Back to GetFilings.com
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, 1998 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: (651) 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. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of January 31, 1999 was approximately $1,090,000 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, 1999 was 4,401,708,
adjusted for the 15% common stock dividend declared on February 22, 1999.
1
TABLE OF CONTENTS
Page
----
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...........................................................10
Item 3. Legal Proceedings....................................................10
Item 4. Submission of Matters to a Vote of Security Holders..................11
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters..................................................11
Item 6. Selected Financial Data..............................................12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................12
Item 7A. - Quantitative and Qualitative Disclosure about Market Risk..........15
Item 8. Consolidated Financial Statements and Supplementary Data.............16
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................35
PART III
Item 10. - Item 13. See Documents Incorporated by Reference...................35
PART IV
Item 14. - Exhibits, Financial Statement Schedules and Reports on Form 8-K....35
Signatures....................................................................36
2
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into the Form 10-K:
PARTS OF FORM 10-K INTO
DOCUMENT WHICH INCORPORATED BY
REFERENCE
- --------------------------------------------------------------------------------
Proxy Statement to be filed on or before April 30, 1999
for the annual meeting of shareholders scheduled to
be held on June 2, 1999 III
3
CROSS-REFERENCE SHEET BETWEEN ITEMS IN PART III OF FORM 10-K AND PROXY STATEMENT
PURSUANT TO GENERAL INSTRUCTION G(4)
SUBJECT HEADINGS IN
DOCUMENT PROXY STATEMENT
- --------------------------------------------------------------------------------
Item 10. Directors and Executive Officers of the Election of Directors
Registrant
Item 11. Executive Compensation Election of Directors
Item 12. Security Ownership of Certain Beneficial Principal Shareholders
Owners and Management
Item 13. Certain Relationships and Related Election of Directors
Transactions
4
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 1999 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 through acquisitions or using joint
ventures with established companies. Acoustic measurements processes to measure
noise levels are technologies 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 related
lines of business. The first is related to the design, equipping, manufacture
and construction of test facilities for turbine engines, engine accessories, and
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 construction of jet engine
testing facilities and wind tunnel testing facilities;
* Design and manufacture of electronic and mechanical turbine engine testing
equipment;
* Providing aerodynamic and propulsion system testing services; and
* Application of engineering technology to specific engine and aerodynamic
testing problems.
5
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.
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
contracts, 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
6
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
branch of 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 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 products and 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 1998, two
customers each accounted for more than 10% of the Company's consolidated
revenues. These two customers were the U.S. Government and Rolls Royce. There is
one customer who accounts for a significant portion of the Company's backlog at
December 31, 1998. Other than this customer, 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, 1998 was $26,518,000. This compares with a
backlog of $14,278,000 on December 31, 1997.
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.
7
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. Also, the activities involving commercial aviation wind tunnels have
been strong and continue to provide opportunities for new business.
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.
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 $521,000,
$696,000 and $500,000 for the years ended December 31, 1998, 1997, and 1996,
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, 1998, the Company and its subsidiaries employed
171 employees. Contract labor has been used as business conditions require. None
of the Company's employees are members of a collective bargaining unit, and the
Company believes its employee relations are good.
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. This restriction is not
expected to have a material adverse effect on the Company's business.
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
8
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 $500,000, which includes $450,000 for
the purchase of new hardware, software and implementation costs that will be
capitalized and $50,000 that will be expensed as incurred. To date, the Company
has incurred the majority of the acquisition costs but little of the
implementation costs, as it is in the early phase of implementation.
The Year 2000 project is estimated to be completed by June 30, 1999, which is
prior to any anticipated impact on ASE's operating systems. Should the Company
be unable to acquire and implement new systems and software prior to the year
2000, it will modify current systems and software to function properly with
respect to dates in the year 2000. The Company believes that with modifications
to existing software and conversions to new software, the Year 2000 issue will
not pose significant operational problems for its computer systems. However, if
such modifications and conversions are not made, or are not completed timely,
the Year 2000 issue could have a material impact on the operations of the
Company.
In addition to the Year 2000 issues relating to the computer systems, the
Company has begun testing its non-IT systems for any other potential Year 2000
issues, and it is communicating with business partners and suppliers to
determine if their Year 2000 compliance status will impact the operations of the
Company. Any issues that are identified as a result of this process are expected
to be corrected by mid-1999.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved. Therefore,
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.
9
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 square feet are used
for offices and 7,000 square feet are 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 on July 2002, 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 are used for manufacturing and 7,000 square feet are used for
offices.
In September 1998, the Company signed an operating lease for 6,500 square feet
of office space in Hampton, Virginia. This office space is occupied by employees
working on current contracts with NASA. The lease is in effect until April 2004.
ITEM 3 - LEGAL PROCEEDINGS
In August 1993, the Company entered into a subcontract (the "Subcontract") with
Opron Inc. ("Opron"), a Canadian company with its principal office in the
Province of Quebec, which was the prime contractor on a jet engine test cell
project under a prime contract between Opron and Rolls Royce (Canada) Ltd. Late
in 1995, a dispute arose between the Company and Opron, which has resulted in
Opron's draw in the amount of CDN $872,042 under a letter of credit. The Company
believes that Opron's claims are excessive. In addition, Opron's claim is partly
offset by unpaid subcontract costs. The Company's 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.
10
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1998 to a vote of security
holders through the solicitation of proxies or otherwise.
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 and traded on The Nasdaq SmallCap
Market(SM). On January 29, 1999, the high and low sales prices for the Company's
common stock were $1.52 and $1.30, respectively.
The high and low sales prices for the Company's common stock for each quarter
during 1997 and 1998 as quoted on The Nasdaq SmallCap Market(SM) were as
follows:
HIGH LOW
------------------------
1997:
First Quarter $1.42 $0.65
Second Quarter 1.30 .77
Third Quarter 1.20 .98
Fourth Quarter 1.85 .90
1998:
First Quarter $2.23 $1.20
Second Quarter 2.61 1.30
Third Quarter 1.57 .98
Fourth Quarter 1.63 1.09
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 ever been paid in the history of the Company prior to 1998,
and no cash dividends have ever been paid by the Company. The Company intends to
use its earnings to finance operations and does not intend to pay cash dividends
on its capital stock in the foreseeable future.
During the first quarter of 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(SM). On February 22, 1999, the Company announced a fifteen percent
dividend to shareholders of record as of
11
March 10, 1999, in an effort to meet The Nasdaq SmallCap Market(SM) value public
float requirement. A hearing was held on March 4, 1999, at Nasdaq to determine
the continued listing status of the Company's stock, but as of the date of this
Annual Report on Form 10-K, Nasdaq had not made any notification to the Company
as to the outcome of the hearing. Financial information contained in this report
has been adjusted to reflect the impact of the common stock split and fifteen
percent stock dividend. As of December 31, 1998 there were approximately 202
holders of record of common stock of the Company and 4,401,708 total shares
outstanding.
ITEM 6 - SELECTED FINANCIAL DATA
Selected financial data for the years ended December 31 are as follows:
1998 1997 1996 1995 1994
--------------------------------------------------------------------------
SELECTED INCOME STATEMENT
DATA
Earned revenue $ 27,181,448 $ 25,032,452 $ 20,383,352 $ 26,037,288 $ 25,229,583
Net income (loss) 665,200 (400,733) (2,527,754) 189,488 (1,175,286)
Net income (loss) per
common share .15 (.09) (.57) .04 (.27)
Weighted average common
shares outstanding 4,401,708 4,401,708 4,401,708 4,401,708 4,401,708
SELECTED BALANCE SHEET DATA
Current assets $ 16,004,487 $ 14,936,589 $ 11,006,645 $ 17,391,439 $ 13,898,995
Current liabilities 15,850,389 15,107,440 10,469,625 13,775,994 10,000,407
Working capital 154,098 (170,851) 537,020 3,615,445 3,898,588
Total assets 21,480,070 20,574,712 17,754,429 24,176,077 21,010,244
Long-term debt and capital
lease obligations 234,119 732,865 1,671,191 2,255,127 3,209,519
Stockholders' equity 4,915,108 4,249,908 4,650,641 7,178,395 6,988,907
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Aero Systems Engineering, Inc. ("Company") is engaged in selling products and
services related to (1) testing turbine engines and designing and operating
aerodynamic wind tunnels, and (2) 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, 1998 was $26,518,000, which consisted
of $25,231,000 that was related to jet engine test cell projects and wind tunnel
projects and $1,287,000 related to Aerotest Lab/Other. Backlog of orders as of
December 31, 1997 was $14,278,000, of which $12,369,000 was related to test cell
and wind tunnel projects and $1,909,000 was related to Aerotest Lab/Other. The
backlog of orders as of
12
December 31, 1996 was $9,457,000, of which $8,009,000 was related to test cell
and wind tunnel projects and $1,448,000 was related to Aerotest Lab/Other.
The backlog as of December 31, 1998 does not include the NASA task order
contract awarded in the second quarter of 1998 with a potential value of $38
million over five years. Definitive task orders issued under this contract will
be included in backlog as they are awarded.
The change in backlog from 1997 to 1998 represents an 86% increase in total
backlog. Also, new orders received in 1998 totaled $39,421,000 as compared to
the previous year of $29,900,000. The 1998 increase in orders included several
large wind tunnel orders, which will provide revenues and gross margin into 1999
and the year 2000.
Earned revenue for the year ended December 31, 1998 was $27,181,000, an increase
of $2,149,000 or 9% as compared to the 1997 revenue of $25,032,000. Earned
revenue for 1996 was $20,383,000. The revenue increase from 1997 to 1998 was due
to an increase in new orders and the completion of projects.
The Company recorded net income of $665,000 in 1998, a net loss of $401,000 in
1997, and a net loss of $2,528,000 in 1996. The turnaround from 1997 was
primarily due to operational improvements implemented by the management team
early in 1997 taking full effect in 1998.
The cost of earned revenue as a percentage of earned revenue was 78% in 1998 as
compared to 81% in 1997 and 78% in 1996. The percentage decrease in cost of
earned revenue during 1998 was due to a mix of improved margins on existing and
new test cell projects and resolving the over-capacity issues that existed in
the first part of 1997 due to the low backlog at the end of 1996.
Operating expenses were $3,916,000, $3,677,000, and $5,673,000 in 1998, 1997,
and 1996, respectively. These expenses increased 7% in 1998 as compared to 1997
as a result of investments in improved administrative technology and salary
increases.
Research and Development (R&D) costs were $521,000, $696,000, and $500,000 in
1998, 1997, and 1996, respectively. The decrease during 1998 was $175,000 or 25%
as compared to 1997's R&D amount. The Company has continued to enhance the
capabilities of the ASE2000 Computer Data Acquisition System in 1998. This
activity will continue into 1999, which management believes will further improve
the marketability of the system.
Interest expense was $888,000, $751,000 and $752,000 in years 1998, 1997 and
1996, respectively. 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 $700,000 during 1998. The weighted average interest rates for
1998 were 9.35% on the line of credit and 6.7% on the note payable to
affiliates.
13
The Company recorded income tax expense of $0 in 1998, as compared to $7,500 in
1997 and $5,000 in 1996.
Liquidity and Capital Resources
The current ratio was 1.0, 1.0, and 1.1 as of December 31, 1998, 1997, and 1996,
respectively. Working capital amounts were $154,000 as of December 31, 1998,
$(171,000) as of December 31, 1997, and $537,000 as of December 31, 1996. Both
current assets and current liabilities increased during 1998 as compared to
1997.
The December 31, 1998 accounts receivable balance was $7,241,000, an increase of
$2,474,000 as compared to a balance of $4,767,000 at December 31, 1997. The
increase in the accounts receivable balance for 1998 was due to the timing of
several large customer billings that were recorded as receivables at the end of
the year.
Accounts payable and accrued expenses were $7,237,000 and $7,806,000 as of
December 31, 1998 and 1997, respectively. The 1998 decrease is $569,000 or 7% as
compared to 1997. The decrease from 1997 is due primarily to the timing of the
procurement activities for the existing projects, of which much had been
completed prior to the end of the year.
Billings in excess of earnings were $1,416,000 as of December 31, 1998, an
increase of $1,188,000 when compared to the balance of $228,000 at December 31,
1997. This is due primarily to improved payment terms on new contracts and
timing of billings to earned revenue recognition on large contracts in their
early phases.
The Company had fully utilized the available line of credit as of December 31,
1998. The total line of credit available is $6,000,000 at a branch of a Swedish
bank in New York City, which is guaranteed by the Company's immediate parent,
Celsius Inc. The average outstanding borrowings were $6,813,000 and $5,436,000
during 1998 and 1997, respectively. The increase in borrowings from 1997 to 1998
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 10.75%. As of January 31, 1999,
the balance of the line of credit was $5,970,000, which reflects the collection
of several large receivables outstanding at the end of the year.
Current financial resources, consisting of working capital and short-term line
of credit facilities, plus anticipated funds from operations, are expected to be
adequate to meet cash requirements at least until the end of 1999.
Capital expenditures were $735,000, $314,000, and $502,000 in 1998, 1997, and
1996, respectively. The 1998 increase was 134% as compared to 1997. Most of the
1998 capital
14
expenditures were used to update desktop and network equipment and new business
systems software.
Highly competitive market conditions have minimized the effect of inflation on
contract selling prices and the cost of purchased materials.
During 1998, approximately 53% 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.
New Accounting Standards
Certain accounting standards have been issued which the Company is not yet
required to adopt. See Notes to Consolidated Financial Statements for a
discussion of the applicable standards.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's debt portfolio is predominantly variable rate, and substantially
all of its long-term contracts are denominated in U.S. dollars. Therefore, the
Company does not believe its operations are exposed to significant market risk
relating to interest rates or foreign currency exchange risk.
15
ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
TABLE OF CONTENTS
Page
----
REPORT OF INDEPENDENT AUDITORS................................................17
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets.............................................................18
Statements of Operations...................................................20
Statements of Changes in Stockholders' Equity..............................21
Statements of Cash Flows...................................................22
Notes to Consolidated Financial Statements.................................23
16
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 subsidiary as of December 31, 1998 and 1997, 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,
1998. 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 subsidiary at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
January 20, 1999
17
AERO SYSTEMS ENGINEERING, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
1998 1997
--------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 16,091 $ 117,018
Accounts receivable--billed contracts, net of allowances
of $50,000 in 1998 and 1997, including retainages
of $106,000 7,240,675 4,766,849
Costs and estimated earnings in excess of billings on
uncompleted contracts 6,710,677 8,340,914
Inventories 1,406,054 1,014,092
Prepaid expenses 50,851 113,532
Deferred and prepaid income taxes 580,139 584,184
--------------------------------
Total current assets 16,004,487 14,936,589
Property, plant and equipment--net 5,475,583 5,607,206
Non-compete agreement, net of accumulated amortization
of $265,000 and $234,083 in 1998 and 1997,
respectively
-- 30,917
--------------------------------
Total assets $ 21,480,070 $ 20,574,712
================================
18
AERO SYSTEMS ENGINEERING, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31
1998 1997
--------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of capital lease obligations $ 98,868 $ 138,114
Current maturities of long-term debt to affiliated
company 400,000 800,000
Notes payable 6,698,996 6,135,121
Accounts payable:
Trade 3,777,507 4,716,027
Affiliated companies 654,067 719,727
Billings in excess of costs and estimated earnings on
uncompleted contracts 1,415,825 228,489
Accrued warranty and losses 703,254 675,254
Accrued salaries and wages 595,213 663,958
Income taxes payable 590 4,924
Other accrued liabilities 1,506,069 1,025,826
--------------------------------
Total current liabilities 15,850,389 15,107,440
Other liabilities:
Deferred income taxes 480,454 484,499
Long-term debt to affiliated company, less current
maturities -- 400,000
Capital lease obligations, less current maturities 234,119 332,865
Stockholders' equity:
Common Stock, $.20 par value:
Authorized shares - 10,000,000
Issued and outstanding shares - 4,401,708 and
2,551,717 in 1998 and 1997 880,342 510,343
Additional paid-in capital 900,275 516,722
Retained earnings 3,134,491 3,222,843
--------------------------------
Total stockholders' equity 4,915,108 4,249,908
--------------------------------
Total liabilities and stockholders' equity $ 21,480,070 $ 20,574,712
================================
SEE ACCOMPANYING NOTES.
19
AERO SYSTEMS ENGINEERING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31
1998 1997 1996
--------------------------------------------------
Earned revenue $ 27,181,448 $ 25,032,452 $ 20,383,352
Cost of earned revenue 21,120,360 20,258,028 15,933,811
--------------------------------------------------
Gross profit 6,061,088 4,774,424 4,449,541
Operating expenses 3,915,974 3,676,961 5,672,734
Research and development 520,600 696,498 499,776
--------------------------------------------------
Operating profit (loss) 1,624,514 400,965 (1,722,969)
Other income (expense):
Interest income 9 7,482 5,280
Interest expense (887,965) (750,773) (751,547)
Other (71,358) (50,895) (53,518)
--------------------------------------------------
(959,314) (794,186) (799,785)
--------------------------------------------------
Income (loss) before income taxes 665,200 (393,221) (2,522,754)
Income tax expense -- (7,512) (5,000)
--------------------------------------------------
Net income (loss) $ 665,200 $ (400,733) $ (2,527,754)
==================================================
Net income (loss) per common share $ .15 $ (.09) $ (.57)
==================================================
Weighted average common and common
equivalent shares outstanding 4,401,708 4,401,708 4,401,708
==================================================
SEE ACCOMPANYING NOTES.
20
AERO SYSTEMS ENGINEERING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL
--------------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
--------------------------------------------------------------
Balance at January 1, 1996 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
Three-for-two stock split 1,275,856 255,172 (255,172) --
15% stock dividend 574,135 114,827 638,725 (753,552)
Net income -- -- -- 665,200
--------------------------------------------------------------
Balance at December 31, 1998 4,401,708 $ 880,342 $ 900,275 $ 3,134,491
==============================================================
SEE ACCOMPANYING NOTES.
21
AERO SYSTEMS ENGINEERING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
1998 1997 1996
--------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 665,200 $ (400,733) $ (2,527,754)
Adjustments to reconcile to net cash provided by
operating activities:
Depreciation and amortization 897,756 927,298 984,891
Decrease (increase) in assets:
Accounts receivable (2,473,826) 372,568 2,234,871
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,630,237 (4,363,779) 3,700,729
Inventories (391,962) 78,165 318,697
Prepaid expenses 62,681 (17,464) 86,685
Refundable income taxes -- -- 3,474
(Decrease) increase in liabilities:
Accounts payable and accrued expenses (564,682) 4,089,512 (2,205,278)
Income taxes payable (4,334) 190 1,538
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,187,336 (163,277) (1,580,506)
--------------------------------------------------
Net cash provided by operating activities 1,008,406 522,480 1,017,347
INVESTING ACTIVITIES
Capital expenditures (735,216) (313,610) (501,933)
--------------------------------------------------
Net cash used in investing activities (735,216) (313,610) (501,933)
FINANCING ACTIVITIES
Net borrowings under line of credit agreements 563,875 698,786 506,758
Payment of notes payable -- -- (126,894)
Principal payments on borrowings from affiliates (800,000) (800,000) (800,000)
Principal payments under capital lease obligations (137,992) (125,722) (100,835)
--------------------------------------------------
Net cash used in financing activities (374,117) (226,936) (520,971)
--------------------------------------------------
Net decrease in cash and cash equivalents (100,927) (18,066) (5,557)
Cash and cash equivalents at beginning of year 117,018 135,084 140,641
--------------------------------------------------
Cash and cash equivalents at end of year $ 16,091 $ 117,018 $ 135,084
==================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid (received) during the year for:
Interest $ 887,965 $ 750,773 $ 772,093
Income taxes 4,334 5,400 (800)
SEE ACCOMPANYING NOTES.
22
AERO SYSTEMS ENGINEERING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
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 10.
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
23
AERO SYSTEMS ENGINEERING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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. On February 22,
1999, the Company announced a fifteen percent stock dividend to shareholders of
record as of March 10, 1999. Financial information contained in this report has
been adjusted to reflect the impact of the stock split and fifteen percent stock
dividend.
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.
24
AERO SYSTEMS ENGINEERING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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, 1998 and 1997, 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.
25
AERO SYSTEMS ENGINEERING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the current
year presentation.
INTERNAL USE SOFTWARE
In March 1998, the AICPA issued SOP 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE DEVELOPED FOR OR OBTAINED FOR INTERNAL USE. The Company plans to adopt
the SOP on January 1, 1999. The SOP will require the capitalization of certain
costs incurred after the date of adoption in connection with developing or
obtaining software for internal use. The Company currently expenses such costs
as incurred. As a result of adopting the new SOP, the Company expects to
capitalize approximately $150,000 related to internal use software development
projects in 1999 that otherwise would have been expensed as incurred. This is
expected to result in an increase in net income of $120,000 or $.03 per share.
26
AERO SYSTEMS ENGINEERING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. CONTRACTS IN PROCESS
YEAR ENDED DECEMBER 31
1998 1997
--------------------------------
Costs incurred on uncompleted contracts $ 43,441,770 $ 30,230,851
Estimated earnings thereon 10,897,073 7,800,319
--------------------------------
Total billable on uncompleted contracts 54,338,843 38,031,170
Less billings applicable thereto 49,043,991 29,918,745
--------------------------------
$ 5,294,852 $ 8,112,425
================================
Included in the accompanying balance sheet under the
following captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts $ 6,710,677 $ 8,340,914
Billings in excess of costs and estimated earnings on
uncompleted contracts 1,415,825 228,489
--------------------------------
$ 5,294,852 $ 8,112,425
================================
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.
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 by Opron 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, 1998 and 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 incurred 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.
27
AERO SYSTEMS ENGINEERING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. CONTRACTS IN PROCESS (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
At December 31, 1998, the Company had certain concentrations of credit risk with
approximately $3,629,760 of unbilled charges and approximately $4,329,876 of
accounts receivable from six customers, which are partially secured by letters
of credit.
3. INVENTORIES
Inventories consist of the following:
DECEMBER 31
1998 1997
--------------------------------
Materials and supplies $ 613,114 $ 592,321
Projects-in-process 792,940 421,771
--------------------------------
$ 1,406,054 $ 1,014,092
================================
4. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31
1998 1997
-------------------------------
Land $ 486,105 $ 486,105
Buildings 3,025,460 3,025,460
Furniture, fixtures and equipment 7,028,213 6,371,045
Wind tunnels and instrumentation 2,702,144 2,658,346
Building improvements 1,337,772 1,303,522
-------------------------------
14,579,694 13,844,478
Less accumulated depreciation (9,104,111) (8,237,272)
-------------------------------
Property, plant and equipment--net $ 5,475,583 $ 5,607,206
===============================
28
AERO SYSTEMS ENGINEERING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. NOTES PAYABLE TO BANKS
At December 31, 1998, the Company had borrowings of $6,698,996 on a $6,000,000
line of credit with a bank bearing interest at a variable rate (8.75% at
December 31, 1998). As of December 31, 1998, 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 (10.75% at December 31, 1998).
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, 1997, the Company had borrowings of $6,135,121 on a $6,000,000
line of credit with a bank bearing variable interest at the bank's reference
rate.
During 1998 and 1997 the average borrowings on these lines of credit were
$6,813,000 and $5,346,000 with weighted average interest rates during the year
of 9.35% and 9.59%, 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. The balance
outstanding at December 31, 1998 was $400,000. 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.
29
AERO SYSTEMS ENGINEERING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
Significant components of the Company's deferred tax liabilities and assets are
as follows:
DECEMBER 31
1998 1997
---------------------------------
Deferred tax assets:
Contract related costs $ 239,000 $ 278,000
Warranty costs 148,000 148,000
Vacation accrual 157,000 131,000
Inventory and receivable reserves 190,000 162,000
Net operating loss carryforward 1,345,000 1,644,000
Other 23,000 --
Tax credit carryforwards 67,000 --
---------------------------------
Total deferred tax assets 2,169,000 2,363,000
Valuation allowance for deferred tax assets (1,689,000) (1,871,000)
---------------------------------
Net deferred tax assets 480,000 492,000
Deferred tax liabilities:
Tax over book depreciation 480,000 484,000
Other -- 8,000
---------------------------------
Total deferred tax liabilities 480,000 492,000
---------------------------------
Net deferred taxes $ -- $ --
=================================
The net operating loss carryforward of $3,635,000 will expire in the year 2012.
The components of income tax expense (benefit) for the years ended December 31
are:
1998 1997 1996
--------------------------------------
Current $ 16,000 $ 8,000 $ 5,000
Deferred (16,000) -- --
--------------------------------------
$ -- $ 8,000 $ 5,000
======================================
30
AERO SYSTEMS ENGINEERING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. 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
1998 1997 1996
--------------------------------------
Income taxes at 34% $ 226,000 $(134,000) $(858,000)
State taxes, net of federal benefit 3,000 5,000 2,000
Effect of net operating loss carryforward
and valuation allowance (230,000) 132,000 849,000
Other 1,000 5,000 12,000
--------------------------------------
$ -- $ 8,000 $ 5,000
======================================
7. LEASE OBLIGATIONS
The Company has capitalized leases which expire through 2002. The capitalized
cost at both December 31, 1998 and 1997 was $840,882 less accumulated
amortization of $397,375 and $315,987, 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 on July
2002 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 2004. Total rental expense under operating leases for occupancy
and equipment was approximately $184,000, $132,000 and $144,000 for 1998, 1997
and 1996, respectively.
31
AERO SYSTEMS ENGINEERING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LEASE OBLIGATIONS (CONTINUED)
Following is a schedule of future minimum lease payments:
CAPITAL OPERATING
LEASES LEASES
------------------------------
Years ending December 31:
1999 $ 124,917 $ 163,705
2000 92,652 138,332
2001 58,260 87,534
2002 122,349 87,534
2003 -- 87,534
Thereafter -- 29,178
------------------------------
Total minimum lease payments 398,178 $ 593,817
==============
Less amount representing interest 65,191
--------------
Present value 332,987
Less principal amount due currently 98,868
--------------
$ 234,119
==============
8. CONTINGENCIES AND COMMITMENTS
Guarantees of approximately $7,762,653 were outstanding at December 31, 1998 to
various customers as bid bonds or in exchange for down payments or warranty
performance bonds.
9. 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, 1998, 1997 and 1996 were $210,000, $193,000 and $218,000,
respectively.
32
AERO SYSTEMS ENGINEERING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. RELATED PARTY TRANSACTIONS
At December 31, 1998 and 1997, Celsius Inc. owned 3,521,369 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.
Celsius Inc. and its affiliated companies provide certain administrative support
services to the Company and the Company is charged a fee for such services.
Such fees with affiliates are summarized as follows:
YEAR ENDED DECEMBER 31
1998 1997 1996
------------------------------------------
Interest expense $ 105,000 $ 65,000 $ 117,000
Administrative charges $ 55,000 $ 65,000 $ 86,000
11. 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 1998. 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 $14,308,277, $11,265,844 and $9,512,160 for 1998, 1997 and
1996, respectively.
33
AERO SYSTEMS ENGINEERING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SEGMENT INFORMATION (CONTINUED)
Information concerning major customers with sales greater than 10% of total
sales for the years ended December 31:
1998 1997 1996
------------------------------------------
Sales to domestic customers:
United States federal government $5,211,808 $5,194,158 $6,289,664
Commercial customers (1 customer in 1997) -- 4,561,789 --
------------------------------------------
$5,211,808 $9,755,947 $6,289,664
==========================================
Sales to foreign customers:
Government-owned (1 customer in 1996) $ -- $ -- $3,260,238
Commercial customers (1 customer in 1998) 5,586,014 -- --
------------------------------------------
$5,586,014 $ -- $3,260,238
==========================================
34
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 30, 1999 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
No exhibits are included in this filing.
(b)3. Reports on Form 8-K
None.
35
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)
By /s/ LEON E. RING
- -------------------- --------------------------------------
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/ LEON E. RING
- -------------------- --------------------------------------
Date Dr. Leon Ring,
President and Chief Executive Officer,
Director
/s/ CHRISTER PERSSON
- -------------------- --------------------------------------
Date Christer Persson, Chairman of the
Board
/s/ A. L. MAXSON
- -------------------- --------------------------------------
Date A. L. Maxson, Director
/s/ ROBERT A. DAVIS
- -------------------- --------------------------------------
Date Robert A. Davis, Director
/s/ RICHARD A. HOEL
- -------------------- --------------------------------------
Date Richard A. Hoel, Director
/s/ STEVEN R. HEDBERG
- -------------------- --------------------------------------
Date Steven R. Hedberg, Chief Financial
Officer
36