AERO SYSTEMS ENGINEERING INC
CREDIT AGREEMENT
<DOCUMENT>
<TYPE>EX-10.3
<SEQUENCE>5
<FILENAME>c65346ex10-3.txt
<DESCRIPTION>CREDIT AGREEMENT
<TEXT>
<PAGE>   1





                                  EXHIBIT 10.3

                                CREDIT AGREEMENT


                         Dated as of September 21, 2001

         Aero Systems Engineering, Inc., a Minnesota corporation (the
"Borrower"), the chief executive office of which is located at 358 East Fillmore
Avenue, St. Paul, Minnesota 55107-1289, and National City Bank of Minneapolis, a
national banking association and its successors and assigns (the "Bank"),
located at 651 Nicollet Mall, Minneapolis, Minnesota 55402, agree as follows:

                                   ARTICLE 1.

                                   DEFINITIONS

         Section 1.1. Definitions. As used in this Agreement the following terms
shall have the following meanings (such meanings to be equally applicable to
singular and plural forms of the terms defined):

                  (a) "Account" and "account" shall have the meaning given
         "Account" under Minn. Stat.ss.336.9-102(2).

                  (b) "Adjusted Debt" shall mean Debt minus all obligations for
         the deferred purchase price of any property or services, any
         undertaking or agreement to reimburse or indemnify as to letters of
         credit, or payment or performance bonds; and all liabilities deemed
         contingent in accordance with GAAP.

                  (c) "Advance" shall have the meaning given to that term in
         Section 2.1 hereof.

                  (d) "Affiliates" shall mean any of the following Persons:

                           (i) any director, officer or employee of the
                  Borrower;

                           (ii) any person who, individually or with his
                  immediate family, beneficially owns or holds 5% or more of
                  voting interest of the Borrower;

                           (iii) any company in which any Person described above
                  owns a 5% or greater equity interest; or

                           (iv) any other Person that at such time directly or
                  indirectly, through one or more intermediaries, controls, or
                  is controlled by, or is under common control with, such first
                  Person. As used in this definition, "control" means the
                  possession, directly or indirectly, of the power to direct or
                  cause the direction of the management and policies of a
                  Person, whether through ownership of voting securities, by
                  contract or otherwise.


<PAGE>   2



                  (e) "Borrowing Base" shall mean the sum of the Direct
         Borrowing Base and the Letter of Credit Borrowing Base.

                           (i) "Direct Borrowing Base" shall mean with respect
                  to the Advances, an amount equal to the sum of

                                    a) 75% of the Value of Eligible Domestic
                           Accounts,

                                    b) a percentage of the Value of Qualified
                           Foreign Accounts to be determined by the Bank in its
                           sole discretion, but never less than 10% nor more
                           than 75% for each account and which will change no
                           more frequently than quarterly, on at least thirty
                           (30) days prior written notice by the Bank to the
                           Borrower,

                                    c) 50% of the Value of Eligible Inventory,
                           and

                                    d) 75% of the Forced Liquidation Value of
                           Machinery and Equipment.

                           (ii) "Letter of Credit Borrowing Base" shall mean
                  with respect to issuing letters of credit and making
                  additional term loans, an amount equal to the sum of

                                    a) 75% of the Forced Liquidation Value of
                           Machinery and Equipment (less any amounts necessary
                           to support outstanding Advances) and

                                    b) 70% of the fair market value of the
                           property encumbered by the Mortgage (the "Mortgaged
                           Property").

                  (f) "Borrowing Base Certificate" means the certificate in the
         form of Exhibit A attached hereto.

                  (g) "Business Day" shall mean any day other than a Saturday,
         Sunday or a public holiday or the equivalent under the laws of the
         State of Minnesota or the United States of America.

                  (h) "Capital Expenditure" shall mean, for any period, the
         aggregate amount of all expenditures during such period by the Borrower
         that would be classified as Capital Expenditures in accordance with
         GAAP, or made in property that is subject to a synthetic lease to which
         the Borrower becomes a lessee during such period, including without
         limitation or duplication, any amount debited to the fixed asset
         account on the balance sheet of the Borrower in respect of (i) the
         acquisition, including, without limitation, acquisition by entry into a
         Capitalized Lease, construction, improvement, replacement or betterment
         of land, buildings, machinery, equipment or of any other fixed assets
         or leaseholds, and (ii) to the extent related to and not included in
         clause (i), materials, contract labor and direct labor (excluding
         expenditures properly chargeable to repairs or maintenance in
         accordance with GAAP).


                                       2

<PAGE>   3


                  (i) "Capitalized Lease" shall mean any lease with respect to
         which the lessee is required concurrently to recognize the acquisition
         of an asset and the incurrence of a liability in accordance with GAAP.

                  (j) "Commitment" shall have the meaning given to that term in
         Section 2.1 hereof.

                  (k) "Contracts" shall mean any and all contracts between the
         Borrower and its customers for the provision of services by the
         Borrower, including but not limited to purchase agreements and
         invoices.

                  (l) "Debt" shall mean, with respect to any Person and without
         duplication, all obligations, contingent or otherwise, which in
         accordance with GAAP should be classified upon such Person's balance
         sheet as liabilities, but in any event including the following (whether
         or not they should be classified as liabilities upon such balance
         sheet): (a) any obligation secured by any mortgage, pledge, security
         interest, lien, charge or other encumbrance existing on property owned
         or acquired subject thereto, whether or not such obligation is the
         obligation of the owner or another party; (b) any obligation on account
         of deposits or advances; (c) any obligation for the deferred purchase
         price of any property or services, except accounts payable arising in
         the ordinary course of business not unpaid for a period of more than 90
         days past the due date; (d) any obligation as lessee under any
         Capitalized Lease; (e) any guaranty, endorsement, performance bond or
         other contingent obligation in respect to indebtedness of others (other
         than the Bank); and (f) any undertaking or agreement to reimburse or
         indemnify issuers of letters of credit. For all purposes of this
         Agreement, the Indebtedness of any Person shall include the
         Indebtedness of any partnership or joint venture in which such Person
         is a general partner or a joint venturer.

                  (m) "EBIT" shall mean, for any period of determination, the
         net income of the Borrower before provision for income taxes and
         interest expense (including, without limitation, implicit interest
         expenses on Capitalized Leases), all as determined in accordance with
         GAAP.

                  (n) "Event of Default" shall mean one of the events specified
         in Section 6.1.

                  (o) "Financing Statements" shall mean all UCC financing
         statements to be filed with appropriate filing offices and all other
         documents which need to be filed with government offices to reflect or
         evidence the security interests granted to the Bank by the Borrower.

                  (p) "Forced Liquidation Value of Machinery and Equipment"
         shall mean an amount equal to the estimated net proceeds that would be
         received from a forced liquidation sale of the machinery and equipment.

                  (q) "GAAP" shall mean generally accepted accounting principles
         as in effect in the United States from time to time as consistently
         applied by the Borrower from year to year.


                                       3

<PAGE>   4


                  (r) "Inventory" shall mean any and all goods in marketable
         condition of the Borrower, including, without limitation, goods in
         transit, wheresoever located which are or may at any time be leased by
         the Borrower to a lessee, held for sale or lease, furnished under any
         contract of service or held as raw materials, work in process, or
         supplies or materials used or consumed in the business of the Borrower,
         or which are held for use in connection with the manufacture, packing,
         shipping, advertising, selling or finishing of such goods, and all
         goods, the sale or other disposition of which has given rise to an
         account, which are returned to and/or repossessed and/or stopped in
         transit by the Borrower or the Bank, or at any time hereafter in the
         possession or under the control of the Borrower or the Bank, or any
         agent or bailee of either thereof, and all documents of title or other
         documents representing the same.

                  (s) "Letters of Credit" shall mean all letters of credit and
         performance bonds issued by the Bank pursuant to this Agreement.

                  (t) "Loan Documents" shall mean this Agreement, the Notes, the
         Security Agreement, the Mortgage, and all other documents to be
         executed in connection with this Agreement, including but not limited
         to those documents to be executed under Section 3.1.

                  (u) "Loan Party" shall mean any Person obligated under any
         Loan Document, including (without limitation) the Borrower.

                  (v) "Mortgage" shall mean the Combination Mortgage, Assignment
         of Rents and Leases, Security Agreement and Fixture Financing
         Statement, dated as of the date hereof, from the Borrower to the Bank,
         together with any amendment thereto.

                  (w) "Notes" shall mean the $9,000,000 Promissory Note, dated
         as of the date hereof, in the principal amount of the Commitment,
         together with any amendment, modification or restatement thereof, and
         any other promissory note executed in connection with this Agreement.

                  (x) "Person" shall mean an individual, corporation,
         partnership, joint venture, trust or unincorporated organization or
         government or other agency or political subdivision thereof.

                  (y) "Security Agreement" shall mean the Security Agreement
         granting the Bank a security interest in all of the Borrower's assets
         (the "Collateral"), dated as of the date hereof, from the Borrower to
         the Bank, together with any amendment thereto and any other documents
         necessary to perfect the Bank's security interest or otherwise allow it
         to realize on Collateral in the event of a default under this
         Agreement.

                  (z) "Subordinated Debt" shall mean Debt of the Borrower which
         has been subordinated in right of payment and security to all of
         Borrower's obligations to the Bank under this Agreement pursuant to an
         agreement or agreements in form and substance acceptable to Bank.

                  (aa) "Subordination Agreement" shall mean the Debt
         Subordination Agreement among the Bank, the Borrower and Celsius Inc.,
         dated as of the date hereof, together with any amendment thereto.


                                       4

<PAGE>   5



                  (bb) "Tangible Net Worth" shall mean, at any determination
         date, the total of all assets that would appear on a balance sheet of
         the Borrower prepared in accordance with GAAP at such time, after
         deducting all proper reserves (including, without limitation, reserves
         for depreciation, obsolescence, amortization, and income taxes) plus
         Subordinated Debt, minus the net book value of all assets, after
         deducting any reserves applicable thereto, which constitute General
         Intangibles or which would otherwise be treated as intangible under
         GAAP including, without limitation, goodwill, unamortized debt discount
         and expense, and organizational expenses, minus all liabilities which
         in accordance with GAAP would be included on the liability side of a
         balance sheet, minus all prepaid expenses, deposits, deferred tax
         assets in excess of deferred tax liabilities, and other deferred
         assets, minus all notes due from or other obligations of any officer,
         director, shareholder, employee or agent of the Borrower or any
         Affiliate, or any Obligor to the Borrower or the Subsidiaries.

                  (cc) "Termination Date" shall have the meaning given to that
         term in Section 2.1 hereof.

                  (dd) "Value of Domestic Eligible Accounts" shall mean the
         aggregate net unpaid amount then due and owing (less any amounts due as
         retainage) under all accounts receivable of the Borrower that: (i)
         arise from the billing of Borrower's Inventory and Contracts in the
         ordinary course of business of the Borrower; (ii) are not more than
         ninety (90) days old from the original due date of invoice (without
         giving any regard to the extension or waiver of the due date); (iii)
         are subject to a perfected first lien security interest in favor of
         only the Bank as required by this Agreement; (iv) are not from an
         account debtor which has suffered a business failure or the termination
         of its existence, or as to which a dissolution, insolvency or
         bankruptcy proceeding has been commenced, any assignment for the
         benefit of creditors has been made or a trustee, receiver or
         conservator has been appointed for all or any part of the property of
         such account debtor; (v) are not accounts receivable due from an
         account debtor affiliated with Borrower in any manner, including
         without limitation, as subsidiary, stockholder, owner, officer,
         director, agent or employee; (vi) are not accounts receivable due from
         an account debtor who is not a resident or citizen of, located in, or
         subject to service of process in, the United States of America; and
         (vii) are not accounts receivable which are "contra" accounts,
         including without limitation accounts receivable which are subject to a
         claim of offset by the account debtor because of (1) a deposit made by
         the account debtor with Borrower, (2) a liability of Borrower to the
         account debtor (including billings in excess of earnings), or (3) a
         claim, defense or dispute of the account debtor against Borrower,
         provided, however, that no obligations of any account debtor to the
         Borrower, except obligations of account debtors which are rated 5A-1 by
         Dunn and Bradstreet, shall be included in this computation if more than
         25% of such account debtor's obligations to Borrower are more than 90
         days old.

                  (ee) "Value of Eligible Inventory" shall mean an amount equal
         to the cost of the Borrower's Inventory (excluding projects-in-process)
         which meets the following requirements:

                           (i)      it is owned by the Borrower and is not
                                    subject to any prior assignment, claim or
                                    lien other than (a) a first priority lien in
                                    favor of the Bank and (ii) liens consented
                                    to by the Bank in writing;


                                       5


<PAGE>   6


                           (ii)     if held for sale or lease or furnishing
                                    under contracts of service, it is (except as
                                    the Bank may otherwise consent in writing)
                                    new and unused and is not unsaleable
                                    merchandise;

                           (iii)    except as the Bank may otherwise consent, it
                                    is not in-transit, it is not stored with a
                                    bailee, warehouseman or similar party; or,
                                    if so stored with the Bank's consent, such
                                    bailee, warehouseman or similar party has
                                    issued and delivered to the Bank, in form
                                    and substance acceptable to the Bank, such
                                    documents and agreements as the Bank may
                                    require, including, without limitation,
                                    warehouse receipts therefor in the Bank's
                                    name;

                           (iv)     the Bank has determined, in its sole and
                                    absolute discretion, that it is not
                                    unacceptable due to age, type, category,
                                    quality and/or quantity;

                           (v)      it is not held by the Borrower on
                                    "consignment" and is not subject to any
                                    other repurchase or return agreement;

                           (vi)     it complies with all standards imposed by
                                    any governmental agency having regulatory
                                    authority over such goods and/or their use,
                                    manufacture or sale;

                           (vii)    it does not, in any way, violate or fail to
                                    meet any warranty, representation or
                                    covenant contained in the Loan Documents
                                    relating directly or indirectly to the
                                    Borrower's Inventory;

                           (viii)   it is located within the continental United
                                    States; and

                           (ix)     it does not consist of branded packaging or
                                    promotional materials.

                           Inventory of a Borrower which is at any time Eligible
                           Inventory but which subsequently fails to meet any of
                           the foregoing requirements shall forthwith cease to
                           be Eligible Inventory so long as it fails to meet
                           such requirements.

                  (ff) "Value of Qualified Foreign Accounts" shall mean the
         aggregate net unpaid amount then due and owing under all foreign
         accounts receivable of the Borrower that: (i) arise from the billing of
         Borrower's Inventory and Contracts in the ordinary course of business
         of the Borrower; (ii) are not more than ninety (90) days old from the
         date of invoice; and (iii) are otherwise acceptable to the Bank in its
         sole discretion, based on pertinent credit factors, including but not
         limited to, collectibility, credit support, and assets located in the
         United States.

         Section 1.2. Accounting and Other Terms. All accounting terms not
specifically defined in this Agreement shall be construed in accordance with
GAAP. Other terms defined herein shall have the meanings ascribed to them
herein.


                                       6


<PAGE>   7


                                   ARTICLE II.

                                    THE LOAN

         Section 2.1. Commitment for Loan. The Bank agrees, in accordance with
the terms of this Agreement, to make advances (the "Advances") to and issue
letters of credit (the "Letters of Credit") for the Borrower from time to time
from the date hereof to and including September 21, 2003 (the "Termination
Date"), or the earlier termination of the Commitment under the terms of this
Agreement, in an aggregate amount not to exceed the lesser of Nine Million and
no hundredths Dollars ($9,000,000.00) or the Borrowing Base, with further
sublimits of the lesser of Six Million and no/100 Dollars ($6,000,000.00) or the
Direct Borrowing Base for Advances and the lesser of Three Million and no/100
Dollars ($3,000,000.00) or the Letter of Credit Borrowing Base for Letters of
Credit, performance bonds, and additional term loans that the Bank may make at
its option. Each Advance shall be in the amount of not less than $10,000.00. For
the purposes of calculating whether the Letter of Credit Borrowing Base has been
exceeded, the amount to be measured shall equal the sum of the aggregate of the
face amounts of all outstanding letters of credit issued by the Bank pursuant to
this Agreement, the aggregate of the face amounts of all outstanding performance
bonds guaranteed by the Bank under this Agreement, and the aggregate principal
balances of all outstanding term loans made by the Bank under this Agreement.
Within the limits of the Commitment the Borrower may borrow, prepay pursuant to
Section 2.5 and reborrow under this Section 2.1. The Bank and the Borrower may
agree to extend the Termination Date, but neither party shall have any
obligation to do so.

         Section 2.2. The Notes. The Advances made, Letters of Credit issued by
the Bank, and additional loans made shall be evidenced by the Note or Notes
which are to be delivered to the Bank pursuant to Article III.

         Section 2.3. Making of Advances. Borrower may request Advances and
Letters of Credit under this Agreement by giving notice in writing or by
facsimile, and must be given so as to be received by the Bank not later than

                  (a) 3:00 p.m., Minneapolis time, the date of requested
         Advance;

                  (b) 3:00 p.m. Minneapolis time, eight business days prior to
         the date of the requested Letter of Credit.

specifying the date of the requested Advance or Letter of Credit and the amount
thereof and any other information requested by the Bank. Any request for an
Advance or Letter of Credit shall be deemed to be a representation that the
Borrower's representations and warranties contained in Section 4.1 are true and
correct as of the date of the Advance or Letter of Credit as though made on and
as of such date and that no event has occurred and is continuing, or will result
from such Advance or issuance of the Letter of Credit, which constitutes an
Event of Default or would constitute an Event of Default but for the requirement
that notice be given or time elapse or both. The Bank may disburse each
requested Advance by crediting immediately available funds in the amount of the
Advance to Borrower's demand deposit account maintained with the Bank.

         Section 2.4. Interest and Payments. The Borrower shall repay, and shall
pay interest on, the aggregate unpaid principal amount of all Advances, draws on
Letters of Credit and term loans in accordance with the Notes. All payments of
principal, interest and fees under this Agreement shall be made when due to the
Bank in U.S. Dollars in immediately available funds. All computations of
interest shall be made by the Bank on the basis of the actual number of days
elapsed in a year of 360 days. Whenever any such payment shall be due on a
non-Business Day such payment shall be made on the next succeeding Business Day,
and such extension of time shall be included in the computation of interest or
fees, as the case may be. The Bank is expressly authorized to charge any
principal or fee payment, when due, to Borrower's demand deposit account
maintained at the Bank, or, if that account shall not contain sufficient funds,
to any other account maintained by Borrower at the Bank.



                                       7


<PAGE>   8


                  (a) The unpaid principal balance of the Loan shall bear
         interest at a definite and certain but variable rate per annum equal to
         the Base Rate (as hereinafter defined) plus the Margin (as hereinafter
         defined). As used herein, "Base Rate" means the rate established by and
         publicly announced by the Bank from time to time as its Base Rate. Each
         change in the Base Rate shall be effective as of the date of
         announcement by the Bank of said change, and the interest rate shall be
         adjusted accordingly on the same date. The Bank may lend to any of its
         customers at rates that are above or below the Base Rate. As used
         herein, "Margin" shall depend on the ratio of the Borrower's Adjusted
         Debt to the Borrower's Tangible Net Worth ("Leverage") as follows based
         on financial statements provided by Borrower to Bank:

<TABLE>
<CAPTION>

                             Leverage            Margin
                         ----------------        ------
                         <S>                     <C>
                          > 3.0 and < 3.5         +.50%
                          -

                          > 2.5 and < 3.0         +.25%
                          -

                          < 2.5                      0%
</TABLE>

                  The Margin for each calendar quarter shall be based on such
         ratio in effect as of the last day of the preceding calendar quarter.
         Each change in the Margin will be given retroactive effect from the
         first day of each calendar quarter based on the Borrower's financial
         reports to the Bank pursuant to section 5.1 (a) hereof.

                  At the Bank's option the interest rate shall be increased by
         three percent (3.0%) during any period of time in which the Borrower is
         in default under the Loan Documents (as hereinafter defined). Interest
         shall be calculated on the basis of a 360-day year but shall be charged
         on the actual number of days principal remains unpaid. In no event
         shall the interest rate exceed the maximum lawful rate. Interest only
         on the unpaid principal balance shall be due and payable in arrears on
         the last day of October, 2001, and on the same day of each month
         thereafter until the Termination Date, on which date the entire unpaid
         principal balance together with all accrued interest shall become due
         and payable.

         Section 2.5. Voluntary Prepayment. The Borrower may, upon notice to the
Bank, prepay the Notes in whole or in part with accrued interest to the date of
such prepayment on the amount prepaid.

         Section 2.6. Mandatory Payment. In the event that the aggregate
outstanding principal amount of Advances made under this Agreement shall exceed
the Direct Borrowing Base or the sum of the aggregate outstanding principal
balances of term loans under this Agreement and the aggregate available draw
amounts on the issued Letters of Credit shall exceed the Letter of Credit
Borrowing Base as shown on the Borrowing Base Certificate most recently
delivered to the Bank pursuant to Section 12, the Borrower shall pay to the Bank
the amount of such excess together with the amount of accrued interest to the
date of such prepayment on the amount prepaid, within five days after demand by
the Bank for such amounts.


                                       8

<PAGE>   9


         Section 2.7. Use of Proceeds. The credit available under this Agreement
shall be used for operating cash flow and letters of credit; subject to the
Borrowing Base limits stated above.

                                  ARTICLE III.

                              CONDITIONS OF LENDING

         Section 3.1. Conditions Precedent to Initial Advance. The Bank shall
have no obligation to make the initial Advance or issue Letters of Credit
hereunder unless the Bank shall have received on or before the date of such
Advance or issuance of a Letter of Credit the following documents:

                  (a) The Notes, properly executed and delivered on behalf of
         the Borrower.

                  (b) The Security Agreement and the Mortgage, in forms
         acceptable to the Bank properly executed and delivered on behalf of the
         Borrower, granting to the Bank a first lien on the property described
         in the Security Agreement (the "Collateral") and the Mortgaged Property
         and the rents, issues, profits and income from the Mortgaged Property
         as security for the performance of the Borrower's obligations under
         this Agreement and the Notes, together with any UCC-1 Financing
         Statement or other document deemed necessary or desirable by the Bank
         to perfect the liens granted by the Security Agreement and the
         Mortgage.

                  (c) The Subordination Agreement, in form acceptable to the
         Bank, properly executed and delivered on behalf of the Borrower and
         Celsius Inc., along with evidence that Celsius Inc. or a wholly owned
         subsidiary thereof shall have loaned at least $1,500,000 to Borrower,
         which debt and security are subordinated to the Bank loan under the
         Subordination Agreement.

                  (d) A title insurance policy issued by a title insurance
         company acceptable to the Bank insuring that the Mortgage is a first
         lien on the Mortgaged Property subject only to those encumbrances
         approved by the Bank.

                  (e) A copy of the Borrower's articles of incorporation
         certified as of a current date by the Minnesota Secretary of State,
         together with a copy of the Borrower's bylaws certified by the
         Secretary or any Assistant Secretary of the Borrower.

                  (f) A certified copy of the resolutions of the Board of
         Directors of the Borrower, approving the execution and delivery of the
         Loan Documents to which it is a party and approving all other matters
         contemplated by this Agreement.

                  (g) A certificate by an officer of the Borrower certifying the
         names of the officer or officers of the Borrower authorized to sign the
         Loan Documents to which it is a party, together with a sample of the
         true signature of such officer.

                  (h) Evidence of insurance as required by the Mortgage, the
         Security Agreement and Section 5.1(e) hereof.

                  (i) UCC, tax lien, bankruptcy and judgment searches showing
         any filings against the Borrower.


                                       9


<PAGE>   10


                  (j) A copy of the Articles of Organization of Minnesota ASE,
         LLC (the "Company") duly certified as of a current date by the
         Minnesota Secretary of State.

                  (k) A copy of the Company's Organizational Agreement, Member
         Control Agreement and Operating Agreement, duly certified as a of a
         current date by an officer or manager of the Borrower.

                  (l) A Certificate of Good Standing of the Company, duly issued
         as of a current date by the Minnesota Secretary of State.

                  (m) A copy of the resolutions of the Company's board of
         governors authorizing execution, delivery and performance of the Loan
         Documents and the transactions contemplated thereby, duly certified by
         an officer or manager of the Company.

                  (n) Copies of all Contribution Agreements with Members of the
         Company.

                  (o) Fully executed and binding contracts with customers in
         form and substance satisfactory to the Bank, including but not limited
         to DSO Singapore and the export license required to perform the DSO
         Singapore contract.

                  (p) An opinion of the Borrower's counsel to the effect that:
         (1) the Borrower is duly organized and is in good standing under the
         laws of Minnesota; (2) the Borrower has the power and authority to own
         and operate the Mortgaged Property and to enter into the Loan
         Documents; (3) the Loan Documents have been duly authorized, executed
         and delivered by the Borrower; (4) the Loan Documents create valid and
         binding obligations upon the Borrower enforceable according to the
         terms thereof; (5) the Loan is not usurious under applicable law; and
         (6) such other matters as Bank or its counsel may require.

                  (q) An opinion of the Company's counsel to the effect that:
         (1) the Company is duly organized and is in good standing under the
         laws of Minnesota; and (2) the letter agreement between the Company and
         the Bank has been duly authorized, executed and delivered by the
         Company and creates valid and binding obligations upon the Company
         enforceable according to the terms thereof; and (3) such other matters
         as Bank or its counsel may require.

                  (r) A certificate by an officer of the Company certifying the
         names of the officer or officers of the Company authorized to sign the
         Loan Documents to which it is a party, together with a sample of the
         true signature of such officer.

                  (s) An agreement with the Company in form and substance
         satisfactory to the Bank.

         Section 3.2. Conditions Precedent to Each Advance and Issuance. The
obligation of the Bank to make an Advance or issue a Letter of Credit (including
the initial Advance) shall be subject to the further conditions precedent, that
on the date of such Advance or Issuance:



                                       10


<PAGE>   11


                  (a) The representations and warranties contained in Section
         4.1 of this Agreement are correct on and as of the date of such Advance
         or Issuance as though made on such date; and

                  (b) No event has occurred and is continuing, or will result
         from such Advance or Issuance, which constitutes an Event of Default or
         would constitute an Event of Default but for the requirement that
         notice be given or time elapse or both.

                                   ARTICLE IV.

                         REPRESENTATIONS AND WARRANTIES

         Section 4.1. Representations and Warranties of the Borrower. To induce
the Bank to make Advances, the Borrower represents and warrants as follows:

                  (a) Corporate Existence; Compliance with Law. The Borrower (i)
         is duly organized, validly existing, and in good standing as a
         corporation under the laws of Minnesota and is qualified to do business
         in each jurisdiction where its ownership of property or conduct of
         business requires such qualification and where failure to qualify would
         have a material adverse effect on the Borrower or its property and/or
         business or on the ability of the Borrower to pay or perform the
         Obligations; (ii) has the corporate power and authority and the legal
         right to own and operate its property and to conduct business in the
         manner in which it does and proposes so to do; and (iii) is in
         compliance with all requirements of law and contractual obligations.

                  (b) Corporate Power; Authorization; Enforceable Obligations.
         The Borrower has the corporate power and authority and the legal right
         to execute, deliver, and perform the Loan Documents to which it is a
         party and has taken all necessary corporate action to authorize the
         execution, delivery, and performance of the Loan Documents. The Loan
         Documents to which it is a party have been duly executed and delivered
         on behalf of the Borrower and constitute legal, valid, and binding
         obligations of the Borrower enforceable against the Borrower in
         accordance with their respective terms, subject to the effect of
         applicable bankruptcy and other similar laws affecting the rights of
         creditors generally and the effect of equitable principles whether
         applied in an action at law or a suit in equity.

                  (c) No Legal Bar. The execution, delivery, and performance of
         the Loan Documents to which the Borrower is a party, the borrowings
         hereunder and the use of the proceeds thereof, will not violate any
         requirement of law or any contractual obligation of the Borrower or
         create or result in the creation of any lien on the Collateral in favor
         of any party other than the Bank.

                  (d) No Material Litigation. Except as disclosed on Exhibit B
         hereto, no litigation, investigation, or proceeding (including, without
         limitation, hazardous materials claims) of or before any arbitrator or
         governmental authority is pending or, to the knowledge of the Borrower,
         threatened by or against the Borrower its or against any of such
         parties' properties or revenues that is likely to be adversely
         determined and that, if adversely determined, is likely to have a
         material adverse effect on the business, operations, property, or
         financial or other condition of the Borrower.


                                       11


<PAGE>   12


                  (e) Taxes. The Borrower has filed or caused to be filed all
         tax returns that are required to be filed and have paid all taxes shown
         to be due and payable on said returns or on any assessments made
         against them or any of it property other than taxes that are being
         contested in good faith by appropriate proceedings and as to which the
         Borrower has established adequate reserves in conformity with GAAP.

                  (f) Investment Company Act. The Borrower is not an "investment
         company" or a company "controlled" by an "investment company" within
         the meaning of the Investment Borrower Act of 1940, as amended.

                  (g) Subsidiaries. Attached hereto as Exhibit C is an accurate
         and complete list of all presently existing Subsidiaries of the
         Borrower, their respective jurisdictions of incorporation and
         qualification and the percentage of their capital stock owned by the
         Borrower or other Subsidiaries. All of the issued and outstanding
         shares of capital stock of such Subsidiaries have been duly authorized
         and issued and are fully paid and nonassessable.

                  (h) Federal Reserve Board Regulations. Neither the Borrower
         nor any of its Subsidiaries is engaged or will engage, principally or
         as one of its important activities, in the business of extending credit
         for the purpose of "purchasing" or "carrying" any "margin stock" within
         the respective meanings of such terms under Regulation U. No part of
         the proceeds of any Loan issued hereunder will be used for "purchasing"
         or "carrying" "margin stock" as so defined or for any purpose that
         violates, or that would be inconsistent with, the provisions of the
         Regulations of the Board of Governors of the Federal Reserve System.

                  (i) ERISA. (i) No Prohibited Transactions, Accumulated Funding
         Deficiencies, withdrawals from Multiemployer Plans or Reportable Events
         have occurred with respect to any Plans or Multiemployer Plans that, in
         the aggregate, could subject the Borrower to any tax, penalty, or other
         liability where such tax, penalty, or liability is not covered in full,
         for the benefit of the Borrower, by insurance; (ii) no notice of intent
         to terminate a Plan has been filed, nor has any Plan been terminated
         under Section 4041 of ERISA, nor has the PBGC instituted proceedings to
         terminate, or appoint a trustee to administer, a Plan, and no event has
         occurred or condition exists that might constitute grounds under
         Section 4042 of ERISA for the termination of, or the appointment of a
         trustee to administer, any Plan; (iii) the present value of all benefit
         liabilities (as defined in Section 4001(a)(16) of ERISA) under all
         Plans (based on the actuarial assumptions used to fund the Plans) does
         not exceed the assets of the Plans; and (iv) the execution, delivery,
         and performance by the Borrower of this Agreement and the Loans
         hereunder and the use of the proceeds thereof will not involve any
         Prohibited Transactions.

                  (j) Assets. The Borrower has good and marketable title to all
         property and assets reflected in the financial statements referred to
         in previous paragraph 4(a), except property and assets sold or
         otherwise disposed of in the ordinary course of business subsequent to
         the respective dates thereof and except for incidental liens or
         imperfections of title which do not involve security for indebtedness
         for borrowed money ("Permitted Encumbrances"). The Borrower has no
         outstanding Liens on any of its properties or assets nor are there any
         security agreements to which the Borrower is a party, or title
         retention agreements, whether in the form of leases or otherwise, of
         any personal property except as reflected in the financial statements
         referred to in previous paragraph 4.1(a) and except for Permitted
         Encumbrances.


                                       12


<PAGE>   13


                  (k) Securities Acts. The Borrower has not issued any
         unregistered securities in violation of the registration requirements
         of Section 5 of the Securities Act of 1933, as amended, or any other
         law, and is not violating any rule, regulation, or requirement under
         the Securities Act of 1933, as amended, or the Securities and Exchange
         Act of 1934, as amended. The Borrower is not required to qualify an
         indenture under the Trust Indenture Act of 1939, as amended, in
         connection with its execution and delivery of the Notes. No proceeds of
         any Advance will be used to acquire any security in any transaction
         which is subject to Section 13 and 14 of the Securities Exchange Act of
         1934.

                  (l) Consents, etc. No consent, approval, authorization of, or
         registration, declaration or filing with any governmental authority is
         required on the part of the Borrower in connection with the execution
         and delivery of the Loan Documents or the performance of or compliance
         with the terms, provisions, and conditions hereof or thereof.

                  (m) Regulated Entities. The Borrower is not subject to
         regulation under the Public Utility Holding Company Act of 1935, the
         Federal Power Act, the Interstate Commerce Act, any state public
         utilities code, or any other Federal or state statute or regulation
         limiting its ability to incur Indebtedness.

                  (n) Copyrights, Patents, Trademarks, and Licenses, etc. The
         Borrower owns or is licensed or otherwise has the right to use all of
         the patents, trademarks, service marks, trade names, copyrights,
         contractual franchises, authorizations, and other rights if the failure
         to so own or be licensed or otherwise have the right to use the same
         could have a material adverse effect on the business, operations,
         property, or financial or other condition of the Borrower. To the best
         knowledge of the Borrower, no slogan or other advertising device,
         product, process, method, substance, part, or other material now
         employed or now contemplated to be employed by the Borrower infringes
         on any rights held by any other Person. Except as specifically
         disclosed in Exhibit B hereto, no claim or litigation regarding any of
         the foregoing is pending or, to the Borrower's knowledge, threatened,
         and to the knowledge of the Borrower, no patent, invention, device,
         application, principle, or any statute, law, rule, regulation,
         standard, or code is pending or proposed that, in either case, could
         reasonably be expected to have a material adverse effect on the
         business, operations, property, or financial or other condition of the
         Borrower.

                  (o) Insurance. The properties of the Borrower are insured with
         financially sound and reputable insurance companies (not Affiliates)
         acceptable to the Bank in such amounts, with such deductibles, and
         covering such risks as are customarily carried by companies engaged in
         similar businesses and owning similar properties in localities where
         the Borrower operates.


                                       13

<PAGE>   14


                  (p) Full Disclosure. None of the representations or warranties
         made by the Borrower in the Loan Documents as of the date such
         representations and warranties are made or deemed made, and none of the
         statements contained in any exhibit, report, statement, or certificate
         furnished by or on behalf of the Borrower in connection with the Loan
         Documents contains or will contain any untrue statement of a material
         fact or omits or will omit any material fact required to be stated
         therein or necessary to make the statements made therein, in light of
         the circumstances under which they are made, not misleading as of the
         time when made or delivered.

                  (q) Solvency. The Borrower, both before and after the funding
         of any Advance hereunder, is solvent, has assets having a fair market
         value in excess of the amount required to pay its probable liabilities
         on its existing debts as they become absolute and matured, and has and
         will have, until the Loan has been paid and performed in full, access
         to adequate capital for the conduct of its business and the ability to
         pay its debts from time to time incurred in connection therewith, as
         such debts mature.

                  (r) Financial Statements. The financial statements of the
         Borrower that have been furnished to the Bank prior to the date of this
         Agreement have been prepared in conformity with GAAP and present fairly
         the financial condition of the Borrower as of the dates of such
         statements, and the results of the operations of the Borrower for the
         financial periods then ended, and since such dates there has been no
         material adverse change in such financial condition.

                  (s) Defaults. The Borrower is not in default in the payment of
         principal or interest on any indebtedness for borrowed money and is not
         in default under any instrument or agreement under or subject to which
         any indebtedness for borrowed money has been issued, and no event has
         occurred and is continuing which, with or without the lapse of time or
         the giving of notice, or both, constitutes or would constitute an event
         of default under any such instrument or agreement or an Event of
         Default hereunder.


                                   ARTICLE V.

                            COVENANTS OF THE BORROWER

         Section 5.1. Affirmative Covenants. So long as the Notes shall remain
unpaid or the Bank shall have a Commitment hereunder, the Borrower will, unless
the Bank shall give its prior written consent:

                  (a) Financial Reporting. Furnish to the Bank:

                           (1) Annual Audit Report. As soon as available and in
                  any event with 120 days after the end of each fiscal year of
                  the Borrower, the annual audit report of the Borrower prepared
                  in conformity with GAAP, consisting of at least statements of
                  income, cash flow and stockholders' equity, and a balance
                  sheet as at the end of such year, setting forth in each case
                  in comparative form corresponding figures from the previous
                  annual audit, certified, without qualification, by independent
                  certified public accountants of recognized standing selected
                  by the Borrower and acceptable to the Bank, together with any
                  management letters, management reports or other supplementary
                  comments or reports to the Borrower or its board of directors
                  furnished by such accountants.


                                      14



<PAGE>   15


                           (2) Monthly Financial Statement. As soon as available
                  and in any event within 30 days after the end of each month of
                  each calendar year of the Borrower, a copy of the unaudited
                  financial statement of the Borrower prepared in the same
                  manner as the audit report referred to above, signed by the
                  Borrower's chief financial officer and consisting of at least
                  statements of income, cash flow and stockholders' equity for
                  the Borrower for such month and for the period from the
                  beginning of such fiscal year to the end of such month, a
                  balance sheet of the Borrower as at the end of such month
                  accounts receivable aging trial balance and Contract
                  Reconciliation Report, all in form and substance satisfactory
                  to Bank.

                           (3) Projections. As soon as available and in any
                  event not later than 30 days preceding the last day of each
                  fiscal year of the Borrower, a projected financial statement
                  and plan of the Borrower (prepared in the same manner as the
                  audit report referred to in (1) above) containing a cash
                  budget projection, and a projected borrowing base availability
                  statement of the Borrower signed by the Borrower's chief
                  financial officer and presenting fairly the Borrower's best
                  good faith projections of the financial position and results
                  of operations of the Borrower for each month of the following
                  fiscal year in form and substance satisfactory to the Bank.

                           (4) Compliance Certificate. Together with the
                  financial statements furnished by the Borrower under (1) and
                  (2), a certificate of the Borrower's chief financial officer,
                  in the form of Exhibit A attached hereto, dated the date of
                  such annual audit report or such monthly financial statement,
                  as the case may be, to the effect that no Default or Event of
                  Default has occurred and is continuing, or, if there is any
                  such event, describing it and the steps, if any, being taken
                  to cure it, and containing a computation of, and showing
                  compliance with, each of the financial ratios and restrictions
                  contained in this Agreement.

                           (5) Borrowing Base Certificate. As soon as available
                  and in any event within 30 days after the end of each month of
                  each calendar year of the Borrower, a Borrowing Base
                  Certificate in the form of Exhibit A attached hereto, signed
                  by the chief financial officer of Borrower.

                           (6) Other Reports. Such other reports as the Bank may
                  request from time to time.


                  (b) Visitation Rights. At any reasonable time and from time to
         time, permit the Bank or any agents or representatives thereof, to
         examine and make copies of and abstracts from the records and books of
         account of, and visit the properties of, the Borrower and to discuss
         the affairs, finances and accounts of the Borrower with any of its
         officers or directors.

                  (c) Notification of Default, Etc. Notify the Bank as promptly
         as practicable (but in any event not later than three (3) Business
         Days) after Borrower obtains knowledge of: (i) the occurrence of any
         event which constitutes an Event of Default or which would constitute
         an Event of Default with the passage of time or the giving of notice or
         both; or (ii) the commencement of any litigation or governmental
         proceedings of any type which could materially adversely affect the
         financial condition or business operations of the Borrower.


                                       15

<PAGE>   16


                  (d) Keeping of Financial Records and Books of Account.
         Maintain proper financial records in accordance with GAAP which fully
         and correctly reflect all financial transactions and all assets and
         liabilities of the Borrower.

                  (e) Maintenance of Insurance. Maintain such insurance with
         reputable insurance carriers as is normally carried by companies
         engaged in similar businesses and owning similar property, and name the
         Bank as loss payee on all policies insuring property in which the Bank
         has a lien or security interest and provide the Bank with certificates
         of insurance evidencing its status as a loss payee. The loss payee
         endorsement shall provide for payment to the Bank notwithstanding any
         acts or omissions of the Borrower and shall require notice to the Bank
         30 days prior to the expiration or cancellation of the insurance.

                  (f) Maintenance of Properties, Etc. Maintain and preserve all
         of its properties, necessary or useful in the proper conduct of its
         business, in good working order and condition, ordinary wear and tear
         excepted.

                  (g) Payment of Taxes. Pay all taxes, assessments and
         governmental charges of any kind payable by it as such taxes,
         assessments and charges become due and before any penalty shall be
         imposed, except as Borrower shall contest in good faith and by
         appropriate proceedings and provided that the Borrower maintains such
         reserves therefor as are required by GAAP.

                  (h) Maintenance of Accounts. Maintain all its corporate bank
         accounts (the accounts for depositing revenues and paying expenses) at
         the Bank.

                  (i) Preservation of Corporate Existence, Etc. Preserve and
         maintain its corporate existence, rights, franchises and privileges in
         the jurisdiction of its incorporation, and qualify and remain
         qualified, as a foreign corporation in each jurisdiction in which such
         qualification is necessary or desirable in view of its business and
         operations or the ownership of its properties.

                  (j) Letter of Credit Fees. Pay the Bank, for the issuance of a
         standby or indemnification letter of credit a fee of 1.25% of the
         amount of the letter of credit plus costs, and for each extension and
         renewal thereof 0.50% of the amount of the letter of credit plus costs.
         For modifications without extensions or renewals, the Borrower shall
         pay only the costs.

                  (k) Interest Coverage Ratio. Maintain an Interest Coverage
         Ratio (as hereinafter defined) of the Borrower of not less than 1.35 to
         1.00. "Interest Coverage Ratio" means a ratio determined as of the end
         of each month as follows:

                           (i) during the twelve month period from October 1,
                  2001 through and including September 30, 2002, the ratio of
                  the Borrower's EBIT to total interest expense for the period
                  from October 1, 2001 through the last day of the most recently
                  ended month; and


                                       16

<PAGE>   17


                           (ii) beginning for the month of October 2002 and for
                  each month thereafter, the ratio of the Borrower's EBIT to
                  total interest expense for the twelve months most recently
                  ended.

                  (l) Leverage Ratio. Maintain a Leverage Ratio (the ratio of
         the Borrower's Adjusted Debt to the Borrower's Tangible Net Worth) of
         not more than 3.5 to 1.0, measured on a monthly basis.

                  (m) Minimum Tangible Net Worth. Achieve a Tangible Net Worth
         of not less than $5,500,000 as of September 30, 2001; and $6,000,000 as
         of December 31, 2001 and the last day of each calendar quarter
         continuously thereafter.

                  (n) Subordinated Creditor Notice. Provide the Bank with copies
         of all notices received by Borrower from the Subordinated Creditor
         within five (5) days after receipt.

         Section 5.2. Negative Covenants. So long as the Notes shall remain
unpaid or the Bank shall have a Commitment hereunder, the Borrower will not,
unless the Bank shall give its prior written consent:

                  (a) Liens. Create or suffer to exist any mortgage, pledge,
         lien, security interest or other encumbrance on the Collateral or the
         Mortgaged Property except those in favor of the Bank or Permitted
         Encumbrances.

                  (b) Merger, Etc. Merge or consolidate with any other Person;
         sell, transfer, convey, lease or otherwise dispose of (whether in one
         transaction or in a series of transactions) all or a substantial
         portion of its assets (whether now owned or hereafter acquired) to any
         other Person.

                  (c) Remuneration. Pay a salary or other remuneration to any of
         its officers, directors, employees or stockholders in an amount which
         is in excess of a reasonable salary or other remuneration paid for
         similar services by similar businesses.

                  (d) Change in Nature of Business. Make any material change in
         the nature of the business of the Borrower, taken as a whole, as
         carried on at the date hereof.

                  (e) Management Fees. Pay annual management fees in excess of
         $210,000 (prorated on a monthly basis); provided however, that no
         management fees shall be paid during any period during which the
         Borrower is in default under this Agreement.

                  (f) Capital Expenditures. Make or incur capital expenditures
         in excess of $850,000 for 2001 and an amount acceptable to the Bank to
         be agreed upon no later than February 15, 2002 for 2002.


                                       17


<PAGE>   18


                                   ARTICLE VI.

                                     DEFAULT

         Section 6.1. Events of Default. "Events of Default" in this Agreement
means any of the following events:

                  (a) Failure of the Borrower to pay the principal of the Notes
         when due or, if payable on demand, upon demand;

                  (b) Failure of the Borrower to pay any interest or fees
         required to be paid hereunder or under the Notes when due;

                  (c) Any representation or warranty made by, or on behalf of,
         any Loan Party in, or pursuant to, any Loan Document shall prove to
         have been incorrect in any material respect when made;

                  (d) Default in performance of any other covenant or agreement
         of any Loan Party in, or pursuant to, any Loan Document and continuance
         of such default or breach for a period of 30 days after written notice
         thereof to the Borrower and such Loan Party by the Bank;

                  (e) The Borrower shall generally not pay its debts as such
         debts become due, or shall admit in writing its inability to pay its
         debts generally, or shall make a general assignment for the benefit of
         creditors; or any proceeding shall be instituted by or against the
         Borrower (and in the case of proceedings against, remain undismissed
         for sixty days) seeking to adjudicate it a bankrupt or insolvent, or
         seeking liquidation, winding up, reorganization, arrangement,
         adjustment, custodianship, protection, relief, or composition of it or
         its debts under any law relating to bankruptcy, insolvency or
         reorganization or relief of debtors, or seeking the entry of an order
         for relief, or the appointment of a receiver, custodian, trustee, or
         other similar official for it or him or for any substantial part of its
         or his property; or shall take any corporate action to authorize any of
         the actions set forth above in this subsection;

                  (f) The Borrower shall fail to pay any indebtedness for
         borrowed money, (including the Subordinated Debt but excluding debt
         evidenced by the Notes) of the Borrower or any interest or premium
         thereon, when due (whether by scheduled maturity, required prepayment,
         acceleration, demand or otherwise) and such failure shall continue
         after the applicable grace period, if any, specified in the agreement
         or instrument relating to such debt; or any other default under any
         agreement or instrument relating to any such debt, or any other event,
         shall occur and shall continue after the applicable grace period, if
         any, specified in such agreement or instrument, if the effect of such
         default or event is to accelerate, or to permit the acceleration of,
         the maturity of such debt; or any such debt shall be declared to be due
         and payable, or required to be prepaid (other than by a regularly
         scheduled required prepayment), prior to the stated maturity thereof;

                  (g) Any guaranty or any third party security interest securing
         any indebtedness of the Borrower to the Bank shall be repudiated or
         revoked, or purported to be repudiated or revoked;

                  (h) The entry against the Borrower of a final judgment, decree
         or order for the payment of money in excess of $25,000 and the
         continuance of such judgment, decree or order unsatisfied for a period
         of 30 days without a stay of execution;


                                       18


<PAGE>   19


                  (i) Any adverse change reasonably deemed by the Bank to be
         material or substantial shall occur in the assets (including the
         Mortgaged Property), financial condition or credit standing of the
         Borrower or the Company;

                  (j) Any sale, encumbrance (occurring after the date hereof),
         or transfer (i) of a majority of the stock interests in the Borrower,
         or (ii) that causes the Company to lose control of the Borrower;

                  (k) Transfer by Celsius Inc. of any of its interests in
         Borrower to (i) non-affiliates of Celsius Inc. without the Borrower or
         Celsius Inc. giving the Bank at least 28 days prior written notice of
         the proposed transfer or (ii) affiliates of Celsius Inc. without the
         Borrower or Celsius Inc. giving the Bank written notice of such
         transfer within fifteen days after the transfer.

         Section 6.2 Rights and Remedies. If any Event of Default shall occur
and be continuing, the Bank may exercise any or all of the following rights and
remedies:

                  (a) By written notice to the Borrower, suspend or terminate
         the Commitment, whereupon the same shall forthwith be suspended or
         terminated;

                  (b) Declare the Notes, all interest thereon, and all other
         obligations under, or pursuant to, any Loan Document to be immediately
         due and payable, and upon such declaration the Notes, interest and
         other obligations shall immediately be due and payable, without
         presentment, demand, protest or any notice of any kind, all of which
         are expressly waived;

                  (c) Exercise any right or remedy under the Mortgage or the
         Security Agreement;

                  (d) Exercise any other right or remedy available to the Bank
         at law or in equity.

                                  ARTICLE VII.

                                  MISCELLANEOUS

         Section 7.1. No Waiver; Cumulative Remedies. No failure or delay on the
part of the Bank in exercising any right or remedy under, or pursuant toy any
Loan Document shall operate as a waiver thereof, nor shall any single or partial
exercise of any such right, remedy or power preclude other or further exercise
thereof, or the exercise of any other right, remedy or power. The remedies in
the Loan Documents are cumulative and are not exclusive of any remedies provided
by law.

         Section 7.2. Amendments and Waivers. No amendment or waiver of any
provision of any Loan Document shall be effective unless such amendment or
waiver is in writing and is signed by the Bank, and such amendment or waiver
shall be effective only in the specific instance and for the specific purpose
for which it was given.



                                       19


<PAGE>   20


         Section 7.3. Notices, Etc. Any notices required or contemplated
hereunder or under the Notes shall be given to the following addresses:

         If to the Borrower:           Aero Systems Engineering, Inc.
                                       358 East Fillmore Avenue
                                       St. Paul, Minnesota 55107-1289
                                       Attention:

         If to Bank:                   National City Bank of Minneapolis
                                       651 Nicollet Mall
                                       Minneapolis, Minnesota 55402
                                       Attention:  John R. Dan, Vice President

         Any notice, demand or request so delivered shall constitute valid
notice under this Agreement and shall be deemed to have been received (a) on the
day of actual delivery in the case of personal delivery, (b) on the next
Business Day after the date when sent in the case of delivery by
nationally-recognized overnight courier, (c) on the third Business Day after the
date of deposit in the U.S. mail in the case of mailing or (d) in the case of a
facsimile transmission on the day sent, if on a Business Day, or if not sent of
a Business Day, on the next Business Day after the day sent, provided that
notices to the Bank pursuant to the provisions of Article II shall not be
effective until received by the Bank. Any party hereto may from time to time by
notice in writing served upon the other as aforesaid designate a different
mailing address or a different person to which all such notices, demands or
request thereafter are to be addressed.

         Section 7.4. Costs and Expenses. The Borrower agrees to pay (a) on the
date of this Agreement all costs and expenses incurred by the Bank through the
date of this Agreement in connection with the credit facilities that are the
subject of this Agreement, including (without limitation) reasonable attorneys
fees and legal expenses and (b) on demand all costs and expenses of the Bank,
including reasonable attorneys fees and expenses, in connection with the
administration and enforcement of the Loan Documents (whether suit is commenced
or not).

         Section 7.5. Right of Set-off. Upon the occurrence and during the
continuance of any Event of Default the Bank is hereby authorized at any time
and from time to time, to the fullest extent permitted by law, to set off and
apply any and all deposits (general or special, time or demand, provisional or
final) at any time held and other indebtedness at any time owing by the Bank to
or for the credit or the account of the Borrower or Guarantor, if any, against
any and all of the obligations of the Borrower now or hereafter existing under
any Loan Documents, irrespective of whether or not the Bank shall have made any
demand under any Loan Documents and although such obligations may be unmatured.
The Bank agrees promptly to notify the Borrower after any such set-off and
application, provided that the failure to give such notice shall not affect the
validity of such set-off and application. The rights of the Bank under this
Section are in addition to other rights and remedies (including, without
limitation, other rights of set-off) which the Bank may have.

         Section 7.6. Governing Law; Severability; Jurisdiction. All Loan
Documents shall be governed by the laws of the State of Minnesota. Any term used
in this Agreement and not otherwise defined shall have the definition given that
term in the Uniform Commercial Code as in effect in the State of Minnesota from
time to time. If any term in this Agreement shall be held to be illegal or
unenforceable, the remaining portions of this Agreement shall not be affected,
and this Agreement shall be construed and enforced as if this Agreement did not
contain the term held to be illegal or unenforceable. The Borrower hereby
irrevocably submits to the jurisdiction of the Minnesota District Court, Fourth
District, and the Federal District Court, District of Minnesota, Fourth
Division, over any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of such action or proceeding may
be heard and determined in any such court.


                                       20


<PAGE>   21


         Section 7.7. Waiver Of Jury Trial. The Bank and the Borrower hereby
voluntarily, knowingly and intentionally waive any and all rights to trial by
jury in any legal action or proceeding arising under this agreement, regardless
of whether such action or proceeding concerns any contractual or tortious or
other claim. The Borrower acknowledges that this waiver of jury trial is a
material inducement to the Bank in extending credit to the Borrower, that the
Bank would not have extended such credit without this jury trial waiver, and
that the Borrower has been represented by an attorney or has had an opportunity
to consult with an attorney in connection with this jury trial waiver and
understands the legal effect of this waiver.

         Section 7.8. Binding Effect; Assignment. All Loan Documents shall be
binding upon and inure to the benefit of the Loan Parties and the Bank and their
respective successors and assigns. No Loan Party shall have the right to assign
its rights or interest under such agreement without the prior written consent of
the Bank.

         IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized officers as of the date first above written.

                                       AERO SYSTEMS ENGINEERING, INC.


                                       By /s/ CHARLES LOUX
                                          --------------------------------------
                                              Charles Loux
                                              Its  President and Chief
                                                Executive Officer


                                       NATIONAL CITY BANK OF MINNEAPOLIS


                                       By /s/ DEAN E. DAVIDSON
                                          --------------------------------------
                                              Dean E. Davidson
                                              Its  Vice President





                                       21



</TEXT>
</DOCUMENT>
