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, 1997
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)
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 average bid and asked
prices of such stock on March 1, 1998, was approximately
$40,787,000. For purposes of this computation, all officers,
directors and 5% beneficial owners of Registrant are deemed to be
affiliates.
As of March 1, 1998, Registrant had outstanding a total of
6,178,449 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
May 12, 1998, are incorporated into Part III.
<PAGE 2>
TABLE OF CONTENTS
Page
Item Number and Caption Number
PART I
1. Business. 1
2. Properties. 4
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
8. Financial Statements and Supplementary Data. 10
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. 10
PART III
10. Directors and Executive Officers of Registrant. 11
11. Executive Compensation. 11
12. Security Ownership of Certain Beneficial
Owners and Management. 11
13. Certain Relationships and Related Transactions. 11
PART IV
14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K. 12
<PAGE 1>
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. On June 16, 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.
On December 30, 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 products of AAON-Oklahoma.
PRODUCTS AND MARKETS
The Company engineers, manufactures and markets commercial
rooftop air-conditioning, heating and heat recovery equipment and
air-conditioning coils. Its products serve the commercial and
industrial new construction and replacement markets. While to
date virtually all of the Company's sales have been to the
domestic market, concerted efforts began in 1993 to develop
foreign sales which accounted for approximately 2% of its sales
last year and are projected to increase in coming years.
The rooftop market consists of units installed on commercial or
industrial structures of generally less than 10 stories in
height.
ACP's coil sales are made to air-conditioning unit manufacturers,
including AAON-Oklahoma, and to the commercial/industrial general
building market.
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 1997 level of sales, approximately $82 million, the
Company has an 8% share of the rooftop market and a 2% share of
the coil market. Approximately 65% of the Company's sales now
come from new construction and 35% from renovation/replacements.
The percentage of sales (for new construction vs. replacement) to
particular customers is related to their stage of development,
e.g., Target and Wal-Mart, 80% new construction and 20%
replacement.
<PAGE 2>
The Company purchases certain components, fabricates sheet metal
and tubing and then assembles and tests its finished products.
The finished products of AAON-Oklahoma 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 finished products of ACP are
coils, consisting of a sheet metal casing with tubing and fins
contained therein.
The Company now has three 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; 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.
AAON-Oklahoma's engineers have developed a heat recovery wheel
for its RK and RF units. The product responds to requirements of
the U.S. Clean Air Act which mandate increased fresh air in
commercial structures. This product, which is marketed under the
name AAONAIRE (registered trademark), increases the capacity of
AAON HVAC units by up to 50% with no additional energy cost.
The Company has been granted patent pending status on this unique
product. This enhancement was introduced in January 1995. The
energy savings and comfort improvement afforded by the heat recovery
wheel have been proven by numerous installations during the past year, but
sales to date, while increasing, account for a minor part of
revenues.
AAON-Oklahoma's products are designed to compete on the high side
of standardized, packaged rooftop products. Accordingly, its
prices range from $300 and $550 per ton of cooling, which is
approximately 5%, on average, higher than other standardized
products. Performance characteristics of these products range in
cooling capacity from 32,900-1,563,469 BTU's and in heating
capacity from 69,000-1,680,000 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.
MAJOR CUSTOMERS
The Company's largest customers last year were Target Stores,
Inc., and Wal-Mart Stores, Inc. Sales to Target and Wal-Mart
were each 11% of total sales in 1997 compared to 14% and 7%,
respectively, in 1996. The Company has no written contract with
Target or Wal-Mart.
The loss of either Target or Walt-Mart as a customer would have a
material adverse effect on the Company. However, with the
Company's emphasis on marketing to other customers, 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.
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, but AAON-Oklahoma purchases all of its
coils from ACP. 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 a year.
<PAGE 3>
DISTRIBUTION
The Company utilizes a direct sales staff of 12 individuals and
approximately 81 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 10 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.
AAON-Oklahoma'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,
AAON-Oklahoma provides parts availability through four
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, an additional four years; and on
gas-fired heat exchangers (if applicable), 10 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 $200,000 per year and is budgeted as a normal,
recurring expense.
BACKLOG
The Company had a current backlog as of March 1, 1998, of
$38,482,000, compared to $14,772,000 at March 1, 1997. The
current backlog consists of orders considered by management to be
firm and substantially all of which will be filled by August 1,
1998; 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 through 1998 and
beyond.
SEASONALITY
Sales of the Company's products are moderately seasonal with the
peak period being July-November of each year.
<PAGE 4>
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 Industries, 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, AAON-
Oklahoma 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, 1998, the Company had 661 employees and 302
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 possibly the patent pending on the heat
recovery wheel option known as AAONAIRE (registered trademark)
discussed under "Products and Markets".
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.
ITEM 2. PROPERTIES.
The plant and office building of AAON-Oklahoma is of sheet metal
construction, containing 337,000 square feet (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 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. 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 $6.25
million per month in 1997, which is 38% 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 office space is believed to be adequate for the foreseeable
future.
In the past, manufacturing equipment contained in the Tulsa
facility has consisted primarily of presses, press breaks and NC
punching equipment. During the last half of 1997, a significant
change was made in the type of sheet metal fabrication equipment
utilized with the purchase of a software driven, automated
punching, shearing and bending machine at a cost of approximately
$2.5 million. Another such machine is currently on order and is
expected to be in operation by July 1, 1998.
Also, on December 31, 1997, the Company purchased a 40-acre tract
of land across the street from its Tulsa facility, having a
457,000 square foot manufacturing/warehouse building and a 22,000
square foot office building, at a total cost of $5.1 million.
The buildings are currently over 90% leased and will afford the
Company additional plant and office space for long-term growth.
<PAGE 5>
The operations of ACP are conducted in a plant/office building at
203-207 Gum Springs Road in Longview, Texas, containing 138,000
square feet on 14 acres. The manufacturing area (approximately
131,000 square feet) is located in two 120-foot wide sheet metal
buildings connected by an adjoining structure and a 28,000 square
foot building adjacent thereto. The facility is built for light
industrial manufacturing.
Bank borrowings of the Company, totalling $12,025,000 at March 1,
1998, are secured, in part, by its Longview buildings.
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, 1997, through December 31, 1997.
<PAGE 6>
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., was as
follows:
Quarter Ended High Bid Low Bid
------------- -------- -------
March 31, 1996 $6.38 $4.50
June 30, 1996 $6.00 $4.38
September 30, 1996 $6.38 $4.25
December 31, 1996 $6.00 $4.63
March 31, 1997 $7.60 $4.32
June 30, 1997 $8.56 $5.48
September 30, 1997 $8.46 $7.16
December 31, 1997 $9.44 $6.40
On March 1, 1998, there were 201 holders of record, and 2,123
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, if following such action there would result a Default
or Event of Default thereunder. The Company paid a 10% stock
dividend on March 27, 1995.
<PAGE 7>
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: 1997 1996 1995 1994 1993
---------------------- ------ ------ ------ ------ ------
(In thousands, except earnings per share)
Net sales $81,676 $62,845 $67,346 $79,542 $45,394
Net income $ 3,022 $ 2,075 $ 2,069 $ 5,101 $ 2,665
Basic earnings per share(1) $ .49 $ .34 $ .34 $ .84 $ .44
Diluted earnings per share $ .48 $ .33 $ .33 $ .81 $ .43
Years ended December 31,
----------------------------------------------
Balance Sheet Data: 1997 1996 1995 1994 1993
------------------- ------ ------ ------ ------ ------
(In thousands)
Total assets $42,769 $35,569 $32,212 $32,562 $24,083
Long-term debt $12,857 $ 8,976 $10,695 $10,648 $11,008
Stockholders' equity $18,873 $15,640 $13,546 $11,461 $ 6,350
______________________
(1) 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.
<PAGE 8>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Set forth below is income statement information with respect to
the Company for years 1997, 1996 and 1995:
Years ended December 31,
------------------------
1997 1996 1995
---- ---- ----
(In thousands)
Net sales $81,676 $62,845 $67,346
Cost of sales 68,605 51,797 56,528
-------- -------- --------
Gross profit 13,071 11,048 10,818
Selling, general and
administrative expenses 8,146 6,413 6,318
-------- -------- --------
Income from operations 4,925 4,635 4,500
Interest expense 687 838 815
Other expense 167 406 452
-------- -------- --------
Income before income taxes 4,071 3,391 3,233
Income tax provision 1,049 1,316 1,164
-------- -------- --------
Net income $ 3,022 $ 2,075 $ 2,069
========= ========= =========
RESULTS OF OPERATIONS
Net sales increased approximately 30% in 1997 as compared to
1996, and 1996 sales were 7% less than in 1995. The increase in
sales in 1997 was attributable to increased sales to the
Company's entire customer base, which is expected to continue in
1998. The reduction in sales in 1996 was primarily attributable
to a drop in sales to two of the Company's largest customers.
Gross profit decreased in 1997 to 16.0% compared to 17.6% in
1996, but was approximately the same as in 1995 (16.1%). The
1.6% decrease in margins in 1997 was attributable primarily to
outsourcing of sheet metal production and a labor shortage, with
attendant increased costs.
While SG&A expenses increased by 27% in 1997 compared to 1996,
these expenses remained relatively the same in 1997, 1996 and
1995 as a percent of sales.
Interest expense has remained at approximately the same level for
three years, despite the significant increase in sales in 1997
and substantial capital expenditures in 1995. Profits in years
1995-1997 also helped to contain borrowings, as did effective
control of inventories.
The $239,000 decrease in other expenses in 1997 compared to 1996
reflects the conclusion of amortization expenses in connection
with the acquisition of AAON Coil Products, Inc.
Income before income taxes in 1995-1997 were relatively the same
as a percent of sales.
The income tax provision in 1997 was affected by permanent tax
deductions and credits.
<PAGE 9>
FINANCIAL CONDITION AND LIQUIDITY
Accounts receivable were only $479,000 higher at December 31,
1997, compared to year end 1996, although sales increased by
$18.8 million, due to improved collections. Inventories
increased by only 16.5% in 1997, even though sales increased by
30%, which reflects more effective controls.
Property, Plant and Equipment at December 31, 1997, was $6.5
million higher than at year end 1996 due to equipment purchases,
in excess of depreciation, and the purchase of real property for
$5.1 million. All capital expenditures in 1997 were financed out
of cash flow, borrowings under the Company's revolving credit
bank loan and a $1.26 million equipment financing.
The size of accounts payable at December 31, 1997 and 1996
primarily reflect the inventories and sales volumes in each of
those years and the timing of payments to creditors.
Also, accrued liabilities at year-end 1997 and 1996 reflect the
amount of reserves (warranty and commissions) related to sales
and the timing of estimated income tax payments.
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.
The Company's revolving credit line (which currently extends to
June 30, 1999) provides for maximum borrowings of $15,150,000.
Interest on this line is payable monthly at the Wall Street
Journal prime rate or LIBOR plus 1.85%, at the election of the
Company. This loan is collateralized by the accounts receivable,
inventory and general intangibles of the Company's two operating
subsidiaries.
YEAR 2000 READINESS
Until recently, many software systems were not programmed to
correctly recognize dates beyond December 31, 1999 (the "Y2K
Problem"). The Company's software systems do not have the Y2K
Problem. The Company will continue to work with its customers
and suppliers to minimize any impact of their Y2K Problems on
AAON.
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", 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 actual 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.
<PAGE 10>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data are included at
page 15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
<PAGE 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 1998 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 1998 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 1998 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 1998 Annual Meeting of
Stockholders.
<PAGE 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 14.
2. Exhibits:
(3) (A) Articles of Incorporation (i)
(A-1) Article Amendments (ii)
(B) Bylaws (i)
(B-1) Amendment of Bylaws (iii)
(4) (A) Restated Revolving Credit and Term
Loan Agreement ("Loan Agreement")
and related documents (iii)
(A-1) Latest amendment of Loan Agreement(iv)
(10) AAON, Inc. 1992 Stock Option Plan, as
amended (v)
(21) List of Subsidiaries (v)
(27) Financial Data Schedule
-----------------
(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, and March 10, 1997.
(iii) Incorporated herein by reference to the
Company's Form 8-K dated June 22, 1992, or
exhibits thereto.
(iv) Incorporated herein by reference to exhibit
to the Company's Form 8-K dated September 26, 1997.
(v) 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.
(b) The Company did not file any reports on Form 8-K
during the period from October 1, 1997, to
December 31, 1997.
<PAGE 13>
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 25, 1998 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 25, 1998 /s/ Norman H. Asbjornson
------------------------------------
Norman H. Asbjornson
President and Director
(principal executive officer)
Dated: March 25, 1998 /s/ William A. Bowen
------------------------------------
William A. Bowen
Vice President-Finance and Director
(principal financial officer
and principal accounting officer)
Dated: March 25, 1998 /s/ John B. Johnson, Jr.
------------------------------------
John B. Johnson, Jr.
Director
Dated: March 25, 1998 /s/ Joseph M. Klein
------------------------------------
Joseph M. Klein
Director
<PAGE 14>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Page
----
Report of Independent Public Accountants 15
Consolidated Balance Sheets 16
Consolidated Statements of Operations 17
Consolidated Statements of Stockholders' Equity 18
Consolidated Statements of Cash Flows 19
Notes to Consolidated Financial Statements 20
<PAGE 15>
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, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of AAON, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Tulsa, Oklahoma
February 4, 1998
<PAGE 16>
AAON, INC.
----------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands, except share amounts)
DECEMBER 31,
-----------------
ASSETS 1997 1996
------ ------- -------
CURRENT ASSETS:
Cash $ 26 $ 138
Accounts receivable, net (Notes 2 and 4) 14,018 13,539
Inventories, net (Notes 2 and 4) 10,652 9,140
Prepaid expenses and other 403 160
Deferred income taxes (Note 5) 1,043 1,604
-------- --------
Total current assets 26,142 24,581
-------- --------
PROPERTY, PLANT AND EQUIPMENT, net (Notes 2 and 4) 16,585 10,133
OTHER ASSETS (Note 2) 42 855
-------- --------
Total assets $ 42,769 $ 35,569
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 7,137 $ 6,097
Accrued liabilities (Note 2) 3,727 4,765
Current maturities of long-term debt (Note 4) 175 91
-------- --------
Total current liabilities 11,039 10,953
-------- --------
LONG-TERM DEBT (Note 4) 12,857 8,976
-------- --------
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, 6,176,449 and 6,128,574 issued at
December 31, 1997 and 1996, respectively 25 25
Additional paid-in capital 7,916 7,705
Retained earnings 10,932 7,910
-------- --------
Total stockholders' equity 18,873 15,640
-------- --------
Total liabilities and stockholders' equity $ 42,769 $ 35,569
======== ========
The accompanying notes are an integral
part of these consolidated balance sheets.
<PAGE 17>
AAON, INC.
----------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(In thousands, except per share amounts)
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
------- ------- -------
NET SALES (Note 6) $81,676 $62,845 $67,346
COST OF SALES 68,605 51,797 56,528
------- ------- -------
GROSS PROFIT 13,071 11,048 10,818
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 8,146 6,413 6,318
------- ------- -------
INCOME FROM OPERATIONS 4,925 4,635 4,500
INTEREST EXPENSE 687 838 815
OTHER EXPENSE 167 406 452
------- ------- -------
INCOME BEFORE INCOME TAXES 4,071 3,391 3,233
INCOME TAX PROVISION (Note 5) 1,049 1,316 1,164
------- ------- -------
NET INCOME $ 3,022 $ 2,075 $ 2,069
======== ======== ========
EARNINGS PER SHARE (Note 2):
Basic $ .49 $ .34 $ .34
======== ======== ========
Diluted $ .48 $ .33 $ .33
======== ======== ========
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic 6,159,177 6,118,697 6,104,666
========= ========= =========
Diluted 6,303,426 6,301,560 6,314,937
========= ========= =========
The accompanying notes are an integral
part of these consolidated statements.
<PAGE 18>
AAON, INC.
----------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
(In thousands)
Common Stock Paid-in Retained
Shares Amount Capital Earnings Total
------ ------ ------- -------- ------
BALANCE, JANUARY 1, 1995 6,101 $ 24 $ 7,671 $ 3,766 $11,461
NET INCOME - - - 2,069 2,069
STOCK OPTIONS EXERCISED (Note 7) 12 - 16 - 16
------ ------ ------ ------ ------
BALANCE, DECEMBER 31, 1995 6,113 24 7,687 5,835 13,546
NET INCOME - - - 2,075 2,075
STOCK OPTIONS EXERCISED (Note 7) 15 1 18 - 19
------ ------ ------ ------ ------
BALANCE, DECEMBER 31, 1996 6,128 25 7,705 7,910 15,640
NET INCOME - - - 3,022 3,022
STOCK OPTIONS EXERCISED (Note 7) 48 - 211 - 211
------ ------ ------ ------ ------
BALANCE, DECEMBER 31, 1997 6,176 $ 25 $ 7,916 $10,932 $18,873
======= ======= ======= ======= =======
The accompanying notes are an integral
part of these consolidated statements.
<PAGE 19>
AAON, INC.
----------
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------
(In thousands)
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,022 $ 2,075 $ 2,069
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 2,517 2,497 2,705
Provision for losses on accounts receivable 175 450 122
Provision for excess and obsolete inventories 20 - -
(Gain) loss on disposition of assets (13) - 1
Deferred income taxes 1,370 (860) (146)
Change in assets and liabilities-
(Increase) decrease in accounts receivable (654) (4,143) 1,930
(Increase) decrease in inventories (1,532) (59) 1,184
(Increase) decrease in prepaid expenses and other (239) 286 (216)
Increase (decrease) in accounts payable 1,040 1,673 (1,428)
Increase (decrease) in accrued liabilities (934) 2,160 (1,060)
------ ------ ------
Total adjustments 1,750 2,004 3,092
------ ------ ------
Net cash provided by operating activities 4,772 4,079 5,161
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property, plant and equipment 81 - 3
Capital expenditures (9,037) (2,053) (4,596)
------ ------ ------
Net cash used in investing activities (8,956) (2,053) (4,593)
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit agreement 39,910 32,651 40,276
Payments under revolving credit agreement (37,115) (31,899) (39,653)
Proceeds from long-term debt 1,260 - 400
Payments on long-term debt (90) (3,322) (970)
Stock options exercised 107 19 16
------ ------ ------
Net cash provided by (used in)
financing activities 4,072 (2,551) 69
------ ------ ------
NET INCREASE (DECREASE) IN CASH (112) (525) 637
------ ------ ------
CASH, beginning of year 138 663 26
------ ------ ------
CASH, end of year $ 26 $ 138 $ 663
======= ======= =======
The accompanying notes are an integral
part of these consolidated statements.
<PAGE 20>
AAON, INC.
----------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1997 AND 1996
--------------------------
(Dollar amounts in thousands,
except share and per share information)
1. OPERATIONS AND ORGANIZATION:
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). Products are
primarily sold to building owner/operators in the domestic
commercial and industrial new construction and replacement
markets.
2. ACCOUNTING POLICIES:
Consolidation
- -------------
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
- -------------------
Revenues are recognized at the time of shipment.
Inventories
- -----------
Inventories are valued at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method.
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:
<PAGE 21>
Years
-----
Buildings 10-20
Machinery and equipment 3-7
Furniture and fixtures 3-5
Warranties
- ----------
A provision is made for the estimated cost of warranty
obligations at the time the related products are sold. Warranty
expense was $2,356, $1,547 and $2,033 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Earnings Per Share
- ------------------
The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings Per Share," effective December 31,
1997, and all earnings per share amounts disclosed herein have
been calculated under the provisions of SFAS No. 128. 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.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with
generally accepted accounting principles 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.
Details to Consolidated Balance Sheets
December 31,
------------
1997 1996
------- -------
ACCOUNTS RECEIVABLE:
Accounts receivable $14,378 $14,072
Less- allowance for doubtful accounts 360 533
------- -------
Total, net $14,018 $13,539
======== ========
INVENTORIES:
Raw materials $ 7,223 $ 5,640
Work in process 2,136 1,385
Finished goods 1,443 2,245
------- -------
10,802 9,270
Less- allowance for excess and
obsolete inventories 150 130
------- -------
Total, net $10,652 $ 9,140
======== ========
<PAGE 22>
December 31,
------------
1997 1996
------- -------
PROPERTY, PLANT AND EQUIPMENT:
Land $ 874 $ 274
Buildings 11,865 7,278
Machinery and equipment 11,906 8,933
Furniture and fixtures 1,909 1,516
------- -------
26,554 18,001
Less- accumulated depreciation 9,969 7,868
------- -------
Total, net $16,585 $10,133
======== ========
OTHER ASSETS:
Deferred income taxes $ - $ 809
Other 42 46
------- -------
Total $ 42 $ 855
======== ========
ACCRUED LIABILITIES:
Warranty $ 1,490 $ 1,390
Commissions 1,220 1,441
Income taxes - 1,214
Other 1,017 720
------- -------
Total $ 3,727 $ 4,765
======== ========
Year Ended December 31,
-----------------------
1997 1996 1995
----- ----- -----
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Balance, beginning of period $ 533 $ 204 $ 145
Provision for losses on accounts
receivable 175 450 122
Accounts receivable written off,
net of recoveries (348) (121) (63)
----- ----- -----
Balance, end of period $ 360 $ 533 $ 204
====== ====== ======
ALLOWANCE FOR EXCESS AND OBSOLETE
INVENTORY:
Balance, beginning of period $ 130 $ 150 $ 240
Provision for excess and obsolete
inventories 20 - -
Inventories written off - (20) (90)
----- ----- -----
Balance, end of period $ 150 $ 130 $ 150
====== ====== ======
3. SUPPLEMENTAL CASH FLOW INFORMATION:
Interest payments of $682, $813 and $815 were made during the
years ended December 31, 1997, 1996 and 1995, respectively.
Payments for income taxes of $912, $652 and $1,604 were made
during the years ended December 31, 1997, 1996 and 1995,
respectively.
<PAGE 23>
4. DEBT:
Long-term debt at December 31, consists of the following:
1997 1996
------ ------
$15,150 bank line of credit, with interest
payable monthly at LIBOR plus 1.85% (7.81% at
December 31, 1997), due June 30, 1999,
collateralized by accounts receivable and
inventory. $11,485 $ 8,690
Bank note, payable in monthly installments of $3,
through March 2000, plus interest at the bank's
prime rate plus 1/4% (8.75% at December 31, 1997),
collateralized by real estate. 287 327
Note payable, due in 84 equal monthly
installments beginning in April 1998, plus
interest at the 30-day commercial paper rate
plus 1.75% (7.5% at December 31, 1997),
collateralized by machinery and equipment. 1,260 50
------- -------
13,032 9,067
Less- current maturities 175 91
------- -------
$12,857 $ 8,976
======== ========
Maturities of long-term debt for each of the years ended December
31, are as follows:
1998 $ 175
1999 11,705
2000 387
2001 180
2002 180
Thereafter 405
-------
$13,032
========
The revolving credit agreement requires, among other things, that
the Company maintain a minimum tangible net worth, working
capital and debt to tangible net worth ratio and it limits
capital expenditures. At December 31, 1997, the Company was in
compliance with the covenants of the revolving credit agreement
or obtained the necessary covenant waiver.
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.
5. INCOME TAXES:
The Company accounts for income taxes as required by Statement of
Financial Accounting Standards (SFAS) 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 basis of assets and
liabilities using currently enacted tax rates.
<PAGE 24>
The income tax provision consists of the following:
Years Ended December 31,
--------------------------
1997 1996 1995
------- ------- -------
Current $ 622 $ 2,176 $ 1,310
Deferred 427 (860) (146)
------- ------- -------
$ 1,049 $ 1,316 $ 1,164
======= ======= =======
The reconciliation of the federal statutory income tax rate to
the effective income tax rate is as follows:
Years Ended December 31,
--------------------------
1997 1996 1995
------- ------- -------
Federal statutory rate 34% 34% 34%
State income taxes - 5 4
Employment credits (4) - -
Other (4) - (2)
------- ------- -------
26% 39% 36%
======= ======= =======
The tax effect of temporary differences giving rise to the
Company's deferred income taxes at December 31 are as follows:
1997 1996
------ ------
Net deferred tax assets (liabilities) -
Valuation reserves for inventories and
accounts receivable $ 197 $ 450
Warranty accrual 575 535
Other accruals 291 572
Depreciation and amortization (41) 388
Other, net 21 468
------ ------
$1,043 $2,413
====== ======
6. MAJOR CUSTOMERS:
Sales to customers with greater than 10% of total sales consist
of the following:
-Years Ended December 31,
---------------------------
1997 1996 1995
------ ------ ------
Target Stores, Inc. 11% 14% 17%
Wal-Mart Stores, Inc. 11% * 27%
* - Less than 10%
<PAGE 25>
7. BENEFIT PLANS:
The Company maintains a stock option plan for key employees and
directors and restricts 1,000,000 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, 1997, 389,625 shares were available
for granting future options. The number and exercise price of
options granted were as follows:
Number Price
of Shares Per Share
--------- ------------
OUTSTANDING AT JANUARY 1, 1995 276,650 $1.14-$13.01
Granted 207,125 $4.50-$5.88
Exercised (15,125) $1.19
Cancelled (42,900) $13.01
--------- ------------
OUTSTANDING AT DECEMBER 31, 1996 425,750 $1.14-$5.88
Granted 167,500 $5.25-$7.19
Exercised (47,875) $1.14-$5.13
Cancelled (20,000) $5.13
-------- ------------
OUTSTANDING AT DECEMBER 31, 1997 525,375 $1.14-$7.19
======== ============
EXERCISABLE AT DECEMBER 31, 1997 221,975 $1.14-$7.19
======== ============
The Company adopted the disclosure-only provisions of SFAS 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 SFAS 123, the
Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
1997 1996
------ ------
Net income:
As reported $3,022 $2,075
Pro forma $2,933 $2,004
Basic earnings per share:
As reported $ .49 $ .34
Pro forma $ .48 $ .33
Diluted earnings per share:
As requested $ .48 $ .33
Pro forma $ .47 $ .32
Because the SFAS 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be
expected in future years.
<PAGE 26>
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: dividend yield of 0%;
expected volatility of 48.26% to 49.41%; risk-free interest rate
of 6.31% to 6.98%; and expected lives of eight years.
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
$159, $97 and $84 in 1997, 1996 and 1995, respectively.
The Company maintains a profit sharing bonus plan under which 10%
of pre-tax profit is paid to eligible employees on a quarterly
basis. Profit sharing expense was $509, $303 and $479 for the
years ended December 31, 1997, 1996 and 1995, respectively.
8. COMMITMENT:
During 1997, the Company entered into an agreement with a
machinery manufacturer for the purchase of sheet metal punching
and bending machines. The total purchase price of the machines
is $3,300. The purchase price will be financed through a long-
term note with a finance company.