1
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, 2000 Commission file number 0-7390
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AERO SYSTEMS ENGINEERING, INC.
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(Exact name of registrant as specified in its charter)
Minnesota 41-0913117
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(State of incorporation) (I.R.S. Employer
Identification No.)
358 East Fillmore Avenue, St. Paul, Minnesota 55107
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (651) 227-7515
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.20 Per Share
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(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, 2001 was approximately $1,261,035 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, 2001 was 4,401,625.
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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..........................................................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 7A Quantitative and Qualitative Disclosure About Market Risk..........14
Item 8. Financial Statements and Supplementary Data........................15
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...............................................33
PART III
Item 10. through Item 13. See Documents Incorporated by Reference............33
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....33
Signatures...................................................................34
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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
DOCUMENT INCORPORATED BY REFERENCE
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Proxy Statement to be filed on or before April 30, 2001
for the annual meeting of shareholders on May 30, 2001 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)
SUBJECT HEADINGS IN
DOCUMENT PROXY STATEMENT
---------------------------------------------------------------------------------------------------
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 was acquired by SAAB AB in March 2000.
The plan of operations for 2001 with respect to the Company 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. Currently, the Company has no agreements regarding such
opportunities. The Company is attempting to expand into the industrial engine
and small commuter engine testing market place. Also, acoustic measurement
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 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:
o Design and overall project management for construction of jet engine
testing facilities and wind tunnel testing facilities;
o Design and manufacture of electronic and mechanical turbine engine
testing equipment;
o Providing of aerodynamic and propulsion system testing services;
o Application of engineering technology to specific engine and
aerodynamic testing problems;
o Providing acoustic design and measurement services.
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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 design and construction
of a building, the Company subcontracts certain civil aspects of the project.
Sales of test facilities have resulted principally from direct customer
contacts, independent sales agents and the Company's internal marketing staff.
Raw Materials - The principal raw materials used by the Company 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.
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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 currently 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 SAAB treasury. 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 2000, three
customers each accounted for more than 10% of the Company's revenues. These
three customers were Boeing, General Electric and DSO-Singapore. 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, 2000 was $27,710,000. This compares with a
backlog of $18,759,000 on December 31, 1999.
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
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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 growth in the automotive wind tunnel area. In order to capture some of this
new automotive wind tunnel business, ASE had previously entered into a teaming
agreement with a leading automotive architecture and engineering company, and
recently established a marketing agreement with an agent in the Detroit area.
The team continues to pursue new opportunities but to date no contracts have
been awarded. Also, the activities involving commercial aviation wind tunnels
applications have been growing, 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 SAAB AB. Without the ability to issue standby letters of
credit to guarantee the performance of the project, ASE might not have been the
prime contractor on certain 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 its latest
computer data acquisition system. The expense of research and development was
$625,000, $743,000 and $521,000 for the years ended December 31, 2000, 1999 and
1998, 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, 2000, the Company employed 173 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 .9 need to have approval from the U.S.
State Department if they are sold to a foreign country.
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For certain foreign and domestic projects, 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.
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 is used
for engineering and administrative offices and 7,000 square feet is used for
manufacturing.
The Company leases from the Port Authority a building that has 24,000 square
feet of manufacturing and warehouse space located at 181 East Florida Street,
Saint Paul, Minnesota. 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 in July 2002, when the Company may purchase the facility
for approximately $95,000.
The Company owns 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.
The Company leases 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
There are no significant legal proceedings in process at the time of this
report.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 2000 to a vote of security
holders through the solicitation of proxies or otherwise.
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PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock currently is quoted on The Nasdaq SmallCap MarketSM.
On January 31, 2001, the closing sale price for the Company's common stock was
$1.63.
The high and low sales prices for the Company's common stock for each quarter
during 1999 and 2000, as quoted on Nasdaq, were as follows:
HIGH LOW
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1999:
First Quarter $1.75 $1.14
Second Quarter 2.13 1.13
Third Quarter 1.63 .75
Fourth Quarter 2.50 1.00
2000:
First Quarter $3.13 $1.44
Second Quarter 2.66 1.75
Third Quarter 2.25 1.25
Fourth Quarter 2.06 1.28
The quotations set forth above reflect inter-dealer prices, without retail
markup, markdown or commission, and may not necessarily represent actual
transactions.
No cash dividends have ever been paid in the history of 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. On March 31,
1999, the Company issued a 15% 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 15% stock dividend. As of December 31, 2000, there
were approximately 191 holders of record of common stock of the Company and
4,401,625 total shares outstanding.
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ITEM 6 - SELECTED FINANCIAL DATA
Selected financial data for the years ended December 31 are as follows:
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
SELECTED INCOME STATEMENT DATA
Earned revenue $30,646,114 $31,061,082 $27,181,448 $25,032,452 $20,383,352
Net income (loss) 331,003 (645,307) 665,200 (400,733) (2,527,754)
Net income (loss) per
common share .08 (.15) .15 (.09) (.57)
Weighted average common shares
outstanding 4,401,625 4,401,625 4,401,625 4,401,625 4,401,625
SELECTED BALANCE SHEET DATA
Current assets $14,026,405 $15,055,233 $16,004,487 $14,936,589 $11,006,645
Current liabilities 13,919,641 15,620,895 15,850,389 15,107,440 10,469,625
Working capital 106,764 (565,662) 154,098 (170,851) 537,020
Total assets 19,210,113 20,683,801 21,480,070 20,574,712 17,754,429
Long-term debt and capital
lease obligations 119,726 170,583 234,119 732,865 1,671,191
Stockholders' equity 4,600,804 4,269,801 4,915,108 4,249,908 4,650,641
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Aero Systems Engineering, Inc. is engaged in selling products and services
related to (1) testing turbine engines and design and operation of aerodynamic
wind tunnels, and (2) providing aerodynamic and propulsion system testing
services. The Company designs the testing facility but subcontracts the civil
engineering work and construction to local civil construction companies.
Results of Operations - The backlog of orders as of December 31, 2000 was
$27,710,000, which consisted of $26,221,000 that was related to jet engine test
cell projects and wind tunnel projects and $1,489,000 related to Aerotest
Lab/Other. Backlog of orders as of December 31, 1999 was $18,759,000, of which
$18,297,000 was related to test cell and wind tunnel projects and $462,000
related to Aerotest Lab/Other.
The change in backlog from 1999 to 2000 represents a 48% increase in total
backlog. Also, new orders received in 2000 totaled $39,598,000 as compared to
the previous year of $23,302,000. The 2000 increase in backlog was mostly
related to the receipt of one large wind tunnel order for $23.3 million to
supply a wind tunnel in Singapore.
Earned revenue for the year ended December 31, 2000 was $30,646,000, a decrease
of $415,000 or 1% as compared to 1999 revenue of $31,061,000. Earned revenue for
1998 was $27,181,000. The revenue decrease from 1999 to 2000 was mostly due to
the fact
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that 1999 revenue included approximately $1.9 million of Year 2000 upgrade
projects of which very little continued into 2000. This was partially offset by
revenue growth in test cells and the Aerotest Lab.
The cost of earned revenue, which includes manufacturing and engineering costs,
was 78% of earned revenue in 2000 as compared to 82% in 1999 and 78% in 1998.
The percentage decrease in cost of earned revenue during 2000 was mostly due to
the fact that 1999 included additional costs on two major wind tunnel projects
and additional reserves recorded for the settlement of a long outstanding
dispute with a foreign contractor. There were no similar major cost increases
that occurred in 2000.
Operating expenses were $5,316,000, $4,591,000 and $3,916,000 in years 2000,
1999 and 1998, respectively. These expenses increased 16% in 2000 as compared to
1999 primarily as a result of investments in marketing personnel and bid and
proposal activities.
Research and Development (R&D) costs were $625,000, $743,000 and $521,000 in
years 2000, 1999 and 1998, respectively, and were primarily related to
activities to enhance the capabilities of the ASE2000 Computer Data Acquisition
System. This activity will continue into 2001, which management believes will
further improve the marketability of the system.
Interest expense was $574,000, $719,000 and $888,000 in years 2000, 1999 and
1998, respectively. The major item bearing interest expense is the line of
credit. The average outstanding borrowings were $4,736,000 and $5,838,000 during
2000 and 1999, respectively. The decrease in borrowings from 1999 to 2000
reflects improved payment terms on new contracts. The weighted average interest
rate for 2000 was 10.6% on the line of credit.
The Company recorded income tax expense of $6,000 in 2000, as compared to
$10,000 in 1999 and $0 in 1998.
The Company recorded net income of $331,000 in 2000, a net loss of $645,000 in
1999, and net income of $665,000 in 1998. The improvement from 1999 was due to
the fact that 1999 included major cost overruns on a couple of wind tunnel
projects and the recording of additional reserves for the settlement of a long
outstanding dispute. Similar events did not occur in 2000.
Liquidity and Capital Resources - To minimize working capital requirements, the
Company attempts to match contract payments with related contract expenditures.
The Company's current ratio was 1.0 as of December 31, 2000, 1999 and 1998.
Working capital amounts were $107,000 as of December 31, 2000, $(566,000) as of
December 31, 1999 and $154,000 as of December 31, 1998.
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The December 31, 2000 accounts receivable balance was $6,361,000, a decrease of
$1,944,000, as compared to 1999's balance of $8,305,000. The decrease in the
accounts receivable balance for 2000 was due to the contractual timing of
customer billings.
Accounts payable and accrued expenses amounts were $4,832,000 and $6,656,000 in
2000 and 1999, respectively. The 2000 decrease is $1,824,000 or 27%, as compared
to 1999. The decrease from 1999 is due primarily to the timing of 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 $2,061,000, a decrease of $3,177,000 when
compared to 1999's balance of $5,238,000. This decrease is due primarily to the
timing of billing milestones related to contracts. Billings are a function of
contract terms and do not necessarily relate to the percentage of completion of
a project.
The Company had fully utilized its available line of credit as of December 31,
2000. 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 balance of the line of credit at December 31, 2000 was
$6,976,000. The increase in the line of credit at December 31, 2000 reflects the
timing of contract invoicing in relation to project expenditures. 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.
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 2001.
Capital expenditures were $655,000, $1,078,000 and $735,000 in years 2000, 1999
and 1998, respectively. The 2000 decrease was 39%, as compared to 1999. Most of
the 2000 capital expenditures were used to update desktop and network equipment
and facility improvements. The 1999 capital expenditures included similar
activities and the acquisition and installation of a new business computer
system.
Highly competitive market conditions have minimized the effect of inflation on
contract selling prices and the cost of purchased materials.
During 2000, approximately 46% 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 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's long-term contracts are substantially all denominated in U.S.
dollars. The Company has hedged any exposure to foreign currency fluctuations. A
10% adverse change in foreign currency rates would not have a material effect on
the Company's results of operations or financial position.
The Company is also subject to interest rate risk. The Company has not hedged
its exposure to interest rate fluctuations; however, a 10% increase or decrease
in interest rates would not have a material effect on the Company's results of
operations, fair values or cash flows.
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ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
Page
REPORT OF INDEPENDENT AUDITORS...............................................16
FINANCIAL STATEMENTS
Balance Sheets............................................................17
Statements of Operations..................................................19
Statements of Changes in Stockholders' Equity.............................20
Statements of Cash Flows..................................................21
Notes to Financial Statements.............................................22
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Report of Independent Auditors
Stockholders and Board of Directors
Aero Systems Engineering, Inc.
We have audited the accompanying balance sheets of Aero Systems Engineering,
Inc. as of December 31, 2000 and 1999, and the related statements of operations,
changes in stockholders' equity and cash flows for each of the three years in
the period ended December 31, 2000. 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 auditing standards generally accepted
in the United States. 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 financial position of Aero Systems Engineering, Inc.
at December 31, 2000 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
January 13, 2001
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Aero Systems Engineering, Inc.
Balance Sheets
DECEMBER 31
-----------------------------
2000 1999
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 47,808 $ 48,476
Accounts receivable--billed contracts, net of allowances of
$50,000 in 2000 and 1999, including retainages of $106,000 in
2000 and 1999 6,361,427 8,304,785
Costs and estimated earnings in excess of billings on
uncompleted contracts 5,409,756 4,768,223
Inventories 1,483,738 1,091,063
Prepaid expenses 57,899 116,069
Deferred and prepaid income taxes 665,777 726,617
----------- -----------
Total current assets 14,026,405 15,055,233
Property, plant and equipment--net 5,183,708 5,628,568
----------- -----------
Total assets $19,210,113 $20,683,801
=========== ===========
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Aero Systems Engineering, Inc.
Balance Sheets (continued)
DECEMBER 31
-----------------------------
2000 1999
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of capital lease obligations $ 50,858 $ 79,187
Notes payable 6,975,755 3,646,955
Accounts payable:
Trade 1,635,791 916,075
Affiliated companies -- 8,362
Billings in excess of costs and estimated earnings on
uncompleted contracts 2,060,706 5,238,424
Accrued warranty and losses 774,417 793,216
Accrued salaries and wages 897,885 846,724
Accrued job costs 444,395 3,308,570
Other accrued liabilities 1,079,834 783,382
----------- -----------
Total current liabilities 13,919,641 15,620,895
Deferred income taxes 569,942 622,522
Capital lease obligations, less current maturities 119,726 170,583
Stockholders' equity:
Common Stock, $.20 par value:
Authorized shares - 10,000,000
Issued and outstanding shares - 4,401,625 880,325 880,325
Additional paid-in capital 900,292 900,292
Retained earnings 2,820,187 2,489,184
----------- -----------
Total stockholders' equity 4,600,804 4,269,801
----------- -----------
Total liabilities and stockholders' equity $19,210,113 $20,683,801
=========== ===========
See accompanying notes.
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Aero Systems Engineering, Inc.f
Statements of Operations
YEAR ENDED DECEMBER 31
-----------------------------------------------
2000 1999 1998
----------- ----------- -----------
Earned revenue $30,646,114 $31,061,082 $27,181,448
Cost of earned revenue 23,799,532 25,588,018 21,120,360
----------- ----------- -----------
Gross profit 6,846,582 5,473,064 6,061,088
Selling, general and administrative expenses
5,315,851 4,590,710 3,915,974
Research and development 625,466 742,559 520,600
----------- ----------- -----------
Operating profit 905,265 139,795 1,624,514
Other income (expense):
Interest income 3,236 2,272 9
Interest expense (574,053) (718,573) (887,965)
Other 2,815 (58,801) (71,358)
----------- ----------- -----------
(568,002) (775,102) (959,314)
----------- ----------- -----------
Income (loss) before income taxes 337,263 (635,307) 665,200
Income tax expense (6,260) (10,000) -
----------- ----------- -----------
Net income (loss) $ 331,003 $ (645,307) $ 665,200
=========== =========== ===========
Net income (loss) per common share $ .08 $ (.15) $ .15
=========== =========== ===========
Weighted average common shares outstanding 4,401,625 4,401,625 4,401,625
=========== =========== ===========
See accompanying notes.
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Aero Systems Engineering, Inc.
Statements of Changes in Stockholders' Equity
COMMON STOCK ADDITIONAL
------------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
--------- -------- ---------- ----------
Balance at January 1, 1998 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 574,052 114,810 638,742 (753,552)
Net income -- -- -- 665,200
--------- -------- -------- ----------
Balance at December 31, 1998 4,401,625 880,325 900,292 3,134,491
Net loss -- -- -- (645,307)
--------- -------- -------- ----------
Balance at December 31, 1999 4,401,625 880,325 900,292 2,489,184
Net income -- -- -- 331,003
--------- -------- -------- ----------
Balance at December 31, 2000 4,401,625 $880,325 $900,292 $2,820,187
========= ======== ======== ==========
See accompanying notes.
20
21
Aero Systems Engineering, Inc.
Statements of Cash Flows
YEAR ENDED DECEMBER 31
----------------------------------------------
2000 1999 1998
----------- ----------- -----------
OPERATING ACTIVITIES
Net income (loss) $ 331,003 $ (645,307) $ 665,200
Adjustments to reconcile net income (loss) to net cash (used
in) provided by operating activities:
Depreciation and amortization 1,100,086 925,411 897,756
Decrease (increase) in assets:
Accounts receivable 1,943,358 (1,064,110) (2,473,826)
Costs and estimated earnings in excess of billings on
uncompleted contracts (641,533) 1,942,454 1,630,237
Inventories (392,675) 314,991 (391,962)
Prepaid expenses 58,170 (65,218) 62,681
(Decrease) increase in liabilities:
Accounts payable and accrued expenses (1,824,007) (579,781) (564,682)
Income taxes payable 8,260 (5,000) (4,334)
Billings in excess of costs and estimated earnings on
uncompleted contracts (3,177,718) 3,822,599 1,187,336
----------- ----------- -----------
Net cash (used in) provided by operating activities (2,595,056) 4,646,039 1,008,406
INVESTING ACTIVITIES
Capital expenditures (655,226) (1,078,396) (735,216)
----------- ----------- -----------
Net cash used in investing activities (655,226) (1,078,396) (735,216)
FINANCING ACTIVITIES
Net borrowings under line of credit agreements 3,328,800 (3,052,041) 563,875
Principal payments on borrowings from affiliates -- (400,000) (800,000)
Principal payments under capital lease obligations (79,186) (83,217) (137,992)
----------- ----------- -----------
Net cash provided by (used in) financing activities 3,249,614 (3,535,258) (374,117)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (668) 32,385 (100,927)
Cash and cash equivalents at beginning of year 48,476 16,091 117,018
----------- ----------- -----------
Cash and cash equivalents at end of year $ 47,808 $ 48,476 $ 16,091
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 574,053 $ 718,573 $ 887,965
Income taxes 260 15,000 4,334
See accompanying notes.
21
22
Aero Systems Engineering, Inc.
Notes to Financial Statements
December 31, 2000
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.
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.
22
23
Aero Systems Engineering, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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. The Company has a simple capital structure with only common
stock outstanding; therefore, basic and diluted earnings per share are the same.
On March 31, 1999, the Company issued a 15% 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 15% stock dividend.
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.
23
24
Aero Systems Engineering, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 2000 and 1999, there were no carrying amounts related to foreign
currency contracts in the balance sheets. The unrealized gains (losses) related
to such contracts were not material to the 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.
24
25
Aero Systems Engineering, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DERIVATIVES AND HEDGING
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is required
to be adopted in years beginning after June 15, 2000. The Statement will require
the Company to recognize all derivatives on the balance sheet at fair value.
Changes in the fair value of derivatives that are hedges will either be offset
against the change in fair value of the hedged assets, liabilities or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The Company does not anticipate that
the adoption of the new Statement will have a significant effect on earnings or
financial position of the Company.
2. CONTRACTS IN PROCESS
YEAR ENDED DECEMBER 31
-----------------------------
2000 1999
----------- -----------
Costs incurred on uncompleted contracts $40,780,632 $35,188,033
Estimated earnings thereon 11,780,634 6,936,458
----------- -----------
Total billable on uncompleted contracts 52,561,266 42,124,491
Less billings applicable thereto 49,212,216 42,594,692
----------- -----------
$ 3,349,050 $ (470,201)
=========== ===========
Included in the accompanying balance sheet under the following captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts $ 5,409,756 $ 4,768,223
Billings in excess of costs and estimated earnings on
uncompleted contracts 2,060,706 5,238,424
----------- -----------
$ 3,349,050 $ (470,201)
=========== ===========
25
26
Aero Systems Engineering, Inc.
Notes to Financial Statements (continued)
2. 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.
CONCENTRATIONS OF CREDIT RISK
At December 31, 2000, the Company had certain concentrations of credit risk with
approximately $4,673,000 of unbilled charges and approximately $3,799,000 of
accounts receivable from four customers, which are partially secured by letters
of credit.
3. INVENTORIES
Inventories consist of the following:
YEAR ENDED DECEMBER 31
-----------------------------
2000 1999
----------- -----------
Materials and supplies $ 1,103,439 $ 841,676
Projects-in-process 380,299 249,387
----------- -----------
$ 1,483,738 $ 1,091,063
=========== ===========
4. PROPERTY, PLANT AND EQUIPMENT
YEAR ENDED DECEMBER 31
-----------------------------
2000 1999
----------- -----------
Land $ 486,105 $ 486,105
Buildings 3,025,460 3,025,460
Furniture, fixtures and equipment 8,325,135 7,831,630
Wind tunnels and instrumentation 2,978,141 2,967,175
Building improvements 1,488,527 1,337,772
----------- -----------
16,303,368 15,648,142
Less accumulated depreciation (11,119,660) (10,019,574)
----------- -----------
Property, plant and equipment--net $ 5,183,708 $ 5,628,568
=========== ===========
26
27
Aero Systems Engineering, Inc.
Notes to Financial Statements (continued)
5. NOTES PAYABLE TO BANKS
At December 31, 2000, the Company had borrowings of $6,975,755 on a $6,000,000
line of credit with a bank bearing interest at a variable rate (10.5% at
December 31, 2000). As of December 31, 2000, 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. At December 31, 1999, the Company had borrowings of $3,646,955 outstanding
on this $6,000,000 line of credit.
Funds provided under this credit line are actually provided by Celsius Inc. and
ultimately from SAAB treasury. A first security interest in all assets of the
Company has been granted to Celsius AB, and a fee is paid through Celsius Inc.
During 2000 and 1999, the average borrowings on these lines of credit were
$4,736,000 and $5,838,000, respectively, with weighted average interest rates
during the year of 10.6% and 9.2%, respectively.
27
28
Aero Systems Engineering, Inc.
Notes to Financial Statements (continued)
6. INCOME TAXES
Significant components of the Company's deferred tax liabilities and assets are
as follows:
DECEMBER 31
----------------------------
2000 1999
----------- ----------
Deferred tax assets:
Contract-related costs $ 454,000 $ 410,000
Warranty costs 148,000 148,000
Vacation accrual 171,000 176,000
Inventory and receivable reserves 267,000 270,000
Net operating loss carryforward 1,230,000 1,457,000
Other 24,000 12,000
Tax credit carryforwards 103,000 79,000
----------- ----------
Total deferred tax assets 2,397,000 2,552,000
Valuation allowance for deferred tax assets (1,827,000) (1,929,000)
----------- ----------
Net deferred tax assets 570,000 623,000
Deferred tax liabilities:
Tax over book depreciation 570,000 623,000
----------- ----------
Net deferred taxes $ -- $ --
=========== ==========
The net operating loss carryforward of approximately $3,325,000 will expire
beginning in the year 2010. The components of income tax expense (benefit) for
the years ended December 31 are:
2000 1999 1998
----------- ----------- ----------
Current $18,000 $10,000 $16,000
Deferred (12,000) -- (16,000)
------- ------- -------
$ 6,000 $10,000 $ --
======= ======= =======
28
29
Aero Systems Engineering, Inc.
Notes to 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
--------------------------------------------
2000 1999 1998
--------- --------- ---------
Income taxes at 34% $ 115,000 $(216,000) $ 226,000
State taxes, net of federal benefit 4,000 3,000 3,000
Effect of net operating loss carryforward and
valuation allowance (118,000) 211,000 (230,000)
Other 5,000 12,000 1,000
--------- --------- ---------
$ 6,000 $ 10,000 $ --
========= ========= =========
7. LEASE OBLIGATIONS
The Company has capitalized leases for facilities and equipment which expire
through 2002. The capitalized cost at December 31, 2000 and 1999 was $857,844
less accumulated amortization of $562,680 and $481,638, respectively. 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 2005. Total rental expense under operating leases for occupancy
and equipment was approximately $217,000, $213,000 and $184,000 for 2000, 1999
and 1998, respectively.
29
30
Aero Systems Engineering, Inc.
Notes to Financial Statements (continued)
7. LEASE OBLIGATIONS (CONTINUED)
Following is a schedule of future minimum lease payments:
CAPITAL OPERATING
LEASES LEASES
--------- ---------
Year ending December 31:
2001 $ 64,364 $115,626
2002 126,595 110,226
2003 -- 110,226
2004 -- 51,870
2005 17,019
-------- --------
Total minimum lease payments 190,959 $404,967
========
Less amount representing interest 20,375
--------
Present value 170,584
Less principal amount due currently 50,858
--------
$119,726
========
Included in the $126,595 capital lease payment in 2002 is the $95,000 purchase
option payment to the Port Authority of Saint Paul for the 181 East Florida
Street facility.
8. CONTINGENCIES AND COMMITMENTS
Guarantees of approximately $4,879,316 were outstanding at December 31, 2000 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 12 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, 2000, 1999 and 1998 were $269,000, $246,000 and $210,000,
respectively.
30
31
Aero Systems Engineering, Inc.
Notes to Financial Statements (continued)
10. RELATED PARTY TRANSACTIONS
At December 31, 2000 and 1999, Celsius Inc. owned 3,522,073 shares of the
Company's common stock. This amount represents 80% of the voting shares
outstanding. Celsius Inc. is a wholly-owned subsidiary of Saab AB, a Swedish
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
-----------------------------------------------
2000 1999 1998
----------- ----------- -----------
Interest expense $ 150,000 $ 131,000 $ 105,000
Administrative charges 50,000 59,000 55,000
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 revenue,
operating profit and identifiable assets during 2000. The Company's operations
are structured to achieve maximum overall corporate objectives. As a result,
significant inter-dependencies and overlaps exist among the Company's operating
units.
Revenues by geographic area are summarized as follows:
2000 1999 1998
----------- ----------- -----------
United States $16,578,706 $18,194,016 $12,873,171
Foreign countries 14,067,408 12,867,066 14,308,277
----------- ----------- -----------
$30,646,114 $31,061,082 $27,181,448
=========== =========== ===========
31
32
Aero Systems Engineering, Inc.
Notes to Financial Statements (continued)
11. SEGMENT INFORMATION (CONTINUED)
The Company had three customers accounting for 28%, 23% and 15% of revenues
during the year ended December 31, 2000, three customers accounting for 25%, 20%
and 11% of sales in the year ended December 31, 1999, and two customers
accounting for 21% and 19% of sales in the year ended December 31, 1998.
12. QUARTERLY RESULTS (UNAUDITED)
Summary data relating to the results of operations for each quarter of the years
ended December 31, 2000 and 1999 are as follows:
THREE MONTHS ENDED
--------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- ---------- ------------ -----------
2000
Earned revenue $6,760,000 $8,078,000 $8,751,000 $7,057,000
Gross profit 1,393,000 1,832,000 1,734,000 1,887,000
Net (loss) income (466,000) 251,000 340,000 206,000
Net (loss) income per
common share $ (.11) $ .06 $ .08 $ .05
1999
Earned revenue $6,396,000 $8,715,000 $7,841,000 $8,109,000
Gross profit 961,000 1,070,000 1,850,000 1,592,000
Net (loss) income (476,000) (454,000) 389,000 (104,000)
Net (loss) income per
common share $ (.11) $ (.10) $ .09 $ (.03)
32
33
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, 2001 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
No reports on Form 8-K were filed during the quarter ended December
31, 2000, or from that date to the date of this annual report on
Form 10-K.
33
34
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)
March 12, 2001 By /s/ CHARLES LOUX
-------------- ---------------------------------------
Date Charles Loux, 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:
March 12, 2001 /s/ CHARLES LOUX
-------------- ---------------------------------------
Date Charles Loux, President and Chief
Executive Officer, Director
March 13, 2001 /s/ CHRISTER PERSSON
-------------- ---------------------------------------
Date Christer Persson, Chairman of the
Board
March 12, 2001 /s/ A. L. MAXSON
-------------- ---------------------------------------
Date A. L. Maxson, Director
March 13, 2001 /s/ LEON E. RING
-------------- ---------------------------------------
Date Dr. Leon Ring, Director
March 13, 2001 /s/ RICHARD A. HOEL
-------------- ---------------------------------------
Date Richard A. Hoel, Director
March 12, 2001 /s/ STEVEN R. HEDBERG
-------------- ---------------------------------------
Date Steven R. Hedberg, Chief Financial
Officer
34