Property, Plant, and Equipment, net 4,754 5,184
Total Assets $ 18,106 $ 18,227
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Page 3
AERO SYSTEMS ENGINEERING, INC.
CONDENSED BALANCE SHEETS
(continued)
September 30, December 31,
LIABILITIES 2001 2000
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(Unaudited) (Note)
(000's omitted, except share data)
CURRENT LIABILITIES
Current Maturities of
Capital Lease Obligations $ 65 $ 51
Notes Payable:
Bank 3,000 0
Affiliated Companies 2,600 6,976
Accounts Payable:
Trade 1,403 1,636
Affiliated Companies 15 0
Billings in Excess of Costs and Estimated
Earnings on Uncompleted Contracts 2,333 2,061
Accrued Warranty and Losses 460 463
Accrued Salaries and Wages 975 898
Other Accrued Liabilities 1,316 1,422
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Total Current Liabilities 12,167 13,507
OTHER LIABILITIES
Capital Lease Obligations,
Less Current Maturities 211 120
Long Term Note Payable - Affiliate 1,500 0
STOCKHOLDERS' EQUITY
Common Stock - Authorized 10,000,000 Shares
of $.20 Par Value; Issued 4,401,625 on
September 30, 2001 and December 31, 2000. 880 880
Additional Paid-in Capital 900 900
Retained Earnings 2,448 2,820
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Total Stockholders' Equity 4,228 4,600
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Total Liabilities and Stockholders' Equity $ 18,106 $ 18,227
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Note: The balance sheet at December 31, 2000 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 4
AERO SYSTEMS ENGINEERING, INC.
CONDENSED STATEMENTS OF EARNINGS
(Unaudited, 000's omitted)
Three Months Ended Nine Months Ended
September 30 September 30
2001 2000 2001 2000
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Earned Revenue $ 5,709 $ 8,751 $ 17,541 $ 23,589
Cost of Earned Revenue 4,025 7,017 12,868 18,630
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Gross Profit 1,684 1,734 4,673 4,959
Operating Expenses 1,372 1,228 4,311 4,452
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Operating Profit 312 506 362 507
Other Income (Expense)
Interest Expense (180) (153) (596) (373)
Other (25) (13) (38) (9)
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(205) (166) (634) (382)
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Income (Loss) Before Income Taxes 107 340 (272) 125
Income Tax Expense 100 0 100 0
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Net Income (Loss) $ 7 $ 340 $ (372) $ 125
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NET INCOME ( LOSS) PER SHARE $ 0.00 $ 0.08 $ (0.08) $ 0.03
========= ========= ========= =========
Dividends per Share None None None None
Page 5
AERO SYSTEMS ENGINEERING, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited, 000's omitted)
Nine Months Ended
September 30,
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2001 2000
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CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (372) $ 125
Adjustment to reconcile net income (loss)
to net cash provided (used) by operating activities:
Depreciation and Amortization 866 889
Other Non-Cash Charges 100 0
(Increase) Decrease in Assets:
Accounts Receivable (1,123) 4,329
Cost and Estimated Earnings in Excess of
Billings on Uncompleted Contracts 929 (1,554)
Inventories (79) (297)
Prepaid Expenses (147) 40
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses (250) (1,176)
Billings in Excess of Costs and Estimated Earnings
on Uncompleted Contracts 272 (1,543)
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Net Cash Provided by
Operating Activities 196 813
CASH FLOW FROM INVESTING ACTIVITIES:
Capital Expenditures (290) (493)
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Net Cash Used in Investing Activities (290) (493)
CASH FLOW FROM FINANCING ACTIVITIES:
Net Borrowings under Line of Credit Agreement (1,376) (274)
Principal Payments under Capital Lease Obligations (41) (59)
Borrowings From Affiliates 1,500 0
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Net Cash Provided (Used) by Financing Activities 83 (333)
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NET CHANGE IN CASH (11) (13)
CASH AT BEGINNING OF YEAR 48 48
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CASH AT END OF QUARTER $ 37 $ 35
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Non-Cash Investing and Financing Activities
Purchase of Equipment under Capital Leases 146 0
Page 6
AERO SYSTEMS ENGINEERING , INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited, 000's omitted)
September 30, 2001
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, 2001 are not necessarily indicative of the results that
may be expected for the year ended December 31, 2001. 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, 2000.
NOTE B - SIGNIFICANT EVENTS
On September 25, 2001, Minnesota ASE, LLC acquired 2,245,000 shares of
common stock of Aero Systems Engineering, Inc. ("Aero Systems") from
Celsius Inc., a subsidiary of Saab AB, representing 51% of the
outstanding shares. Celsius Inc. retained a 29% stock interest in Aero
Systems. In accordance with the terms of the transaction, Aero Systems
borrowed $1,500,000 from Celsius Inc. in order to provide working
capital to Aero Systems. This loan was collateralized by a third party
pledge by Minnesota ASE, LLC of the shares of Aero Systems purchased by
Minnesota ASE, LLC from Celsius Inc. and has a term of three years at
an annual percentage rate of 8%. In connection with the acquisition of
Aero Systems' stock by Minnesota ASE, LLC, Aero Systems entered into a
secured credit agreement with a bank which provides for up to $6
million in loans and $3 million in letters of credit. The operating
loans up to $6 million are secured by the Company's receivables,
inventories, and machinery and equipment. The letter of credit
borrowing base of up to $3 million is secured by the Company's
mortgaged property. The term of the credit agreement is two years, and
the loans under it bear interest at a variable interest rate equal to
the bank's base rate plus a margin of up to one-half of one percent.
The bank's base rate as of September 30, 2001 was 6.0%. On September
25, 2001, Minnesota ASE, LLC also loaned Aero Systems $2,600,000 in
order to supplement bank financing. The maturity date of this note is
January 11, 2002, and the interest rate is variable at the bank's base
rate plus .25%.
Through September 25, 2001, Aero Systems was included in the
consolidated federal income tax return of Celsius Inc. The Company's
income tax provision was calculated and presented on a separate return
basis. Upon the closing of the acquisition of 51% of Aero Systems'
stock by Minnesota ASE, LLC, Celsius Inc. will own less than 80% of
Aero Systems and, accordingly, will no longer include Aero Systems in
its consolidated federal income tax return. In the third quarter, in
conjunction with that transaction, the Company recorded income tax
expense of $99,686 to reduce its income tax receivable from Celsius
Inc. as a result of the termination of the tax sharing agreement.
Page 7
AERO SYSTEMS ENGINEERING , INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited, 000's omitted)
NOTE C - DERIVATIVES AND HEDGING
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities, during the first quarter of 2001. In doing so, the Company
did not incur any material transition adjustments. All derivatives are
recognized on the balance sheet at their fair value. On the date a
derivative contract is entered into, the derivative is designated as a
fair value or cash flow hedge.
The Company formally documents all relationships between hedging
instruments and the hedged items, as well as its risk-management
objectives and strategy for undertaking various hedge transactions. The
Company formally assesses, both at the hedge's inception and on an
ongoing basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in cash flows
of the hedged items.
The Company uses foreign currency forward exchange contracts to hedge
against the effect of exchange rate fluctuations on certain foreign
currency denominated contracts.
NOTE D - RECLASSIFICATION
Certain prior period amounts have been reclassified to conform to
current period presentation.
NOTE E - CONTRACTS IN PROCESS
Information with respect to contracts in process follows:
September 30, September 30,
2001 2000
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Costs Incurred on Uncompleted Contracts $ 52,616 $ 40,032
Estimated Earnings Thereon 15,997 11,466
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Total Earned Revenue on Uncompleted Contracts 68,613 51,498
Less Billings Applicable Thereto 66,878 49,124
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$ 1,735 $ 2,374
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Included in Accompanying Balance Sheet
Under Following Captions:
Costs and Estimated Earnings in Excess of
Billings on Uncompleted Contracts $ 4,068 $ 6,069
Billings in Excess of Costs and Estimated
Earnings on Uncompleted Contracts 2,333 3,695
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$ 1,735 $ 2,374
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NOTE F - CONTINGENCIES AND COMMITMENT
Guarantees of approximately $5,661,600 were outstanding on September
30, 2001 to various customers as bid bonds or in exchange for down
payments or warranty performance bonds.
Page 8
AERO SYSTEMS ENGINEERING, INC.
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
Financial Condition
(All dollar amounts are in thousands.)
On September 25, 2001, Minnesota ASE, LLC acquired 2,245,000 shares of common
stock of Aero Systems Engineering, Inc. ("Aero Systems") from Celsius Inc., a
subsidiary of Saab AB, representing 51% of the outstanding shares. Celsius Inc.
retained a 29% stock interest in Aero Systems. This transaction is further
described in Footnote B to the Quarterly Financial Statements.
Worldwide revenue for the third quarter 2001 totaled $5,709, which was a 35%
decrease from $8,751 in revenue for the third quarter of last year. Income
before taxes for the third quarter was $107 as compared to third quarter income
before taxes of $340 last year.
Backlog of orders as of September 30, 2001 was $29,722 as compared with $27,710
and $31,423 as of December 31, 2000 and September 30, 2000, respectively. The
change from December 31, 2000 represents a 7% increase. The year to date orders
through September are $19.6 million.
The revenue and earnings before taxes decrease were mostly attributable to the
delay of U.S. government approval of the export license application for the wind
tunnel project in Singapore. The export license was submitted for approval
during the fourth quarter of 2000. Due to this delay, work on the project had
been very limited, resulting in lower revenue and margin recognition. The export
license was received in early September 2001, and the activity level has now
increased on the project.
Through September 25, 2001, Aero Systems was included in the consolidated
federal income tax return of Celsius Inc. The Company's income tax provision was
calculated and presented on a separate return basis. Upon the closing of the
acquisition of 51% of Aero Systems' stock by Minnesota ASE, LLC, Celsius Inc.
will own less than 80% of Aero Systems and, accordingly, will no longer be able
include Aero Systems in its consolidated federal income tax return. In the third
quarter, in conjunction with that transaction, the Company recorded income tax
expense of $100 to reduce its income tax receivable from Celsius Inc. as a
result of the termination of the tax sharing agreement.
Cost as a percentage of earned revenue for the third quarter, which includes
manufacturing and engineering costs, was 71% as compared to 80% during the same
period of last year. This decrease is mostly the result of improved project
margins on the wind tunnels and Aerotest Lab projects during the third quarter
of 2001.
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.
Page 9
AERO SYSTEMS ENGINEERING, INC.
Selling, general and administrative expenses of $1,302 were 23% of revenues
during the third quarter of 2001 as compared to $1,066 and 12% during the same
period of last year. This increase of $236 or 22% was primarily related to the
additional marketing staff added at the end of 2000 and the increase in bid and
proposal activities related to several new proposals.
Research and development expenses were $70 during the third quarter of 2001 as
compared to $162 in the same period in 2000. This decrease of $92 or 57% is
mostly related to the focus of certain resources in the third quarter 2001 on
project and proposal work rather than on R&D activities. During 2001, additional
research and development expenses will be incurred for continued enhancements to
the ASE2000, aero-acoustic analysis and new product initiatives.
Interest expense of $180 was incurred during the third quarter of 2000 as
compared to $153 for 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 third quarter of 2001 as
compared to the third quarter of last year.
Capital expenditures for the third quarter 2001 were $22 as compared to $358 for
the same period of last year. It is expected that for the remainder of 2001,
additional capital expenditures will be used to purchase additional equipment
for R&D projects and the engineering departments.
Accounts receivable at the end of the third quarter 2001 were $7,484 as compared
with the year-end 2000 balance of $6,361. This increase of $1,123 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 $929, or 19%, to $4,068 as compared with
the year-end 2000 balance of $4,997. 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 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.
Current notes payable balance was $5,600 as compared to the year-end 2000
balance of $6,976, which is a decrease of $1,376 or 20%. This decrease is
primarily the result of the receipt of $1,500 cash from Celsius Inc. for the
three year note payable. As of October 31, 2001, current notes payable was
$2,500. Long term notes payable balance was $1,500 at the end of the third
quarter 2001 compared to the year-end 2000 balance of $0.
Accounts payable and accrued expenses at the end of the third quarter decreased
$250 or 6% as compared to the year-end 2000 balance. This was primarily due to
the delay of the Singapore wind tunnel project moving into the procurement phase
as a result of the delay in receiving the export license.
Billings in excess of costs and estimated earnings on uncompleted contracts at
the end of the third quarter increased $272 to $2,333 compared to the year-end
2000 balance of $2,061. The increase since year-end is due to the timing of
billing milestones related to contracts. Billings are a function of contract
terms and do not necessarily relate to the percentage of completion of a
project.
Page 10
AERO SYSTEMS ENGINEERING, INC.
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. During the third
quarter 2001, Celsius Inc. sold 51% of the total outstanding shares of common
stock of ASE to Minnesota ASE, LLC. Related to this transaction, the Company has
secured new bank financing agreements for operating funds and future letter of
credit needs. These new agreements are asset based collateral agreements, with
the funds available under these agreements determined by the available securable
assets at any point in time, up to a maximum of $6,000 of operating funds, and
$3,000 of letter of credit funds. Also related to the transaction, Celsius Inc.
has agreed to continue to hold certain existing bank guarantees until maturity
that were previously provided to a few of the Company's customers, and Celsius
Inc. has provided a three year $1,500 loan to the Company at 8% per year, which
is subordinated debt under the new bank agreement. The Company has provided an
indemnification agreement to Celsius Inc. to secure Celsius Inc.'s interest in
the above items.
At the end of the third quarter, the Company had notes payable balances of
$5,600 current and $1,500 long term. The current notes payable balance of $5,600
consisted of $3,000 of borrowings under the new bank agreement, and $2,600 of
interim loans provided by Minnesota ASE, LLC for a period up to 120 days to
bridge cash needs until significant customer invoice payments are received. At
the time of this filing, $1,600 of the $2,600 interim loans have been repaid to
Minnesota ASE, LLC. 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 continued to put pressure on 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 2001, the contracts awarded in the
recent months of the year and the improved backlog should provide a solid base
for the rest of 2001.
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AERO SYSTEMS ENGINEERING, INC.
PART II - OTHER INFORMATION
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, 2001. On October 4, 2001, the registrant
filed a Form 8-K report to declare a change in control of
registrant, and to file the new bank documents as a result of the
change in control.
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 13, 2001
/s/ Charles Loux
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Charles Loux, President and CEO
/s/ Steven R. Hedberg
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Steven R. Hedberg, Chief Financial Officer
Page 12