UNITED STATES 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, 2001 Commission file number: 33-18336-LA AAON, INC. ---------- (Exact name of Registrant as specified in its charter) Nevada 87-0448736 ------ ---------- (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 2425 South Yukon, Tulsa, Oklahoma 74107 --------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (918) 583-2266 Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.004 ----------------------------- (Title of Class) Rights to Purchase Series A Preferred Stock ------------------------------------------- (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 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of Registrant's voting stock held by non-affiliates computed by reference to the closing price of such stock on March 1, 2002, was approximately $155,716,000. For purposes of this computation, all officers, directors and 5% beneficial owners of Registrant are deemed to be affiliates. As of March 1, 2002, Registrant had outstanding a total of 8,780,142 shares of its $.004 par value Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's definitive Proxy Statement to be filed in connection with the Annual Meeting of Stockholders to be held June 4, 2002, are incorporated into Part III. Page TABLE OF CONTENTS Page Item Number and Caption Number PART I 1. Business. 1 2. Properties. 5 3. Legal Proceedings. 5 4. Submission of Matters to a Vote of Security Holders. 5 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters. 6 6. Selected Financial Data. 7 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 8 7A. Quantitative and Qualitative Disclosures About Market Risk. 11 8. Financial Statements and Supplementary Data. 11 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 11 PART III 10. Directors and Executive Officers of Registrant. 12 11. Executive Compensation. 12 12. Security Ownership of Certain Beneficial Owners and Management. 12 13. Certain Relationships and Related Transactions. 12 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 13 Page PART I Item 1. Business. General Development of Business AAON, Inc., a Nevada corporation ("AAON-Nevada" or, including its subsidiaries, the "Company"), was incorporated on August 18, 1987. AAON, Inc., an Oklahoma corporation ("AAON-Oklahoma"), was incorporated on August 15, 1988, for the purpose of acquiring the assets, subject to certain liabilities, of the Heating, Ventilation and Air-Conditioning ("HVAC") Division of John Zink Company in Tulsa, Oklahoma. In June 1989, pursuant to a Conversion/Exchange Agreement, AAON-Oklahoma became a wholly-owned subsidiary of AAON-Nevada. AAON-Oklahoma is engaged in the manufacture and sale of commercial rooftop air-conditioners and heating equipment. In December 1991, AAON Coil Products, Inc. ("ACP", formerly CP/AAON, Inc.), a Texas corporation organized as a wholly-owned subsidiary of AAON-Nevada for such purpose, purchased most of the assets of Coils Plus, Inc., of Longview, Texas, which manufactures coils used in the Company's products, as well as air handling and condensing units introduced in 1998. Products and Markets The Company engineers, manufactures and markets commercial rooftop air-conditioning, heating and heat recovery equipment, air-conditioning coils and air handling and condensing units. Its products serve the commercial and industrial new construction and replacement markets. To date virtually all of the Company's sales have been to the domestic market, with foreign sales accounting for only 2% of its sales in 2001. The rooftop and condenser markets consist of units installed on commercial or industrial structures of generally less than 10 stories in height. Air handling units and coils are applicable to all sizes of commercial and industrial buildings. Coil sales are also made to other air-conditioning unit manufacturers. The size of these markets is determined primarily by the number of commercial and industrial building completions. The replacement market consists of products installed to replace existing units/components which are worn or damaged. Historically, approximately half of the industry's market has consisted of replacement units. The commercial and industrial new construction market is subject to cyclical fluctuations in that it is generally tied to housing starts, but has a lag factor of 6-18 months. Housing starts, in turn, are affected by such factors as interest rates, the state of the economy, population growth and the relative age of the population. When new construction is down, the Company emphasizes the replacement market. Based on its 2001 level of sales, approximately $157 million, the Company has a 12% share of the rooftop market and a 1% share of the coil market. Approximately 60% of the Company's sales now come from new construction and 40% from renovation/replacements. The percentage of sales for new construction vs. replacement to particular customers is related to their stage of development. In the case of Wal-Mart, Target and Home Depot, due to their growth posture, the Company's sales to these major customers was approximately 80% for new construction and 20% replacement. Sales of air handling and condensing units in 2001 amounted to approximately $2.9 million. (1) The Company purchases certain components, fabricates sheet metal and tubing and then assembles and tests its finished products. The Company's primary finished products consist of a single unit system containing heating, cooling and/or heat recovery components in a self-contained cabinet, referred to in the industry as "unitary" products. The Company's other finished products are coils consisting of a sheet metal casing with tubing and fins contained therein, air handling units consisting of coils, blowers and filters and condensing units consisting of coils, fans and compressors. The Company currently has four groups of rooftop products: its RK Series, which is offered in 18 cooling sizes ranging from 3 to 60 tons; its RF Series, which is offered in nine cooling sizes ranging from 40 to 130 tons; its RL Series, which is offered in 15 cooling sizes ranging from 40 to 230 tons, which will replace the RF Series during 2002; and its HA Series, which is a horizontal discharge package for either rooftop or ground installation, offered in nine sizes ranging from 4 to 50 tons. The Company's heat recovery option applicable to its RK and RF units (which responds to the U.S. Clean Air Act mandate to increase fresh air in commercial structures and increases the capacity of these units by up to 50% with no additional energy cost) has gained significant customer acceptance. The Company's products are designed to compete on the high side of standardized, packaged rooftop products. Accordingly, its prices range from $300 to $550 per ton of cooling, which is approximately 4%, on average, higher than other standardized products. Performance characteristics of these products range in cooling capacity from 32,900-2,676,000 BTU's and in heating capacity from 69,000-3,990,000 BTU's. All of the Company's rooftop products meet the Department of Energy's efficiency standards, which are designed to set the maximum amount of energy to be used in producing a given amount of cooling. A typical commercial building installation requires a ton of air-conditioning for every 300-400 square feet or, for a 100,000 square foot building, 250 tons of air-conditioning, which would involve multiple units. The Company has developed a prototype wall-hung heating and air-conditioning unit which it plans to market for commercial buildings requiring a product designed for small space(s). Pilot production and testing of this product has begun, but sales in 2001 were not significant. In December 2001, the Company began marketing commercial water chillers. The development of these products did not require a material investment, but could produce material results. Major Customers The Company's largest customers last year were Wal-Mart Stores, Inc., Home Depot, Inc., and Target Stores, Inc. Sales to Wal-Mart, Target and Home Depot were 14%, 11% and 10% of total sales, respectively, in 2001 compared to 19%, 9% and 10%, respectively, in 2000. The Company has no written contract with these customers. The loss of any of the above customers would have a material adverse affect on the Company. However, with the continuing expansion of the Company's customer base, management believes that the extent of its dependence on sales to its major customers will diminish over a period of time. In order to diversify its customer base, the Company has added to and/or upgraded its sales representation in various markets. (2) Sources and Availability of Raw Materials The most important materials purchased by the Company are steel, copper and aluminum, which are obtained from domestic suppliers. The Company also purchases from other domestic manufacturers certain components, including compressors, electric motors and electrical controls used in its products. The Company endeavors to obtain the lowest possible cost in its purchases of raw materials and components, consistent with meeting specified quality standards. The Company is not dependent upon any one source for its raw material or the major components of its manufactured products. By having multiple suppliers, the Company believes that it will have adequate sources of supplies to meet its manufacturing requirements for the foreseeable future. Further, the Company attempts to limit the impact of increases in raw materials and purchased component prices on its profit margins by negotiating with each of its major suppliers on a term basis from six months to three years. Distribution The Company utilizes a direct sales staff of nine individuals and approximately 84 independent manufacturer representatives' organizations having 101 offices to market its products in the United States. The Company also has one international sales organization, which utilizes 12 distributors in other countries. Sales are made directly to the contractor or end user, with shipments being made from the Company's Tulsa and Longview plants to the job site. Billings are to the contractor or end user, with a commission paid directly to the manufacturer representative. The Company's products and sales strategy focus on a "niche" market. The targeted market for its rooftop equipment is customers seeking a product of better quality than offered, and/or options not offered, by standardized manufacturers. To support and service its customers and the ultimate consumer, the Company provides parts availability through two independent parts distributors and has a factory service organization at its Tulsa plant. Also, a number of the manufacturer representatives utilized by the Company have their own service organizations, which, together with the Company, provide the necessary warranty work and/or normal service to customers. The Company's warranty on its products is: for parts only, the earlier of one year from the date of first use or 15 months from date of shipment; compressors (if applicable), an additional four years; and on gas-fired heat exchangers (if applicable), 15 years. Research and Development All R&D activities of the Company are company-sponsored, rather than customer-sponsored. Ongoing work involves the HA Series, component evaluation and refinement, development of control systems and new product development. This work will cost approximately $600,000 per year and is budgeted as a normal, recurring expense. (3) Backlog The Company had a current backlog as of March 1, 2002, of $28,800,000, compared to $34,360,000 at March 1, 2001. The current backlog consists of orders considered by management to be firm and substantially all of which will be filled by August 1, 2002; however, the orders are subject to cancellation by the customers. Working Capital Practices Working capital practices in the industry center on inventories and accounts receivable. The Company regularly reviews its working capital components with a view to maintaining the lowest level consistent with requirements of anticipated levels of operation. Its greatest needs arise during the months of July-November, the peak season for inventory (primarily purchased material) and accounts receivable. The Company's working capital requirements are generally met through a bank revolving credit facility, which currently permits borrowings up to $15,150,000. The Company believes that it will have sufficient bank credit available to meet its working capital needs for the foreseeable future. Seasonality Sales of the Company's products are moderately seasonal with the peak period being July-November of each year. Competition In the domestic market, the Company competes primarily with Trane Company, a division of American Standard, Inc., Carrier Corporation, a subsidiary of United Technologies Corporation, Lennox International, Inc., and York International Corporation. All of these competitors are substantially larger and have greater resources than the Company. The Company competes primarily on the basis of total value, quality, function, serviceability, efficiency, availability of product, product line recognition and acceptability of sales outlet. However, in new construction where the contractor is the purchasing decision maker, the Company often is at a competitive disadvantage on sales of rooftop units because of the emphasis placed on initial cost; whereas, in the replacement market and other owner-controlled purchases of such units, the Company has a better chance of getting the business since quality and long-term cost are generally taken into account. Employees As of March 1, 2002, the Company had 931 employees and 127 temporaries, none of whom are represented by unions. Management considers its relations with its employees to be good. Patents, Trademarks, Licenses and Concessions The Company does not consider any patents, trademarks, licenses or concessions held by it to be material to its business operations, other than patents issued regarding its heat recovery wheel option, blower, gas-fired heat exchanger, wall-hung curb and evaporative condenser desuperheater. Environmental Matters Laws concerning the environment that affect or could affect the Company's domestic operations include, among others, the Clean Water Act, the Clean Air Act, the Resource Conservation and Recovery Act, the Occupational Safety and Health Act, the National Environmental Policy Act, the Toxic Substances Control Act, regulations promulgated under these Acts, and any other federal, state or local laws or regulations governing environmental matters. The Company believes that it presently complies with these laws and that future compliance will not materially adversely affect the Company's earnings or competitive position. (4) Item 2. Properties. The plant and office facilities of AAON-Oklahoma consist of a 337,000 square foot building (322,000 sq. ft. of manufacturing/warehouse space and 15,000 sq. ft. of office space) located on a 12-acre tract of land at 2425 South Yukon, Tulsa, Oklahoma (the "original facility"), and a 457,000 square foot manufacturing/warehouse building and a 22,000 square foot office building (the "expansion facility") located on a 40-acre tract of land across the street from the original facility. Both plants are of sheet metal construction. The original facility's manufacturing area is in a heavy industrial type building, with total coverage by bridge cranes, containing manufacturing equipment designed for sheet metal fabrication and metal stamping. The manufacturing equipment contained in the original facility consists primarily of automated sheet metal fabrication equipment, supplemented by presses, press breaks and NC punching equipment. Assembly lines consist of four cart-type conveyor lines with variable line speed adjustment, three of which are motor driven. Subassembly areas and production line manning are based upon line speed. The manufacturing facility is 1,140 feet in length and varies in width from 390 feet to 220 feet. Production at this facility averaged approximately $12.3 million per month in 2001, which is 60% of the estimated capacity of the plant. Management deems this plant to be nearly ideal for the type of rooftop products being manufactured by the Company. The expansion facility, which was purchased in December 1997, is 24% (108,000 sq. ft.) utilized by the Company and 76% leased to third parties. The Company uses 8,000 sq. ft. for office space, 20,000 sq. ft. for warehouse space and 80,000 sq. ft. for manufacturing. The remaining 349,000 sq. ft. will afford the Company additional plant and office space for long-term growth. The operations of ACP are conducted in a plant/office building at 203-207 Gum Springs Road in Longview, Texas, containing 226,000 square feet on 14 acres. The manufacturing area (approximately 219,000 square feet) is located in three 120-foot wide sheet metal buildings connected by an adjoining structure. The facility is built for light industrial manufacturing. Item 3. Legal Proceedings. The Company is not a party to any pending legal proceeding which management believes is likely to result in a material liability and no such action is contemplated by or, to the best of its knowledge, has been threatened against the Company. Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted to a vote of security holders, through solicitation of proxies or otherwise, during the period from October 1, 2001, through December 31, 2001. (5) PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The Company's Common Stock is traded on the NASDAQ National Market under the symbol "AAON". The range of sales prices for the Company's Common Stock during the last two years, as reported by National Association of Securities Dealers, Inc. (adjusted for the 3-for-2 stock split on September 28, 2001), was as follows: Quarter Ended High Bid Low Bid ------------- -------- ------- March 31, 2000 $ 12.71 $ 9.00 June 30, 2000 $ 18.50 $ 11.50 September 30, 2000 $ 17.25 $ 14.75 December 31, 2000 $ 17.00 $ 11.54 March 31, 2001 $ 16.58 $ 12.33 June 30, 2001 $ 18.50 $ 11.17 September 30, 2001 $ 21.33 $ 16.87 December 31, 2001 $ 24.47 $ 16.00 On March 1, 2002, there were 1,034 holders of record, and 3,134 beneficial owners, of the Company's Common Stock. Since its inception, no cash dividends have been paid on the Company's Common Stock and the Company does not anticipate paying cash dividends in the foreseeable future. There is a negative covenant under the Company's Revolving Credit and Term Loan Agreement which prohibits the declaration or payment of such dividends. (6) Item 6. Selected Financial Data. The following selected financial data should be read in conjunction with the financial statements and related notes thereto for the periods indicated, which are included elsewhere in this report. Years Ended December 31, --------------------------------------------------------------------------------- Results of Operations: 2001 2000 1999 1998 1997 - ---------------------- ----------- -------- ----------- ----------- ---------- (In thousands, except earnings per share) Net sales $ 157,252 $ 154,982 $ 131,947 $ 109,624 $ 81,676 Net income $ 14,156 $ 12,794 $ 9,697 $ 5,230 $ 3,022 Basic earnings per share $ 1.63 $ 1.46 $ 1.04 $ .56 $ .33 Diluted earnings per share $ 1.56 $ 1.38 $ 1.00 $ .55 $ .32 Weighted average shares outstanding: Basic 8,661 8,793 9,362 9,303 9,239 Diluted 9,094 9,264 9,690 9,578 9,455 December 31, --------------------------------------------------------------------------------- Balance Sheet Data: 2001 2000 1999 1998 1997 - ------------------- ----------- ----------- --------- ----------- ---------- (In thousands) Total assets $ 76,295 $ 76,818 $ 58,656 $ 50,506 $ 42,810 Long-term debt $ 985 $ 5,853 $ 6,630 $ 10,980 $ 12,857 Stockholders' equity $ 50,041 $ 37,012 $ 33,618 $ 24,411 $ 18,873 Basic earnings per common share were computed by dividing net income by the weighted average number of shares of common stock outstanding during the reporting period. Diluted earnings per common share were determined on the assumed exercise of dilutive options, as determined by applying the treasury stock method. Effective September 28, 2001, the Company completed a three-for-two stock split. The shares outstanding and earnings per share disclosures have been restated to reflect the stock split. (7) Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. AAON, Inc., engineers, manufactures and markets commercial rooftop air-conditioning, heating and heat recovery equipment, air conditioning coils and air handling and condensing units. AAON's primary products are its RK, RF and RL (which was designed to replace the RF) series units and the Company also began producing water chillers in late 2001. Future revenues will also come from the introduction of an expanded air-handler product. AAON sells its products to property owners and contractors through its internal sales force and a network of manufacturers' representatives. The demand for AAON's products is influenced by national and regional economic and demographic factors. The commercial and industrial new construction market is subject to cyclical fluctuations in that it is generally tied to housing starts, but has a lag factor of 6-18 months. Housing starts, in turn, are affected by such factors as interest rates, the state of the economy, population growth and the relative age of the population. When new construction is down, the Company emphasizes the replacement market. The principal components of cost of goods sold are labor, raw materials, component costs, factory overhead, freight out and engineering expense. The principal raw materials used in AAON's manufacturing processes are steel, copper and aluminum. The major component costs include compressors, electric motors and electronic controls. Selling, general and administrative costs include the Company's internal sales force, warranty costs, profit sharing and administrative expenses. Warranty expense is estimated based on historical trends and other factors. The Company's warranty period is generally one year from the date of first use or 15 months from date of shipment; however, compressors (if applicable) carry an additional four-year warranty and gas-fired heat exchangers (if applicable) have a 15-year warranty. In late 1997, the Company began receiving additional machinery to allow for continued expansion of its production. At the end of 1997, the Company bought a 40-acre tract of land across the street from its original plant, containing 457,000 sq. ft. of manufacturing/warehouse space and a 22,000 sq. ft. office building (the "expansion facility"). In 1999 an expansion of slightly over 90,000 sq. ft. was begun on the Longview, Texas, facility, which was completed in 2000. During 2001 the Company began producing its new, larger tonnage RL series units in 100,000 sq. ft. of the expansion facility. Throughout this time period, machinery was added in both the Tulsa and Longview facilities, which allowed the Company to increase sales by 93% from 1997 to 2000. In addition, these facilities have allowed the Company to install assembly areas specifically designed for a particular product, thus improving assembly labor. The new machinery additions have permitted better utilization of manufacturing personnel. Also during this period, the Company invested heavily in creating new computer software to improve its operations. These improvements and expansions contributed to the increase in margins from 16.0% in 1997 to 24.7% in 2001. (8) Set forth below is income statement information with respect to the Company for years 2001, 2000 and 1999: Years ended December 31, 2001 2000 1999 ---- ---- ---- (In Thousands) Net sales $157,252 $154,982 $131,947 Cost of sales 118,399 120,233 101,229 ------- ------- ------- Gross profit 38,853 34,749 30,718 Selling, general and administrative expenses 16,011 13,922 14,741 ------- ------- ------- Income from operations 22,842 20,827 15,977 Interest expense 892 904 574 Other income 536 436 238 ------- ------- ------- Income before income taxes 22,486 20,359 15,641 Income tax provision 8,330 7,565 5,944 ------- ------- ------- Net income $ 14,156 $ 12,794 $ 9,697 ======= ======= ======= Results of Operations Net sales increased approximately 1.5% in 2001 as compared to 2000, and 2000 sales were 17.5% greater than in 1999. Sales for the first three quarters of 2001 were 5.6 % greater than sales for the same period in 2000. Following the events of September 11, the Company experienced a period of minimal sales activity and many orders were delayed by the Company's customers. Accordingly, sales for the fourth quarter of 2001 decreased 11% compared to the same period in 2000. The increase in sales in 2000 compared to 1999 was attributable to increased sales to the Company's entire customer base. Sales to existing customers accounted for 90% of the Company's business in 2001, with 10% coming from new business. Gross profit in 2001 increased to 24.7% compared to 22.4% in 2000 and 23.3% in 1999. Material cost as a percent of sales decreased to 49.9% in 2001 compared to 53.4% in 2000. Direct labor as a percent of sales decreased to 4.6% in 2001 compared to 6.8% in 2000. Material and direct labor as a percent of sales improved due to efficiencies being realized from the higher plant utilization and a more stable work force which allowed the Company to reduce the amount of overtime incurred. The more stable work force has also allowed the Company to realize better overall labor efficiencies. The decrease in margins in 2000 compared to 1999 was primarily attributable to higher material costs that could not be recovered through higher selling prices. Selling, general and administrative expenses increased to $16.0 million, or 10.0% of sales, in 2001 from $13.9 million, or 9.0% of sales, in 2000. The increase is primarily due to higher warranty costs related to the introduction of new products both within existing and new product lines. Selling, general and administrative expense decreased in 2000 from $14.7 million, or 11.2% of sales, in 1999. The decrease was primarily due to lower warranty costs and lower professional fees. Other income is primarily attributable to rental income from the Company's "expansion facility." Interest expense was $.9 million, $.9 million and $.6 million in 2001, 2000 and 1999, respectively. The increase in 2001 and 2000 compared to 1999 primarily relates to borrowings for the purchase of equipment and facilities described above. The income tax provisions in 2001, 2000 and 1999 were 37%, 37% and 38%, respectively. (9) New Accounting Pronouncements In July 2001, the FASB issued Statement of Financial Accounting Standards No. 141, "Business Combinations" (Statement 141), Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (Statement 142) and Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" (Statement 143). In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (Statement 144). Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. The Company is required to adopt the provisions of Statement 141 immediately, and Statement 142 effective January 1, 2002. Goodwill acquired in business combinations completed before July 1, 2001, will continue to be amortized prior to the adoption of Statement 142. Adoption of Statement 141 and 142 had no material impact on the Company's results of operations or financial condition. Statement 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. Statement 143 is effective for fiscal years beginning after June 15, 2002. Statement 144 retains the requirement to report discontinued operations separately and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. Statement 144 is effective for fiscal years beginning after December 15, 2001, and for interim periods within those fiscal years. The Company is currently assessing the impact of Statements 143 and 144 on its financial condition and results of operations. Financial Condition and Liquidity Cash flows from operations were $23.9 million, $14.0 million and $12.0 million in 2001, 2000 and 1999, respectively. Cash flows from operations in 2001 consisted of net income of $14.2 million, depreciation of $4.4 million and working capital and other changes of $5.3 million. Working capital changes were primarily due to decreases in accounts receivable and inventories of $4.6 million and $1.8 million, respectively, at December 31, 2001, compared to year-end 2000. Additionally, accounts payable and accrued liabilities decreased $1.6 million at December 31, 2001 from December 31, 2000. Cash flows used in investing activities were $8.8 million, $10.7 million and $6.6 million, in 2001, 2000 and 1999, respectively. Cash flows used in investing activities in 2001 primarily related to capital expenditures for additional machinery and refurbishments made to the Company's manufacturing facilities. Cash flows used in financing activities were $14.0 million, $3.3 million and $5.3 million in 2001, 2000 and 1999, respectively. Cash flows used in financing activities in 2001 primarily related to net debt payments of $11.8 million and stock repurchases of $2.8 million, net of $.6 million from stock option exercises. The Company's total outstanding debt at December 31, 2001 was $1.9 million compared to $13.7 million at December 31, 2000. The Company's revolving credit line (which currently extends to July 31, 2002) provides for maximum borrowings of $15.15 million. Interest on this line is payable monthly at the Wall Street Journal prime rate less .5% or LIBOR plus 1.6%, at the election of the Company. Borrowings available under the revolving credit line at December 31, 2001 were $14.7 million. Future cash flows are expected to be used to fund possible acquisitions and/or additional stock repurchases or will be retained for general working capital purposes. (10) The capital needs of the Company are met primarily by its bank revolving credit facility. Management believes this bank debt (or comparable financing), term loans and projected profits from operations will provide the necessary liquidity and capital resources to the Company for at least the next five years. The Company's belief that it will have the necessary liquidity and capital resources is based upon its knowledge of the HVAC industry and its place in that industry, its ability to limit the growth of its business if necessary, and its relationship with its existing bank lender. Forward-Looking Statements This Annual Report includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "expects", "anticipates", "intends", "plans" "believes", "seeks", "estimates", "will", and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Important factors that could cause results to differ materially from those in the forward-looking statements include (1) the timing and extent of changes in material prices, (2) the effects of fluctuations in the commercial/industrial new construction market, (3) the timing and extent of changes in interest rates, as well as other competitive factors during the year, and (4) general economic, market or business conditions. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The Company is exposed to changes in interest rates regarding its total variable rate debt of $446,000. A hypothetical 10% change in interest rates on its variable rate borrowings would not have a material effect on the Company's earnings or cash flows. Foreign sales accounted for only 2% of the Company's sales in 2001 and the Company accepts payment for such sales only in U.S. dollars; hence, the Company is not exposed to any foreign currency exchange rate risk. Important raw materials purchased by the Company are steel, copper and aluminum, which are subject to price fluctuations. The Company attempts to limit the impact of price increases on these materials by negotiating with each of its major suppliers on a term basis from six months to three years. Item 8. Financial Statements and Supplementary Data. The financial statements and supplementary data are included at page 17. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. (11) PART III Item 10. Directors and Executive Officers of Registrant. Incorporated by reference to the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Company's 2002 Annual Meeting of Stockholders. Item 11. Executive Compensation. Incorporated by reference to the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Company's 2002 Annual Meeting of Stockholders. Item 12. Security Ownership of Certain Beneficial Owners and Management. Incorporated by reference to the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Company's 2002 Annual Meeting of Stockholders. Item 13. Certain Relationships and Related Transactions. Incorporated by reference to the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Company's 2002 Annual Meeting of Stockholders. (12) PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) 1. Financial statements. See Index to Consolidated Financial Statements on page 16. 2. Exhibits: (3) (A) Articles of Incorporation (i) (A-1) Article Amendments (ii) (B) Bylaws (i) (B-1) Amendments of Bylaws (iii) (4) (A) Second Restated Revolving Credit and Term Loan Agreement ("Loan Agreement") and related documents (iv) (A-1) Latest amendments of Loan Agreement (v) (B) Rights Agreement dated February 19, 1999 (vi) (10) AAON, Inc. 1992 Stock Option Plan, as amended (vii) (21) List of Subsidiaries (viii) (23) Consent of Arthur Andersen LLP ----------------------- (i) Incorporated herein by reference to the exhibits to the Company's Form S-18 Registration Statement No. 33-18336-LA. (ii) Incorporated herein by reference to the exhibits to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, and to the Company's Forms 8-K dated March 21, 1994, March 10, 1997, and March 17, 2000. (iii) Incorporated herein by reference to the Company's Forms 8-K dated March 10, 1997, May 27, 1998 and February 25, 1999, or exhibits thereto. (iv) Incorporated by reference to exhibit to the Company's Form 8-K dated September 25, 1996. (v) Incorporated herein by reference to exhibits to the Company's Forms 8-K dated September 26, 1997, March 9, 1999, and March 17, 2000, January 18, 2001, and September 24, 2001. (vi) Incorporated by reference to exhibits to the Company's Form 8-K dated February 25, 1999, and Form 8-A Registration Statement No. 000-18953. (vii) Incorporated herein by reference to exhibits to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, and to the Company's Form S-8 Registration Statement No. 33-78520, as amended. (13) (viii) Incorporated herein by reference to exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. (b) The Company did not file any reports on Form 8-K during the period from October 1, 2001, to December 31, 2001. (14) SIGNATURES Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. AAON, INC. Dated: March 15, 2002 By: /s/ Norman H. Asbjornson ------------------------------------ Norman H. Asbjornson, President Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Dated: March 15, 2002 /s/ Norman H. Asbjornson ------------------------------------ Norman H. Asbjornson President and Director (principal executive officer) Dated: March 15, 2002 /s/ Kathy I. Sheffield ------------------------------------ Kathy I. Sheffield Treasurer (principal financial officer and principal accounting officer) Dated: March 15, 2002 /s/ John B. Johnson, Jr. ------------------------------------ John B. Johnson, Jr. Director Dated: March 15, 2002 /s/ Thomas E. Naugle ------------------------------------ Thomas E. Naugle Director Dated: March 15, 2002 /s/ Jerry E. Ryan ------------------------------------ Jerry E. Ryan Director (15) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Report of Independent Public Accountants 17 Consolidated Balance Sheets 18 Consolidated Statements of Operations 19 Consolidated Statements of Stockholders' Equity 20 Consolidated Statements of Cash Flows 21 Notes to Consolidated Financial Statements 22 (16) Report of Independent Public Accountants To the Stockholders of AAON, Inc.: We have audited the accompanying consolidated balance sheets of AAON, Inc. (a Nevada corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. 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 AAON, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Tulsa, Oklahoma February 6, 2002 (17) AAON, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts) DECEMBER 31, ------------ 2001 2000 -------- -------- ASSETS - ------ CURRENT ASSETS: Cash and cash equivalents $ 1,123 $ 17 Accounts receivable, net 23,392 28,247 Inventories, net 13,471 15,140 Prepaid expenses and other 220 245 Deferred tax asset 4,067 3,709 -------- -------- Total current assets 42,273 47,358 -------- -------- PROPERTY, PLANT AND EQUIPMENT, net 34,022 29,460 -------- -------- Total assets $ 76,295 $ 76,818 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Accounts payable $ 8,005 $ 11,691 Accrued liabilities 13,496 12,351 Current maturities of long-term debt 884 7,860 -------- -------- Total current liabilities 22,385 31,902 -------- -------- DEFERRED TAX LIABILITY 2,884 2,051 -------- -------- LONG-TERM DEBT 985 5,853 -------- -------- CONTINGENCIES STOCKHOLDERS' EQUITY, per accompanying statements: Preferred stock, $.001 par value, 5,000,000 shares authorized, no shares issued - - Common stock, $.004 par value, 50,000,000 shares authorized, 8,666,207 and 8,644,611 issued at December 31, 2001 and 2000, respectively 35 35 Additional paid-in capital 1,063 - Retained earnings 48,943 36,977 -------- -------- Total stockholders' equity 50,041 37,012 -------- -------- Total liabilities and stockholders' equity $ 76,295 $ 76,818 ======== ======== The accompanying notes are an integral part of these consolidated balance sheets. (18) AAON, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) YEARS ENDED DECEMBER 31, ------------------------------ 2001 2000 1999 ----------- ---------- ---------- NET SALES $ 157,252 $ 154,982 $ 131,947 COST OF SALES 118,399 120,233 101,229 ---------- ---------- ---------- GROSS PROFIT 38,853 34,749 30,718 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 16,011 13,922 14,741 ---------- ---------- ---------- INCOME FROM OPERATIONS 22,842 20,827 15,977 INTEREST EXPENSE 892 904 574 OTHER INCOME 536 436 238 ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 22,486 20,359 15,641 INCOME TAX PROVISION 8,330 7,565 5,944 ---------- ---------- ---------- NET INCOME $ 14,156 $ 12,794 $ 9,697 ========== ========== ========== EARNINGS PER SHARE: Basic $ 1.63 $ 1.46 $ 1.04 ========== ========== ========== Diluted $ 1.56 $ 1.38 $ 1.00 ========== ========== ========== WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 8,661 8,793 9,362 ========== ========== ========== Diluted 9,094 9,264 9,690 ========== ========== ========== The accompanying notes are an integral part of these consolidated statements. (19) AAON, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands) Common Stock ------------------- Paid-in Retained Shares Amount Capital Earnings Total ------ ------ ------- -------- ----- BALANCE, JANUARY 1, 1999 9,329 $ 37 $ 8,212 $ 16,162 $ 24,411 NET INCOME - - - 9,697 9,697 STOCK OPTIONS EXERCISED, INCLUDING TAX BENEFITS 72 - 308 - 308 STOCK RETIRED (92) - (798) - (798) ------ ----- -------- --------- --------- BALANCE, DECEMBER 31, 1999 9,309 37 7,722 25,859 33,618 NET INCOME - - - 12,794 12,794 STOCK OPTIONS EXERCISED, INCLUDING TAX BENEFITS 192 1 969 - 970 STOCK REPURCHASED AND RETIRED (856) (3) (8,691) (1,676) (10,370) ------ ----- -------- --------- --------- BALANCE, DECEMBER 31, 2000 8,645 35 - 36,977 37,012 NET INCOME - - - 14,156 14,156 STOCK OPTIONS EXERCISED, INCLUDING TAX BENEFITS 178 1 1,634 - 1,635 STOCK ISSUED TO EMPLOYEES 1 - 25 - 25 STOCK REPURCHASED AND RETIRED (158) (1) (596) (2,190) (2,787) ------ ----- -------- --------- --------- BALANCE, DECEMBER 31, 2001 8,666 $ 35 $ 1,063 $ 48,943 $ 50,041 ====== ===== ======== ========= ========= The accompanying notes are an integral part of these consolidated statements. (20) AAON, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) YEARS ENDED DECEMBER 31, ------------------------ 2001 2000 1999 ---------- ---------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 14,156 $ 12,794 $ 9,697 ---------- ---------- ---------- Adjustments to reconcile net income to net cash provided by operating activities- Depreciation 4,380 3,465 3,063 Provision for losses on accounts receivable 260 696 470 Provision for excess and obsolete inventories (100) 50 550 Gain on disposition of assets (125) (11) (40) Deferred income taxes 475 (127) (220) Changes in assets and liabilities- Accounts receivable 4,595 (7,616) (3,864) Inventories 1,769 (3,324) (256) Prepaid expenses and other 25 321 (325) Accounts payable (3,686) 2,646 567 Accrued liabilities 2,130 5,146 2,311 ---------- ---------- ---------- Net cash provided by operating activities 23,879 14,040 11,953 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of property, plant and equipment 200 11 40 Capital expenditures (9,017) (10,744) (6,689) ---------- ---------- ---------- Net cash used in investing activities (8,817) (10,733) (6,649) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under revolving credit agreement 56,290 68,219 60,875 Payments under revolving credit agreement (62,761) (66,092) (62,975) Proceeds from long-term debt 2,500 5,048 - Payments on long-term debt (7,873) (530) (2,569) Stock issued to employees 25 - - Stock options exercised 650 410 163 Repurchase of stock (2,787) (10,370) (798) ---------- ---------- ---------- Net cash used in financing activities (13,956) (3,315) (5,304) ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH 1,106 (8) - ---------- ---------- ---------- CASH AND CASH EQUIVALENTS, beginning of year 17 25 25 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS, end of year $ 1,123 $ 17 $ 25 ========== ========== ========== The accompanying notes are an integral part of these consolidated statements. (21) AAON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (Dollar amounts in thousands, except share and per share information) 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -------------------------------------------------------- AAON, Inc. (the Company, a Nevada corporation) is engaged in the manufacture and sale of commercial rooftop air conditioners, heating equipment and air conditioning coils through its wholly-owned subsidiaries AAON, Inc. (AAON, an Oklahoma corporation) and AAON Coil Products, Inc. (ACP, a Texas corporation). The consolidated financial statements include the accounts of the Company and its subsidiaries, AAON and ACP. All significant intercompany accounts and transactions have been eliminated. Revenue Recognition The Company recognizes revenues from sales of products at the time of shipment. Amounts billed to customers for shipping and handling costs are also included in revenues, consistent with EITF 00-10, "Accounting for Shipping and Handling Fees and Costs." Business and Credit Concentrations The Company's customers are concentrated primarily in the domestic commercial and industrial new construction and replacement markets. At December 31, 2001, two customers represented approximately 14% and 11%, respectively, of accounts receivable. At December 31, 2000, one customer represented approximately 10% of total accounts receivable. The Company reviews a customer's credit history before extending credit. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. Sales to customers representing 10% or greater of total sales consist of the following: Years Ended December 31, ------------------------ 2001 2000 1999 ---- ---- ---- Home Depot 10% 10% * Wal-Mart Stores, Inc. 14% 19% 23% Target 11% * * *Less than 10% Cash and Cash Equivalents Cash and cash equivalents consists of bank deposits and $1.1 million in highly liquid, interest bearing money market funds with initial maturities of three months or less. Inventories Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. (22) Property, Plant and Equipment Property, plant and equipment are stated at cost. Maintenance, repairs and betterments, including replacement of minor items, are charged to expense; major additions to physical properties are capitalized. Property, plant and equipment are depreciated using the straight-line method over the following estimated useful lives: Years Buildings 10-30 Machinery and equipment 3-15 Furniture and fixtures 2-5 Warranties A provision is made for the estimated cost of warranty obligations at the time the related products are sold. Warranty expense was $5,792, $4,938 and $5,456 for the years ended December 31, 2001, 2000 and 1999, respectively. Earnings Per Share Basic earnings per common share were computed by dividing net income by the weighted average number of shares of common stock outstanding during the reporting period. Diluted earnings per common share were determined based on the assumed exercise of dilutive options, as determined by applying the treasury stock method. For the year ended December 31, 2001 and 2000, 22,500 and 5,000 options, respectively, were considered to be anti-dilutive. For the year ended December 31, 1999, all outstanding options were considered dilutive. A reconciliation of net income and weighted average shares (in thousands) used in computing basic and diluted earnings per share is as follows: Year Ended December 31, 2001 ------------------------------------- Per-Share Income Shares Amount Basic EPS $ 14,156 8,661 $1.63 Net additional shares issuable - 433 - --------- ------- ----- Diluted EPS $ 14,156 9,094 $1.56 ========= ======= ===== Year Ended December 31, 2000 ------------------------------------- Per-Share Income Shares Amount Basic EPS $ 12,794 8,793 $1.46 Net additional shares issuable - 471 - --------- ------- ----- Diluted EPS $ 12,794 9,264 $1.38 ========= ======= ===== Year Ended December 31, 1999 ------------------------------------- er-Share Income Shares Amount Basic EPS $ 9,697 9,362 $1.04 Net additional shares issuable - 328 - --------- ------- ----- Diluted EPS $ 9,697 9,690 $1.00 ========= ======= ===== (23) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Stock Split Effective September 28, 2001, the Company completed a three-for-two stock split payable in the form of a 50% stock dividend. All stock and per share information for all periods presented have been adjusted to reflect the three-for-two stock split. Reclassifications Certain reclassifications have been made to the 2000 and 1999 financial statements to conform with the 2001 presentation. Such reclassifications did not impact total assets or net income. New Accounting Pronouncements In July 2001, the FASB issued Statement of Financial Accounting Standards No. 141, "Business Combinations" (Statement 141), Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (Statement 142), and Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" (Statement 143). In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (Statement 144). Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. The Company is required to adopt the provisions of Statement 141 immediately, and Statement 142 effective January 1, 2002. Goodwill acquired in business combinations completed before July 1, 2001, will continue to be amortized prior to the adoption of Statement 142. The adoption of Statement 141 and 142 had no material impact on the Company's results of operations or financial condition. Statement 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. Statement 143 is effective for fiscal years beginning after June 15, 2002. Statement 144 retains the requirement to report discontinued operations separately and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. Statement 144 is effective for fiscal years beginning after December 15, 2001, and for interim periods within those fiscal years. The Company is currently assessing the impact of Statements 143 and 144 on its financial condition and results of operations. (24) Details to Consolidated Balance Sheets - -------------------------------------- December 31, ------------ 2001 2000 -------- -------- ACCOUNTS RECEIVABLE: Accounts receivable $ 24,252 $ 29,297 Less- allowance for doubtful accounts 860 1,050 -------- -------- Total, net $ 23,392 $ 28,247 ======== ======== December 31, ------------ 2001 2000 -------- -------- INVENTORIES: Raw materials $ 10,376 $ 10,651 Work in process 2,258 1,967 Finished goods 1,687 3,472 -------- -------- 14,321 16,090 Less-allowance for excess and obsolete inventories 850 950 -------- -------- Total, net $ 13,471 $ 15,140 ======== ======== PROPERTY, PLANT AND EQUIPMENT: Land $ 874 $ 885 Buildings 16,893 16,594 Machinery and equipment 35,331 27,869 Furniture and fixtures 3,197 3,175 -------- -------- 56,295 48,523 Less- accumulated depreciation 22,273 19,063 -------- -------- Total, net $ 34,022 $ 29,460 ======== ======== ACCRUED LIABILITIES: Warranty $ 7,000 $ 5,400 Commissions 3,295 3,427 Income taxes 1,048 933 Workers' compensation 314 890 Medical self-insurance 651 660 Other 1,188 1,041 -------- -------- Total $ 13,496 $ 12,351 ======== ======== Years Ended December 31, ------------------------ 2001 2000 1999 -------- -------- -------- ALLOWANCE FOR DOUBTFUL ACCOUNTS: Balance, beginning of period $ 1,050 $ 850 $ 410 Provision for losses on accounts receivable 260 696 470 Accounts receivable written off, net of recoveries (450) (496) (30) -------- -------- -------- Balance, end of period $ 860 $ 1,050 $ 850 ======== ======== ======== Years Ended December 31, ------------------------ 2001 2000 1999 -------- -------- -------- ALLOWANCE FOR EXCESS AND OBSOLETE INVENTORIES: Balance, beginning of period $ 950 $ 900 $ 350 Provision for excess and obsolete inventories - 50 550 Adjustments to reserve (100) - - -------- -------- -------- Balance, end of period $ 850 $ 950 $ 900 ======== ======== ======== (25) 2. SUPPLEMENTAL CASH FLOW INFORMATION: ----------------------------------- Interest payments of $892, $889 and $561 were made during the years ended December 31, 2001, 2000 and 1999, respectively. Payments for income taxes of $6,754, $6,375 and $6,234 were made during the years ended December 31, 2001, 2000 and 1999, respectively. 3. DEBT: ----- Long-term debt at December 31, consists of the following: 2001 2000 ------- ------- $15,150 unsecured bank line of credit, with interest payable monthly at LIBOR plus 1.60% (3.47% at December 31, 2001), due July 31, 2002. $ 446 $ 6,917 Notes payable, due in monthly installments of $36, with interest ranging from 7.47% to 7.52% at December 31, 2001, collateralized by machinery and equipment. 1,423 6,796 ------- ------- 1,869 13,713 Less- current maturities 884 7,860 ------- ------- Total long-term debt $ 985 $ 5,853 ======= ======= Maturities of long-term debt for each of the years ended December 31 are as follows: 2002 $ 884 2003 438 2004 438 2005 109 ------- $ 1,869 Based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities, the fair value of the long-term debt approximates the carrying value. 4. INCOME TAXES: ------------- The Company accounts for income taxes as required by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and income tax bases of assets and liabilities using currently enacted tax rates. The income tax provision consists of the following: Years Ended December 31, ------------------------------------ 2001 2000 1999 --------- -------- ------ Current $ 7,855 $ 7,692 $ 6,164 Deferred 475 (127) (220) -------- -------- -------- $ 8,330 $ 7,565 $ 5,944 ======== ======== ======== The reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows: Years Ended December 31, -------------------------------- 2001 2000 1999 ---- ---- ---- Federal statutory rate 35% 35% 35% State income taxes, net of federal benefit 4 4 4 Employment credits (1) (2) (1) Other (1) - - --- --- --- 37% 37% 38% === === === (26) The tax effect of temporary differences giving rise to the Company's deferred income taxes at December 31 are as follows: 2001 2000 ------- ------- Deferred tax assets - Valuation reserves $ 648 $ 740 Warranty accrual 2,653 1,998 Other accruals 746 958 Other, net 20 13 ------- ------- $ 4,067 $ 3,709 ======= ======= Deferred tax liabilities - Depreciation and amortization $ 2,884 $ 2,051 ======= ======= 5. BENEFIT PLANS: -------------- The Company maintains a stock option plan for key employees and directors and restricts 1,950,000 shares of common stock for issuance under the plan. Under the terms of this plan, the exercise price of shares granted will not be less than 85% of their fair market value at the date of the grant. The exercise price of all options granted was equal to the market price at the date of grant. Options granted vest at a rate of 20% per year, commencing one year after date of grant, and are exercisable for ten years. At December 31, 2001, 663,388 shares were available for granting future options. For the years ending December 31, 2001 and 2000, the Company reduced its income taxes payable by $985 and $559, respectively, as the result of nonqualified stock options exercised under the Company's stock option plan. The number and exercise price of options granted were as follows: Weighted Average Number Exercise Price of Shares Per Share --------- -------------- OUTSTANDING AT JANUARY 1, 1999 1,108,313 $ 3.77 Granted 450,750 8.43 Exercised (71,363) 2.48 Cancelled (31,500) 5.25 ------------ ------- OUTSTANDING AT DECEMBER 31, 1999 1,456,200 5.25 Granted 7,500 14.75 Exercised (192,075) 2.15 Cancelled (75,300) 7.50 ------------ ------- OUTSTANDING AT DECEMBER 31, 2000 1,196,325 5.66 Granted 131,250 17.24 Exercised (177,875) 3.70 Cancelled (46,400) 8.19 ------------ ------- OUTSTANDING AT DECEMBER 31, 2001 1,103,300 $ 7.52 ============ ======= (27) The following is a summary of stock options outstanding as of December 31, 2001: Options Outstanding Options Exercisable --------------------------------------------------------- ------------------------------------ Number Weighted Weighted Number Weighted Range of Outstanding at Average Average Remaining Exercisable at Average Exercise Prices December 31, 2001 Exercise Price Contractual Life December 31, 2001 Exercise Price --------------- ----------------- -------------- ----------------- ----------------- -------------- $.76 41,250 $ .76 .2 41,250 $ .76 3.00-5.08 489,300 4.41 5.1 390,571 4.30 6.00-6.67 112,500 6.20 7.0 60,000 6.15 7.50-8.67 321,500 8.52 7.6 136,850 8.46 12.88-14.97 60,000 14.16 9.3 1,500 14.75 18.53-20.10 78,750 19.35 9.7 - - --------- ------- ------- ------ 1,103,300 $ 7.52 630,171 $ 5.17 ========= ======= ======= ====== The Company applies the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for the Company's stock option plans been determined consistent with the provisions of Statement 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: 2001 2000 1999 -------- ------- ------- Net income: As reported $ 14,156 $ 12,794 $ 9,697 Pro forma $ 13,581 $ 12,229 $ 9,299 Basic earnings per share: As reported $ 1.63 $ 1.46 $ 1.04 Pro forma $ 1.57 $ 1.39 $ .99 Diluted earnings per share: As reported $ 1.56 $ 1.38 $ 1.00 Pro forma $ 1.49 $ 1.32 $ .96 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: 2001 2000 1999 ------- ------- ------- Expected dividend yield 0% 0% 0% Expected volatility 45.38% 51.99% 54.33% Risk-free interest rate 5.04% 5.50% 6.09% Expected life 8 yrs 8 yrs 8 yrs The Company sponsors a defined contribution benefit plan. Employees can make contributions at a minimum of 1% and a maximum of 15% of compensation. The Company may, on a discretionary basis, contribute a Company matching contribution not to exceed 6% of compensation. The Company made matching contributions of $504, $493 and $329 in 2001, 2000 and 1999, respectively. The Company made additional discretionary contributions of $325, $1,308 and $1,150 in the form of Company stock during 2001, 2000 and 1999, respectively. The Company maintains a discretionary profit sharing bonus plan under which 10% of pre-tax profit at each subsidiary is paid to eligible employees on a quarterly basis. Profit sharing expense was $2,507, $2,277 and $1,735, for the years ended December 31, 2001, 2000 and 1999, respectively. (28) 6. STOCKHOLDER RIGHTS PLAN: ------------------------ During 1998, the Board of Directors adopted a Stockholder Rights Plan. The plan creates a dividend of one right for each outstanding share of the Company's common stock. The rights are traded with the Company's common stock. Generally, the rights become exercisable after a public announcement that a person has acquired, or a tender offer is made for, 20% or more of the common stock of the Company. If either of these events occur, each right will entitle the holder (other than a holder owning more than 20% of the outstanding stock) to buy the number of shares of the Company's common stock having a market value two times the exercise price. The exercise price is $60. The rights may be redeemed by the Company for $0.001 per right until a person or group has acquired 20% of the Company's common stock. The distribution of the rights were made to stockholders of record as of March 1, 1999. 7. CONTINGENCIES: -------------- The Company is subject to claims and legal actions that arise in the ordinary course of business. Management believes that the ultimate liability, if any, will not have a material effect on the Company's financial position or on the results of operations. 8. QUARTERLY RESULTS (Unaudited): ------------------------------ The following is a summary of the quarterly results of operations for the years ended December 31, 2001 and 2000: Quarter Ended ------------- March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- 2001 - ---- Net sales $ 39,435 $ 41,520 $ 41,402 $ 34,895 Gross profit 11,262 10,882 8,733 7,976 Net income 3,576 3,816 3,523 3,241 Earnings per share: Basic .41 .44 .40 .37 Diluted .39 .42 .38 .36 Quarter Ended ------------- March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- 2000 - ---- Net sales $ 35,465 $ 39,388 $ 40,970 $ 39,159 Gross profit 8,835 8,563 8,889 8,462 Net income 3,045 3,328 3,409 3,012 Earnings per share: Basic .34 .38 .39 .35 Diluted .33 .36 .37 .33 (29) EXHIBIT 23 Consent of Independent Public Accountants As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 (File Nos. 33-78520, 333-52824 and 333-23479) ARTHUR ANDERSEN LLP Tulsa, Oklahoma March 15, 2002 (30)