FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 Commission file number: 33-183336-LA AAON, INC. ---------- (Exact name of registrant as specified in its charter) Nevada 87-0448736 ------ ---------- (State or other jurisdiction (IRS Employer of incorporation) Identification No.) 2425 South Yukon, Tulsa, Oklahoma 74107 --------------------------------------- (Address of principal executive offices) (Zip Code) (918) 583-2266 -------------- (Registrant's telephone number, including area code) 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. 6,211,949 shares of $.004 par value Common Stock. <PAGE 1> PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. On pages 3 through 8 of this report. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Results of Operations. Net sales increased by $20,372,000 (from $58,181,000 to $78,553,000) during the nine- month period ended September 30, 1998, compared to the same period in 1997, and by $7,841,000 (from $21,248,000 to $29,089,000) during the third quarter of 1998 compared to 1997. Net income increased by $1,847,000 [from $1,927,000, $.31 per share (Diluted), to $3,774,000, $.59 per share] during the nine-month period ended September 30, 1998, compared to the same period in 1997, and by $890,000 (from $500,000, $.08 per share, to $1,390,000, $.22 per share) during the third quarter of 1998 compared to 1997. The increase in sales during the first nine months of 1998 compared to 1997 resulted from higher sales to the Company's entire customer base. The earnings increase reflects higher sales and lower costs and expenses, despite continued abnormal overtime and higher labor costs in the very tight labor market. Orders continue to be well ahead of last year and management anticipates record sales and earnings for the year. Financial Condition and Liquidity. While there were material increases in current assets ($5,927,000) and current liabilities ($3,772,000) at September 30, 1998, compared to December 31, 1997, these increases mainly reflect the higher sale volume. The Company made capital expenditures totalling $4,486,000 during the nine months ended September 30, 1998. 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. For information concerning the Company's long-term debt at September 30, 1998, see Note 3 to the Financial Statements on pages 7 and 8 of this report. <PAGE 2> Year 2000 Disclosure ("Y2K"). The Company believes that it is now fully compliant in regard to the "Year 2000 Problem", insofar as its internal operations are concerned, except for embedded technology in two major sheet metal fabricating machines which are scheduled to be corrected in the first quarter of 1999. With regard to its suppliers, in September, 1998, the Company sent 800 questionnaires to determine their state of readiness and the readiness of the suppliers' suppliers. To date approximately 200 responses have been received, most indicating that they are in compliance. The Company will follow up with those not in compliance and those who have not responded. On or before the start of the fourth quarter of 1999, the Company will be doing business only with suppliers who are in compliance. The Company does not anticipate incurring material costs in addressing Y2K issues. Subject to timely correction of the embedded technology in the sheet metal fabricating machines mentioned above, the Company does not believe it will experience any material adverse consequences to its manufacturing operations, internally or externally, due to Y2K, but management can conceive of problems in receiving payments from customers if there should be wide- spread defects affecting the financial/banking industry. If the Company has any concerns as to specific suppliers, it would commence a buildup of inventory of such parts starting in the third quarter of 1999 and establish alternate suppliers for those in question. Forward-Looking Statements. Language above containing forward-looking statements is based on beliefs of the Company's management, as well as assumptions made by and information currently available to management. Actual results could differ materially from those contemplated by the forward-looking statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable <PAGE 3> <TABLE> AAON, Inc. Consolidated Balance Sheets SEPTEMBER 30, DECEMBER 31, 1998 * 1997 (In Thousands, except share amounts) <CAPTION> <S> <C> <C> ASSETS CURRENT ASSETS: Cash $ 13 $ 26 Accounts receivable 19,397 14,018 Inventories 10,995 10,652 Prepaid expenses 621 403 Deferred income tax 1,043 1,043 -------- -------- Total current assets 32,069 26,142 -------- -------- PROPERTY, PLANT, AND EQUIPMENT, at cost: Land 874 874 Buildings 12,053 11,865 Machinery and equipment 16,145 11,906 Furniture and fixtures 1,968 1,909 -------- -------- 31,040 26,554 Less-accumulated depreciation 12,014 9,969 -------- -------- Net property, plant and equipment 19,026 16,585 OTHER ASSETS 3 42 -------- -------- $ 51,098 $ 42,769 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 8,594 $ 7,137 Accrued liabilities 5,460 3,727 Current maturities of long-term debt 757 175 -------- -------- Total current liabilities 14,811 11,039 -------- -------- LONG-TERM DEBT 13,441 12,857 -------- -------- STOCKHOLDERS' EQUITY: Common stock, $.004 par, 50,000,000 shares authorized 25 25 Preferred stock, 5,000,000 shares authorized, no shares issued Additional paid-in capital 8,115 7,916 Retained earnings 14,706 10,932 -------- -------- Total stockholders' equity 22,846 18,873 -------- -------- $ 51,098 $ 42,769 ======== ======== * Unaudited </TABLE> <PAGE 4> <TABLE> AAON, Inc. Consolidated Statements of Operations Three Three Nine Nine Months Months Months Months Ended Ended Ended Ended Sept 30, Sept 30, Sept 30, Sept 30, 1998* 1997* 1998* 1997* (In Thousands, except per share amounts) <CAPTION> <S> <C> <C> <C> <C> Sales, net $ 29,089 $ 21,248 $ 78,553 $ 58,181 Cost of sales 23,737 18,283 64,168 48,775 -------- -------- -------- -------- Gross profit 5,352 2,965 14,385 9,406 Selling, general and administrative expenses 2,882 1,851 7,697 5,539 -------- -------- -------- -------- Income from operations 2,470 1,114 6,688 3,867 Interest expense 284 189 699 501 Amortization and other expense <63> 47 <151> 118 -------- -------- -------- -------- Income before income taxes 2,249 878 6,140 3,248 Income tax provision 859 378 2,366 1,321 -------- -------- -------- -------- Net income $ 1,390 $ 500 $ 3,774 $ 1,927 ======== ======== ======== ======== Net income per share (Basic) $ .22 $ .08 $ .61 $ .31 ======== ======== ======== ======== (Diluted) $ .22 $ .08 $ .59 $ .31 ======== ======== ======== ======== * Unaudited </TABLE> <PAGE 5> <TABLE> AAON, Inc. Consolidated Statements of Stockholders' Equity <CAPTION> COMMON STOCK PAID IN ACCUMULATED SHARES AMOUNT CAPITAL EARNINGS TOTAL ---------- ---------- ---------- ----------- ---------- (In Thousands) <S> <C> <C> <C> <C> <C> BALANCE, December 31, 1997 6,176 $ 25 $ 7,916 $10,932 $18,873 ISSUE OF COMMON STOCK* 36 -0- 199 -0- 199 NET INCOME* -0- -0- -0- 3,774 3,774 ----------- ----------- ----------- ----------- ----------- BALANCE, September 30, 1998* 6,212 $ 25 $ 8,115 $14,706 $22,846 =========== =========== =========== =========== =========== * Unaudited </TABLE> <PAGE 6> <TABLE> AAON, Inc. Consolidated Statements of Cash Flows <CAPTION> Nine Nine Three Three Months Months Months Months Ended Ended Ended Ended Sept 30, Sept 30, Sept 30, Sept 30, 1998* 1997* 1998* 1997* (In Thousands) <S> <C> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,774 $ 1,927 $ 1,390 $ 500 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 2,045 1,750 635 627 Change in assets and liabilities: <Increase> decrease in accounts receivable <5,379> <332> <4,026> <1,193> <Increase> decrease in inventories <343> <2,971> 1,782 <1,532> <Increase> decrease in prepaid expenses and other <179> <110> <145> 557 Increase <decrease> in accounts payable 1,457 390 <984> <248> Increase <decrease> in accrued liabilities 1,733 <135> 477 74 ------- ------- ------- ------- Total adjustments <666> <1,408> <2,261> <1,715> ------- ------- ------- ------- Net cash provided by <used in> operating activities 3,108 519 <871> <1,215> ------- ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures <4,486> <2,958> <713> <2,043> ------- ------- ------- ------- Net cash used in investing activities <4,486> <2,958> <713> <2,043> ------- ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowing under revolving credit agreement 36,580 28,990 14,525 11,065 Payments under revolving credit agreement <38,880> <26,830> <14,790> <8,490> Borrowing to long-term debt 3,466 1,180 1,764 1,250 Cash from issue of stock 199 78 82 23 ------- ------- ------- ------- Net cash provided by <used in> financing activities 1,365 3,418 1,581 3,848 ------- ------- ------- ------- NET CHANGE IN CASH <13> 979 <3> 590 CASH, beginning of period 26 138 16 527 ------- ------- ------- ------- CASH, end of period $ 13 $ 1,117 $ 13 $ 1,117 ======= ======= ======= ======= * Unaudited </TABLE> <PAGE 7> AAON, INC. NOTES TO FINANCIAL STATEMENTS September 30, 1998 1. BASIS OF PRESENTATION: The financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures made in these financial statements are adequate to make the information presented not misleading when read in conjunction with the financial statements and the notes thereto included in the Company's latest audited financial statements which were included in the Form 10-K Report for the fiscal year ended December 31, 1997, filed by AAON, Inc. with the SEC. Certain reclassifications of prior year amounts on the statement of cash flows have been made to conform to current year presentations. However, management believes that no adjustments to the financial statements are necessary. 2. INVENTORIES: Inventories at September 30, 1998 (unaudited), and December 31, 1997, consist of the following: Sept. 30, December 31, 1998 1997 ----------- ------------ Raw Materials $ 7,649,000 $ 7,073,000 Work in Process 1,644,000 2,136,000 Finished Goods 1,702,000 1,443,000 $10,995,000 $10,652,000 ----------- ----------- 3. LONG-TERM DEBT: Long-term debt at September 30, 1998 (unaudited), and December 31, 1997, consists of the following: Sept. 30, December 31, 1998 1997 ----------- ------------ Bank Note, payable in monthly principal payments of $3,333 through February 2000, with a balloon payment in March 2000, plus interest payable monthly at bank's base rate plus 0.25% (8.50% at Sept. 30, 1998) collateralized by real estate $ 257,000 $ 287,000 <PAGE 8> $15,150,000 bank line of credit with interest payable monthly at LIBOR plus 1.70% (7.36% at September 30, 1998) due August 31, 2000 collateralized by accounts receivable, inventory, and intangibles of AAON and AAON COIL PRODUCTS $ 9,185,000 $11,485,000 Five notes payable due in 84 equal installments totaling $59,728 beginning in April, May and Sept. 1998, plus interest at 7.47%, 7.52% and 7.11% collateralized by machinery and equipment. 4,756,000 1,260,000 ----------- ----------- 14,198,000 13,032,000 Less Current Maturities 757,000 175,000 ----------- ----------- $13,441,000 $12,857,000 ----------- ----------- 4. FOOTNOTES INCORPORATED BY REFERENCE: Certain footnotes are applicable to the financial statements, but would be substantially unchanged from those presented in the December 31, 1997, 10-K filed with the SEC. Accordingly, reference should be made to this statement for the following: Note Description - ---- ----------------------------------------------- 1 Operations and Organization 2 Accounting Policies 5 Income Taxes 6 Major Customers 7 Benefit Plans <PAGE 9> PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits - None. (b) Reports on Form 8-K - None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AAON, INC. Dated: November 2, 1998 By: /s/ Norman H. Asbjornson -------------------------- Norman H. Asbjornson President Dated: November 2, 1998 By: /s/ William A. Bowen -------------------------- William A. Bowen Vice President-Finance