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, 1999 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. 6,259,324 shares of $.004 par value Common Stock. <PAGE 1> PART I - FINANCIAL INFORMATION Item 1. Financial Statements. On pages 4 through 9 of this report. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations. Net sales increased by $17,448,000, up 22% (from $78,553,000 to $96,001,000) during the nine-month period ended September 30, 1999, compared to the same period in 1998. The increase in sales in 1999 resulted from continuing strong demand from both manufacturers' representatives and the Company's national account base, which is expected to continue throughout the rest of the year. Gross profit increased in the first nine months of 1999 to 25.3% compared to 18.3% in the same period in 1998. The increase in margins was attributable to growth and stability of the Company's work force which impacted manufacturing efficiencies, and continuing efforts to automate certain areas of production which aided operating margins. SG&A expenses increased $4,960,000 (64%) during the nine months ended September 30, 1999, compared to 1998. This increase is primarily attributable to higher sales volume and includes a $1,600,000 increase in warranty costs, $500,000 in professional and legal fees, $1,300,000 million in employment related costs and other selling and marketing expenses. Net income during the first nine months of 1999 ($7,006,000) increased almost four times the rate of sales (86% vs. 22%) compared to the same period in 1998, due to the improvement in gross margins, which resulted primarily from improved operating efficiencies rather than price increases. Financial Condition and Liquidity. The $4,861,000 increase in accounts receivable at September 30, 1999, compared to December 31, 1998, was due to the sales increase. The $1,748,000 decrease in inventories resulted from tighter production and purchasing controls. Property, plant and equipment increased $2,518,000, at September 30, 1999, reflecting additions to machinery and equipment, including a new main frame computer, offset in part by greater depreciation. All capital expenditures in the first nine months of 1999 were financed out of cash flow, borrowings under the Company's revolving credit bank loan and equipment financing. Current liabilities were up $2,086,000 reflecting higher reserves and accrued liabilities, related to the increase in sales and production. 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. <PAGE 2> For information concerning the Company's long-term debt at September 30, 1999, see Note 3 to the Financial Statements on pages 8 and 9 of this report. 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. 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 756 responses have been received, most indicating that they are in compliance. The Company is following up with those not in compliance and those who have not responded. The Company is now doing business only with suppliers who are in compliance. The Company does not anticipate incurring material costs in addressing Y2K issues. 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 and establish alternate suppliers for those in question. Forward-Looking Statements This Report includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "expects", "anticipates", "intends", "plans" "believes", "seeks", "estimates", "will", variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Important factors that could cause actual results to differ materially from those in the forward-looking statements include (1) the timing and extent of changes in material prices, (2) the effects of fluctuations in the commercial/industrial new construction market, (3) the timing and extent of changes in interest rates, as well as other competitive factors during the year, and (4) general economic, market or business conditions. Item 3. Quantitative and Qualitative Disclosures About Market Risk. While the Company is exposed to changes in interest rates regarding $6,135,000 of its total debt of $8,543,000, a hypothetical 10% change in interest rates on its variable rate borrowings would not have a material effect on the Company's earnings or cash flow. <PAGE 3> Foreign sales account for only 2% of the Company's total sales and the Company accepts payment for such sales only in U.S. dollars; hence, the Company is not exposed to any foreign currency exchange rate risk. Important raw materials purchased by the Company are steel, copper and aluminum, which are subject to price fluctuations. The Company attempts to limit the impact of price increases on these materials by negotiating with each of its major suppliers on a term basis from six months to three years. <PAGE 4> <TABLE> AAON, Inc. Consolidated Balance Sheet * Sep. 30, 1999 Dec. 31, 1998 ------------- ------------- (In Thousands) <CAPTION> <S> <C> <C> ASSETS CURRENT ASSETS Cash $ 752 $ 25 Accounts Receivable 22,794 17,933 Inventories 10,412 12,160 Prepaid Expenses 218 241 Deferred Income Tax 1,594 1,594 ------- ------- Total Current Assets 35,770 31,953 ------- ------- PROPERTY, PLANT AND EQUIPMENT, at cost: Land 874 874 Buildings 12,830 12,089 Machinery and Equipment 19,483 16,264 Furniture and Fixtures 2,784 2,004 ------- ------- sub-total Property, Plant & Equipment 35,971 31,231 Less: Accumulated depreciation 14,900 12,678 ------- ------- Total Property, Plant & Equipment 21,071 18,553 ------- ------- TOTAL ASSETS $56,841 $50,506 ======= ======= LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES Accounts Payable $ 7,884 $ 8,478 Accrued Liabilities 8,879 5,880 Current maturities of long-term debt 438 757 Total Current Liabilities 17,201 15,115 ------- ------- LONG-TERM DEBT 8,105 10,980 ------- ------- STOCKHOLDER'S EQUITY Common Stock, $.004 par, 50,000,000 shares 25 25 authorized; 6,259,324 issued and outstanding Preferred Stock, 5,000,000 shares authorized, - - no shares issued Additional paid-in capital 8,342 8,224 Retained earnings 23,168 16,162 ------- ------- Total Stockholders' Equity 31,535 24,411 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $56,841 $50,506 ======= ======= * unaudited </TABLE> <PAGE 5> <TABLE> AAON, Inc. Consolidated Statements of Operations* Three Months Ended Nine Months Ended ------------------ ----------------- Sep. 30, 1999 Sep. 30, 1998 Sep. 30, 1999 Sep. 30, 1998 ------------- ------------- ------------- ------------- (In Thousands) <CAPTION> <S> <C> <C> <C> <C> Sales, net $ 35,003 $ 29,089 $ 96,001 $ 78,553 Cost of Sales 26,650 23,737 71,754 64,168 -------- -------- -------- -------- Gross Profit 8,353 5,352 24,247 14,385 Selling, general and administrative expenses 3,696 2,882 12,657 7,697 -------- -------- -------- -------- Income from operations 4,657 2,470 11,590 6,688 Interest expense 126 284 459 699 Amortization and other expense (57) (63) (133) (151) -------- -------- -------- -------- Income before income taxes 4,588 2,249 11,264 6,140 Income tax provision 1,767 859 4,258 2,366 -------- -------- -------- -------- Net income $ 2,821 $ 1,390 $ 7,006 $ 3,774 ======== ======== ======== ======== Net income per share (Basic) $ 0.45 $ 0.22 $ 1.12 $ 0.61 ======== ======== ======== ======== (Diluted) $ 0.43 $ 0.22 $ 1.09 $ 0.59 ======== ======== ======== ======== Weighted average of shares outstanding: (Basic) 6,258,348 6,208,362 6,242,081 6,197,540 ========= ========= ========= ========= (Diluted) 6,499,669 6,361,867 6,452,327 6,383,513 ========= ========= ========= ========= *unaudited </TABLE> <PAGE 6> <TABLE> AAON, Inc. Consolidated Statements of Stockholders' Equity Common Stock Paid In Accumulated Shares Amount Capital Earnings Total --------------------- ------- ----------- ----- (in thousands) <CAPTION> <S> <C> <C> <C> <C> <C> Balance, December 31, 1998 6,219 $ 25 $8,224 $16,162 $24,411 Issue of Common Stock* 40 - 118 - 118 Net Income* 0 - - 7,006 7,006 ----- ---- ------ ------- ------- Balance, September 30, 1999* 6,259 $ 25 $8,342 $23,168 $31,535 ===== ==== ====== ======= ======= * unaudited </TABLE> <PAGE 7> <TABLE> AAON, Inc. Consolidated Statements of Cash Flows* Nine Months Ended ----------------- Sep. 30, 1999 Sep. 30, 1998 ------------- ------------- (In Thousands) <CAPTION> <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 7,006 $ 3,774 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and Amortization 2,222 2,045 Change in assets and liabilities: (Increase) decrease in: Accounts Receivable (4,861) (5,379) Inventories 1,748 (343) Prepaid Expenses 23 (179) Increase (decrease) in: Accounts Payable (594) 1,457 Accrued Liabilities 2,999 1,733 ------- ------- Total Adjustments 1,537 (666) ------- ------- Net cash provided by (used in) Operating Activities 8,543 3,108 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Capital Expenditures (4,740) (4,486) ------- ------- Net cash used in investing activities (4,740) (4,486) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowing Under Revolving Credit Agreement 43,830 36,580 Payments under Revolving Credit Agreement (44,585) (38,880) Changes in long-term debt (2,439) 3,466 Cash from issue of Stock 118 199 ------- ------- Net cash provided by (used in) financing activities (3,076) 1,365 ------- ------- NET CHANGE IN CASH 727 (13) CASH, beginning of period 25 26 ------- ------- CASH, end of period $ 752 $ 13 ======= ======= *unaudited </TABLE> <PAGE 8> AAON, INC. NOTES TO FINANCIAL STATEMENTS September 30, 1999 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, 1998, filed by AAON, Inc. with the SEC. Certain reclassifications of prior year amounts 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, 1999 (unaudited), and December 31, 1998, consist of the following: September 30, December 31, 1999 1998 ------------ ----------- Raw Materials $ 6,825,000 $ 8,253,000 Work in Process 1,574,000 1,628,000 Finished Goods 2,013,000 2,279,000 ------------ ------------ $10,412,000 $12,160,000 ------------ ------------ 3. LONG-TERM DEBT: Long-term debt at September 30, 1999 (unaudited), and December 31, 1998, consists of the following: September 30, December 31, 1999 1998 ------------ ----------- 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% (8.0% at June 30, 1999) collateralized by real estate $ 0 $ 250,000 <PAGE 9> $15,150,000 bank line of credit with interest payable monthly at LIBOR plus 1.70% (7.08% at September 30, 1999) due August 31, 2001 $ 6,135,000 $ 6,890,000 Three notes payable due in 84 equal installments totaling $36,489, plus interest at 7.47%, and 7.52%, collateralized by machinery and equipment 2,408,000 4,597,000 ----------- ----------- 8,543,000 11,737,000 Less Current Maturities 438,000 757,000 ----------- ----------- $ 8,105,000 $10,980,000 ----------- ----------- 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, 1998, 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 10> PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits - None. (b) Registrant filed one report on Form 8-K during the three-month period ended September 30, 1999. It was dated September 17, 1999, reporting Registrant's authorization of the repurchase of up to 10% of the company's outstanding common stock. 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 4, 1999 By: /s/ Norman H. Asbjornson -------------------------------- Norman H. Asbjornson President Dated: November 4, 1999 By: /s/ Kathy I. Sheffield -------------------------------- Kathy I. Sheffield Treasurer