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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
Commission file number: 33-18336-LA
AAON, INC.
(Exact name of Registrant as specified in its charter)
Nevada 87-0448736
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
2425 South Yukon, Tulsa, Oklahoma 74107
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(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, 1996, was approximately $22,287,000. For purposes of this computation, all
officers, directors and 5% beneficial owners of Registrant are deemed to be
affiliates.
As of March 1, 1996, Registrant had outstanding a total of 6,113,449 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 14, 1996, are
incorporated into Part III.
TABLE OF CONTENTS
PAGE
NUMBER
ITEM NUMBER AND CAPTION
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
8. Financial Statements and Supplementary Data. 9
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. 9
PART III
10. Management Report. 10
11. Executive Compensation. 10
12. Security Ownership of Certain Beneficial
Owners and Management. 10
13. Certain Relationships and Related Transactions. 10
PART IV
14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K. 11
PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS
AAON, Inc., formerly Diamond Head Resources, Inc., a Nevada corporation ("AAON-
Nevada" or, including its subsidiaries, the "Company"), was incorporated on
August 18, 1987. In early 1988, Diamond Head Resources, Inc., made a public
offering of its stock in furtherance of the objective of seeking and acquiring
an interest in a prospective business opportunity.
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. AAON-Oklahoma's purchase of the HVAC
business was consummated on September 30, 1988, at which time AAON-Nevada made a
loan of virtually all of its assets ($580,000) to AAON-Oklahoma to partially
finance the purchase. An integral part of that transaction was a
Conversion/Exchange Agreement by and among AAON-Nevada, AAON-Oklahoma and the
stockholders of AAON-Oklahoma, which was "triggered" on June 16, 1989. As a
result, the $580,000 loan was converted to equity, the former stockholders of
AAON-Oklahoma became the owners of 80% of the outstanding stock of AAON-Nevada
and 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, CP/AAON, Inc. ("CP/AAON"), a Texas corporation organized
as a wholly-owned subsidiary of AAON-Nevada for such purpose, purchased most of
the assets of Coils Plus, Inc. ("CP"), of Longview, Texas, which manufactures
coils used in the products of AAON-Oklahoma. In connection with the purchase of
assets from CP, CP/AAON entered into a non-compete agreement with the former
stockholder of CP. The agreement requires payments equal to 20% of CP/AAON's
pre-tax income for years 1992-1996. In addition, a lump-sum equal to five times
the average of the payments for 1995 and 1996, subject to a maximum of
$4,000,000, will be payable in April 1997. Also, the agreement requires CP/AAON
to make monthly advances of $20,000 through December 1996 against amounts
becoming due thereunder.
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.
CP/AAON'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.
1
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 are, in turn, 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 1995 level of sales, approximately $67 million, the Company has a
7% 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., Wal-Mart, 90% new construction and 10% replacement.
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 CP/AAON are coils, consisting of a
sheet metal casing with tubing and fins contained therein.
The Company now has four groups of rooftop products: its RH 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 140 tons; its RG Series, which
is a heat pump variation of the RH Series; and its HA Series, which is a
horizontal discharge package for either rooftop or ground installation, offered
in nine sizes ranging from 4 to 40 tons.
AAON-Oklahoma's engineers have developed a new heat-wheel option for its RH, RF
and RG units. The product responds to new requirements of the U.S. Clean Air
Act which mandate increased fresh air in commercial structures. This product,
which will be marketed under the name "AAONAIRE", 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 heatwheel have been proven by numerous installations during the past
year, but sales to date have been modest.
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 32,900-1,569,200 BTU's and in heating capacity
from 65,000-1,680,000 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 two largest customers are Wal-Mart and Target. Wal-Mart accounted
for approximately 27% of the Company's sales in 1995, compared to 40% in 1994.
Sales to Target were 17% of total sales in 1995 and less than 10% in 1994.
Sales to Wal-Mart are made pursuant to calendar year contracts, now effective
for 1995, which are by letter agreement providing for automatic renewal for
additional terms of one year each, unless terminated by either party upon ninety
days' notice prior to the end of the existing year term. Wal-Mart has been a
significant customer of the Company and its predecessor since 1971. The Company
has no written contract with Target.
2
The loss of Wal-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 Wal-Mart will
diminish over a period of time.
In order to diversify its customer base, the Company plans to add to and/or
upgrade its sales representation in various markets, seek general trade
business, as well as other national accounts, and penetrate additional trade
areas, both domestic and foreign.
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 CP/AAON. 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.
DISTRIBUTION
The Company utilizes a direct sales staff of 10 individuals and approximately 70
independent manufacturer representatives' organizations to market its products
in the United States. The Company also has one international sales
representative and utilizes six 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 six 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, and 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.
3
BACKLOG
The Company had a current backlog as of March 1, 1996, of $10,478,000, compared
to $22,352,000 at March 1, 1995. The current backlog consists of orders
considered by management to be firm and substantially all of which will be
filled by July 1, 1996; 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 allowable
borrowings up to $8,150,000. The Company believes that it will have sufficient
bank credit available to meet its working capital needs through 1996 and beyond.
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., Lennox Industries, Inc., York International
Corporation and Carrier Corporation, a subsidiary of United Technologies
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, 1996, the Company had 480 employees and 94 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-wheel option known as "AAONAIRE" discussed under
"Products and Markets" and "Major Customers" above.
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 building of AAON-Oklahoma is of sheet metal construction,
containing 332,000 square feet (317,000 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 three cart-type conveyor lines with variable line speed
adjustment, two 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 $4.8 million per month in 1995, which is
29% 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 forseeable future.
The operations of CP/AAON 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 $7,860,000 at March 1, 1996, are
secured, in part, by its Tulsa and Longview facilities (buildings and
equipment).
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, 1995, through December
31, 1995.
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 the National Association of Securities
Dealers, Inc., was as follows:
Quarter Ended High Bid Low Bid
------------- -------- -------
March 31, 1994 $14.125 $ 7.25
June 30, 1994 $ 18.00 $ 10.75
September 30, 1994 $ 16.75 $12.125
December 30, 1994 $14.875 $ 10.75
March 31, 1995 $ 15.00 $ 10.50
June 30, 1995 $ 11.75 $ 6.75
September 30, 1995 $ 7.75 $ 6.50
December 31, 1995 $ 7.00 $ 4.50
On March 1, 1996, there were 250 holders of record, and 2,533 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.
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: 1995 1994 1993 1992 1991
- ------------------------- ------ ------ ------ ---- ------
(In thousands, except earnings per share)
Net sales $67,346 $79,542 $45,394 $37,026 $26,678
Net income $ 2,069 $ 5,101 $ 2,665 $ 1,593 $ 379
Earnings per share (1) $ .34 $. 81 $ .44 $ .26 $ .06
December 31,
---------------------------------------------------------
Balance Sheet Data: 1995 1994 1993 1992 1991
- ------------------------- ------- ------- ------- ------- -------
(In thousands)
Total assets $32,212 $32,562 $24,083 $15,705 $14,309
Long-term debt $10,695 $10,648 $11,008 $ 4,087 $ 5,343
Stockholders' equity $13,546 $11,461 $ 6,350 $ 3,685 $ 2,092
_____________
(1) Earnings per share for the years ended December 31, 1995, 1994, 1993, 1992
and 1991 are based on 6,104,666, 6,301,088, 6,091,392, 6,091,392 and
6,091,392 common shares and common share equivalents, respectively. Common
share equivalents represent shares issuable upon assumed exercise of stock
options which would have a dilutive effect. Common share equivalents had no
material effect on the computation in 1995, 1993, 1992 or 1991. The Company
paid a 10% stock dividend on March 27, 1995. Effective September 15, 1993,
the Company completed a one-for-four reverse stock split. The shares
outstanding and earnings per share disclosures have been restated to
reflect the stock dividend and the reverse stock split.
7
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 1995, 1994 and 1993:
Years ended December 31,
----------------------------------
1995 1994 1993
------- -------------- -------
(In thousands)
Net sales $67,346 $79,542 $45,394
Cost of sales 56,528 61,664 33,908
------- ------- -------
Gross profit 10,818 17,878 11,486
Selling, general and 6,318 7,921 6,178
administrative expenses ------- ------- -------
Income from operations 4,500 9,957 5,308
Interest expense 815 806 809
Other expense 452 445 259
------- ------- -------
Income before income taxes 3,233 8,706 4,240
Income tax provision 1,164 3,605 1,575
------- ------- -------
Net income $ 2,069 $ 5,101 $ 2,665
======= ======= =======
RESULTS OF OPERATIONS
Net sales decreased by approximately 15% in 1995 as compared to 1994, but were
33% greater than in 1993. The reduction in sales in 1995 as compared to 1994 was
primarily attributable to a drop in sales to two of the Company's largest
customers, whereas the 75% increase in sales in 1994 as compared to 1993
reflected a nearly across the board growth in sales to all categories of
customers. The differences in levels of sales in all three years were mainly due
to the volume of business (approximately 97%), rather than price changes. The
outlook for 1996 is for sales comparable to 1995 and for a continuation of the
trend of less concentration of sales to a few major, national account customers.
Gross profit declined in 1995 and 1994 to 16.1% and 22.5%, respectively, of net
sales, compared to 25.3% in 1993, due to an inability to pass on increased
costs, mitigated in part in 1994 by forward purchasing of material which enabled
the Company to avoid substantial increases in copper and aluminum prices. The
Company expects continued difficulty in 1996 in passing on increased costs to
existing customers, but anticipates getting better margins on sales to new
customers, with the net effect of achieving some overall improvement in margins.
SG&A expenses decreased 20% in 1995 compared to 1994, whereas these expenses
increased 28% in 1994 compared to 1993, in both instances being primarily
attributable to the volume of business, i.e., warranty and selling costs.
Interest expense has remained at approximately the same level for three years,
despite substantial capital expenditures in 1995 and the significant increase in
sales in 1994. Profits in 1995 and 1994 also helped to contain borrowings, as
did effective control of inventories and accounts receivable.
Income before income taxes in 1995 decreased 63% compared to 1994 primarily due
to cost increases exceeding selling price increases. Income before income taxes
in 1994 increased 105% over 1993 primarily due to a 75% increase in sales and an
increase in SG&A of only 28% as compared to 1993.
8
FINANCIAL CONDITION AND LIQUIDITY
Accounts receivable and inventories in 1995 were comparable to 1994 as a
percentage of sales. Accounts receivable and inventories were disproportionately
less than the increase in sales in 1994 as compared to 1993.
The $2,082,000 increase in "Property, Plant and Equipment" in 1995, net of
depreciation, was attributable to the major expansion of the Company's Tulsa and
Longview, Texas, manufacturing facilities. All capital expenditures in 1995 were
financed out of that year's cash flow and a minor amount of borrowings under the
Company's revolving credit bank loan, except for the Longview land and
improvements purchases which were financed by a bank term loan.
The size of accounts payable at December 31, 1995 and 1994 primarily reflect the
inventories and sales volumes in each of those years.
Also, accrued liabilities at year-end 1995 and 1994 reflect the amount of
reserves (warranty, commissions and employee payroll and benefit accruals)
related to sales.
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, including
a lump-sum payment, if any (pursuant to a noncompete agreement with the former
stockholder of Coils Plus, Inc., the assets of which were acquired by CP/AAON in
December, 1991) equal to five times the average of 20% of CP/AAON's pre-tax
income for 1995 and 1996, which will be payable in April, 1997. 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 July 31, 1997)
provides for maximum borrowings of $8,150,000. Interest on this line is payable
monthly at the Chase Manhattan Bank prime rate or LIBOR plus 2.4%, at the
election of the Company. Availability of funds under the agreement is based on
80% of eligible accounts receivable, plus 50% of raw materials and finished
goods inventories, with inventories not to exceed 50% of the borrowing base. Its
term loans were in the original principal amounts of $2,550,000 and $1,450,000,
providing for monthly principal payments of $25,000 and $15,000, respectively
(which commenced June 30, 1992), and $1,000,000, providing for monthly principal
payments of $10,000 (which commenced February 28, 1994). Interest on these loans
is payable monthly at the Chase Manhattan Bank prime rate plus 1/2%. The
maturity of all three term loans is January 31, 1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data are included at page 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
9
PART III
ITEM 10. MANAGEMENT REPORT.
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 1996 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 1996 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 1996 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 1996 Annual Meeting of Stockholders.
10
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 13.
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) (A) Letter Agreement with Wal-Mart Stores, Inc. (ii)
(B) 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 Form 8-K dated
March 21, 1994.
(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 March 18, 1996.
(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.
(b) The Company did not file any reports on Form 8-K during the period
from October 1, 1995, to December 31, 1995.
11
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 20, 1996 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 20, 1996 /s/ Norman H. Asbjornson
--------------------------------------
Norman H. Asbjornson
President and Director
(principal executive officer)
Dated: March 20, 1996 /s/ William A. Bowen
--------------------------------------
William A. Bowen
Vice President-Finance and Director
(principal financial officer
and principal accounting officer)
Dated: March 20, 1996 /s/ John B. Johnson, Jr.
--------------------------------------
John B. Johnson, Jr.
Director
Dated: March 20, 1996 /s/ Richard E. Minshall
--------------------------------------
Richard E. Minshall
Director
12
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Page
----
Report of Independent Public Accountants 14
Consolidated Balance Sheets 15
Consolidated Statements of Operations 16
Consolidated Statements of Stockholders' Equity 17
Consolidated Statements of Cash Flows 18
Notes to Consolidated Financial Statements 19
13
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, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995.
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, 1995 and 1994, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Tulsa, Oklahoma
February 2, 1996
14
AAON, INC.
----------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands, except share amounts)
DECEMBER 31,
-------------------
ASSETS 1995 1994
- ---------------------------------------- -------- --------
CURRENT ASSETS:
Cash $ 663 $ 26
Accounts receivable, net (Notes 2
and 4) 9,846 11,898
Inventories, net (Notes 2 and 4) 9,061 10,245
Prepaid expenses and other 475 201
Deferred income taxes (Note 5) 1,104 1,385
------- -------
Total current assets 21,149 23,755
PROPERTY, PLANT AND EQUIPMENT, net
(Notes 2 and 4) 10,312 8,230
OTHER ASSETS, net (Note 2) 751 577
------- -------
Total assets $32,212 $32,562
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 4,424 $ 5,852
Accrued liabilities (Note 2) 2,605 3,665
Current maturities of long-term debt
(Note 4) 942 936
------- -------
Total current liabilities 7,971 10,453
------- -------
LONG-TERM DEBT (Note 4) 10,695 10,648
------- -------
STOCKHOLDERS' EQUITY, per
accompanying statements (Note 8):
Preferred stock, $.001 par value,
5,000,000 shares authorized, no shares
issued - -
Common stock, $.004 par value,
50,000,000 shares authorized 24 24
Additional paid-in capital 7,687 7,671
Retained earnings 5,835 3,766
------- -------
Total stockholders' equity 13,546 11,461
------- -------
Total liabilities and stockholders'
equity $32,212 $32,562
======= =======
The accompanying notes are an integral
part of these balance sheets.
15
AAON, INC.
----------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(In thousands, except per share amounts)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
--------- --------- --------
NET SALES (Note 6) $67,346 $79,542 $45,394
COST OF SALES 56,528 61,664 33,908
------- ------- -------
GROSS PROFIT 10,818 17,878 11,486
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 6,318 7,921 6,178
------- ------- -------
INCOME FROM OPERATIONS 4,500 9,957 5,308
INTEREST EXPENSE 815 806 809
OTHER EXPENSE 452 445 259
------- ------- -------
INCOME BEFORE INCOME TAXES 3,233 8,706 4,240
INCOME TAX PROVISION (Note 5) 1,164 3,605 1,575
------- ------- -------
NET INCOME $ 2,069 $ 5,101 $ 2,665
======= ======= =======
EARNINGS PER SHARE $.34 $.81 $.44
======= ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING 6,105 6,301 6,091
======= ======= =======
The accompanying notes are an integral
part of these statements.
16
AAON, INC.
----------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
----------------------------------------------------
(In thousands)
Common Stock
----------------- Paid-in Retained
Shares Amount Capital Earnings Total
-------- ------ ------- --------- --------
BALANCE, JANUARY 1, 1993 22,150 $22 $ 984 $ 2,679 $ 3,685
REVERSE STOCK SPLIT (Note 8) (16,612) - - - -
NET INCOME - - - 2,665 2,665
------- ------ ------ ------- -------
BALANCE, DECEMBER 31, 1993 5,538 22 984 5,344 6,350
NET INCOME - - - 5,101 5,101
STOCK OPTIONS EXERCISED (Note 7) 8 - 10 - 10
STOCK DIVIDEND (Note 8) 555 2 6,677 (6,679) -
------- ------ ------ ------- -------
BALANCE, DECEMBER 31, 1994 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
======= ====== ====== ======= =======
The accompanying notes are an integral
part of these statements.
17
AAON, INC.
----------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
FOR THE YEARS
ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,069 $ 5,101 $ 2,665
-------- -------- --------
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities-
Depreciation and amortization 2,705 1,714 1,130
Provision for losses on accounts
receivable 122 157 111
Provision for excess and obsolete
inventories - 100 -
Loss on disposition of assets 1 38 11
Deferred income taxes (146) (1,051) (266)
Change in assets and liabilities-
(Increase) decrease in accounts
receivable 1,930 (3,941) (4,096)
(Increase) decrease in inventories 1,184 (3,347) (2,381)
(Increase) decrease in prepaid
expenses and other (216) (66) 74
Increase (decrease) in accounts payable (1,428) 1,971 2,126
Increase (decrease) in accrued
liabilities (1,060) 2,073 594
-------- -------- --------
Total adjustments 3,092 (2,352) (2,697)
-------- -------- --------
Net cash provided by (used in)
operating activities 5,161 2,749 (32)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property,
plant and equipment 3 59 -
Capital expenditures (4,596) (2,376) (2,575)
-------- -------- --------
Net cash used in investing
activities (4,593) (2,317) (2,575)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit
agreement 40,276 35,130 23,103
Payments under revolving credit
agreement (39,653) (34,542) (18,770)
Proceeds from long-term debt 400 - 1,007
Payments on long-term debt (970) (1,117) (2,685)
Stock options exercised 16 10 -
-------- -------- --------
Net cash provided by (used in)
financing activities 69 (519) 2,655
-------- -------- --------
NET INCREASE (DECREASE) IN CASH 637 (87) 48
-------- -------- --------
CASH, beginning of year 26 113 65
-------- -------- --------
CASH, end of year $ 663 $ 26 $ 113
======== ======== ========
The accompanying notes are an integral
part of these statements.
18
AAON, INC.
----------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1995 AND 1994
--------------------------
(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
components through its wholly-owned subsidiaries AAON, Inc. (AAON, an Oklahoma
corporation) and CP/AAON, Inc. (CP/AAON, a Texas corporation). Products are
primarily sold to building owner/operators in the domestic commercial and
industrial new construction and replacement markets.
In December 1991, CP/AAON acquired certain assets of Coils Plus, Inc. (CP), an
air coil manufacturer. In connection with the purchase from CP, CP/AAON
entered into a noncompetition agreement with the former stockholder of CP.
The agreement requires payments equal to 20 percent of CP/AAON's pre-tax
income for each of the years ending December 31, 1992 through 1996. In
addition, a lump-sum payment equal to five times the average of the payments
for 1995 and 1996, subject to a maximum of $4,000, will be payable in April
1997. Also, the agreement requires CP/AAON to make monthly advances of $20
through December 1996. Any additional amounts payable exceeding the monthly
advances will be expensed at the end of each year. No such expense was
required for 1995, 1994, 1993 or 1992. The present value of the total of
advances is recorded as a noncompetition agreement and is being amortized over
five years.
2. ACCOUNTING POLICIES:
--------------------
CONSOLIDATION
-------------
The consolidated financial statements include the accounts of the Company and
its subsidiaries, AAON and CP/AAON. All significant intercompany accounts and
transactions have been eliminated.
REVENUE RECOGNITION
-------------------
Revenues are recognized at the time of shipment.
19
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 of physical properties, 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 10-20
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 $2,033, $2,712 and $2,457
for the years ended December 31, 1995, 1994 and 1993, respectively.
EARNINGS PER SHARE
------------------
Earnings per share has been computed by dividing net income by the weighted
average number of common shares and common share equivalents outstanding,
restated for the one-for-four reverse stock split and the ten percent stock
dividend (See Note 8). Common share equivalents included in the computation
represent shares issuable upon assumed exercise of stock options which would
have a dilutive effect. Common share equivalents had no material effect on
the computation in 1995 or 1993.
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.
RECLASSIFICATIONS
-----------------
Certain reclassifications have been made to the 1994 consolidated financial
statements to conform with the 1995 presentation. These reclassifications did
not impact net income.
20
DETAILS TO CONSOLIDATED BALANCE SHEETS
- --------------------------------------
December 31,
---------------------
1995 1994
--------- ---------
ACCOUNTS RECEIVABLE:
Accounts receivable $10,050 $12,043
Less- allowance for doubtful accounts 204 145
------- --------
Total, net $ 9,846 $11,898
======= ========
INVENTORIES:
Raw materials $ 5,451 $ 6,448
Work in process 1,366 2,202
Finished goods 2,394 1,835
------- --------
9,211 10,485
Less- allowance for excess and obsolete
inventories 150 240
------- --------
Total, net $ 9,061 $10,245
======= ========
PROPERTY, PLANT AND EQUIPMENT:
Land $ 274 $ 227
Buildings 7,246 4,088
Machinery and equipment 7,523 6,343
Furniture and fixtures 1,100 896
------- --------
16,143 11,554
Less- accumulated depreciation 5,831 3,324
------- --------
Total, net $10,312 $ 8,230
======= ========
OTHER ASSETS:
Noncompetition agreement $ 975 $ 975
Deferred income taxes 449 22
Other 107 165
------- --------
1,531 1,162
Less- accumulated amortization for
noncompetition agreement 780 585
------- --------
Total, net $ 751 $ 577
======= ========
ACCRUED LIABILITIES:
Warranty $ 1,390 $ 1,830
Commissions 555 680
Other 660 1,155
------- --------
Total $ 2,605 $ 3,665
======= ========
Year Ended December 31,
-----------------------------
1995 1994 1993
----- ------- --------
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Balance, beginning of period $ 145 $ 80 $ 81
Provision for losses on accounts
receivable 122 157 111
Accounts receivable written off, net
of recoveries (63) (92) (112)
----- ------- --------
Balance, end of period $ 204 $ 145 $ 80
===== ======= ========
ALLOWANCE FOR EXCESS AND
OBSOLETE INVENTORY:
Balance, beginning of period $ 240 $ 140 $ 240
Provision for excess and obsolete
inventories - 100 -
Inventories written off (90) - (100)
----- ------- --------
Balance, end of period $ 150 $ 240 $ 140
===== ======= ========
21
3. SUPPLEMENTAL CASH FLOW INFORMATION:
-----------------------------------
Interest payments of $815, $760 and $809 were made during the years ended
December 31, 1995, 1994 and 1993, respectively. Payments for income taxes of
$1,604, $4,335 and $1,923 were made during the years ended December 31, 1995,
1994 and 1993, respectively.
4. DEBT:
-----
Long-term debt at December 31, consists of the following:
1995 1994
-------- --------
Three bank term-loan agreements,
payable in total monthly payments
of $50 through January 1999 with a
balloon payment in January 1999,
plus interest payable monthly
at Chase Manhattan Bank prime plus
1/2% (9% at December 31, 1995),
collateralized by machinery,
equipment and real estate. $ 2,930 $ 3,530
$8,150 maximum bank line of credit
subject to a borrowing base of accounts
receivable and inventory, with interest
at LIBOR plus 2.4% (8.33% at December 31,
1995), due July 31, 1997, collateralized
by accounts receivable, inventory,
intangibles and the stock of AAON and
CP/AAON. 7,938 7,315
Bank term-loan agreement, 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, 1995), collateralized by
real estate. 367 -
Noncompetition agreement discounted at
8.5%, payable in monthly payments of $20
through December 1996. 229 440
Other 173 299
------- -------
11,637 11,584
Less- current maturities 942 936
------- -------
$10,695 $10,648
======= =======
Combined maturities of debt for each of the years ended December 31, are
as follows:
1996 $ 942
1997 8,439
1998 460
1999 1,590
2000 206
-------
$11,637
=======
The revolving credit and the term-loan agreement requires, among other things,
that the Company maintain minimum net worth, a minimum tangible net worth,
minimum working capital and a minimum debt to tangible net worth ratio. The
revolving credit portion of the agreement allows the Company two interest rate
options; Chase Manhattan Bank prime or LIBOR plus 2.4%. At December 31, 1995,
the Company was in compliance with the covenants of the revolving credit and
term-loan agreements.
22
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:
-------------
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No.
109 requires an asset and liability approach to financial accounting and
reporting for income taxes. The difference between the financial statement
and tax basis of assets and liabilities is determined and deferred tax assets
or liabilities are computed for those differences that have future tax
consequences. The adoption of this statement did not impact the consolidated
financial statements.
The income tax provision consists of the following:
Years Ended December 31,
------------------------------
1995 1994 1993
-------- -------- --------
Current $1,310 $ 4,656 $1,841
Deferred (146) (1,051) (266)
------ ------- ------
$1,164 $ 3,605 $1,575
====== ======= ======
The reconciliation of the federal statutory income tax rate to the effective
income tax rate is as follows:
Years Ended December 31,
----------------------------
1995 1994 1993
------ ------- ------
Federal statutory rate 34% 34% 34%
State income taxes 4 6 -
Other (2) 1 3
------ ------- ------
36% 41% 37%
====== ======= ======
The tax effect of temporary differences giving rise to the Company's deferred
income taxes at December 31 are as follows:
1995 1994
------- --------
Net deferred tax assets -
Valuation reserves $ 213 $ 201
Warranty accrual 556 759
Other accruals 286 372
Depreciation and amortization 126 (188)
Noncompetition agreement 322 210
Other, net 50 53
------ ------
$1,553 $1,407
====== ======
23
6. MAJOR CUSTOMERS:
----------------
Sales to customers with greater than ten percent of total sales consist of the
following:
Years Ended December 31,
---------------------------
1995 1994 1993
------- ------- -------
Target 17% * *
Wal-Mart Stores, Inc. 27% 40% 38%
K-Mart Corp. * * 12%
* - Less than 10 percent
7. BENEFIT PLANS:
--------------
During 1994, the shareholders approved an amendment to the stock option plan
for key employees and directors to increase the number of shares of common
stock covered by the plan to 605,000. Under the terms of this plan, the
exercise price of shares granted will not be less than 85 percent 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 percent per year, commencing one year after date of
grant, and are exercisable for ten years. At December 31, 1995, 306,350
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, 1993 237,500 $ 1.25-$1.31
Granted - -
Exercised - -
-------- ------------
OUTSTANDING AT DECEMBER 31, 1993 237,500 $ 1.25-$1.31
Stock dividend 23,750 -
Granted 37,400 $ 13.01
Exercised (8,250) $ 1.19
-------- ------------
OUTSTANDING AT DECEMBER 31, 1994 290,400 $1.19-$13.01
Exercised (13,750) $ 1.19
-------- ------------
OUTSTANDING AT DECEMBER 31, 1995 276,650 $1.19-$13.01
======== ============
EXERCISABLE AT DECEMBER 31, 1995 123,800 $1.19-$13.01
======== ============
The Company sponsors a defined contribution benefit plan. Employees can make
contributions at a minimum of one percent and a maximum of 15 percent of
compensation. The Company may, on a discretionary basis, contribute a Company
matching contribution not to exceed six percent of compensation. The Company
made matching contributions of $84, $78 and $27 in 1995, 1994 and 1993,
respectively.
The Company maintains a profit sharing bonus plan under which ten percent of
pre-tax profit is paid to eligible employees on a quarterly basis. Profit
sharing expense was $479, $998 and $457 for the years ended December 31, 1995,
1994 and 1993, respectively.
24
8. STOCK DIVIDEND AND REVERSE STOCK SPLIT:
---------------------------------------
During February 1995, the Company declared a ten percent stock dividend. The
earnings per share and average shares outstanding amounts in the 1994
consolidated statements of operations and the shares outstanding in the 1994
consolidated statements of stockholders' equity were restated to reflect the
stock dividend. Effective September 15, 1993, the Company completed a one-
for-four reverse stock split. The earnings per share and average shares
outstanding amounts in the consolidated statements of operations have been
restated to reflect the reverse stock split.
25