SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997 Commission file number 0-7390
AERO SYSTEMS ENGINEERING, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-0913117
(State of incorporation) (I.R.S. Employer
Identification No.)
358 East Fillmore Avenue, St. Paul, Minnesota 55107
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 227-7515
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.20 Per Share
(Title of Class)
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 twelve 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____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of January 31, 1998 was approximately $723,000 based upon the
average of the closing bid and asked prices of the stock on such date.
The number of common shares outstanding as of January 31, 1998 was 2,551,717.
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TABLE OF CONTENTS
Page
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DOCUMENTS INCORPORATED BY REFERENCE...........................................3
CROSS-REFERENCE SHEET BETWEEN ITEMS IN PART III
OF FORM 10-K AND PROXY STATEMENT PURSUANT TO
GENERAL INSTRUCTION G(4)......................................................4
PART I
Item 1. Business.............................................................5
Item 2. Properties...........................................................9
Item 3. Legal Proceedings....................................................9
Item 4. Submission of Matters to a Vote of Security Holders..................9
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.............................................10
Item 6. Selected Financial Data.............................................11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................11
Item 8. Consolidated Financial Statements and Supplementary Data............14
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................31
PART III
Item 10. - Item 13. See Documents Incorporated by Reference.................31
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....31
Signatures...................................................................32
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DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into the Form 10-K:
PARTS OF FORM 10-K
INTO WHICH INCORPORATED
DOCUMENT BY REFERENCE
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Proxy Statement to be filed on or before April 13, 1998
for the annual meeting of shareholders on May 13, 1998 III
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CROSS-REFERENCE SHEET BETWEEN ITEMS IN PART III
OF FORM 10-K AND PROXY STATEMENT PURSUANT TO
GENERAL INSTRUCTION G(4)
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SUBJECT HEADINGS IN
DOCUMENT PROXY STATEMENT
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Item 10. Directors and Executive Officers of the Registrant Election of Directors
Item 11. Executive Compensation Election of Directors
Item 12. Security Ownership of Certain Beneficial Owners and Management Principal Shareholders
Item 13. Certain Relationships and Related Transactions Election of Directors
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PART I
ITEM 1 - BUSINESS
GENERAL DEVELOPMENT OF BUSINESS - Aero Systems Engineering, Inc. ("ASE" or the
"Company") is a global turnkey provider of test facilities and systems for the
aerodynamic and propulsion test system markets. ASE is a Minnesota corporation
that was organized on May 11, 1967. From that time until 1993, the Company had
been primarily engaged in selling products and services related to testing
turbine engines. On July 30, 1993, the Company purchased substantially all of
the assets of FluiDyne Engineering Corporation ("FluiDyne") relating to
FluiDyne's business of designing, constructing and supplying various types of
test facilities, such as wind tunnels and other aerodynamic test facilities. The
acquisition also included the Aerotest Laboratory which provides aeropropulsion
component and aerodynamic testing services.
Approximately 80% of the Company's outstanding common stock is owned by Celsius
Inc. Celsius Inc. is a wholly-owned subsidiary of Celsius AB, which is a Swedish
company. Celsius AB is also publicly traded in Sweden and is partially owned by
the Swedish government.
The plan of operations for 1998 with respect to the Company and its subsidiary
is to continue with its current activities and operations in the test cell, wind
tunnel, and aerodynamic testing markets. In addition, the Company plans to
explore new markets as deemed appropriate using joint ventures with established
companies. Acoustic measurements in conjunction with aerodynamic testing is a
technology where the company is creating new customers and providing additional
value to existing customers.
LINES OF BUSINESS/SEGMENT REPORTING - The Company is engaged in two lines of
business. The first is related to the design, equipping, manufacture and
construction of test facilities for turbine engines, engine accessories, and for
wind tunnels. The second business line is providing aeropropulsion component
testing and aerodynamic testing services at the Aerotest laboratory facility.
The Company regards these lines of business as being in their entirety, one
segment of business.
PRODUCTS AND SERVICES - The Company's products and services include the
following:
* Design and overall project management for jet engine testing
facilities and wind tunnel testing facilities;
* Design and manufacture of electronic and mechanical turbine engine
testing equipment;
* Providing of aerodynamic and propulsion system testing services;
* Application of engineering technology to specific engine and
aerodynamic testing problems.
The Company undertakes research and development projects by applying leading
edge technology to customer situations in engine, wind tunnel, and aerodynamic
testing.
The Company's principal sources of revenue are the design and construction of
turbine and wind tunnel test facilities and associated test equipment. An
additional important source of revenue for the Company is providing aerodynamic
and propulsion system testing services at the Aerotest Laboratory.
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The Company does not generally produce products as inventory items; rather, the
Company's products are usually made to order and are limited to individual
application and adaptation. The Company does build and inventory limited amounts
of selected electronic products and spare parts and components for customer
support.
Most of the instrumentation and much of the equipment used in a jet engine or
wind tunnel test facility are not manufactured by the Company. The Company adds
value by combining these electronic and mechanical components purchased from
other companies and assembles them to make the desired testing equipment or
facility. For a complete test facility, which includes designing and
construction of a building, the Company subcontracts certain civil aspects of
the project.
Sales of test facilities have resulted principally from direct customer contact,
independent sales agents, and the Company's internal marketing staff.
RAW MATERIALS - The principal raw materials used by the Company and its
subsidiaries are raw and fabricated steel and aluminum. Various electronic
components are also purchased and assembled into completed units. These
materials are readily available from a number of suppliers. Therefore, the
Company anticipates no difficulty in securing an alternate source of supply of
these products should it be unable to obtain materials from its present
suppliers.
PATENTS AND TRADEMARKS - The Company currently owns several patents relating to
a free piston shock tube and for a test cell stack design. The Company has
applied to various foreign countries' patent offices to register the U.S.
patents in those countries.
Periodically, the Company seeks trademark protection for certain of its
products. The Company does not hold nor has it issued any significant licenses,
franchises, or concessions. While the Company may apply for patents on some of
its instruments or components thereof, generally, the Company does not consider
the patentability or the protection that may be afforded by patents to be
material to its present business.
SEASONAL NATURE OF BUSINESS - The business of the Company is not seasonal in
nature.
WORKING CAPITAL - The Company is not required to maintain significant amounts of
inventory or supplies. The Company does not generally grant extended payment
terms to customers. However, because many of the Company's contracts with its
customers are over multiple years, outstanding balances due from a customer may
be quite large. The Company generally is required to issue standby letters of
credit as a guarantee for customers' advances and performance of the project by
the Company.
Additionally, in various governmental contracts, there are retainages, usually
5% - 10%, that are held back by governmental agencies to ensure contract
performance. The Company's practices concerning inventory and credit are
consistent with practices in the industry.
Availability of working capital financing is necessary for the current
operations of the business. The Company presently has a line of credit with a
Swedish bank in New York for $6,000,000. Funds provided by this bank are
actually provided by Celsius Inc. and ultimately by AB Celsius Finance. In
consideration of providing working capital funds, a first security interest in
all
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assets of the Company has been granted to Celsius Inc. and a fee is also paid to
Celsius Inc. Although the Company's management has no reason to believe that
availability of such funds from Celsius Inc. will cease in the near future,
there can be no assurance that such availability will continue indefinitely.
CUSTOMERS - The Company provides services for numerous companies in the aircraft
industry as well as the U.S. federal government and foreign governmental
entities. The orders to provide these services can originate from many customers
and quite frequently result in repeat business. In 1997, two customers accounted
for more than 10% of the Company's consolidated revenues. These two customers
were the U.S. Government and Pratt & Whitney. The Company believes that the loss
of no other single customer would have a material adverse effect on its future
revenues.
BACKLOG - The Company's order backlog constitutes future revenue to be earned on
contracts, including unearned revenue on projects currently in progress. The
backlog of orders as of December 31, 1997 was $14,278,000. This compares with a
backlog of $9,457,000 on December 31, 1996.
COMPETITION - There are several other firms in the world offering services
similar to those provided by the Company. These firms are based in North
America, Europe and the Pacific Rim. The exact competitive position of the
Company in the markets in which it operates is not known to the Company, but the
Company believes that it is one of the major suppliers in the markets it serves.
The technology used by the Company is not proprietary, and most commercial
airlines, engine manufacturers, and airframe manufacturers have the in-house
engineering capability to compete directly with the Company in the design and
building of jet engine test facilities. The Company believes that in order to
reduce cost and risk many of these firms generally prefer to engage the services
of the Company or one of its competitors. In the test cell industry in which the
Company competes, the principal means of competition are price, technological
design, project management knowledge, and delivery capability.
In the wind tunnel facilities area, the Company has historically designed and
built high speed wind tunnels for worldwide governmental agencies, commercial
companies, and other research institutions.
With worldwide defense budgets being reduced during the past few years, the
number of wind tunnel projects has been steadily declining. However, there has
been steady growth in the automotive wind tunnel area. In order to capture some
of this new automotive wind tunnel business, ASE has entered into a teaming
agreement with a leading automotive architecture and engineering company. The
team continues to pursue new opportunities but to date no contracts have been
awarded.
The Company has in the past been aided in financing projects by utilizing the
financial strength of Celsius AB. Without the ability to issue standby letters
of credit to guarantee the performance of the project, ASE would not have been
the prime contractor on many of these projects.
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RESEARCH AND DEVELOPMENT - Research and development performed by the Company is
applied engineering, that is, applying present engineering knowledge and
technology toward solving customer problems in turbine engine and aerodynamic
testing. The Company is currently enhancing the ASE2000, which is a new computer
data acquisition system. The expense of research and development was $696,000,
$500,000 and $919,000 for the years ended December 31, 1997, 1996, and 1995,
respectively.
ENVIRONMENTAL MATTERS - There has not been, and it is not expected that there
will be, any material effect upon capital expenditures, earnings, or the
competitive position of the Company due to compliance with federal, state and
local environmental protection regulations.
EMPLOYEES - As of December 31, 1997, the Company and its subsidiaries employed
147 employees. Contract labor has been used as business conditions require.
FOREIGN OPERATIONS - While business in foreign countries is always subject to
interference or restrictions by foreign governments or restrictions imposed by
the United States government, the Company believes that the nature of its
business is such that it is not likely to be subject to such interference. Wind
tunnels with a mach number in excess of 1.2 need to have approval from the U.S.
State Department if they are sold to a foreign country.
For each foreign or domestic project, the Company obtains payment terms or
financial protections, such as irrevocable letters of credit and bank
guarantees, to better assure payment to the Company in the event of any
financial difficulty. Nevertheless, foreign projects always have inherent
foreign currency risks with respect to currency exposures or purchase
commitments. The Company hedges currency exposure as deemed appropriate to
minimize the foreign exchange exposure.
IMPACT OF YEAR 2000 - Some of the Company's older computer programs for internal
business systems were written using two digits rather than four to define the
applicable year. As a result, those computer programs have time-sensitive
software that recognize a date using "00" as the year 1900 rather than the year
2000. This could cause a system failure or miscalculations causing disruptions
of operations, including, among other things, a temporary inability to process
transactions or engage in similar normal business activities.
The Company has completed an assessment and will have to modify or replace
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 $350,000 which includes $225,000 for
the purchase of new hardware and software that will be capitalized and $125,000
that will be expensed as incurred. To date, the Company has incurred very little
of this cost since it is in the early phases of the project relating to
requirements definitions and product selection.
The project is estimated to be completed not later than June 30, 1999, which is
prior to any anticipated impact on its operating systems. 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.
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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.
ITEM 2 - PROPERTIES
The Company's headquarters are located in a concrete building in a light
industrial area at 358 East Fillmore Avenue, Saint Paul, Minnesota that it has
been occupying since 1971. The Company purchased this facility during 1993 from
the Port Authority of Saint Paul (the "Port Authority"). Currently, the Company
has approximately 52,000 total square feet of which 45,000 is used for offices
and 7,000 square feet is used for manufacturing.
In September 1988, the Company exercised an option to assume a lease from the
Port Authority on a building that has 24,000 square feet of manufacturing and
warehouse space located at 181 East Florida Street, Saint Paul, Minnesota. The
Company paid approximately $114,000 in cash and assumed the remaining lease with
the Port Authority. The cost of the lease has been capitalized at $273,000 for
financial reporting purposes. The lease agreement contains several purchase
options at various times during the lease period. The most favorable option
occurs at the end of the lease period when the Company may purchase the facility
for approximately $95,000. The Company intends to continue leasing the facility
until the end of the lease term.
As a part of the FluiDyne asset acquisition, the Company purchased an
aerodynamic testing facility located at 13825 Schmidt Lake Road, Plymouth,
Minnesota. Currently, the Company has approximately 25,000 total square feet of
specialized engineering and testing space at this facility of which 18,000
square feet is used for manufacturing and 7,000 square feet is used for offices.
ITEM 3 - LEGAL PROCEEDINGS
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 the
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
No matter was submitted during the fourth quarter of 1997 to a vote of security
holders through the solicitation of proxies or otherwise. During the first
quarter 1998, the Company's Board of Directors approved a change to the Articles
of Incorporation to increase the authorized shares from 3,000,000 to 10,000,000.
This change requires shareholder approval which is expected to
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be obtained at a special shareholder meeting on March 4, 1998. The main reason
for the Company implementing this change is to increase the number of shares in
"public float" to maintain current security listing on the Nasdaq SmallCap
Market. Increasing the number of shares in "public float" was accomplished by
declaring a three-for-two common stock split effected in the form of a 50% stock
dividend.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
In May 1985, the Company obtained a listing for its common stock on Nasdaq. The
Company's common stock currently is quoted on the Nasdaq Smallcap Market. The
Company's common stock is traded primarily in the local over-the-counter market.
On January 31, 1998, the closing bid and asked prices for the Company's common
stock were $1.50 and $1.75, respectively.
The high and low bid prices for the Company's common stock for each quarter
during 1996 and 1997 as quoted on Nasdaq were as follows:
HIGH LOW
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1996:
First Quarter $1.94 $1.25
Second Quarter 2.31 1.38
Third Quarter 1.63 0.94
Fourth Quarter 1.38 1.00
1997:
First Quarter $1.00 $0.75
Second Quarter 1.38 1.00
Third Quarter 1.13 1.13
Fourth Quarter 1.75 1.63
The quotations set forth above reflect inter-dealer prices, without retail
markup, markdown, or commission, and may not necessarily represent actual
transactions.
No dividends have previously been paid in the history of the Company. The
Company intends to use its earnings to finance operations and does not intend to
pay dividends on its capital stock in the foreseeable future, although during
first quarter 1998 the Company announced a three-for-two common stock split
effected in the form of a 50% stock dividend. This action was taken to increase
the Company's number of shares in "public float" to exceed the new minimum
required to maintain current security listing on the Nasdaq SmallCap Market.
Financial information contained in this report has not been adjusted to reflect
the impact of the common stock split. As of December 31, 1997 there were
approximately 211 holders of record of common stock of the Company and 2,551,717
total shares outstanding.
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ITEM 6 - SELECTED FINANCIAL DATA
Selected financial data for the years ended December 31 are as follows:
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1997 1996 1995 1994 1993
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SELECTED INCOME STATEMENT DATA
Earned revenue $25,032,452 $20,383,352 $26,037,288 $25,229,583 $27,871,999
Net (loss) income (400,733) (2,527,754) 189,488 (1,175,286) 594,008
Net (loss) income per common share (.16) (.99) .07 (0.46) 0.23
Weighted average common shares
outstanding 2,551,717 2,551,717 2,551,717 2,551,717 2,551,717
SELECTED BALANCE SHEET DATA
Current assets $14,936,589 $11,006,645 $17,391,439 $13,898,995 $19,901,048
Current liabilities 15,107,440 10,469,625 13,775,994 10,000,407 14,248,261
Working capital (170,851) 537,020 3,615,445 3,898,588 5,652,787
Total assets 20,574,712 17,754,429 24,176,077 21,010,244 27,285,927
Long-term debt and capital lease
obligations 732,865 1,671,191 2,255,127 3,209,519 4,310,500
Stockholders' equity 4,249,908 4,650,641 7,178,395 6,988,907 8,164,193
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Aero Systems Engineering, Inc. ("ASE" or the "Company") is a global provider of
products and services related to (1) testing turbine engines, (2) design and
operation of aerodynamic wind tunnels, and (3) providing aerodynamic and
propulsion system testing services. The Company will design the testing facility
but will subcontract the civil engineering work and construction to local civil
construction companies.
Results of Operations
The backlog of orders as of December 31, 1997 was $14,278,000 which consisted of
$12,369,000 that was related to jet engine test cell projects and wind tunnel
projects, and $1,909,000 related to Aerotest Lab/Other. Backlog of orders as of
December 31, 1996 was $9,457,000 of which $8,009,000, was related to test cell
and wind tunnel projects, and $1,448,00 related to Aerotest Lab/Other. Backlog
of orders as of December 31, 1995 was $27,016,000 of which $24,797,000 was
related to test cell projects and wind tunnel projects, and $2,219,000 related
to Aerotest Lab/Other. The December 31, 1995 backlog included a large amount for
the National Wind Tunnel Complex (NWTC) project which was subsequently canceled
in early 1996.
The change in backlog from 1996 to 1997 represents a 51% increase in total
backlog. Also, new orders received in 1997 totaled $29,000,000 as compared to
the previous year of $2,800,000. The 1996 total includes a $7,100,000 reduction
for the cancellation of the NWTC project. The change in backlog from 1995 to
1996 represents a 65% decrease in total backlog.
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Earned revenue for the year ended December 31, 1997 was $25,032,000, an increase
of $4,649,000 or 23% as compared to the 1996 revenue of $20,383,000. Earned
revenue for 1995 was $26,037,000. The revenue increase from 1996 to 1997 was due
to an increase in new orders and the completion of projects.
The Company recorded net loss of $401,000 in 1997, net loss of $2,528,000 in
1996, and net income of $189,000 in 1995. The loss incurred in 1997 was
primarily due to the low backlog going into the year negatively impacting the
financial performance of the first half of the year, which was partially offset
by the improved second half financial performance.
The cost of earned revenue as a percentage of earned revenue was 81% in 1997 as
compared to 78% in 1996 and 75% in 1995. The percentage increase in cost of
earned revenue during 1997 was due to a mix of lower margins on existing wind
tunnel and test cell projects and over-capacity issues in the first part of the
year due to the low backlog at the start of 1997.
Operating expenses were $3,677,000, $5,673,000, and $4,545,000 in years 1997,
1996, and 1995, respectively. These expenses decreased 35% in 1997 as compared
to 1996 as a result of improved management of the bid and proposal process and
the impact of reduced number of personnel from the 1996 levels.
Research and Development (R&D) costs were $696,000, $500,000, and $919,000 in
years 1997, 1996, and 1995, respectively. The increase during 1997 was $196,000
or 39% as compared to 1996's R&D amount. The Company continued to enhance the
capabilities of the ASE2000 Computer Data Acquisition System as planned. This
activity will continue into 1998 which management believes will improve
marketability of the system.
Interest income was $7,000 in 1997, $5,000 during 1996, and $51,000 in 1995.
This income relates to short term investments the Company has throughout the
year.
Interest expense was $751,000 in 1997, $752,000 during 1996, and $816,000 in
1995. The two major items bearing interest expense are the $6,000,000 line of
credit, and the note payable to affiliates which had an average balance of
$1,600,000 during 1997. The weighted average interest rates for 1997 were 9.59%
on the line of credit and 6.7% on the note payable to affiliates.
The Company recorded income tax expense of $7,500 in 1997, as compared to $5,000
in 1996 and $23,000 in 1995.
Liquidity and Capital Resources
The current ratio was 1.0, 1.1, and 1.3 as of December 1997, 1996, and 1995,
respectively. Working capital amounts were $(171,000) in 1997, $537,000 in 1996,
and $3,615,000 in 1995. Both current assets and current liabilities increased
during 1997 as compared to 1996.
The December 31, 1997 accounts receivable balance was $4,767,000, a decrease of
$372,000 as compared to 1996's balance of $5,139,000. The decrease in the
accounts receivable balance for 1997 was due partly to improved collection of
past due accounts and partly to contract invoice timing.
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Accounts payable and accrued expenses amounts were $7,806,000, and $3,716,000,
in 1997 and 1996, respectively. The 1997 increase is $4,090,000 or 110% as
compared to 1996. The increase from 1996 is due primarily to increased project
work expenditures in line with the increased backlog.
Billings in excess of earned revenues were $228,000, a decrease of $164,000 when
compared to 1996's balance of $392,000. This is due primarily to advances
received on contracts at the end of 1996 that have been earned in 1997.
The Company has fully utilized the available on one line of credit as of
December 31, 1997. The total line of credit available is $6,000,000 at a Swedish
bank in New York City which is guaranteed by the Company's immediate parent,
Celsius Inc. The average outstanding borrowings were $5,346,000 and $4,704,000
during 1997 and 1996, respectively. The increase in borrowings from 1996 to 1997
reflects increased project expenditures in line with the increased backlog.
Although the line of credit has a $6,000,000 limit, Celsius Inc. has allowed the
Company to exceed this limit for short periods of time. The portion over
$6,000,000 is assessed a higher interest rate of 11.5%.
Current financial resources, i.e., working capital and short-term line of credit
facilities, plus anticipated funds from operations, are expected to be adequate
to meet cash requirements in 1998.
Capital expenditures were $314,000, $502,000, and $646,000 in years 1997, 1996,
and 1995, respectively. The 1997 decrease was 37% as compared to 1996. Most of
the 1997 capital expenditures were used to update desktop and network equipment
and additional engineering hardware.
Highly competitive market conditions have minimized the effect of inflation on
contract selling prices and the cost of purchased materials.
During 1997, approximately 45% of revenues were from international projects.
Substantially all of the contract amounts are payable in U.S. Dollars. For those
contracts that are denominated in foreign currencies, the Company has entered
into forward exchange contracts with banks to minimize the foreign currency
exchange rate risks.
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ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
TABLE OF CONTENTS
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REPORT OF INDEPENDENT AUDITORS...........................................15
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets........................................................16
Statements of Operations..............................................18
Statements of Changes in Stockholders' Equity.........................19
Statements of Cash Flows..............................................20
Notes to Consolidated Financial Statements............................21
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Report of Independent Auditors
Stockholders and Board of Directors
Aero Systems Engineering, Inc.
We have audited the accompanying consolidated balance sheets of Aero Systems
Engineering, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Aero Systems
Engineering, Inc. and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
January 22, 1998
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Aero Systems Engineering, Inc. and Subsidiaries
Consolidated Balance Sheets
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DECEMBER 31
1997 1996
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ASSETS
Current assets:
Cash and cash equivalents $ 117,018 $ 135,084
Accounts receivable--billed contracts, net of allowances
of $50,000 in 1997 and 1996, including retainages of
$106,000 and $319,000 in 1997 and 1996, respectively 4,766,849 5,139,417
Costs and estimated earnings in excess of billings on uncompleted
contracts 8,340,914 3,977,135
Inventories 1,014,092 1,092,257
Prepaid expenses 113,532 96,068
Deferred income tax benefit 484,499 466,999
Income tax receivable 99,685 99,685
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Total current assets 14,936,589 11,006,645
Property, plant and equipment--net 5,607,206 6,167,894
Non-compete agreement, net of accumulated amortization
of $234,083 and $181,083 in 1997 and 1996,
respectively 30,917 83,917
Investments - 495,973
------------------------------------
Total assets $20,574,712 $17,754,429
====================================
</TABLE>
<PAGE>
Aero Systems Engineering, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of capital lease obligations $ 138,114 $ 125,510
Current maturities of long-term debt to affiliated company 800,000 800,000
Notes payable 6,135,121 5,436,335
Accounts payable:
Trade 4,716,027 1,260,748
Affiliated companies 719,727 63,227
Billings in excess of costs and estimated earnings on
uncompleted contracts 228,489 391,766
Accrued warranty and losses 675,254 690,762
Accrued salaries and wages 663,958 797,451
Income taxes payable 4,924 4,734
Other accrued liabilities 1,025,826 899,092
------------------------------------
Total current liabilities 15,107,440 10,469,625
Other liabilities:
Deferred income taxes 484,499 466,999
Deferred revenue - 495,973
Long-term debt to affiliated company, less current
maturities
400,000 1,200,000
Capital lease obligations, less current maturities 332,865 471,191
Commitments and contingencies
Stockholders' equity:
Common Stock, $.20 par value:
Authorized shares - 3,000,000
Issued and outstanding shares - 2,551,717 in
1997 and 1996 510,343 510,343
Additional contributed capital 516,722 516,722
Retained earnings 3,222,843 3,623,576
------------------------------------
Total stockholders' equity 4,249,908 4,650,641
------------------------------------
Total liabilities and stockholders' equity $20,574,712 $17,754,429
====================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
Aero Systems Engineering, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
------------------------------------------------------
<S> <C> <C> <C>
Earned revenue $ 25,032,452 $ 20,383,352 $ 26,037,288
Cost of earned revenue 20,258,028 15,933,811 19,591,711
------------------------------------------------------
Gross profit 4,774,424 4,449,541 6,445,577
Operating expenses 3,676,961 5,672,734 4,545,051
Research and development 696,498 499,776 918,946
------------------------------------------------------
Operating profit (loss) 400,965 (1,722,969) 981,580
Other income (expense):
Interest income 7,482 5,280 50,915
Interest expense (750,773) (751,547) (816,417)
Other (50,895) (53,518) (3,950)
------------------------------------------------------
(794,186) (799,785) (769,452)
------------------------------------------------------
(Loss) income before income taxes (393,221) (2,522,754) 212,128
Income tax expense (7,512) (5,000) 22,640
------------------------------------------------------
Net (loss) income $ (400,733) $ (2,527,754) $ 189,488
======================================================
Net (loss) income per common share $ (.16) $ (.99) $ .07
======================================================
Weighted average common shares
outstanding 2,551,717 2,551,717 2,551,717
======================================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
Aero Systems Engineering, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 2,551,717 $510,343 $516,722 $5,961,842
Net income - - - 189,488
-----------------------------------------------------------------------
Balance at December 31, 1995 2,551,717 510,343 516,722 6,151,330
Net loss - - - (2,527,754)
-----------------------------------------------------------------------
Balance at December 31, 1996 2,551,717 510,343 516,722 3,623,576
Net loss - - - (400,733)
-----------------------------------------------------------------------
Balance at December 31, 1997 2,551,717 $510,343 $516,722 $3,222,843
=======================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
Aero Systems Engineering, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
---------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net (loss) income $ (400,733) $(2,527,754) $ 189,488
Adjustments to reconcile to net cash provided by (used
in) operating activities:
Depreciation and amortization 927,298 984,891 923,329
Decrease (increase) in assets:
Accounts receivable 372,568 2,234,871 (2,612,715)
Costs and estimated earnings in excess of billings
on uncompleted contracts (4,363,779) 3,700,729 (954,402)
Inventories 78,165 318,697 (239,311)
Prepaid expenses (17,464) 86,685 12,411
Refundable income taxes -- 3,474 --
(Decrease) increase in liabilities:
Accounts payable and accrued expenses 4,089,512 (2,205,278) 32,908
Income taxes payable 190 1,538 3,196
Billings in excess of costs and estimated earnings
on uncompleted contracts (163,277) (1,580,506) 1,224,011
---------------------------------------------------
Net cash provided by (used in) operating activities 522,480 1,017,347 (1,421,085)
INVESTING ACTIVITIES
Capital expenditures (313,610) (501,933) (645,521)
Proceeds from sale of assets -- -- 1,000
Principal payments received on note receivable -- -- 335,059
---------------------------------------------------
Net cash used in investing activities (313,610) (501,933) (309,462)
FINANCING ACTIVITIES
Net borrowings under line of credit agreements 698,786 506,758 2,388,956
Payment of notes payable -- (126,894) --
Principal payments on borrowings from affiliates (800,000) (800,000) (800,000)
Principal payments under capital lease obligations (125,722) (100,835) (27,876)
---------------------------------------------------
Net cash (used in) provided by financing activities (226,936) (520,971) 1,561,080
---------------------------------------------------
Net decrease in cash and cash equivalents (18,066) (5,557) (169,467)
Cash and cash equivalents at beginning of year 135,084 140,641 310,108
---------------------------------------------------
Cash and cash equivalents at end of year $ 117,018 $ 135,084 $ 140,641
===================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid (received) during year for:
Interest $ 750,773 $ 772,093 $ 815,071
Income taxes 5,400 (800) 6,449
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
Aero Systems Engineering, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company's major operations are in the design and manufacture of electronic,
mechanical, and computerized engine and engine accessory test equipment and the
design, equipping, and construction of engine test facilities, wind tunnels and
other aerodynamic test facilities. In addition, the Company provides
aeropropulsion component testing and vehicle aerodynamic testing services. The
Company is an 80% owned subsidiary of Celsius Inc. See Note 11.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CONTRACTS
Income on long-term contracts is recognized using the percentage-of-completion
method. On contracts where the percentage-of-completion method is used, revenue
is recognized for a portion of the total contract revenue, in the proportion
that costs incurred bear to management's estimate of total contract costs to be
incurred, commencing when progress reaches a point where experience is
sufficient to estimate final results with reasonable accuracy. Earnings and
costs on contracts are subject to revision throughout the terms of the contract,
and any required revisions are made in the periods in which revisions become
known. Provision is made for the full amount of anticipated losses in the period
in which they are determinable.
<PAGE>
Aero Systems Engineering, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONTRACTS(CONTINUED)
Costs and estimated earnings in excess of billings on uncompleted contracts
represent revenues recognized on contracts for which billings will be presented
in accordance with contract provisions. Such revenues are generally expected to
be billed and collected within one year.
INVENTORIES
Inventories are stated at the lower of cost (determined by the first-in,
first-out method) or market.
EARNINGS PER SHARE
Net income (loss) per share of common stock is computed by dividing net income
(loss) for the year by the weighted average number of common shares outstanding
during the year.
On February 2, 1998, the Company's Board of Directors approved a three-for-two
stock split effected in the form of a 50% common stock dividend. The stock split
is contingent upon shareholder approval, at a special meeting of shareholders on
March 4, 1998, of a proposal to amend the Company's articles of incorporation to
increase the number of authorized shares of common stock. Financial information
contained in this report has not been adjusted to reflect the impact of the
common stock split.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards(SFAS) No. 128, EARNINGS PER SHARE, which requires
companies to present basic earnings per share and diluted earnings per share,
instead of the primary and fully diluted earnings per share that is currently
required. The Company has a simple capital structure with only common stock
outstanding; therefore, SFAS 128 had no impact on the Company.
WARRANTY POLICY
The Company's warranty policy generally provides for one-year coverage on
defective equipment due to faulty design, workmanship, or nonconformity to
specifications. Estimated warranty costs are recorded when revenues are
recognized.
<PAGE>
Aero Systems Engineering, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
Impairment losses are recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
DEPRECIATION
Property, plant and equipment are recorded at cost and depreciated over their
estimated useful lives of three to forty years using straight-line and
accelerated methods. Depreciation expense includes the amortization of capital
lease assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used in estimating the indicated fair
values of financial instruments:
Cash and cash equivalents: The carrying amount approximates fair value
because of the short maturity of those instruments.
Short-term and Long-term debt: The fair value is estimated based on current
rates offered for similar debt, which approximates carrying value.
Foreign Currency Contracts: The fair values of foreign currency contracts
(used for hedging purposes) are estimated by obtaining quotes from banks. At
December 31, 1997 and 1996, there were no carrying amounts related to foreign
currency contracts in the consolidated balance sheets. The unrealized gains
(losses) related to such contracts were not material to the consolidated
financial statements.
INCOME TAXES
The Company accounts for income taxes under the liability method. Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Effective November 1, 1990, the
Company became a consolidated subsidiary of Celsius Inc. and is included in the
consolidated federal income tax return with Celsius Inc. The Company's income
tax provision is calculated and presented on a separate return basis.
<PAGE>
Aero Systems Engineering, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. ASSET ACQUISITION
In connection with the 1993 acquisition of FluiDyne Engineering Corporation
("FluiDyne") the Company paid $265,000 for a five-year covenant not to compete
on the part of FluiDyne and an executive officer of FluiDyne. This covenant is
being amortized over the life of the agreements. The Company also agreed to pay
to FluiDyne royalties calculated on the basis of revenue earned during the
period from August 1, 1993 through July 31, 1995. No royalties were earned under
this agreement during 1995. In addition, the Company acquired a collaboration
and license agreement that calls for a foreign entity to pay the Company a 5%
royalty on the value of certain components manufactured by the foreign entity
with the use of FluiDyne technology. Advances received for future royalties of
$495,973 have been reflected as deferred revenue in the accompanying
consolidated balance sheet as of December 31, 1996. The Company acquired a
stripped (zero coupon) United States Treasury bond which was used to repay the
royalty advance because none was earned.
3. CONTRACTS IN PROCESS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
------------------------------------
<S> <C> <C>
Costs incurred on uncompleted contracts $30,230,851 $24,721,747
Estimated earnings thereon 7,800,319 8,367,209
------------------------------------
Total billable on uncompleted contracts 38,031,170 33,088,956
Less billings applicable thereto 29,918,745 29,503,587
------------------------------------
$ 8,112,425 $ 3,585,369
====================================
Included in the accompanying balance sheet under the
following captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts $ 8,340,914 $ 3,977,135
Billings in excess of costs and estimated earnings on
uncompleted contracts 228,489 391,766
------------------------------------
$ 8,112,425 $ 3,585,369
====================================
</TABLE>
<PAGE>
Aero Systems Engineering, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. CONTRACTS IN PROCESS(CONTINUED)
The Company is a contractor/subcontractor on various U.S. federal
government-related firm, fixed-price contracts. The negotiated firm, fixed price
is subject to downward readjustment if it is subsequently determined that the
cost data submitted by the Company is erroneous.
The Company is a subcontractor on various U.S. federal government cost-plus,
fixed-fee contracts. The final contract price will be determined when the
contract is completed. The Company is recognizing revenue on the contracts based
on estimates of the final contract values.
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 letter of credit. Funds under
the letter of credit were advanced by Celsius AB, and are included in Accounts
Payable to Affiliated Companies in the consolidated balance sheet at December
31, 1997. The Company believes that Opron's claims are excessive. In addition,
this claim is partly offset by unpaid subcontract costs which are included in
Costs on uncompleted contracts. Management does not expect the resolution of the
dispute to have a material adverse effect on the Company's financial position or
results of operations.
CONCENTRATIONS OF CREDIT RISK
At December 31, 1997, the Company had certain concentrations of credit risk with
approximately $4,446,118 of unbilled charges and approximately $1,957,997 of
accounts receivable from six customers, which are partially secured by letters
of credit.
4. INVENTORIES
Inventories consist of the following:
DECEMBER 31
1997 1996
------------------------------------
Materials and supplies $ 592,321 $ 685,276
Projects-in-process 421,771 406,981
------------------------------------
$1,014,092 $1,092,257
====================================
<PAGE>
Aero Systems Engineering, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31
1997 1996
------------------------------------
Land $ 486,105 $ 486,105
Buildings 3,025,460 3,025,460
Furniture, fixtures and equipment 6,371,045 6,130,459
Wind tunnels and instrumentation 2,658,346 2,590,843
Building improvements 1,303,522 1,298,001
------------------------------------
13,844,478 13,530,868
Less accumulated depreciation (8,237,272) (7,362,974)
------------------------------------
Property, plant and equipment--net $ 5,607,206 $ 6,167,894
====================================
6. NOTES PAYABLE
At December 31, 1997, the Company had borrowings of $6,135,000 on a $6,000,000
line of credit with a bank bearing interest at a variable rate (9.5% at December
31, 1997). As of December 31, 1997, the Company had fully utilized the available
borrowings on this line of credit. Although the line of credit has a $6,000,000
limit, Celsius Inc. has allowed the Company to exceed this limit for short
periods of time. The portion over $6,000,000 is assessed a higher interest rate
of 11.5%.
Funds provided under this credit line are actually provided by Celsius Inc. and
ultimately from AB Celsius Finance. A first security interest in all assets of
the Company has been granted to Celsius Inc., and a fee is paid through Celsius
Inc.
At December 31, 1996, the Company had borrowings of $5,436,335 on a $6,000,000
line of credit with a bank bearing interest at the bank's reference rate.
During 1997 and 1996 the average borrowings on these lines of credit were
$5,346,000 and $4,704,000 with weighted average interest rates during the year
of 9.59% and 9.40%, respectively.
On February 15, 1994, the Company borrowed $4,000,000 from Celsius Inc. over a
five year term bearing interest at the rate of 6.7%. This loan was used to
reduce the Company's short-term borrowings under its line of credit. Currently,
$1,200,000 of the loan is outstanding of which $400,000 is classified as
long-term with the remaining $800,000 classified as short-term. The loan is
secured by a mortgage on the Company's facilities. Principal and interest is due
in semi-annual installments that began August 15, 1994 and will extend through
February 15, 1999.
<PAGE>
Aero Systems Engineering, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. INCOME TAXES
Significant components of the Company's deferred tax liabilities and assets are
as follows:
DECEMBER 31
1997 1996
--------------------------
Deferred tax assets:
Contract related costs $ 278,000 $ 291,000
Warranty costs 148,000 148,000
Vacation accrual 131,000 123,000
Inventory and receivable reserves 162,000 179,000
Net operating loss carryforward 1,644,000 1,467,000
--------------------------
Total deferred tax assets 2,363,000 2,208,000
Valuation allowance for deferred tax assets (1,871,000) (1,728,000)
--------------------------
Net deferred tax assets 492,000 480,000
Deferred tax liabilities:
Tax over book depreciation 484,000 467,000
Other 8,000 13,000
--------------------------
Total deferred tax liabilities 492,000 480,000
--------------------------
Net deferred taxes $ - $ -
==========================
The net operating loss carryforward of $4,444,000 will expire in the year 2010.
The components of income tax expense for the years ended December 31 are:
1997 1996 1995
------------------------------------------------------
Current $ 7,512 $ 5,000 $ 22,640
Deferred - - -
------------------------------------------------------
$ 7,512 $ 5,000 $ 22,640
======================================================
<PAGE>
Aero Systems Engineering, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. INCOME TAXES(CONTINUED)
Total income tax expense differs from taxes computed by applying the United
States statutory federal income tax rate as follows:
YEAR ENDED DECEMBER 31
1997 1996 1995
------------------------------------
Income taxes at 34% $(133,695) $(857,736) $ 72,123
State taxes, net of federal benefit 4,960 1,848 6,386
Foreign sales corporation tax (benefit) -- -- 12,963
Change in valuation allowance 131,247 848,709 (70,926)
Other 5,000 12,179 2,094
------------------------------------
$ 7,512 $ 5,000 $ 22,640
====================================
8. LEASE OBLIGATIONS
The Company has capitalized leases which expire through 2002. The capitalized
cost at both December 31, 1997 and 1996 was $840,882, less accumulated
amortization of $315,987 and $235,989, respectively. In 1996, the Company
acquired equipment financed with capitalized leases aggregating $414,912. One
capitalized lease agreement, which relates to a warehouse facility in St. Paul,
Minnesota, contains several purchase options at various times during the lease
period. The most favorable option occurs at the end of the lease period when the
Company may purchase the facility for approximately $95,000.
The Company also has a number of operating lease agreements primarily involving
manufacturing and warehouse space and office equipment, which expire on various
dates through 2003. Total rental expense under operating leases for occupancy
and equipment was approximately $132,000, $144,000 and $177,000 for 1997, 1996
and 1995, respectively.
<PAGE>
Aero Systems Engineering, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. LEASE OBLIGATIONS(CONTINUED)
Following is a schedule of future minimum lease payments:
CAPITAL OPERATING
LEASES LEASES
------------------------------------
Years ending December 31:
1998 $ 175,581 $ 126,685
1999 124,917 131,343
2000 92,652 118,150
2001 58,260 67,352
2002 122,349 67,352
Thereafter 16,838
------------------------------------
Total minimum lease payments 573,759 $ 527,720
===================
Less amount representing interest 102,780
------------------
Present value 470,979
Less principal amount due currently 138,114
------------------
$ 332,865
==================
9. CONTINGENCIES AND COMMITMENTS
Guarantees of approximately $10,469,000 were outstanding at December 31, 1997 to
various customers as bid bonds or in exchange for down payments or warranty
performance bonds.
10. RETIREMENT/SAVINGS PLAN
The Company has a Retirement/Savings Plan which qualifies under Section 401(k)
of the Internal Revenue Code and covers all employees. Members of the Plan who
have completed at least twelve consecutive months of service, during which they
have worked at least 1,000 hours, are eligible for the employer matching
contribution. Contributions up to 6% of the employees' compensation are matched
at a rate of 50% by the Company. Company contributions to the plan for the years
ended December 31, 1997, 1996 and 1995 were $193,000, $218,000 and $206,000,
respectively.
11. RELATED PARTY TRANSACTIONS
At December 31, 1997 and 1996, Celsius Inc. owned 2,041,782 shares of the
Company's common stock. This amount represents 80% of the voting shares
outstanding. Celsius Inc. is a wholly-owned subsidiary of Celsius AB, a Swedish
holding company.
<PAGE>
Aero Systems Engineering, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. RELATED PARTY TRANSACTIONS(CONTINUED)
Celsius Inc. and its affiliated companies provide certain administrative support
services to the Company and the Company is charged a fee for such services.
Transactions with affiliates are summarized as follows:
YEAR ENDED DECEMBER 31
1997 1996 1995
---------------------------------------------------
Interest expense $65,000 $117,000 $121,000
Administrative charges $65,000 $ 86,000 $ 84,000
12. SEGMENT INFORMATION
The Company operates primarily in one business segment relating to engine and
aerodynamic test facilities. This segment represented more than 90% of
consolidated revenue, operating profit and identifiable assets during 1997. The
Company's operations are structured to achieve consolidated objectives. As a
result, significant inter-dependencies and overlaps exist among the Company's
operating units.
Export sales were $11,265,844, $9,512,160 and $12,306,218 for 1997, 1996 and
1995, respectively.
Information concerning major customers with sales greater than 10% of total
sales for the years ended December 31:
1997 1996 1995
---------------------------------------
Sales to domestic customers:
United States federal government $5,194,158 $6,289,664 $9,989,460
Commercial customers:
(1 customer in 1997) 4,561,789 - -
=======================================
$9,755,947 $6,289,664 $9,989,460
=======================================
Sales to foreign customers:
Government-owned (1 customer in 1996) $ - $3,260,238 $ -
---------------------------------------
$ - $3,260,238 $ -
=======================================
<PAGE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 through ITEM 13
Items 10 through 13 of this Annual Report on Form 10-K are omitted because the
Company intends to file on or before April 13, 1998 a definitive proxy statement
conforming to Schedule 14A involving the election of directors. Certain
information set forth in such proxy statement is hereby incorporated by
reference into this Annual Report on Form 10-K as Items 10, 11, 12 and 13 of
Part III.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a)1. Financial Statements
The financial statements and notes thereto are set forth in the Index to
Financial Statements filed as Item 8 to this Annual Report on Form 10-K.
(a)2. Financial Statement Schedules
All schedules have been omitted, as the required information is not
present or not present in amounts sufficient to require submission of
the schedules or because the information required is included in the
financial statements or notes thereto.
(a)3. Exhibits
The following exhibits are incorporated by reference to Exhibits 3a.,
respectively, to the Company's Annual Report on Form 10-K for the year
ended December 31, 1983:
3a. Restated Articles of Incorporation
The following exhibit is incorporated by reference to Exhibit 3b. to
the Company's Annual Report on Form 10-K for the year ended December
31, 1990:
3b. Amended Bylaws
(b)3. Reports on Form 8-K None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Aero Systems Engineering, Inc.
(Registrant)
/s/
____________________ By__________________________
Date Dr. Leon Ring,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
is signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
/s/
- -------------------- ---------------------------------
Date Dr. Leon Ring,
President and Chief Executive Officer,
Director
/s/
- -------------------- ---------------------------------
Date Christer Persson, Chairman of the Board
/s/
- -------------------- ---------------------------------
Date A. L. Maxson, Director
- -------------------- ---------------------------------
Date Robert A. Davis, Director
/s/
- ------------------ ---------------------------------
Date Richard A. Hoel, Director
/s/
- -------------------- ---------------------------------
Date Steven R. Hedberg,
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000002589
<NAME> STEVE R. HEDBERG
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 117
<SECURITIES> 0
<RECEIVABLES> 4,767
<ALLOWANCES> 0
<INVENTORY> 1,014
<CURRENT-ASSETS> 14,937
<PP&E> 13,844
<DEPRECIATION> 8,237
<TOTAL-ASSETS> 20,575
<CURRENT-LIABILITIES> 15,107
<BONDS> 0
0
0
<COMMON> 510
<OTHER-SE> 517
<TOTAL-LIABILITY-AND-EQUITY> 20,575
<SALES> 25,032
<TOTAL-REVENUES> 25,032
<CGS> 20,258
<TOTAL-COSTS> 20,258
<OTHER-EXPENSES> 43
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 751
<INCOME-PRETAX> (393)
<INCOME-TAX> 8
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (401)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> 0
</TABLE>
