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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, 1996
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
------------------------------------------------
(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, 1997, was approximately
$30,296,000. For purposes of this computation, all officers,
directors and 5% beneficial owners of Registrant are deemed to be
affiliates.
As of March 1, 1997, Registrant had outstanding a total of
6,128,574 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 29, 1997, are incorporated into Part III.
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. 9
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. 9
PART III
10. Directors and Executive Officers of Registrant. 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., 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, 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., 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.
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.
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 1996 level of sales, approximately $63 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., Target, 80% new construction and 20% 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 130 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 50 tons.
AAON-Oklahoma's engineers have developed a heat recovery wheel
for its RH, RF and RG 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 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 Customer
The Company's largest customer last year was Target Stores, Inc.
Sales to Target were 14% of total sales in 1996 compared to 17%
in 1995. The Company has no written contract with Target.
The loss of Target 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 Target 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 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 12 individuals and
approximately 76 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.
Backlog
The Company had a current backlog as of March 1, 1997, of
$14,772,000, compared to $10,478,000 at March 1, 1996. The
current backlog consists of orders considered by management to be
firm and substantially all of which will be filled by July 1,
1997; 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
$12,150,000. The Company believes that it will have sufficient
bank credit available to meet its working capital needs through
1997 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, 1997, the Company had 556 employees and 157
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 $4.5
million per month in 1996, which is 27% 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.
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 $6,609,000 at March 1,
1997, 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, 1996, through December 31, 1996.
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, 1995 $ 15.00 $ 10.50
June 30, 1995 $ 11.75 $ 6.75
September 30, 1995 $ 7.75 $ 6.50
December 30, 1995 $ 7.00 $ 4.50
March 31, 1996 $ 6.375 $ 4.50
June 30, 1996 $ 6.00 $ 4.375
September 30, 1996 $ 6.375 $ 4.25
December 31, 1996 $ 6.00 $ 4.625
On March 1, 1997, there were 225 holders of record, and 2,173
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.
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 1996 1995 1994 1993 1992
Operations:
(In thousands, except earnings per share)
Net sales $62,845 $67,346 $79,542 $45,394 $37,026
Net income $ 2,075 $ 2,069 $ 5,101 $ 2,665 $ 1,593
Earnings per $ .34 $ .34 $ .81 $ .44 $ .26
share (1)
December 31,
Balance Sheet 1996 1995 1994 1993 1992
Data: (In thousands)
Total assets $35,569 $32,212 $32,562 $24,083 $15,705
Long-term debt $ 8,976 $10,695 $10,648 $11,008 $ 4,087
Stockholders' $15,640 $13,546 $11,461 $ 6,350 $ 3,685
equity
(1) Earnings per share for the years ended December 31, 1996,
1995, 1994, 1993 and 1992 are based on 6,118,697, 6,104,666,
6,301,088 and 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 1996, 1995, 1993 or 1992.
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 1996, 1995 and 1994:
Years ended December 31,
1996 1995 1994
------ ------ ------
(In thousands)
Net sales $62,845 $67,346 $79,542
Cost of sales 51,797 56,528 61,664
------ ------ ------
Gross profit 11,048 10,818 17,878
Selling, general and 6,112 6,318 7,921
administrative expenses
------ ------ ------
Income from operations 4,936 4,500 9,957
Interest expense 838 815 806
Other expense 707 452 445
------ ------ ------
Income before income taxes 3,391 3,233 8,706
Income tax provision 1,316 1,164 3,605
------ ------ ------
Net income $2,075 $2,069 $5,101
====== ====== ======
Results of Operations
Net sales decreased by approximately 7% in 1996 as compared to
1995, and 1995 sales were 15% less than in 1994. The reductions
in sales in 1996 and 1995 were primarily attributable to a drop
in sales to two of the Company's largest customers. The outlook
for 1997 is for increased sales to its entire customer base.
Gross profit increased in 1996 to 17.6% compared to 16.1% in
1995, but was less than the 22.5% margin in 1994. The 1.5%
increase in margin in 1996 compared to 1995 resulted primarily
from higher selling prices, whereas the lower margin in 1995
compared to 1994 mainly reflected substantial increases in copper
and aluminum prices. The Company expects to realize a
continuation of modest increases in gross profit in 1997.
While SG&A expenses decreased slightly in 1996 compared to 1995,
such expenses were considerably higher in 1994 primarily because
of the greater 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 years 1994-
1996 also helped to contain borrowings, as did effective control
of inventories.
Income before income taxes were comparable the last two years,
whereas such income in 1995 decreased 63% compared to 1994
primarily due to cost increases exceeding selling price
increases.
Financial Condition and Liquidity
The $3.7 million increase in accounts receivable at December 31,
1996, compared to year end 1995, was primarily attributable to
slower collections and, to a lesser extent, to increased sales in
the fourth quarter of 1996. Accounts receivable in 1995 were
comparable to 1994 as a percentage of sales. Inventories at
December 31, 1996 and 1995 were at approximately the same level,
but were higher at year end 1994 due to greater sales.
Property, Plant and Equipment at December 31, 1996 and 1995 were
approximately the same amount, with depreciation being only
slightly more than additions during 1996. There was a $2 million
increase in PP&E in 1995, net of depreciation, which was
attributable to major expansions 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, 1996 and 1995
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 1996 and 1995 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, 1998) provides for maximum borrowings of $12,150,000.
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.
Forward-Looking Statements
The outlook/expectation for increases in sales and gross profit
in 1997 expressed under Results of Operations above constitute
forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company believes that these forecasts
are based on reasonable assumptions. No assurances, however, can
be given that these goals will be achieved. 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, and (3) the timing and extent of changes in interest
rates, as well as other competitive factors during the year.
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.
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 1997 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 1997 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 1997 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 1997 Annual Meeting of Stockholders.
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) 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 6, 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 11, 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, as amended.
(b) The Company did not file any reports on Form 8-K during the
period from October 1, 1996, to December 31, 1996.
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 10, 1997 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 10, 1997 /s/ Norman H. Asbjornson
-------------------------
Norman H. Asbjornson
President and Director
(principal executive officer)
Dated: March 10, 1997 /s/ William A. Bowen
-------------------------
William A. Bowen
Vice President-Finance and Director
(principal financial officer
and principal accounting officer)
Dated: March 10, 1997 /s/ John B. Johnson, Jr.
-------------------------
John B. Johnson, Jr.
Director
Dated: March 10, 1997 /s/ Richard E. Minshall
-------------------------
Richard E. Minshall
Director
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
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, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. 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, 1996 and 1995,
and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Tulsa, Oklahoma
February 7, 1997
AAON, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
DECEMBER 31,
ASSETS
1996 1995
------ ------
CURRENT ASSETS:
Cash $ 138 $ 663
Accounts receivable, net (Notes 2 and 4) 13,539 9,846
Inventories, net (Notes 2 and 4) 9,140 9,061
Prepaid expenses and other 160 475
Deferred income taxes (Note 5) 1,604 1,104
------- -------
Total current assets 24,581 21,149
PROPERTY, PLANT AND EQUIPMENT, net (Notes 2 10,133 10,312
and 4)
OTHER ASSETS, net (Note 2) 855 751
------- -------
Total assets $ 35,569 $ 32,212
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $6,097 $4,424
Accrued liabilities (Note 2) 4,765 2,605
Current maturities of long-term debt (Note 4) 91 942
------- -------
Total current liabilities 10,953 7,971
------- -------
LONG-TERM DEBT (Note 4) 8,976 10,695
------- -------
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, 6,128,574 and 6,113,449
issued at December 31, 1996 and 1995,
respectively
25 24
Additional paid-in capital 7,705 7,687
Retained earnings 7,910 5,835
------- -------
Total stockholders' equity 15,640 13,546
------- -------
Total liabilities and stockholders' equity $35,569 $32,212
======= =======
The accompanying notes are an integral
part of these balance sheets.
AAON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
FOR THE YEARS ENDED DECEMBER 31,
1996 1995 1994
------ ------ ------
NET SALES (Note 6) $ 62,845 $ 67,346 $ 79,542
COST OF SALES 51,797 56,528 61,664
------- ------- -------
GROSS PROFIT 11,048 10,818 17,878
SELLING, GENERAL AND 6,413 6,318 7,921
ADMINISTRATIVE EXPENSES
------- ------- -------
INCOME FROM OPERATIONS 4,635 4,500 9,957
INTEREST EXPENSE 838 815 806
OTHER EXPENSE 406 452 445
------- ------- -------
INCOME BEFORE INCOME TAXES 3,391 3,233 8,706
INCOME TAX PROVISION (Note 5) 1,316 1,164 3,605
------- ------- -------
NET INCOME $ 2,075 $ 2,069 $ 5,101
======= ======= =======
EARNINGS PER SHARE $ .34 $ .34 $ .81
======= ======= =======
WEIGHTED AVERAGE SHARES 6,119 6,105 6,301
OUTSTANDING ======= ======= =======
The accompanying notes are an integral
part of these statements.
AAON, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Common Stock Paid-in Retained
Shares Amount Capital Earnings Total
------ ------ ------- -------- ------
BALANCE, JANUARY 1, 1994 5,538 $ 22 $ 84 $ 5,344 $ 6,350
NET INCOME - - - 5,101 5,101
STOCK OPTIONS EXERCISED 8 - 10 - 10
(Note 7)
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 12 - 16 - 16
(Note 7) ----- ---- ----- ----- ------
BALANCE, DECEMBER 31,1995 6,113 24 7,687 5,835 13,546
NET INCOME - - - 2,075 2,075
STOCK OPTIONS EXERCISED 15 1 18 - 19
(Note 7) ----- ---- ----- ----- ------
BALANCE, DECEMBER 31,1996 6,128 $ 25 $ 7,705 $ 7,910 $15,640
===== ===== ======= ======= =======
The accompanying notes are an integral
part of these statements.
AAON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
FOR THE YEARS
ENDED DECEMBER 31,
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES: ----- ----- -----
Net income $2,075 $2,069 $5,101
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation and amortization 2,497 2,705 1,714
Provision for losses on accounts 450 122 157
receivable
Provision for excess and obsolete - - 100
inventories
Loss on disposition of assets - 1 38
Deferred income taxes (860) (146) (1,051)
Change in assets and liabilities-
(Increase) decrease in accounts (4,143) 1,930 (3,941)
receivable
(Increase) decrease in inventories (59) 1,184 (3,347)
(Increase) decrease in prepaid 286 (216) (66)
expenses and other
Increase (decrease) in accounts 1,673 (1,428) 1,971
payable
Increase (decrease) in accrued liabilities 2,160 (1,060) 2,073
----- ----- -----
Total adjustments 2,004 3,092 (2,352)
----- ----- -----
Net cash provided by operating 4,079 5,161 2,749
activities ----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property, plant and - 3 59
equipment
Capital expenditures (2,053) (4,596) (2,376)
----- ----- -----
Net cash used in investing activities (2,053) (4,593) (2,317)
----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit agreement 32,651 40,276 35,130
Payments under revolving credit agreement (31,899) (39,653) (34,542)
Proceeds from long-term debt - 400 -
Payments on long-term debt (3,322) (970) (1,117)
Stock options exercised 19 16 10
----- ----- -----
Net cash provided by (used in) financing (2,551) 69 (519)
activities ----- ----- -----
NET INCREASE (DECREASE) IN CASH (525) 637 (87)
----- ----- -----
CASH, beginning of year 663 26 113
----- ----- -----
CASH, end of year $138 $663 $26
===== ===== =====
The accompanying notes are an integral
part of these statements.
AAON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(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
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 required
payments equal to 20 percent of CP/AAON's pre-tax income for each
of the years ending December 31, 1992 through 1996. Also, the
agreement required CP/AAON to make monthly advances of $20
through December 1996. There were no additional amounts payable
exceeding the monthly advances.
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.
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 $1,547, $2,033 and $2,712 for the years ended
December 31, 1996, 1995 and 1994, 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 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 1996 or
1995.
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,
1996 1995
ACCOUNTS RECEIVABLE: ----- -----
Accounts receivable $14,072 $10,050
Less- allowance for doubtful accounts 533 204
------ ------
Total, net $13,539 $9,846
====== ======
INVENTORIES:
Raw materials $5,640 $5,451
Work in process 1,385 1,366
Finished goods 2,245 2,394
------ ------
9,270 9,211
Less- allowance for excess and obsolete 130 150
inventories ------ ------
Total, net $9,140 $9,061
====== ======
December 31,
1996 1995
PROPERTY, PLANT AND EQUIPMENT: ----- -----
Land $ 274 $ 274
Buildings 7,278 7,246
Machinery and equipment 8,933 7,523
Furniture and fixtures 1,516 1,100
------ ------
18,001 16,143
Less- accumulated depreciation 7,868 5,831
------ ------
Total, net $10,133 $10,312
======= =======
OTHER ASSETS:
Noncompetition agreement $ - $ 975
Deferred income taxes 809 449
Other 46 107
------ ------
855 1,531
Less- accumulated amortization for - 780
noncompetition agreement ------ ------
Total, net $ 855 $ 751
======= =======
ACCRUED LIABILITIES:
Warranty $ 1,390 $ 1,390
Commissions 1,441 555
Income taxes 1,214 264
Other 720 396
------ ------
Total $ 4,765 $ 2,605
======= =======
Year Ended December 31,
1996 1995 1994
ALLOWANCE FOR DOUBTFUL ACCOUNTS: ----- ----- -----
Balance, beginning of period $ 204 $ 145 $ 80
Provision for losses on accounts 450 122 157
receivable
Accounts receivable written off, net of (121) (63) (92)
recoveries ----- ----- -----
Balance, end of period $ 533 $ 204 $ 145
====== ====== ======
ALLOWANCE FOR EXCESS AND OBSOLETE
INVENTORY:
Balance, beginning of period $ 150 $ 240 $ 140
Provision for excess and obsolete - - 100
inventories
Inventories written off (20) (90) -
----- ----- -----
Balance, end of period $ 130 $ 150 $ 240
====== ====== ======
3. SUPPLEMENTAL CASH FLOW INFORMATION:
Interest payments of $813, $815 and $760 were made during the
years ended December 31, 1996, 1995 and 1994, respectively.
Payments for income taxes of $652, $1,604 and $4,335 were made
during the years ended December 31, 1996, 1995 and 1994,
respectively.
4. DEBT:
Long-term debt at December 31, consists of the following:
1996 1995
Three bank term-loan agreements, paid in 1996. ----- ------
$ - $ 2,930
$12,150 maximum bank line of credit, with
interest payable monthly at LIBOR plus 1.85%
(7.50% at December 31, 1996), due June 30, 1998,
collateralized by accounts receivable and
inventory. 8,690 7,938
Bank term-loan agreement, payable in monthly
installments of $3, through March 2000, plus
interest at the bank's prime rate plus 1/4%
(8.5% at December 31, 1996), collateralized by
real estate. 327 367
Other 50 402
----- ------
9,067 11,637
Less- current maturities 91 942
----- ------
$8,976 $10,695
====== =======
Combined maturities of debt for each of the years ended December 31,
are as follows:
1997 $ 91
1998 8,730
1999 40
2000 206
-------
$ 9,067
=======
The revolving credit agreement requires, among other things, that
the Company maintain a minimum tangible net worth, minimum
working capital and a minimum debt to tangible net worth ratio.
At December 31, 1996, the Company was in compliance with the
covenants of the revolving credit agreement.
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 applies the provisions of Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes." SFAS 109 requires recognition of deferred tax
liabilities and assets for expected future consequences of events
that have been included in a company's financial statements or
tax return. Under this method, deferred tax liabilities and
assets are determined based on the difference between the
financial statement and tax basis of assets and liabilities using
enacted tax rates.
The income tax provision consists of the following:
Years Ended December 31,
1996 1995 1994
----- ----- -----
Current $2,176 $1,310 $4,656
Deferred (860) (146) (1,051)
------ ------ ------
$1,316 $1,164 $3,605
====== ====== ======
The reconciliation of the federal statutory income tax rate to
the effective income tax rate is as follows:
Years Ended December 31,
1996 1995 1994
----- ----- -----
Federal statutory rate 34% 34% 34%
State income taxes 5 4 6
Other - (2) 1
------ ------ ------
39% 36% 41%
====== ====== ======
The tax effect of temporary differences giving rise to the
Company's deferred income taxes at December 31 are as follows:
1996 1995
Net deferred tax assets - ----- -----
Valuation reserves $450 $213
Warranty accrual 535 556
Other accruals 572 286
Depreciation and amortization 388 126
Noncompetition agreement 420 322
Other, net 48 50
------ ------
$2,413 $1,553
====== ======
6. MAJOR CUSTOMERS:
Sales to customers with greater than ten percent of total sales
consist of the following:
Years Ended December 31,
1996 1995 1994
----- ----- -----
Target Stores 14% 17% *
Wal-Mart Stores, Inc. * 27% 40%
* - Less than ten percent
7. BENEFIT PLANS:
The Company maintains a stock option plan for key employees and
directors and restricts 605,000 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 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, 1996, 142,125
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, 1994 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
Granted 207,125 $4.50-$5.13
Exercised (15,125) $1.19
Cancelled (42,900) $13.01
------- -----------
OUTSTANDING AT DECEMBER 31, 1996 425,750 $1.19-$5.13
======= ===========
EXERCISABLE AT DECEMBER 31, 1996 190,025 $1.19-$5.13
======= ===========
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:
1996 1995
Net income: ----- -----
As reported $2,075 $2,069
Pro forma $2,004 $2,069
Earnings per share:
As reported $.34 $.34
Pro forma $.33 $.34
Because of 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.
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 50.24% to 50.79%; risk-free interest rate
of 6.14% to 6.78%; and expected lives of eight years.
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 $97, $84 and $78 in 1996, 1995 and
1994, 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 $303, $479 and $998
for the years ended December 31, 1996, 1995 and 1994,
respectively.
8. STOCK DIVIDEND:
During February 1995, the Company declared a ten percent stock
dividend. The earnings per share and average shares outstanding
amounts in the 1994 consolidated statement of operations and the
shares outstanding in the 1994 consolidated statement of
stockholders' equity were restated to reflect the stock dividend.