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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1999
or
[ ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to ______________
Commission File Number 0-27958
FLANDERS CORPORATION
(Exact name of registrant as specified in its charter)
North Carolina 13-3368271
(State or other jurisdiction of ----------
incorporation or organization) (IRS Employer ID Number)
2399 26th Avenue North, St. Petersburg, FL 33734
------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (727) 822-4411
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, $.001 per share par value
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. [ ]
As of April 13, 2000, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $57,985,947.
As of April 13, 2000, the number of shares outstanding of the registrant's
common stock was 25,435,583 shares.
FLANDERS CORPORATION
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
PART I........................................................................3
Item 1. Business.........................................................3
Item 2. Properties......................................................11
Item 3. Legal Proceedings...............................................12
Item 4. Submission of Matters to a Vote of Security Holders.............12
PART II......................................................................13
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................................13
Item 6. Selected Financial Data.........................................14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................15
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.....................................................24
Item 8. Financial Statements and Supplementary Data.....................24
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..........................24
PART III.....................................................................25
Item 10. Directors and Executive Officers of the Registrant..............25
Item 11. Executive Compensation..........................................26
Item 12. Security Ownership of Certain Beneficial Owners and
Management......................................................32
Item 13. Certain Relationships and Related Transactions..................34
PART IV......................................................................35
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.............................................35
SIGNATURES...................................................................38
FINANCIAL STATEMENTS
Report of Grant Thornton LLP Independent Certified Public Accountants...F-2
Independent Auditor's Report of McGladrey & Pullen, LLP.................F-3
Consolidated Balance Sheets.............................................F-4
Consolidated Statements of Earnings.....................................F-5
Consolidated Statements of Stockholders' Equity.........................F-6
Consolidated Statements of Cash Flows...................................F-7
Notes to Consolidated Financial Statements.............................F-10
Financial Statement Schedules..........................................F-27
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PART I
Item 1. Business
OVERVIEW
We design, manufacture and sell air filters and related products. Historically,
we have been a leading manufacturer of High Efficiency Particulate Air (HEPA)
filters, specializing in high-end cleanroom and containment filters for end
users in semiconductor manufacturing, nuclear processing, biotechnology, and
other high technology applications. In 1995, we began a strategy of growth
through acquisition, and acquired manufacturers of a broad range of additional
air filtration products, growing from $39 million in sales in 1995 to
approximately $171 million in sales in 1999. We now offer air filters ranging
from spun-glass furnace filters through high-volume electrostatic precipitators
and cleanroom laminar-flow HEPA filters.
Our air filters are utilized by many industries, including those associated with
commercial and residential heating, ventilation and air conditioning systems
(commonly known as "HVAC" systems), semiconductor manufacturing, ultra-pure
materials, biotechnology, pharmaceuticals, synthetics, nuclear power and nuclear
materials processing. We also design and manufacture much of our own production
equipment to automate our processes in order to decrease labor costs associated
with our standard products. We also produce glass-based air filter media for
many of our products. Our customers include Abbott Laboratories, The Home Depot,
Inc., Motorola, Inc., Merck & Co., Inc., Upjohn Co., Wal-Mart Stores, Inc.,
Westinghouse Electric Corp., and several large computer chip manufacturers.
The vast majority of our revenues come from the sale of after-market replacement
filters, since air filters are typically placed in equipment designed to last
much longer than the filters.
GENERAL DEVELOPMENT OF BUSINESS
Flanders Corporation was incorporated on July 2, 1986 in the State of Nevada,
and is currently domiciled in North Carolina. Beginning in December 1995, we
began to implement a strategy of growth through acquisition, acquiring several
companies specializing in air filters and related products, including Flanders
Filters, Inc., Charcoal Service Corporation, Air Seal Filter Housings, Inc.,
Precisionaire, Inc., and Eco-Air Products, Inc.
Effective April 1, 1999, we purchased the Tidewater group of companies for
$1,750,000, and spent approximately $177,000 in legal, accounting and other
expenses which were counted as part of the acquisition cost, for a total cost of
acquisition of approximately $1,927,000. Tidewater is an air filter distributor
and service organization, with some limited manufacturing capacity for specialty
products. Prior to the acquisition, Tidewater was an exclusive distributor of a
competitor's products.
Effective June 30, 1998, pursuant to a stock purchase agreement, we acquired
substantially all the outstanding stock of Eco-Air Products, Inc. The purchase
price, including expenses and net of cash received, was approximately
$15,455,160, plus up to $5,000,000 payable in cash or common stock (at sellers'
option) if certain performance criteria are met.
RECENT DEVELOPMENTS
On March 21, 2000, we announced that we had engaged the investment banking firm
PaineWebber Incorporated to help us explore strategic alternatives, including
the possible sale of the Company.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This annual report, including all documents incorporated herein by reference,
includes certain "forward-looking statements" within the meaning of that term in
Section 27A of the Securities Act of 1933, and Section 21E of the Exchange Act,
including, among others, those statements preceded by, following or including
the words "believes," "expects," "anticipates" or similar expressions.
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These forward-looking statements are based largely on the current expectations
of management and are subject to a number of risks and uncertainties. Actual
results could differ materially from these forward-looking statements. In
addition to the other risks described in the "Factors That May Affect Future
Results" discussion under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Part II of this annual report, important
factors to consider in evaluating such forward-looking statements include risk
of product demand, market acceptance, economic conditions, competitive products
and pricing, difficulties in product development, commercialization and
technology. In light of these risks and uncertainties, there can be no assurance
that the events contemplated by the forward-looking statements contained in this
annual report will, in fact, occur.
INDUSTRY BACKGROUND
The McIlvaine Company, a leading industry analyst, estimated that the worldwide
air filtration market would be approximately $3.2 billion in 1999, with the
United States being the largest market for air filters because of the prevalence
of forced air heating and cooling. McIlvaine also estimated the air filtration
market would grow at an annual rate of 8% per year through 2003. They indicated
that the driving forces behind growth in the air filtration market would be
using higher-performance filters in commercial and residential spaces instead of
current low-efficiency models, and the use of air filters in new applications.
Management believes the forces driving the air filtration market are evolving,
beginning in the past decade and continuing for the next several years, from
preserving machinery and equipment to maintaining indoor air quality. In
addition, we expect many high-growth technology industries to increase their
reliance on air filters to remove microscopic and gaseous contaminants from
sensitive manufacturing processes associated with semiconductor manufacturing,
pharmaceutical production, ultra-pure materials manufacturing and biotechnology.
Companies are devoting resources to air filtration products to enhance process
efficiency and employee productivity.
Air filters are used in many different applications, including the following:
o Commercial and Residential HVAC Systems. Replacement filters are an
essential requirement for the efficient operation of commercial and
residential HVAC systems.
o General Industrial. Air filters are used in standard industrial settings
to provide cleaner work environments; for example, auto makers use air
filtration systems to remove "oil mist" contaminants from the air in
their plants, and industrial paint booth users utilize air filtration to
remove paint particles from the air.
o Semiconductors. HEPA and carbon filters are necessary to meet the
increasingly stringent manufacturing environment requirements of
semiconductor manufacturers, where microscopic airborne contaminants can
ruin microchips during production, having a large impact on
manufacturing yield and profitability. Carbon filters are also being
increasingly used to filter gaseous contaminants from semiconductor
manufacturing areas.
o Pharmaceuticals. Pharmaceutical companies are increasingly using
cleanrooms to prevent cross-contamination between different products and
different lots of the same products being manufactured at the same
facility. The increasing use of cultured microbes for drug production is
also expected to increase demand for high-end containment environments.
o Biotechnology. Containment systems for the manipulation of viruses and
bacteria using genetic engineering techniques are critical to the
biotechnology industry.
o Nuclear Power and Materials Processing. Filtration systems are necessary
to radioactive containment procedures for all nuclear facilities.
RECENT TRENDS
Recent trends in the air filter industry, as well as changes in laws and
governmental regulations, all encourage an increased awareness of the benefits
of the use of air filtration products. Some of these trends and changes are:
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Indoor Air Quality and Health. We believe there is an increase in public
concern regarding the effects of Indoor Air Quality on employee productivity
and health, as well as an increase in interest in standards for detecting
and solving IAQ problems. For example, the American Society of Heating
Refrigeration and Air-Conditioning Engineers (ASHRAE) has recently
established certain minimum standards for ventilation and indoor air quality
for commercial and industrial settings. The World Health Organization has
recently been studying the effects of air quality on human health, including
widely publicized epidemiological studies indicating that airborne
contaminants kill more people than automobile accidents.
Hazardous Working Environments. Several studies recognize that air quality
in working facilities has an impact upon human health. OSHA regulations, in
particular, have made IAQ a consideration in a wide variety of industries,
ranging from those industries using spray-paint booths to those using
automobile assembly lines.
Sick Building Syndrome. Sick Building Syndrome, which is characterized by
lethargy, frequent headaches, eye irritation and fatigue, has recently been
shown to be a valid concern, and is a major design consideration in new and
renovated commercial and industrial buildings. The identification of "sick"
buildings, and solutions for mitigation, involve complex issues which need
to be examined on a case-by-case basis by qualified engineers; solutions
typically include improving the HVAC and filtration systems of the "sick"
buildings.
Hazardous Emission Regulation and Resultant Liability. Electrical utilities
became subject to emissions regulations under Title 4 of the Clean Air Act.
In addition, OSHA's Hazardous Communication Standard, the Toxic Release
Inventory and community "right to know" regulations regarding liability for
claims made by employees or neighboring communities have made many
industries, in particular the chemical and semiconductor industries, more
aware of clean air regulations. As a result, these industries have taken
voluntary steps, including the utilization of air filtration systems, to
bring emissions of potentially hazardous substances into line with
regulatory standards.
STRATEGY
Our current business strategy seeks to increase earnings, and hence shareholder
value, by improving operating efficiency and increasing our market share.
IMPROVE OPERATING EFFICIENCY
Eliminate Unprofitable Operations. During 1997, we established a new
subsidiary, Airseal West, Inc., to serve as a manufacturer of industrial air
handlers, custom housings, and related products for the western U.S. The
market opportunities envisioned by this venture failed to materialize, and
Airseal West focused its primary efforts on perceived opportunities in
businesses and products unrelated to air filtration, including sporting
goods, vending equipment and other general manufacturing. In December 1999,
the Board of Directors adopted a formal plan to close Airseal West and sell
its non air filter related assets. We estimate this will save approximately
$2 million per year (see "Management's Discussions and Analysis of Financial
Condition and Results of Operations - Discontinued Operations").
Vertical Integration. In December 1997, we acquired a small glass media
manufacturing plant in Salt Lake City, Utah, which produced spun-glass media
for our highest-volume products, flat panel filters, using traditional
processes, supplying perhaps 5% of our demand for this material. This plant
was also in the process of building a more efficient plant for producing the
spun-glass media used in these filters. In 1998, we began to build the
second generation of equipment for this purpose. By September 1999, we had
completed, evaluated and replicated the second generation of equipment and
begun building enough of this equipment to increase our production to the
level required to supply our three plants in the western U.S. with media.
This project should be completed in the second quarter of 2000. We plan to
establish a duplicate plant in North Carolina to supply our plants in the
rest of the U.S. With both plants in production, we estimate this process
will decrease our costs associated with spun-glass materials by at least
forty percent, representing approximately $2.5 million in annual cost
savings at current rates of usage.
Strategic Acquisitions. We continue to search for opportunities to acquire
new businesses, although our criteria for evaluating these businesses has
moved toward acquiring regional distributors and resellers, and away from
acquiring competing air filter manufacturers. We are looking for potential
acquisitions with the
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following characteristics: (i) dominant positions in local or regional
markets, (ii) a stable customer base distinct from our existing customers,
and (iii) a history of consistent and healthy earnings. Acquiring resellers
and distributors with these characteristics allows us to increase operating
margins by removing at least one layer of "middlemen," and their compounding
mark-ups and commissions from the sales and distribution process, allowing
us to charge higher prices while maintaining competitive pricing with end
users. At the present time, we do not have any binding agreements with
respect to future acquisitions.
Centralize Overhead Functions. During the fourth quarter of 1999, we
consolidated all of the sales forces of our various subsidiaries into a
single, consistent national sales team, eliminating overlapping territories,
duplication of literature, centralizing travel coordination and adding focus
to our sales efforts. We are continuing to centralize and eliminate
duplication efforts between subsidiaries in the following areas: purchasing,
production planning, shipping coordination, accounting, personnel
management, risk management and benefit plan administration.
Expand Mexican Manufacturing. We expect to have completed an expansion of
our Tijuana, Mexico, plant, which will produce our standard spun-glass and
pleated filters, in all grades, for sale in the western U.S. We will be
moving some of the production equipment from our plants in San Diego and
Nevada to this expansion.
Electronic Commerce. We believe there are significant cost savings and error
reduction opportunities in allowing our customers to enter orders, examine
specifications, receive confirmations, and check on the status of their
orders, via the Internet. In September 1999, we began an initiative to
analyze all other areas of our business for plans to implement savings by
using the Internet to automate communications with current customers,
potential customers, end users and investors. We believe there are
opportunities for significant cost reductions in customer service, shipping
errors, orders administration, customer pre-qualification, lead generation
and documentation storage. We anticipate completion of the first iteration
and implementation of this process in the year 2000, and plan to make the
Internet a central part of our future strategy for growth and cost
minimization. We do not anticipate significant direct retail sales from
electronic commerce in the foreseeable future, because shipping bulky
packages of inexpensive filters in less than truckload quantities is
prohibitively expensive.
Increase Market Share
Increase Sales to Existing and New Customers. We sell our products through a
direct sales force and manufacturers' representatives. Historically, any
given manufacturers' representative has only sold a small sub-set of our
current complete product line. However, we now offer a much larger range of
air filtration products, allowing these representatives to purchase their
full line of air filtration products from us instead of buying a mix of air
filtration products from a range of manufacturers.
Use Facilities Located Throughout the United States to Increase Market
Share. Through acquisition and the establishment of new plants, we have
placed facilities within one day's over-the-road shipping of most major
population centers in the United States. We believe this ability to
regionalize production and distribution will improve our business in several
ways: (i) Decrease cost of sales by reducing the average distance between
our plants and our customers, and hence decrease the cost of outbound
freight; (ii) increase responsiveness by decreasing the average time
required to ship products to customers; and (iii) increase our share of
national accounts' total business by having manufacturing facilities in
closer proximity to customers' regional distribution centers. The ability to
service all major population centers with regional manufacturing centers is
critical for our business, allowing us to compete on price against less
broadly based competitors without sacrificing margins, as well as the
ability to respond more rapidly than most of our competition.
Adapt Processes to New End User Requirements. During 1999, we established a
complete line of air filtration products for the removal of airborne paint
and associated solvents from the air. We were able to adapt our bulk
manufacturing processes to the high-volume synthetic media required for this
end use, and anticipate that revenues in this area will exceed $10 million
in 2000. We continue to watch for applications where our competitive
strengths can be readily adapted to new end users.
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Offer Indoor Air Quality Diagnosis and Remediation Services. During 1999, as
part of the acquisition of the Tidewater group of companies, we acquired a
small engineering firm specializing in monitoring air quality using
automated real-time data collection techniques over a period of months,
diagnosing any potential indoor air quality problems and suggesting
remediation programs. We believe we will be able to leverage this expertise
into value-added sales to our existing industrial and commercial customers,
and the filter sales and service companies which supply them, increasing our
revenues by adding value-added consulting and monitoring services.
Continued Emphasis on Quality and Performance. A continued emphasis on
product quality has allowed us to capture market share serving several
industries in recent years.
MARKETING
During 1999, we restructured and centralized our sales and marketing structure,
which we believe allows us to focus our marketing efforts more precisely, and
ensures consistency of presentation and pricing across all customers.
Previously, each subsidiary had its own sales and marketing infrastructure,
which contributed to waste and inefficiency, and more importantly, market
confusion. Our marketing efforts are targeted to the needs of individual
customers and groups of customers, and may consist of mass marketing allowances
and incentive programs for retailers, educational point of purchase materials
and enhanced signage for consumers and industry-specific technical seminars for
filter sales and service organizations.
Much of our marketing effort consists of personal visits to customers and
distributors through an extensive tiered network of contract salespeople.
Periodic visits are enhanced by mass mailings announcing new products,
participation in trade shows for exposure and lead generation, technical
articles and advertisements in trade periodicals, and a newly redesigned catalog
containing all Flanders products. During 1999, we restructured and unified all
of our product offerings, so that each subsidiary no longer generates its own
marketing literature. We also re-wrote the bulk of our catalog and promotional
materials to include all product lines in a consistent and easy-to-access
format, which can be used by all of our customers.
Besides developing new sales leads and contacts, we are also focused on
increasing the effectiveness of our existing distributors and contract salesmen,
by allowing them to offer our products as a complete "single-source" for air
filtration products. We believe this will allow them to increase their sales for
the following reasons:
Dependability and Responsiveness. Our ability to express-ship via standard
ground freight to any major population center within one day is a key
competitive advantage. We also believe that our expansion program and
general production capacity also allow us to handle relatively large orders
with shorter lead times than any of our competitors.
Product Quality. We are known as a manufacturer of high performance air
filtration products. We currently offer filters of 99.999997% on particles
0.1 microns or larger, which we believe is the highest efficiency rating
available anywhere. We have also been recognized for consistency and quality
of our products by several third-party rating organizations.
Name Recognition. We believe that each of our product lines has high name
recognition in its target markets. Our representatives and distributors have
indicated that they believe their sales will increase with additional
products associated with Flanders.
Single-Source Supplier. We provide a broad spectrum of air filtration
products. The ability to work with a single source for filters will enable
representatives to operate more efficiently, only needing to be trained on
one filtration system, maintain contacts with a single organization and
order from a central source.
Product Promotion and Innovation. We plan to continue to introduce new
applications we are developing for filtration products. Representatives and
distributors will be able to take advantage of the additional name
recognition and public knowledge associated with the marketing of the new
products. We believe these representatives will see this as a competitive
advantage to selling our products.
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PRODUCTS
We design, manufacture and market a broad range of air filters and related
products, including:
o High Efficiency Particulate Air (HEPA) filters (at least 99.97%
efficient) in various grades, for use in semiconductor facilities,
nuclear containment vessels, disease containment facilities, and other
critical applications
o Absolute Isolation Barriers which are customized stand-alone units,
typically manufactured of stainless steel, used in various industries
which require absolute control over contaminants, atmospheric
composition and containment
o Industrial mid-range specialty filters which fall under specifications
which are categorized by efficiency ratings established by the American
Society of Heating, Refrigeration and Air Conditioning Engineers
(ASHRAE), used in a wide variety of industries, including paint
facilities, automobile factories, chemical treatment plants, mushroom
farms, coal mines, oil refineries and power plants
o Carbon filters, both in bonded panels and activated charcoal beds, used
to remove gaseous contaminants, odors and toxic chemical vapors in
various commercial and industrial applications
o Commercial and industrial filters for use in office and general
manufacturing environments, typically sold through wholesalers and
distributors
o Residential heating and air conditioning filters, typically sold through
retailers
o Specialized air filter housings, for use in multi-stage filtration
applications
o Other related products, including tubing insulation, ductwork and
equipment cleaning chemicals, custom air handlers and specialized filter
housings.
MANUFACTURING
We manufacture air filters, housings, Absolute Isolation Barriers and related
equipment at several facilities in the United States, which range in size from
18,000 square feet to approximately 400,000 square feet.
o Precisionaire has seven separate manufacturing facilities located in
Bartow, Florida, Terrell, Texas, Salt Lake City, Utah, Henderson,
Nevada, Momence, Illinois, Smithfield, North Carolina and Auburn,
Pennsylvania, which produce a broad range of commercial, residential and
industrial filters.
o FFI's facility in Washington, North Carolina, produces high-end HEPA
products for cleanrooms. Management believes that FFI's ability to
manufacture its own HEPA filter media provides it with a significant
competitive advantage, allowing more direct control over quality and
composition than is generally available with outside suppliers.
o Flanders/CSC's facility, located in Bath, North Carolina, manufactures
HEGA filters, high-end containment environments, housings, custom filter
assemblies and other custom filtration products and systems which
require extensive custom design, production and lot tracking. For
example, CSC's products are used in the production and containment of
potentially dangerous biologically engineered microorganisms.
o Air Seal's facility, located in Stafford, Texas, produces mid-range
custom filter housings. o Eco-Air's facilities in San Diego, California,
and Tijuana, Mexico, manufacture air filtration products ranging from
standard-grade disposable filters through industrial HEPA filters.
In addition, we design, manufacture and assemble the majority of our automated
production equipment.
Our manufacturing operations are subject to periodic inspection by regulatory
authorities. Because of the nature of some of our products, these agencies
include, in some cases, the Department of Energy, the Food and Drug
Administration and other agencies responsible for overseeing sensitive
technologies. One of the considerations in deciding which types of products each
facility will manufacture is the segregation of highly-regulated products to a
minimal number of facilities to reduce the overhead associated with regulatory
monitoring and compliance.
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Each of our manufacturing facilities utilizes testing and design strategies
appropriate to the products manufactured. These range from standard statistical
process quality controls for residential replacement filters to individual
testing and certification with patented proprietary particle scanning
technologies for each laminar-grade HEPA filter. We believe that our ability to
comprehensively test and certify HEPA filters is a competitive advantage.
SOURCE AND AVAILABILITY OF RAW MATERIALS
Our principal raw materials are cardboard, fiberglass fibers, extruded glass,
sheet metal, extruded aluminum, adhesives, resins and wood. These raw materials
are readily available in sufficient quantities from many suppliers.
COMPETITION
The air-filtration market is fragmented and highly competitive. There are many
companies which compete in our market areas. We believe that the principal
competitive factors in the air filtration business include product performance,
name recognition, price, product knowledge, reputation, customized design,
timely delivery and product maintenance. We believe that we compete favorably in
all of these categories. Competitors include successful companies with
resources, assets, financial strength and market share which may be greater than
ours. Major competitors include American Air Filter International, Farr Company,
HEPA Corporation, Purolator Products Air Filtration Company, Donaldson Company,
Inc. and Clark Corporation.
PATENTS, TRADEMARKS AND LICENSES
We currently hold 17 patents relating to filtration technology, including
patents relating to HEPA filters and fabrication methods, filter leak testing
methods and laminar flow cleanrooms. We also have patents pending for one of the
components related to Absolute Isolation Barriers, and the impregnation method
used in the manufacture of Arm & Hammer Pleated Filters.
We have obtained and own the following federal trademark registrations:
PRECISIONAIRE(R), EZ FLOW(R), SMILIE(R), AIRVELOPE(R), CHANNEL-CEIL(R),
CHANNEL-HOOD(R), PUREFORM(R), ECONO-CELL(R), GAS-PAK(R), PUREFRAME(R), DIMPLE
PLEAT(R), BLU-JEL(R), VLSI(R), CHANNEL-SEAL-ADAPTER(R), SUPERFLOW(R),
FLANDERS(R), CHANNEL-WALL(R), SUPERSEAL(R), AIRPURE(R) and PURESEAL(R). The
Company also has applied for federal trademark protection for the following
marks: FLANDERS ABSOLUTE ISOLATIONTM, FLANDERS/CSCTM, TECH-SORBTM and
FUTUREFLOTM. Although management believes that the patents and trademarks
associated with our various product lines and subsidiaries are valuable, we do
not consider any of them to be essential to our business.
We currently license some of our products to specialty HVAC and ASHRAE filter
manufacturers who produce products under their own name and with their own
identifying labels.
CUSTOMERS
We are not dependent upon any single customer. One customer, Wal-Mart Stores,
Inc., accounted for 10%, 10% and 11% of net sales during 1999, 1998 and 1997,
respectively. Home Depot, Inc., accounted for 12%, 10% and 8% of net sales
during 1999, 1998 and 1997, respectively. No other single customer accounted for
10% or more of net sales. Other significant customers include Abbott
Laboratories, Motorola, Inc., Merck & Co., Inc., Upjohn Co., Westinghouse
Electric Corp., and several large computer chip manufacturers.
BACKLOG
We had approximately $12,700,000 in firm backlog on December 31, 1999, compared
to $11,084,000 on December 31, 1998. Firm backlog includes orders received and
not begun and the unfinished and unbilled portion of contracts in progress.
Orders are typically not cancelable without penalty, except for certain stable
filter supply contracts to nuclear facilities operated by the United States
government. Backlog varies from week to week, based on the timing and mix of
orders received. All backlog at December 31, 1999, is expected to be shipped by
the end of the second quarter of 2000.
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EMPLOYEES
The Company employed 2,391 full-time employees on December 31, 1999; 1,986 in
manufacturing, 29 in development and technical staff, 48 in sales and marketing,
and the remaining 328 in support staff and administration. The Company believes
that its relationship with its employees is satisfactory. Manufacturers'
representatives are not employees of the Company.
RESEARCH AND DEVELOPMENT
Our research and development is focused in the following areas:
Automated equipment design, to increase the efficiency and profitability of
production lines used for mass production of off-the-shelf filters.
Alternative filtration media types, including evaluation of new synthetic
media products, which might either increase efficiency or decrease media
costs; the Company's Arm & Hammer Pleated Filters are an application of this
type of research.
Improved media production techniques, particularly at Precisionaire's spun
fiberglass production facility in Salt Lake City, Utah, and FFI's HEPA paper
mill in Washington, North Carolina; during the past ten years, the Company
has increased the efficiency of its filters through advances in media
formulation and production techniques from 99.97% to 99.999997%.
Application development, where new methods and products are developed from
existing technologies.
Research and development costs for 1999, 1998 and 1997 were approximately
$763,000, $2,250,000 and $373,000, respectively. Research and development costs
were expensed and included in general and administration expenses during the
period incurred. The large increase in research and development expense between
1998 and 1997 was primarily due to the development of three product lines: Arm &
Hammer Pleated Filters, Environmental Tobacco Smoke Systems, and Retrofit Air
Handlers.
GOVERNMENT REGULATION
Our operations are subject to certain federal, state and local requirements
relating to environmental, waste management, health and safety regulations. We
attempt to operate our business in compliance with all applicable government,
environmental, waste management, health and safety regulations and we believe
that our products meet standards from applicable government agencies. There can
be no assurance that future regulations will not require us to modify our
products to meet revised safety or other requirements.
SEASONALITY
Historically, our business has been seasonal, with a substantial percentage of
sales occurring during the second and third quarters of each year. In addition,
demand for our general commercial and industrial products appears to be highly
influenced by the weather, with higher sales generally associated with extremes
of either hot or cold weather, and lower sales generally associated with
temperate weather. Because of these seasonal and weather-related demand
fluctuations, quarter-to-quarter performance may not be a good predictor of
future results.
EXPORT SALES
We sell products for and to end users outside of the United States through
domestic specialty cleanroom contractors. These sales are counted as domestic
sales. We also sell products through foreign distributors, primarily in Europe,
and through Flanders International, Ltd., a wholly-owned subsidiary located in
Singapore which sells to customers in the Far East. Sales through foreign
distributors and Flanders International amounted to less than 5% of net sales
for each of the last three fiscal years. Assets held outside the United States
are negligible.
10
Item 2. Properties
The following table lists our principal facilities. Management believes that
these properties are adequate for its current operational needs, but we may at
some point relocate, reorganize or consolidate various facilities for reasons of
operating efficiencies, or may open new plants to take advantage of perceived
new economic opportunities.
Approximate Floor Monthly
Principal Facility Location Space (sq. ft.) Expense Lease/Type
------------------ -------- ----------------- --------- ----------
Manufacturing and office Washington, North
facility Carolina 220,000 $13,775 Owned
Manufacturing, service and
office facility Bath, North Carolina 44,282 N/A Owned
Manufacturing plant Bartow, Florida 175,000 29,121 Owned
R&D & Warehouse Lakeland, Florida 40,000 6,559 Leased
Manufacturing plant Terrell, Texas 146,256 29,858 Owned
Manufacturing plant Auburn, Pennsylvania 91,000 7,097 Owned
Office space and St. Petersburg,
headquarters Florida 18,000 N/A Owned
Office space and Warehouse Richmond, VA 10,000 2,200 Leased
Office space and Warehouse Virginia Beach, VA 25,000 6,850 Leased
Manufacturing plant Henderson, Nevada 100,000 26,000 Leased
Manufacturing plant Momence, Illinois 210,000 44,062 Owned
Sales office and warehouse Singapore 10,000 3,350 Leased
Manufacturing and office
facility Stafford, Texas 18,000 N/A Owned
Manufacturing plant Salt Lake City, Utah 70,805 21,963 Leased
Smithfield, North
Manufacturing plant Carolina 399,090 N/A Owned
Plant and office facility San Diego, California 96,660 37,697 Leased
Manufacturing plant Tijuana, Mexico 49,000 13,500 Leased
This property is encumbered by a mortgage.
This mortgage is paid quarterly rather than monthly; the quarterly
payments are $132,187.
This property is used as security for an Industrial Revenue Bond with
face value of $4,500,000. Monthly payments are for interest only on the
bond, and vary from month to month based on the interest rate during the
period. At December 31, 1999, the interest rate on the bond was 3.2%.
We are purchasing this building, along with an additional 100,000 square
feet of space under construction for approximately $3,994,000 pending
completion of the additional space, expected to be completed in May
2000. See "Managements Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources" and "Notes
to Consolidated Financial Statements - Note M."
11
Item 3. Legal Proceedings
The Company is involved in a dispute with a customer involving a purchase of
approximately $5 million in air filters, with approximately $2.6 million of
related accounts receivable currently uncollected, filed as Case No. CV 98-19817
on October 10, 1998 in the Superior Court of the State of Arizona in and for the
County of Maricopa, Intel Corporation v. Flanders Filters, Inc. The customer
contends that certain filters manufactured by the Company did not conform to
specifications, and has asked for unspecified relief and damages. The Company
has filed a counter-claim asking for the amount of its receivable and
unspecified relief and damages. Independent testing and other information
available to management indicate the filters did conform to specifications;
therefore, management believes the receivable is fully collectible. However, it
is reasonably possible the estimate of collection may change in the near term.
Additionally, from time to time, we are a party to various legal proceedings
incidental to our business. None of these proceedings are material to our
business, operations or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
We held our annual meeting of shareholders on December 21, 1999. During the
meeting, holders of 17,496,387 shares, representing approximately 68.8% of
25,435,583 shares outstanding on the record date, attended either in person or
by proxy. Holders of 13,846,481 shares (approximately 79.1% of shares present)
voted to elect as members of the Board of Directors Robert R. Amerson, Steven K.
Clark, J. Russell Fleming and Linwood Allen Hahn, holders of 1,968 voted
against; and holders of 3,647,938 shares abstained. As a result, Messrs.
Amerson, Clark, Fleming and Hahn were elected for one-year terms as directors.
Holders of 13,858,772 shares (approximately 79.2% of shares present) voted to
ratify the firm of Grant Thornton LLP as the Company's independent auditors for
the fiscal year ended December 31, 1999, holders of 14,168 shares voted against
the ratification and holders of 3,623,446 shares abstained. As a result, Grant
Thornton's appointment was ratified.
12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Price Range of Common Stock
The Company's common stock is listed on the Nasdaq National Market System under
the symbol "FLDR." The following table sets forth, for the periods indicated,
the high and low closing prices of the Company's common stock as reported by the
Nasdaq National Market System. Such quotations do not include retail mark-ups,
mark-downs, or other fees or commissions.
High Low
----------- -----------
Fiscal 1999
Fourth Quarter ended December 31, 1999 $ 3 5/16 $ 2 1/4
Third Quarter ended September 30, 1999 3 3/8 2 3/8
Second Quarter ended June 30, 1999 3 13/16 2 1/2
First Quarter ended March 31, 1999 5 1/8 2 9/16
Fiscal 1998
Fourth Quarter ended December 31, 1998 4 3/16 2 15/16
Third Quarter ended September 30, 1998 5 1/2 3 1/2
Second Quarter ended June 30, 1998 6 4 1/2
First Quarter ended March 31, 1998 8 1/2 5 9/16
Approximate Number of Equity Securityholders
On April 13, 2000, Flanders' common stock closed at $3 1/8. As of April 13,
2000, there were approximately 296 holders of record of the Company's common
stock. The Company estimates there are approximately 2,400 beneficial owners of
the Company's common stock.
Dividends
We have not declared or paid cash dividends on our common stock. Currently, we
intend to retain any future earnings to finance the growth and development of
the business, therefore we do not anticipate paying cash dividends in the
foreseeable future. In the future, the Board of Directors may decide to change
this policy, based upon its evaluation of our earnings, financial position,
capital requirements and any factors the Board of Directors may consider to be
relevant. Under the terms of our revolving credit line we cannot pay dividends
without the prior written consent of the bank. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" and "Notes to Consolidated Financial Statements - Note H."
SALES OF UNREGISTERED SECURITIES
The Company did not sell any unregistered common shares or other unregistered
securities during 1997, 1998 and 1999.
13
Item 6. Selected Financial Data
The following financial data is an integral part of, and should be read in
conjunction with, the "Consolidated Financial Statements" and notes thereto.
Information concerning significant trends in the financial condition and results
of operations is contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Selected Historical Operations Data (In thousands, except per share data)
Year Ended December 31,
---------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
Net sales $ 171,392 $ 154,765 $ 131,899 $ 73,056 $ 38,636
Gross profit 43,975 37,660 32,880 19,459 9,682
Operating expenses 33,802 28,108 23,510 13,460 7,263
Operating income from continuing operations 10,172 9,551 9,370 5,999 2,419
Earnings from continuing operations before
income taxes 10,174 10,991 9,850 5,771 1,830
Provision for income taxes 4,671 4,450 3,751 2,178 685
Earnings from continuing operations 5,503 6,541 6,098 3,594 1,146
Loss from discontinued operations (2,686) (1,253) (259) -- --
Net Earnings $ 2,817 $ 5,288 $ 5,839 $ 3,594 $ 1,146
========== ========== ========== ========= =========
Earnings per share from continuing operations
Basic $ 0.22 $ 0.26 $ 0.33 $ 0.27 $ 0.12
========== ========== ========== ========= =========
Diluted $ 0.21 $ 0.24 $ 0.28 $ 0.23 $ 0.12
========== ========== ========== ========= =========
Earnings per share
Basic $ 0.11 $ 0.21 $ 0.32 $ 0.27 $ 0.12
========== ========== ========== ========= =========
Diluted $ 0.11 $ 0.20 $ 0.27 $ 0.23 $ 0.12
========== ========== ========== ========= =========
Weighted average common shares outstanding
Basic 25,344 25,134 18,509 13,171 9,832
========== ========== ========== ========= =========
Diluted 26,525 27,107 22,477 16,384 9,832
========== ========== ========== ========= =========
Selected Historical Balance Sheet Data (In thousands)
December 31,
--------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- ----------
Working capital $ 45,889 $ 47,972 $ 55,179 $ 22,570 $ 4,108
Total assets 170,429 167,780 145,881 86,518 18,529
Long-term obligations1 32,328 31,371 14,771 42,156 1,761
Total shareholders' equity 112,127 109,603 106,207 25,353 8,208
- --------------------
1 Long-term obligations include long-term notes payable, long-term debt,
including current maturities, convertible debt, and committed capital.
14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with "Item 6 - Selected
Consolidated Financial Data" and "Consolidated Financial Statements," all
included elsewhere herein. The information set forth in this "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
includes forward-looking statements that involve risks and uncertainties. Many
factors, including but not limited to those discussed below under "Factors That
May Affect Future Results" could cause actual results to differ materially from
those contained in the forward-looking statements below.
Overview
Flanders is a full-range air filtration product company engaged in designing,
manufacturing and marketing high performance, mid-range and standard-grade air
filtration products and certain related products and services. We focus on those
products with high replacement potential. We also design and manufacture much of
our own production equipment and also produce glass-based media for many of our
air filtration products. From 1996 to 1999, we experienced significant growth
from the acquisition of other air filtration related companies. As of March 30,
1999, we acquired the Taffco group, a regional air filter sales and service
distributor headquartered in Virginia. As of June 30, 1998, we acquired Eco-Air.
Eco-Air specializes in the manufacture and sale of air filtration products to
markets on the West Coast ranging from high-end HEPA filters through
standard-grade filters. The results of operations for the acquired businesses
are included in our financial statements only from the applicable date of
acquisition. As a result, historical results of operations for the periods
presented should be evaluated specifically in the context of these acquisitions.
Additionally, the historical results of operations do not reflect any future
operating efficiencies and improvements from integrating and consolidating the
acquired businesses into our operations. There can be no guarantee that we will
be able to achieve these objectives and gains in efficiency. We believe the
Acquisitions will have a positive impact on its future results of operations.
Also in 1998, we established Sierra Ridge Filtration, Inc., a direct distributor
of air filtration products with sales offices located in the western United
States.
Results of Operations
1999 Compared to 1998
The following table summarizes the Company's results of operations as a
percentage of net sales for 1999 and 1998.
1999 1998
----------------- -----------------
Net sales ............................................. $ 171,392 100.0% $ 154,765 100.0%
Gross profit .......................................... 43,975 25.7 37,660 24.3
Operating expenses .................................... 33,802 19.7 28,108 18.2
Operating income from continuing operations ........... 10,172 5.9 9,551 6.2
Earnings from continuing operations before income taxes 10,174 5.9 10,991 7.1
Provision for income taxes ............................ 4,671 2.7 4,450 2.9
Earnings from continuing operations ................... 5,503 3.2 6,541 4.2
Loss from discontinued operations ..................... (2,686) (1.6) (1,253) (0.8)
Net earnings .......................................... $ 2,817 1.6 $ 5,289 3.4
Net Sales: Net sales for 1999 increased by $16,627,000 or 10.7%, to
$171,392,000 for 1999, from $154,765,000 for 1998. The increase in net sales
was due to: (i) the acquisitions of Eco-Air and the Tidewater group, which
contributed approximately $15,334,000 of net sales; and (ii) the Company's
success in attracting work and expanding its original core business, which
grew by approximately 1% between 1999 and 1998 and contributed an additional
$1,293,000 to net sales.
15
Gross Profit: Gross profit for 1999 increased $6,315,000, or 16.8%, to
$43,975,000, which represented 25.7% of net sales, compared to $37,660,000,
which represented 24.3% for 1998. This increase in gross margin percentage
was primarily due to:
o Higher margins on sales made through our direct sales offices, which
made significant contributions to sales of our products for the
first time during the last half of 1999;
o Margin improvement from our ongoing automation projects;
o Operational efficiencies at our newest facilities in Nevada,
Illinois and North Carolina, which are gradually increasing over
time and should increase to the levels experienced historically at
other plants during the next twelve to eighteen months; and
o Internally produced spun-glass media for our residential and
commercial flat-panel furnace and air conditioning filters began in
significant quantities during the fourth quarter of 1999, providing
an estimated savings of approximately $100,000.
o Hurricane Floyd which caused us to close four of our plants in the
eastern United States for periods ranging from 0.5 days to 5.5 days.
There is an associated insurance claim whose amount has not yet been
determined, which will be booked as "other income" during the period
in which the amount becomes fully determined.
Operating Expenses: Operating expenses during 1999 increased $5,694,000, or
20.3% to $33,802,000, representing 19.7% of net sales, compared to
$28,108,000 for 1998, which represented 18.2% of net sales. The increase in
operating expenses was primarily due to the acquisitions of Eco-Air and the
Tidewater group, which added approximately $5,031,000 in operating expenses.
Excluding these acquisitions, operating expenses increased $663,000 from
1999 compared to 1998. This increase is primarily due to the establishment
of direct sales offices during the last part of 1998 and all of 1999, which
offset the increase in gross profit margin attributable to direct office
operations. Other factors affecting operating expenses included decreased
expenditures for new product development expenditures between 1999 and 1998,
the consolidation and centralization of overhead functions, increased in
outbound freight expenses related to increased sales and higher fuel costs,
and increased sales commission expenses associated with increased sales.
Discontinued Operations: In December 1999, we adopted a formal plan to close
Airseal West, a wholly-owned subsidiary, and sell its various assets and
product lines to unrelated third parties. The anticipated date of closure is
approximately April 30, 2000. All dispositions of assets are expected to be
completed before December 31, 2000. The assets to be sold consist primarily
of accounts receivable, inventories, manufacturing equipment, designs and
other intellectual properties. The estimated net loss of the discontinued
operations of approximately $2,686,000 represents approximately $1,793,000
of losses incurred during 1999 and $893,000 of estimated loss on the
disposal of the assets of Airseal West (both figures net of income tax
benefit). During 1998, operating losses from Airseal West were approximately
$1,253,000, net of income tax benefit.
Provision for Taxes: Our income tax provision for 1999 increased $221,000,
or 5.0%, to $4,671,000, from $4,450,000 for 1998, which represented 45.9%
and 40.5% of earnings from continuing operations before income taxes,
respectively. Our tax provision increased because of larger amounts of
nondeductible expenses, primarily amortization of goodwill, and certain
one-time adjustments related to estimated accrued income taxes. Our blended
rate state and federal tax rate, excluding the effect of nondeductible
expenses consisting primarily of amortization of goodwill of approximately
$900,000 per year and one-time adjustments, is approximately 40.0%.
Earnings from Continuing Operations: Earnings from continuing operations for
1999 decreased $1,038,000, or 15.9%, to $5,503,000, or $0.22 per share basic
($0.21 diluted), compared to $6,541,000, or $0.26 per share basic ($0.24
diluted), for 1998. The decrease in earnings is primarily attributable to
decreases in net nonoperating income (expense), consisting primarily of
additional interest expense and reduced interest income, and an increase in
our effective income tax rate.
16
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
The following table summarizes the Company's results of operations as a
percentage of net sales for the years ended December 31, 1998 and 1997.
1998 1997
----------------- ------------------
Net sales ............................................. $ 154,765 100.0% $ 131,899 100.0%
Gross profit .......................................... 37,660 24.3 32,880 24.9
Operating expenses .................................... 28,108 18.2 23,509 17.8
Operating income from continuing operations ........... 9,551 6.2 9,370 7.1
Earnings from continuing operations before income taxes 10,991 7.1 9,850 7.5
Provision for income taxes ............................ 4,450 2.9 3,751 2.8
Earnings from continuing operations ................... 6,541 4.2 6,098 4.6
Loss from discontinued operations ..................... (1,253) (0.8) (259) (0.2)
Net earnings .......................................... $ 5,289 3.4 $ 5,839 4.4
Net Sales: Net sales for 1998 increased by $22,866,000, or 17.3%, to
$154,765,000, from $131,899,000 for 1997. The increase in net sales was due
to: (i) the acquisition of Eco-Air, which contributed approximately
$12,718,000 of net sales; and (ii) the Company's success in attracting work
and expanding its original core business, which grew by approximately 7.7%
between 1998 and 1997 and contributed an additional $10,148,000 to net
sales. The Company experienced reductions in sales of its laminar-flow HEPA
products for cleanroom applications, which were balanced by increased sales
of its ASHRAE-rated mid-range products for industrial and commercial
applications.
Gross Profit: Gross profit for 1998 increased $4,780,000, or 14.5%, to
$37,660,000, which represented 24.3% of net sales, compared to $32,880,000,
which represented 24.9% for 1997. The primary reasons for the decrease in
gross profit margin percentage were: (i) The consolidation of the Company's
Airpure facility, located in Selma, North Carolina, into the Company's new
facility in nearby Smithfield, North Carolina, which took place during the
fourth quarter of 1998 and resulted in extended periods of downtime due to
equipment movement, calibration and production flow refinement, as well as
other direct costs associated with moving equipment and inventory from the
old facility to the new plant; (ii) higher than normal costs, mostly during
the first three quarters of 1998, associated with new facilities in
Henderson, Nevada and Smithfield, North Carolina, consisting primarily of
labor inefficiencies associated with training new production employees and
installation of new equipment; (iii) higher than normal freight costs
associated with shipping products from "established" facilities to meet
demand from new geographical areas while additional equipment was installed
in various plants; and (iv) inefficiencies associated with irregular orders
and slowdowns at FFI's facility in Washington, North Carolina. These
decreases in gross profit were partially balanced by efficiencies associated
with the Company's ongoing automation project for stock product lines, which
is substantially complete for the Company's highest volume products.
Operating Expenses: Operating expenses during 1998 increased $4,599,000, or
19.6% to $28,108,000, representing 18.2% of net sales, compared to
$23,509,000 for 1997, which represented 17.8% of net sales. The increase in
operating expenses was primarily due to the acquisition of Eco-Air, which
added approximately $3,720,000 in operating expenses. Excluding Eco-Air,
operating expenses increased $879,000 from the year ended December 31, 1998
compared to the year ended December 31, 1997. Major factors affecting
operating expenses included approximately $2,250,000 in research and
development expenditures for the development of new product lines, compared
to approximately $373,000 in 1997, the consolidation and centralization of
overhead functions, and increased sales commission expense associated with
increase sales.
Net Income: Net income for 1998 decreased $550,000, or 9.4%, to $5,289,000,
or $0.21 per share basic ($0.20 diluted), compared to $5,839,000, or $0.32
per share basic ($0.27 diluted), for 1997. The decrease in net income is
primarily attributable to the Company's decrease in profit margin as a
percentage of sales.
17
Effects of Inflation
The Company's business and operations have not been materially affected by
inflation during the periods for which financial information is presented.
Liquidity and Capital Resources
Working capital was $45,889,000 at December 31, 1999, compared to $47,972,000 at
December 31, 1998. This includes cash and cash equivalents of $824,000 and
$13,763,000 at December 31, 1999 and 1998, respectively.
Trade receivables increased $2,352,000, or 8.8%, to $29,023,000 at December 31,
1999 from $26,671,000 at December 31, 1998. The increase in receivables is
primarily due to increases associated with the increased volume of net sales
(approximately $2,659,000) and timing differences in shipments and payments
received.
Continuing operations generated $5,242,000 of cash during 1999, compared to
generating $849,000 during 1998. The difference in cash flows was associated
with smaller increases in inventories during 1999 compared to 1998, and an
increase in accounts payable of $173,000 in 1999 compared to a decrease of
$2,629,000 in 1998. Financing activities for continuing operations consumed
$5,262,000 during 1999 of cash, primarily from payments on debt financing.
Investing activities for continuing operations consumed $11,881,000 of cash
during 1999, consisting primarily of the purchase of property, plant and
equipment, and cash paid for the acquisition of the Tidewater group. The
purchase price, including expenses and net of cash received, was approximately
$1,787,000. The acquisition of Tidewater was funded from operating cash flow and
the Company's revolving credit facility. The effective date of the acquisition
for financial statement purposes was April 1, 1999, and financial statements
include the operating activities and assets of the Tidewater group from that
date.
On February 9, 2000, we completed the extension of our $45,000,000 revolving
line of credit facility with SunTrust. Outstanding balances on the credit line
bear interest at the option of the Company, at either (a) the "prime" rate of
interest publicly announced by SunTrust Bank, which was 8.5% at December 31,
1999, or (b) the "LIBOR" rate as reported by the Wall Street Journal, which was
5.3% at December 31, 1999, plus an amount equal to 1.00% to 1.95%, depending on
the ratio of total liabilities of the Company to its tangible net worth. As of
December 31, 1999, the Company had used $11,370,000 of the revolving credit
facility. Unless this line of credit is renewed, it will expire in June 2002.
As of April 1, 1998, we entered into a Loan Agreement and issued a Note to the
Johnston County Industrial Facilities and Pollution Control Financing Authority
and such authority issued Industrial Development Revenue Bonds (the "Bonds") for
an aggregate of $4,500,000, the proceeds of which were loaned for the
construction of a 400,000 square foot manufacturing facility in Johnston County,
North Carolina. The Note extends for a term of fifteen (15) years and bears
interest at a variable rate determined by the remarketing agent of the Bonds on
a weekly basis equal to the minimum rate necessary to sell such Bonds at their
par value which, as of December 31, 1999, was 3.2% per annum. The Bonds are
collateralized by a $4,500,000 letter of credit which expires in June 2002.
Continuing expansion may require substantial capital investment for the
manufacture of filtration products. Although we have been able to arrange debt
facilities or equity financing to date, there can be no assurance that
sufficient debt financing or equity will continue to be available in the future,
or that it will be available on acceptable terms. Failure to obtain sufficient
capital could materially adversely impact our growth strategy.
In 1998, the Board of Directors authorized the repurchase of up to two million
shares of the Company's common stock. As of March 24, 2000, the Company had
repurchased 1,014,650 shares of its common stock under this authorization; thus,
as of this date, up to an additional 985,350 shares are available for
repurchase. These shares may be acquired in the open market or through
negotiated transactions. These repurchases may be made from time to time,
depending on market conditions, share price and other factors. These repurchases
are to be used primarily to satisfy the Company's obligations under its stock
option and purchase plans or any other authorized incentive plans, or for
issuance pursuant to future equity financing by the Company. Effective with the
engagement of PaineWebber in March 2000, repurchases under the plan were
suspended.
18
Outlook
During 1999, we saw the first signs that our newly established manufacturing
facilities are beginning to complete their start-up phases. Efficiency at these
new facilities is beginning to increase. We expect this process to continue for
the next eighteen months, until the new plants reach our goals for material
utilization, labor productivity and throughput. Critical to this process,
however, will be our success in obtaining additional sales to more fully utilize
the production capacity we have put into place.
In July 1999, we established a national contracts sales group. This group is
focused on obtaining national supply agreements with major industrial end users,
typically with purchases from us by each such customer expected to exceed $1
million per year. These types of customers are not typically accessible to our
predominantly regional representative and distributor organizations, and so
remain a largely untapped market for us. While it is difficult to predict the
precise magnitude of sales that will actually result from this endeavor, we have
targeted customers with aggregate annual air filtration requirements in excess
of $100 million. To date, we have received our first major contract for this
market segment, a three-year exclusive arrangement to provide filters to a major
HVAC system manufacturer which is expected to contribute at least $5 million to
annual sales, which began in the fourth quarter of 1999.
During the year, we negotiated joint venture agreements with major air filter
distributors or manufacturers in several different areas in the Pacific Rim,
including Australia, Korea, Malaysia, Singapore, Taiwan, Hong Kong and China.
These arrangements are structured so that we sell the ventures proprietary
materials and provide certain proprietary equipment. These agreements are not
expected to have a material effect on our financial position or results of
operations during the year 2000. However, we hope that the ventures will become
a significant source of revenue and income in the future.
During 1999, we finished our internal verification of a new Indoor Air Quality
system targeted toward commercial office buildings. This product, part of our
engineered services group, uses air quality monitoring, computer models and
automated data collection to develop a complete analysis of a building's air
quality over time, which is then used to generate and verify solutions to air
quality problems. While the installations of this technology currently in place
are not material to our results, and sales from this product are not expected to
be a material contributor in the year 2000, we believe this combination of
filtration products and engineering services is the best way to address Indoor
Air Quality problems, including Sick Building Syndrome, and believe the
potential market for this application exceeds $5 million.
We believe the semiconductor industry has been experiencing a cyclical slowdown
in capital spending for new facilities, and thus on spending for cleanroom
filtration products, since the first quarter of 1997. While we expect capital
spending for new semiconductor facilities to increase in the future, this was
not a significant factor in our overall business during 1999 (less than 7% of
our sales in 1999 and 1998 were from high-end products sold for use in the
semiconductor industry). During the first quarter of 2000, we have seen definite
signs that the semiconductor industry will require additional capacity in the
near future, including price increases in commodity DRAM markets and several new
facility announcements. Therefore, we expect sales for products used in
semiconductor plants to increase through the rest of 2000.
We have collected data that indicates that residential filter users replace
their filters, on average, approximately once per year. Manufacturers of
residential furnace and air conditioning systems recommend that these filters be
changed every month. A minor trend toward increased maintenance of these
residential heating and cooling systems could have a positive impact on our
business.
We believe there is currently a gradually increasing public awareness of the
issues surrounding indoor air quality and that this trend will continue for the
next several years. We also believe there is an increase in public concern
regarding the effects of indoor air quality on employee productivity, as well as
an increase in interest by standards-making bodies in creating specifications
and techniques for detecting, defining and solving indoor air quality problems.
We further believe there will be an increase in interest in our Absolute
Isolation Barriers in the future because these products may be used in both
semiconductor and pharmaceutical manufacturing plants to prevent
cross-contamination between different lots and different processes being
performed at the same facility. These products also increase production yields
in many applications.
19
Our most common products, in terms of both unit and dollar volume, are
residential throw-away spun glass filters, which usually sell for prices under
$1.00. Any increase in consumer concern regarding air pollution, airborne
pollens, allergens, and other residential airborne contaminants could result in
replacement of some of these products with higher value products. Our higher
value products include our NaturalAire higher-efficiency filters for residential
use, with associated sales prices typically over $5.00 each. Any such trend
would have a beneficial effect on our business.
Currently, the largest domestic market for air filtration products is for
mid-range ASHRAE-rated products and HVAC systems, typically used in commercial
and industrial buildings. To date, our penetration of this market has been
relatively small. We believe our ability to offer a "one stop" supply of air
filtration products to HVAC distributors and wholesalers may increase our share
of this market. We also believe that our recently developed modular air handlers
and environmental tobacco smoke systems will enable us to expand sales to these
customers. We intend our new products to serve as high profile entrants with
distributors and manufacturers' representatives, who can then be motivated to
carry our complete product line.
This Outlook section, and other portions of this document, include certain
"forward-looking statements" within the meaning of that term in Section 27A of
the Securities Act of 1933, and Section 21E of the Securities Exchange Act of
1934, including, among others, those statements preceded by, following or
including the words "believe," "expect," "intend," "anticipate" or similar
expressions. These forward-looking statements are based largely on the current
expectations of management and are subject to a number of assumptions, risks and
uncertainties. Our actual results could differ materially from these
forward-looking statements. Important factors to consider in evaluating such
forward-looking statements include those discussed below under the heading
"Factors That May Affect Future Results" as well as:
o the shortage of reliable market data regarding the air filtration
market,
o changes in external competitive market factors or in our internal
budgeting process which might impact trends in our results of
operations,
o anticipated working capital or other cash requirements,
o changes in our business strategy or an inability to execute our strategy
due to unanticipated changes in the market,
o product obsolescence due to the development of new technologies, and
o various competitive factors that may prevent us from competing
successfully in the marketplace.
In light of these risks and uncertainties, there can be no assurance that the
events contemplated by the forward-looking statements contained in this Form
10-K will in fact occur.
Factors That May Affect Future Results
Our Failure to Manage Future Growth Could Adversely Impact Our Business Due to
the Strain on Our Management, Financial and Other Resources
If our business continues to grow, the additional growth will place burdens on
management to manage such growth while maintaining profitability. We have no
guarantee that we will be able to do so. Due to our recent acquisitions and
expansions, our net sales increased by approximately 344% from 1995 through
1999, (a compound annual growth rate of 45%). We may not continue to expand at
this rate. Our ability to compete effectively and manage future growth depends
on our ability to:
o recruit, train and manage our work force, particularly in the areas of
corporate management, accounting, research and development and
operations,
o manage production and inventory levels to meet product demand,
o manage and improve production quality,
o expand both the range of customers and the geographic scope of our
customer base, and
o improve financial and management controls, reporting systems and
procedures.
Any failure to manage growth effectively could have a material adverse effect on
our business, financial condition and results of operations.
20
We Must Develop, Produce and Sell New Products That Keep Up With Rapid
Technological Change to Maintain Approximately 20% of Our Revenues and Maintain
Value of Our Inventory and Other Assets
As of December 31, 1999, approximately 20% of our revenues resulted from sales
of high-end filtration products that are especially vulnerable to new technology
development. Our ability to remain competitive in this area will depend in part
upon our ability to:
o anticipate technological changes,
o develop new and enhanced filtration systems that meet our customers'
needs, and
o introduce these systems at competitive prices in a timely and
cost-efficient manner.
We have no assurance that we will successfully anticipate future technological
changes or that technologies or systems developed by others will not render our
technology obsolete. Additionally, we have no assurance that the products we
develop will be commercially viable. A failure to successfully anticipate future
technological changes could also require us to write down inventories, equipment
or other assets associated with obsolete products or dispose of these assets at
a price lower than book value, which could have a material adverse effect on our
financial condition and results of operations.
Our Business May Suffer if Our Competitive Strategy is Not Successful
Our continued success depends on our ability to compete in an industry that is
highly competitive. This competition may increase as new competitors enter the
market. Several of these competitors may have longer operating histories and
greater financial, marketing and other resources than we do. Additionally, our
competitors may introduce new products or enhancements to products that could
cause a decline in sales or loss of market acceptance of our existing products.
Under our current competitive strategy, we endeavor to remain competitive by:
o increasing our market share,
o expanding our market through the introduction of new products which
require periodic replacement, and
o improving operating efficiencies.
Although our executive management team continues to review and monitor our
strategic plans, we have no assurance that we will be able to follow our current
strategy or that this strategy will be successful.
Our Market Share May Not Continue to Increase if we are Unable to Acquire
Additional Synergistic Businesses
In the past several years we have significantly increased our market share by
acquiring synergistic businesses. Although we intend to continue to increase our
market share in this manner, we have no assurance that future acquisition
opportunities will be available. Additionally, in the future we may not have
access to the substantial debt or equity financing to finance potential
acquisitions. Moreover, these types of transactions may result in potentially
dilutive issuances of equity securities, the incurrence of additional debt and
amortization of expenses related to goodwill and intangible assets, all of which
could adversely affect our profitability. Our strategy of growth through
acquisition also exposes us to the potential risks inherent in assessing the
value, strengths, weaknesses, and potential profitability of acquisition
candidates and in integrating the operations of acquired companies. We do not
currently have any binding agreements with respect to future acquisitions.
Our Business May Suffer if Our Strategy to Increase the Size and Customer Base
of the Air Filtration Market is Unsuccessful
We are developing new products as part of our strategy to increase the size and
customer base of the air filtration market. We have no assurance that this
strategy will be successful. We have no guarantee that any new products we
develop will gain acceptance in the marketplace, or that these products will be
successful. Additionally, we have no assurance we will be able to recoup the
expenditures associated with the development of these products. To succeed in
this area we must:
o increase public awareness of the issues surrounding indoor air quality,
o adequately address the unknown requirements of the potential customer
base,
21
o develop new products that are competitive in terms of price, performance
and quality, and
o avoid significant increases in current expenditure levels in
development, marketing and consumer education.
We May Experience Critical Equipment Failure Which Could Have a Material Adverse
Effect on Our Business
If we experience extended periods of downtime due to the malfunction or failure
of our automated production equipment, our business, financial condition and
operations may suffer. We design, manufacture and assemble the majority of the
automated production equipment used in our facilities. We also use other
technologically advanced equipment for which manufacturers may have limited
production capability or service experience. If we are unable to quickly repair
our equipment or quickly obtain new equipment or parts from outside
manufacturers, we could experience extended periods of downtime in the event of
malfunction or equipment failure.
If Automation of Our Production Lines Fails to Produce the Projected Results,
Our Business Will Suffer
We have only recently substantially completed a program to increase our gross
margins by automating portions of our production lines. Although the designs
have been extensively tested in the field, we have no assurance that the new
equipment will produce the expected beneficial results on our gross margins.
Additionally, we are not certain that any increases in efficiencies will not be
offset in the marketplace by competitors making similar improvements to their
facilities.
Our Plan to Centralize Overhead Functions May Not Produce the Anticipated
Benefits to Our Operating Results
We are currently implementing plans to centralize and eliminate duplication of
efforts between our subsidiaries in the following areas:
o purchasing,
o production planning,
o shipping coordination,
o marketing,
o accounting,
o personnel management,
o risk management, and
o benefit plan administration.
We have no assurance that cutting overhead in this fashion will have the
anticipated benefits to our operating results. Additionally, we have no
assurance that these reorganizations will not significantly disrupt the
operations of the affected subsidiaries.
Our Success Depends on Our Ability to Retain and Attract Key Personnel
Our success and future operating results depend in part upon our ability to
retain our executives and key personnel, many of whom would be difficult to
replace. Our success also depends on our ability to attract highly qualified
engineering, manufacturing, technical, sales and support personnel for our
operations. Competition for such personnel, particularly qualified engineers, is
intense, and there can be no assurance that we will be successful in attracting
or retaining such personnel. Our failure to attract or retain such persons could
have a material adverse effect on our business, financial condition and results
of operations.
Our Current Distribution Channels May be Unavailable if Our Manufacturers'
Representatives Decide to Work Primarily With One of Our Competitors
We provide our manufacturers' representatives with the ability to offer a full
product line of air filtration products to existing and new customers. Some of
our competitors offer similar arrangements. We do not have exclusive
relationships with most of our representatives. Consequently, if our
representatives decide to work primarily with one of our competitors, our
current distribution channels, and hence, our sales, could be significantly
reduced.
22
Management Controls a Significant Percentage of Our Stock
As of December 31, 1999, our directors and executive officers beneficially held
approximately 41.9% of our outstanding common stock. As a result, such
shareholders effectively control or significantly influence all matters
requiring shareholder approval. These matters include the election of directors
and approval of significant corporate transactions. Such concentration of
ownership may also have the effect of delaying or preventing a change in
control.
We May be Required to Issue Stock in the Future That Will Dilute the Value of
Our Existing Stock
If we issue the following securities, such securities may dilute the value of
the securities that our existing stockholders now hold.
We have granted warrants to purchase of total of 612,239 of our shares of common
stock to various parties with exercise prices ranging from $5.54 to $14.73 per
share. All of the warrants are currently exercisable. As a result, if the
warrant holders exercise these warrants, we will issue shares of stock that will
generally be available for sale in the public market.
We have granted options to purchase a total of 7,005,700 shares of common stock
to various parties with exercise prices ranging from $1.00 to $9.50 per share.
The majority of these options are currently exercisable. Additionally, most of
the common stock issuable upon the exercise of these options is registered on a
Form S-8. As a result, if the option holders exercise these options, we will
issue shares of stock that will generally be available for sale in the public
market.
Our Shareholders May Not Realize Certain Opportunities Because of Our Charter
Provisions and North Carolina Law
Our Articles of Incorporation and Bylaws contain provisions that are designed to
provide our board of directors with time to consider whether a hostile takeover
offer is in our best interest and the best interests of our shareholders. These
provisions may discourage potential acquisition proposals and could delay or
prevent a change of control in our business. Additionally, we are subject to the
Control Shares Acquisition Act of the State of North Carolina. This act provides
that any person who acquires "control shares" of a publicly held North Carolina
corporation will not have voting rights with respect to the acquired shares
unless a majority of the disinterested shareholders of the corporation vote to
grant such rights. This could deprive shareholders of opportunities to realize
takeover premiums for their shares or other advantages that large accumulations
of stock would typically provide.
Our Business Can be Significantly Affected by Environmental Laws
The constantly changing body of environmental laws and regulations may
significantly influence our business and products. These laws and regulations
require that certain environmental standards be met and impose liability for the
failure to comply with such standards. While we endeavor at each of our
facilities to assure compliance with environmental laws and regulations, we
cannot be certain that our operations or activities, or historical operations by
others at our locations, will not result in civil or criminal enforcement
actions or private actions that could have a materially adverse effect on our
business. We have, in the past, and may, in the future, purchase or lease
properties with unresolved potential violations of federal or state
environmental regulations. In these transactions, we have been successful in
obtaining sufficient indemnification and mitigating the impact of the issues
without recognizing significant expenses associated with litigation and cleanup.
However, purchasing or leasing these properties requires us to weigh the cost of
resolving these issues and the likelihood of litigation against the potential
economic and business benefits of the transaction. If we fail to correctly
identify, resolve and obtain indemnification against these risks, they could
have a material adverse impact on our financial position.
Because of the foregoing factors, as well as other variables affecting our
operating results, past financial performance should not be considered a
reliable indicator of future performance, and investors should not use
historical trends to anticipate results or trends in future periods.
23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to various market risks, including changes in foreign
currency exchange rates and interest rate risks. Market risk is the potential
loss arising from adverse change in market rates and prices, such as foreign
currency exchange and interest rates. For the Company, these exposures are
primarily related to the sale of product to foreign customers and changes in
interest rates. The Company does not have any derivatives or other financial
instruments for trading or speculative purposes.
The fair value of the Company's total debt at December 31, 1999 was
approximately $32,328,000. Market risk was estimated as the potential decrease
(increase) in future earnings and cash flows resulting from a hypothetical 10%
increase (decrease) in the Company's estimated weighted average borrowing rate
at December 31, 1999. Although most of the interest on the Company's debt is
indexed to a market rate, there would be no material effect on the future
earnings or cash flows related to the Company's total debt for such a
hypothetical change.
The Company's financial position is not materially affected by fluctuations in
currencies against the U.S. dollar, since assets held outside the United States
are negligible. The Company's sensitivity analysis of the effects of changes in
foreign currency exchange rates does not factor in a potential change in sales
levels of local currency prices, as the preponderance of its foreign sales occur
over short periods of time or are demarcated in U.S. dollars.
Item 8. Financial Statements and Supplementary Data
Attached, beginning at page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On November 23, 1999, the Board of Directors approved (i) the engagement of
Grant Thornton LLP as the independent auditors for Flanders Corporation and (ii)
the dismissal of McGladrey & Pullen LLP as such independent auditors. The
shareholders ratified this selection in our annual meeting. See "Item 4 -
Submission of Matters to a Vote of Security Holders."
During the three years ended December 31, 1998 and the subsequent interim period
through November 23, 1999, (i) there were no disagreements with McGladrey &
Pullen, LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures, which disagreements if
not resolved to its satisfaction would have caused it to make reference in
connection with its report to the subject matter of the disagreement, and (ii)
McGladrey & Pullen, LLP did not advise the registrant regarding any "reportable
events" as defined in Item 304 (a)(1)(v) of Regulation S-K.
The accountants' report of McGladrey & Pullen, LLP on the consolidated financial
statements of Flanders Corporation and subsidiaries as of and for the years
ended December 31, 1998, 1997 and 1996 did not contain any adverse opinion or
disclaimer of opinion, and was not qualified or modified as to uncertainty,
audit scope, or accounting principles.
Neither Grant Thornton LLP or its members has any financial interest, direct or
indirect in the Company nor does Grant Thornton LLP or any of its members ever
been connected with the Company as a promoter, underwriter, trustee, director,
officer or employee.
24
PART III
Item 10. Directors and Executive Officers of the Registrant
Identification of Directors and Executive Officers
Set forth below is information regarding (i) the current directors of the
Company, who will serve until the next annual meeting of shareholders or until
their successors are elected or appointed and qualified, and (ii) the current
executive officers of the Company, who are elected to serve at the discretion of
the Board of Directors.
Name Age Title
------------------- --- --------------------------------
Robert R. Amerson 49 President, Chief Executive Officer
and Director
C. W. "Andy" Wood 60 Vice President Sales
Steven K. Clark 47 Chief Operating Officer, Vice President
Finance/Chief Financial Officer
and Director
Leonard J. Fetcho 59 Vice President Operations
John L. Cherry 56 Vice President Engineered Products
John Houmis 52 Vice President Engineering
Linwood Allen Hahn 51 Director
J. Russell Fleming 50 Director
Robert R. Amerson. Mr. Amerson has been President and Chief Executive Officer
since 1988. Mr. Amerson is also a Director, a position he has held since 1988.
He joined us in 1987 as Chief Financial Officer. Mr. Amerson has a Bachelor of
Science degree in Business Administration from Atlantic Christian College.
C.W. "Andy" Wood. Mr. Wood has been Vice President of Sales since 1998 and Vice
President of Sales for Precisionaire, a wholly owned subsidiary, since 1982. Mr.
Wood oversees all marketing and sales efforts of the Company. Mr. Wood has more
than thirty years of experience in the air filtration industry. Mr. Wood has an
Associates Degree in Industrial Management from the Georgia Institute.
Steven K. Clark. Mr. Clark was named as Vice President Finance, Chief Financial
Officer and Director in December 1995 and Chief Operating Officer in November
1999. Mr. Clark acted as a consultant from November, 1995 through December,
1995. From July 1992 through October 1995, he was the Chief Financial Officer of
Daw Technologies, Inc., a specialty cleanroom contractor and major customer of
the Company. While Chief Financial Officer of Daw Technologies, Mr. Clark was
late in filing a Form 3 amendment and certain Form 4s and Form 5s. He agreed to
a cease and desist order with respect to these violations. No violations other
than the timeliness of filing those reports were alleged by the Securities and
Exchange Commission ("SEC"). Prior to this he was a senior partner of Miller and
Clark, an accounting and management services firm. Mr. Clark spent four years
with Price Waterhouse, and an additional four years with Arthur Andersen, both
accounting firms. He is a Certified Public Accountant, has Bachelor of Arts
degrees in Accounting and Political Science and a Master of Business
Administration Degree, all from the University of Utah.
Leonard J. Fetcho. Mr. Fetcho has been Vice President Operations since December
1999. He is also President of Eco-Air Products, Inc., which was acquired by the
Company in June 1998. Mr. Fetcho has held the position of President of Eco-Air
Products Inc. since 1993. Mr. Fetcho has extensive experience in the air
filtration industry,
25
including being manager of national accounts for Farr Corporation, and director
of sales and marketing for Cambridge Filter Corporation, both competitors. Mr.
Fetcho has a bachelor's degree in accounting from Morrisville College.
John L. Cherry. Mr. Cherry has been Vice President Engineered Products since
December 1999. At that time, he was appointed General Manager of Flanders
Filters, Inc., and Flanders/CSC, both wholly owned subsidiaries. Mr. Cherry
served as President of Flanders/CSC from March 1997 through December 1999 and as
Vice President/General Manager before that, beginning in 1980. Mr. Cherry has an
Associates Degree in design technology from Thomas Nelson Community College.
John Houmis. Mr. Houmis has been Vice President Engineering since December 1998.
He has direct responsibility for manufacturing engineering, quality control and
production control systems. From May 1998 to December 1998, he was Director of
Special Project - Plants for Precisionaire, a wholly owned subsidiary. From 1993
to October 1997, Mr. Houmis was the general manager of Precisionaire's main
manufacturing facility in Florida. Mr. Houmis has Bachelor of Science and Master
of Science degrees in engineering from the University of South Florida.
Linwood Allen Hahn. Mr. Hahn was elected as a Director in December 1999. Mr.
Hahn practices Real Property Law, Estates, Municipal Law and Corporate Law in
Greenville, North Carolina. Mr. Hahn graduated from he University of North
Carolina at Chapel Hill with a BA degree in 1970, the University of Tennessee
College of Law, JD degree in 1973. He is currently a member of the North
Carolina State Bar Association and the North Carolina Trial Lawyer's Association
as well as serving on the advisory boards of several private charitable
organizations.
J. Russell Fleming. Mr. Fleming was elected as a Director in December 1999. Mr.
Fleming is Owner/President of Cape Point Development Co., Inc., located in
Greenville, North Carolina, specializing in land development and
commercial/multi-family construction. Mr. Fleming Is also Owner/President of New
East Management & Realty, Inc., also located in Greenville, NC, which manages
residential and commercial rental properties. Mr. Fleming attended East Carolina
University prior to obtaining his General Contractor and Real Estate Broker
licenses.
Item 11. Executive Compensation
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Company's Board of Directors consists of
Messrs. Hahn and Fleming, both non-employee directors, and Messr. Amerson, the
Chief Executive Officer.
Summary Compensation Table
The following table sets forth the aggregate cash compensation paid by the
Company for services rendered during the last three years to the Company's Chief
Executive Officer and to each of the Company's other executive officers whose
annual salary, bonus and other compensation exceeded $100,000 in 1999.
26
Annual Compensation Long-Term Compensation
------------------------------------- -----------------------------------
Awards Payouts
------------------------- --------
Securities
Other Restricted Underlying
Annual Stock Options/ LTIP
Compen- Award(s) SARs Payouts
Name and Principal Position Year Salary ($) Bonus ($) sation ($) ($) (#) ($)
- ------------------------------------------ ----------- ---------- ------------ ----------- ------------ --------
Robert R. Amerson 1999 254,808 - - - 1,000,0002 -
President and CEO 1998 250,000 - - - -
1997 250,000 - 5,500 - - -
C.W. "Andy" Wood 1999 304,519 - - - - -
Vice President Sales 1998 183,558 - - - - -
1997 169,856 - 4,965 - - -
Steven K. Clark 1999 250,000 - - - 1,000,0002 -
Vice President Finance/CFO 1998 250,000 - - - - -
1997 250,000 - - - - -
Leonard J. Fetcho 1999 164,827 - 11,787 - - -
Vice President Operations 1998 206,008 2,000,000 - - 40,000 -
1997 265,927 - - - - -
John L. Cherry 1999 150,408 - 12,452 - 10,000 -
Vice President Engineered
Products 1998 149,600 - 10,771 - 10,000 -
1997 145,006 - 12,089 - 10,000 -
John Houmis 1999 106,164 - - - - -
Vice President Engineering 1998 59,828. - - - - -
1997 68,009 - - - - -
Mr. Amerson's and Mr. Clark each have an annual salary of $250,000, plus
a possible bonus each year, under their respective Employment
Agreements, as amended. See "Employment Agreements."
Messrs. Amerson and Clark each had options to purchase 1,000,000 shares
at $2.50 per share whose expiration date was extended, on December 22,
1999, from February 22, 2001 to February 22, 2006. This extension
resulted in the establishment of a new measurement date for the value of
the options for financial statement reporting purposes. On the date of
grant, the closing market price for the Company's stock was equal to or
above the options' strike price.
Mr. Fetcho joined the Company as of June 30, 1998, when the Company
acquired Eco-Air. Mr. Fetcho's total compensation for 1998 since the
date of acquisition was $93,149. Mr. Fetcho's annual salary is $165,000,
plus a possible bonus each year, under his Employment Agreement. See
"Employment Agreements". Prior to acquisition, Eco-Air paid Mr. Fetcho
$112,859 in salary during 1998 and a $2,000,000 bonus for his role in
negotiating the sale of Eco-Air. During 1997 and 1996, Eco-Air paid Mr.
Fetcho $265,927 and $201,034, respectively.
Mr. Houmis' compensation for 1997 reflected ten months of salary. Mr.
Houmis' compensation for 1998 reflects seven months' salary.
27
OPTIONS/SARs GRANTED IN LAST FISCAL YEAR
The following table sets forth information regarding all individual grants of
options made during the last completed year to the named executive officers.
Individual Grants
- --------------------------------------------------------------------------------------------------------------------
Potential Realizable
Value at
Assumed Annual
Number of % of Total Rates of Stock
Securities Options/SARs Price Appreciation
Underlying Granted to Exercise or for Option Term
Options/SARs Employees in Base Price Expiration -----------------------------
Name Granted (#) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- ------------------- --------------- --------------- -------------- ------------ -------------- -------------
Robert R. Amerson 1,000,000 46.3% $ 2.50 2/22/2006 $ 918,382 $2,174,135
C.W. "Andy" Wood - - - - - -
Steven K. Clark 1,000,0002 46.3% 2.50 2/22/2006 918,382 2,174,135
Leonard J. Fetcho - - - - - -
John L. Cherry 10,000 0.5% 4.75 7/23/2004 - 6,113
John Houmis - - - - - -
The potential realizable value portion of the foregoing table
illustrates value that might be realized upon exercise of the options
immediately prior to the expiration of their term, assuming the
specified compounded rates of appreciation on the common stock over the
term of the options. These numbers do not take into account plan
provisions providing for termination of the option following termination
of employment or non-transferability.
Messrs. Amerson and Clark each had options to purchase 1,000,000 shares
at $2.50 whose expiration date was extended from February 22, 2001 to
February 22, 2006 effective December 22, 1999.
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
The following table sets forth the aggregate number and value of stock options
and SAR's exercised during the last year by the Company's Chief Executive
Officer and by each of the Company's other executive officers whose annual
salary, bonus and other compensation exceed $100,000.
Number of Securities
Shares Underlying Unexercised Value of Unexercised
Acquired Options/SARs at Fiscal In-the-Money Options/
On Value Year-End (#) SARs at Fiscal Year-End
Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
- --------------------- ------------ ------------ ------------------------- -------------------------
Robert R. Amerson - $ - 3,150,000 / - $ 1,725,000 / -
C.W. "Andy" Wood - - - / - - / -
Steven K. Clark - - 3,150,000 / - 1,725,000 / -
Leonard J. Fetcho - - 40,000 / - - / -
John L. Cherry - - 40,000 / - - / -
John Houmis - - - / - - / -
28
Compensation of Directors
Directors who are Company employees receive no additional or special
remuneration for serving as directors. The Company's non-employee Directors are
paid $500 plus out-of-pocket expenses for each meeting of the Board of Directors
and upon meeting certain qualifications receive an option to purchase 5,000
shares of the Company's common stock at or above the market price of the common
stock on the date of grant for every year they remain a director. During 1999,
each of the non-employee directors received an option to purchase 50,000 shares
of the Company's common stock at an exercise price of $2.50 per share.
Employment Agreements
Messrs. Amerson and Clark have employment agreements effective as of December
15, 1995 ("Employment Agreements"). The Employment Agreements, as amended,
provide for an annual base salary of $250,000 for both Mr. Amerson and Mr. Clark
and terminate in 2010. The Employment Agreements also provide that the executive
shall be entitled to the following termination payments: (i) 100% of his current
base salary if the employment is terminated as a result of his death or
disability; (ii) up to 200% of his current base salary if the employment is
terminated by the Company for any reason other than death, disability or for
cause, or (iii) up to 250% of the executive's gross income during the year
preceding his termination if the Employment Agreement is terminated by the
executive for good reason or by the Company for any reason other than death,
disability or cause and the termination occurs within two years after a change
of control of the Company has occurred.
Messr. Fetcho has an employment agreement effective as of June 30, 1998, which
provides for an annual base salary of $165,000 and terminates in 2003. Mr.
Fetcho's employment agreement also provides that the executive shall be entitled
to the following termination payments: (i) 100% of his current base salary if
the employment is terminated as a result of his death or disability; (ii) up to
200% of his current base salary if the employment is terminated for any reason
other than death, disability or for cause, or (iii) up to 250% of the
executive's gross income during the year preceding his termination if the
Employment Agreement is terminated by the executive for good reason or by the
Company for any reason other than death, disability or cause and the termination
occurs within two years after a change of control of the Company has occurred.
OTHER INFORMATION REGARDING THE BOARD OF DIRECTORS
Board Meetings and Committees
During 1999, the Board of Directors met two (2) times and also executed various
resolutions and written actions in lieu of meetings. All directors were in
attendance at each of these meetings. The Board of Directors has an Audit
Committee and a Compensation Committee. The Audit Committee reviews the results
and scope of the audit and other services provided by the Company's independent
auditors, reviews and evaluates the Company's internal audit and control
functions, and monitors transactions between the Company and its employees,
officers and directors. The Compensation Committee administers the Company's
equity incentive plans and designates compensation levels for officers and
directors of the Company. The Audit Committee met two (2) times during 1999. The
Compensation Committee met two (2) times during 1999.
Currently, the Audit Committee consists of Messrs. Hahn, Fleming and Clark. The
Compensation Committee consists of Messrs. Hahn, Fleming and Amerson.
Long-Term Incentive Plan
During 1996, the Company adopted the Long Term Incentive Plan to assist the
Company in securing and retaining key employees and consultants. The LTI Plan
authorizes grants of incentive stock options, nonqualified stock options, stock
appreciation rights ("SARs"), restricted stock performance shares and dividend
equivalents to officers and key employees of the Company and outside consultants
to the Company. There are 1,986,800 shares of Common Stock reserved for award
under the LTI Plan. During 1999, 1998 and 1997, the Company awarded options to
purchase 52,850, 316,850 and 95,600 shares of Common Stock under the LTI Plan,
respectively.
The Plan is administered by the Compensation Committee. The Compensation
Committee determines the total number and type of awards granted in any year,
the number and selection of employees or consultants to receive awards, the
29
number and type of awards granted to each grantee and the other terms and
provisions of the awards, subject to the limitations set forth in the LTI Plan.
Stock Option Grants. The Compensation Committee has the authority to select
individuals who are to receive options under the LTI Plan and to specify the
terms and conditions of each option so granted (incentive or nonqualified), the
exercise price (which must be at least equal to the fair market value of the
common stock on the date of grant with respect to incentive stock options), the
vesting provisions and the option term. Unless otherwise provided by the
Compensation Committee, any option granted under the LTI Plan expires the
earlier of ten years from the date of grant or, three months after the
optionee's termination of service with the Company if the termination of
employment is attributable to (i) disability, (ii) retirement, or (iii) any
other reason, or 15 months after the optionee's death. As of April 13, 2000,
there are 503,870 options outstanding under the LTI Plan.
Stock Appreciation Rights. The Compensation Committee may grant SARs separately
or in tandem with a stock option award. A SAR is an incentive award that permits
the holder to receive (per share covered thereby) an equal amount by which the
fair market value of a share of common stock on the date of exercise exceeds the
fair market value of such share on the date the SAR was granted. Under the LTI
Plan, the Company may pay such amount in cash, in common stock or a combination
of both. Unless otherwise provided by the Compensation Committee at the time of
grant, the provisions of the LTI Plan relating to the termination of employment
of a holder of a stock option will apply equally, to the extent applicable, to
the holder of a SAR. A SAR granted in tandem with a related option will
generally have the same terms and provisions as the related option with respect
to exercisability. A SAR granted separately will have such terms as the
Compensation Committee may determine, subject to the provisions of the LTI Plan.
As of April 13, 2000, no SARs are outstanding under the LTI Plan.
Performance Shares. The Compensation Committee is authorized under the LTI Plan
to grant performance shares to selected employees. Performance shares are rights
granted to employees to receive cash, stock, or other property, the payment of
which is contingent upon achieving certain performance goals established by the
Compensation Committee. As of April 13, 2000, no performance shares are
outstanding under the LTI Plan.
Restricted Stock Awards. The Compensation Committee is authorized under the LTI
Plan to issue shares of restricted common stock eligible participants on such
terms and conditions and subject to such restrictions, if any, outstanding under
the LTI Plan. As of April 13, 2000, no restricted shares have been awarded under
the LTI Plan.
Dividend Equivalents. The Compensation Committee may also grant dividend
equivalent rights to participants subject to such terms and conditions as may be
selected by the Compensation Committee. Dividend equivalent rights entitle the
holder to receive payments equal to dividends with respect to all or a portion
of the number of shares of stock subject to an option award or SARs, as
determined by the Committee. As of April 13, 2000, no dividend equivalents are
outstanding under the LTI Plan.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION
General
The Compensation Committee of the Board of Directors is composed of two
independent directors who have no "interlocking relationships" (as defined by
the SEC) and the Chief Executive Officer, who recuses himself from votes and
discussions on his own compensation.
We are engaged in highly competitive businesses and compete nationally for
personnel at the executive and technical staff level. Outstanding candidates are
aggressively recruited, often at premium salaries. Highly qualified employees
are essential to our success. We are committed to providing competitive
compensation that helps attract, retain, and motivate the highly skilled people
we require. We strongly believe that a considerable portion of the compensation
for the Chief Executive Officer and other top executives must be tied to the
achievement of business objectives, completing acquisitions, and to business
unit and overall financial performance, both current and long-term.
30
Executive Compensation
Our executive compensation program is administered by the Compensation
Committee. The role of the Compensation Committee is to review and approve
salaries and other compensation of the executive officers of the Company, to
administer the executive officer bonus plan and stock option plans, and to
review and approve stock option grants to all employees including the executive
officers of the Company.
General Compensation Philosophy
Our compensation philosophy is that total cash compensation should vary with the
performance of the Company and any long-term incentive should be closely aligned
with the interest of the stockholders. Total cash compensation for the executive
officers consists of the following components:
o Base salary
o An executive officer bonus that is related to growth in sales and
operating earnings of the Company.
Long-term incentives are realized through the granting of stock options to
executives and key employees through the LTI Plan. We have also granted certain
non-qualified options to our executive officers. We have no other long-term
incentive plans for our officers and employees.
Base Salary and Executive Officer Bonus Target
Current base salaries for the executive officers were determined by arms' length
negotiations with the Board of Directors. Certain executive officers have
employment contracts with the Company. During 1998 and 1999, none of the
executive officers, including the Chief Executive Officer, reached their bonus
target, and hence no bonuses were awarded to executive officers in 1999, nor
will bonuses be awarded in 2000 for performance in 1999.
Stock Options
Stock options are granted to aid in the retention of executive and key employees
and to align the interests of executive and key employees with those of the
stockholders. The level of stock options granted (i.e., the number of shares
subject to each stock option grant) is based on the employee's ability to impact
future corporate results. An employee's ability to impact future corporate
results depends on the level and amount of job responsibility of the individual.
Therefore, the level of stock options granted is proportional to the
Compensation Committee's evaluation of each employee's job responsibility. For
example, Robert R. Amerson, as the Chief Executive Officer, has the highest
level of responsibility and would typically be awarded the highest level of
stock options. Stock options are granted at a price not less than the fair
market value on the date granted.
31
Comparative Stock Performance Graph
The following graph1 shows a comparison of cumulative total returns for the
Company, the NASDAQ Stock Market -- U.S. Index and the NASDAQ Non-Financial
Index during the period commencing February 26, 1996 and ending December 31,
1999. The comparison assumes $100 was invested on February 26, 1996 in the
Company's common stock with the reinvestment of all dividends, if any. Total
shareholder returns for prior periods are not an indication of future returns.
[GRAPHIC OMITTED]
2/96 12/96 12/97 12/98 12/99
---- ----- ----- ----- -----
Flanders Corporation 100 380 370 163 100
Nasdaq Stock Market (U.S.) 100 122 150 223 414
Nasdaq Industrial 100 121 142 193 331
- ------------------------------------
1 Flanders did not have a public market for its stock prior to its listing
on the OTC Bulletin Board in February 1996.
Respectfully submitted,
COMPENSATION COMMITTEE:
Linwood Allen Hahn J. Russell Fleming
Robert R. Amerson
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth all individuals known by the Company to
beneficially own 5% or more of the Company's common stock, and all officers and
directors of the registrant, with the amount and percentage of stock
beneficially owned, as of April 13, 2000. Except as indicated in the following
footnotes, each listed beneficial owner has sole voting and investment power
over the shares of common stock held in their names.
32
Percentage of
Name and Address Shares of Common Stock Outstanding Shares of
of Beneficial Owner Beneficially Owned Common Stock
------------------- ---------------------- ---------------------
Robert R. Amerson
531 Flanders Filters Road
Washington, NC 27889 7,914,370 27.69%
Steven K. Clark
531 Flanders Filters Road
Washington, NC 27889 5,170,183 18.09%
Stephen D. Klocke
531 Flanders Filters Road
Washington, NC 27889 109,427 *
John L. Cherry
531 Flanders Filters Road
Washington, NC 27889 40,000 *
C.W. "Andy" Wood
2399 26th Avenue North
St. Petersburg, FL 33713 700 *
Linwood Allen Hahn
531 Flanders Filters Road
Washington, NC 27889 52,500 *
J. Russell Fleming
531 Flanders Filters Road
Washington, NC 27889 70,000 *
Leonard J. Fetcho
2399 26th Avenue North
St. Petersburg, FL 33713 40,000 *
Franklin Resources, Inc.
777 Marivers Island Blvd., 6th Fl.
San mateo, CA 94404 1,328,931 5.22%
Dimensional Fund Advisors, Inc.
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401 1,980,500 7.79%
Becker Capital Management, Inc.
1211 SW Fifth Avenue, Suite 2185
Portland, OR 97204 2,194,700 8.63%
Crabbe Huson Group, Inc.
121 SW Morrison, Suite 1400
Portland, OR 97204 2,641,200 10.38%
All Executive Officers and Directors
as a Group (8 persons),,,
, 13,396,880 41.93%
- -------------------------------------
* Represents less than 1% of the total issued and outstanding shares of
common stock.
33
Applicable percentage of ownership is based on 25,435,583 shares of
common stock outstanding as of April 13, 2000, together with all
applicable options for unissued securities for such shareholders
exercisable within sixty days. Shares of common stock subject to options
exercisable within sixty days are deemed outstanding for computing the
percentage ownership of the person holding such options, but are not
deemed outstanding for computing the percentage of any other person.
Includes 1,150,000 shares which are subject to an option to purchase
such shares from the Company at $1.00 per share, 1,000,000 shares which
are subject to an option to purchase such shares from the Company at
$2.50 per share and 1,000,000 shares which are subject to an option to
purchase such shares from the Company at $7.50 per share.
Includes 16,800 shares which are subject to an option to purchase such
shares from the Company at $2.50 per share, 10,000 shares which are
subject to an option to purchase such shares from the Company at $7.50
per share, and 10,000 shares which are subject to an option to purchase
such shares from the Company at $7.125 per share.
Includes 10,000 shares which are subject to an option to purchase such
shares from the Company at $6.94 per share, 10,000 shares which are
subject to an option to purchase such shares from the Company at $7.13
per share, and 20,000 shares which are subject to an option to purchase
such shares from the Company at $4.75 per share.
Includes 50,000 shares which are subject to an option to purchase such
shares from the Company at $2.50 per share.
Includes 40,000 shares which are subject to an option to purchase such
shares from the Company at $5.38 per share.
Item 13. Certain Relationships and Related Transactions
At April 13, 2000, Steven K. Clark owed the Company $2,743,014 (including
accrued interest) which he previously borrowed to settle claims, to make certain
payments under an indemnity agreement he entered into with the Company and to
purchase certain shares from Thomas T. Allan, a former officer and director. To
evidence the amount owed, effective February 11, 1997, Mr. Clark issued a note
to the Company in the amount of $109,013 with interest at the variable rate of
LIBOR plus 1.25% per annum, payable in full on February 10, 1999. On April 25,
1997, Mr. Clark issued a note to the Company in the amount of $250,000 at the
above interest rate, payable in full on April 24, 1999. On September 5, 1997,
Mr. Clark assumed a note between Thomas T. Allan for a principal amount of
$409,750, at the above interest rate, payable in full on September 4, 1999. On
April 15, 1998, Mr. Clark issued a note to the Company in the amount of
$1,580,609 with interest at the rate of 7% per annum, payable in full on
December 31, 2003. On April 24, 1999, the Board of Directors agreed to
consolidate and refinance Mr. Clark's debts to the Company, whereby Mr. Clark
issued a note to the Company in the amount of $2,569,871 with interest accruing
at the rate of LIBOR plus 1%, payable in full on December 31, 2010 or upon
demand by the Company, and canceled all of the other above-described notes.
At December 31, 1999, Robert R. Amerson owed the Company $1,657,392 (including
accrued interest) which he previously borrowed to settle claims, to make certain
payments under an indemnity agreement he entered into with the Company and to
purchase certain shares from Thomas T. Allan, a former officer and director of
the Company. To evidence the amount owed, effective February 11, 1997, Mr.
Amerson issued a note to the Company in the amount of $109,013 with interest at
the rate of LIBOR plus 1.25% per annum, payable in full on February 10, 1999. On
April 25, 1997, Mr. Amerson issued a note to the Company in the amount of
$250,000 at the above-described interest rate, payable in full on April 24,
1999. On September 25, 1997, Mr. Amerson assumed a note between Thomas T. Allan
for a principal amount of $409,750, at the above interest rate, payable in full
on September 4, 1999. On April 15, 1998, Mr. Amerson issued a note to the
Company in the amount of $440,194 with interest at the rate of 7% per annum,
payable in full on December 31, 2003. On April 24, 1999, the Board of Directors
agreed to consolidate and refinance Mr. Amerson's debt to the Company, whereby
Mr. Amerson issued a note to the Company in the amount of $1,555,802 with
interest accruing at the rate of LIBOR plus 1%, payable in full on December 31,
2010 or upon demand by the Company, and canceled all of the other
above-described notes.
34
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
The following constitutes a list of Financial Statements, Financial Statement
Schedules and Exhibits required to be used in this report.
(a)(1) Financial Statements: Financial Statements are included beginning at
page F-1 as follows:
Report of Grant Thornton LLP Independent Certified Public
Accountants......................................................F-2
Independent Auditor's Report of McGladrey & Pullen, LLP..........F-3
Consolidated Balance Sheets at December 31, 1999 and 1998........F-4
Consolidated Statements of Earnings for the years ended
December 31, 1999, 1998 and 1997.................................F-5
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997.....................F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.................................F-7
Notes to Consolidated Financial Statements......................F-10
(a)(2) Financial Statement Schedules
Report of Grant Thornton LLP Independent Certified Public
Accountants.....................................................F-28
Independent Auditor's Report of McGladrey & Pullen, LLP.........F-29
Schedule II. Valuation and Qualifying Accounts.................F-30
All schedules not listed have been omitted because they are not
applicable or the information has been otherwise supplied in the
Registrant's financial statements and schedules.
(a)(3) Exhibits:
3.1 Articles of Incorporation for Flanders Corporation, filed with the
Form 8-A dated March 8, 1996, incorporated herein by reference.
3.2 Bylaws of Flanders Corporation, filed with the Form 8-A dated March
8, 1996, incorporated herein by reference.
10.1 Indemnification Agreement between Flanders Corporation, Steven K.
Clark, Robert Amerson and Thomas Allan, filed with the December 31,
1995 Form 10-K, incorporated herein by reference.
10.2 Stock Purchase Agreement between Flanders Corporation and the
Shareholders of Eco-Air Products, Inc. dated May 7, 1998, filed with
the June 30, 1998 Form 8-K, incorporated herein by reference.
10.3 Amendment dated May 20, 1998 to Stock Purchase Agreement by and
between the Registrant and the Shareholders of Eco-Air Products,
Inc. dated May 7, 1998, filed with the June 30, 1998 Form 8-K,
incorporated herein by reference.
35
10.4 Promissory Note from Precisionaire, Inc. to SunTrust Bank, Tampa
Bay, in the amount of $2,134,524 dated August 28, 1997, filed with
the September 15, 1997 Form S-1 (Reg No. 333-33635), and
incorporated herein by reference.
10.5 Assumption Agreement between POF Realty, Precisionaire, Inc., Polk
County Industrial Development Authority and SunTrust Bank, dated
August 1, 1997, filed with the September 15, 1997 Form S-1 (Reg No.
333-33635), and incorporated herein by reference.
10.6 Mortgage Deed and Security Agreement between Precisionaire, Inc. and
Sun Trust Bank, Tampa Bay dated August 28, 1997, filed with the
September 15, 1997 Form S-1 (Reg No. 333-33635), and incorporated
herein by reference.
10.7 Credit Agreement between Flanders Corporation, SunTrust Bank, Tampa
Bay and Zions First National Bank, dated November 10, 1997, filed
with the December 31, 1997 Form 10-K, and incorporated herein by
reference.
10.8 Loan Agreement between Will-Kankakee Regional Development Authority
and Flanders Corporation dated December 15, 1997, filed with the
December 31, 1997 Form 10-K, and incorporated herein by reference.
10.9 Letter of Credit Agreement between Flanders Corporation and SunTrust
Bank, Tampa Bay, dated April 1, 1998, filed with the Form 10-Q dated
March 31, 1998, and incorporated herein by reference.
10.10 Credit Agreement between Flanders Corporation, SunTrust Equitable
Securities Corporation and SunTrust Bank, dated February 9, 2000,
filed herewith.
10.11 Loan Agreement between Flanders Corporation and the Johnston County
Industrial Facilities and Pollution Control Financing Authority,
dated April 1, 1998, filed with the Form 10-Q dated March 31, 1998,
and incorporated herein by reference.
10.12 Loan Agreement between Flanders Corporation and the Johnston County
Industrial Facilities and Pollution Control Financing Authority,
dated March 1, 2000, filed herewith.
10.13 Flanders Corporation 1996 Director Option Plan, filed with the Form
10-K dated December 31, 1995, and incorporated herein by reference.
10.14 Employment Agreement between Elite Acquisitions, Inc., Flanders
Filters, Inc., and Steven K. Clark, filed with the December 31, 1995
Form 10-K, incorporated herein by reference.
10.15 Amendment to Employment Agreement between Elite Acquisitions, Inc.,
Flanders Filters, Inc., and Steven K. Clark, filed with Form S-1
dated October 21, 1996 (Reg. No. 333-14655) and incorporated herein
by reference.
10.16 Amendment to Employment Agreement between Elite Acquisitions, Inc.,
Flanders Filters, Inc., and Steven K. Clark, filed with the Form
10-K dated December 31, 1997 and incorporated herein by reference.
10.17 Amendment to Employment Agreement between Elite Acquisitions, Inc.,
Flanders Filters, Inc., and Steven K. Clark, filed herewith.
10.18 Employment Agreement between Elite Acquisitions, Inc., Flanders
Filters, Inc. and Robert R. Amerson, filed with the December 31,
1995 Form 10-K, incorporated herein by reference.
10.19 Amendment to Employment Agreement between Elite Acquisitions, Inc.,
Flanders Filters, Inc., and Robert R. Amerson, filed with Form S-1
dated October 21, 1996 (Reg. No. 333-14655) and incorporated herein
by reference.
10.20 Amendment to Employment Agreement between Elite Acquisitions, Inc.,
Flanders Filters, Inc., and Robert R. Amerson, filed with the Form
10-K dated December 31, 1997 and incorporated herein by reference.
10.21 Amendment to Employment Agreement between Elite Acquisitions, Inc.,
Flanders Filters, Inc., and Robert R. Amerson, filed herewith.
10.22 Employment Agreement between Eco-Air Products, Inc., and Leonard J.
Fetcho.
36
10.23 Stock Option Agreement between Elite Acquisitions, Inc. and Robert
R. Amerson, filed with the December 31, 1995 Form 10-K, incorporated
herein by reference.
10.24 Stock Option Agreement between Flanders Corporation and Robert R.
Amerson dated February 22, 1996, filed with Form S-8 on July 21,
1997, incorporated herein by reference.
10.25 Amendment to Stock Option Agreement between Flanders Corporation and
Robert R. Amerson dated December 22, 1999, filed herewith.
10.26 Stock Option Agreement between Flanders Corporation and Robert R.
Amerson dated June 3, 1996, filed with Form S-8 on July 21, 1997,
incorporated herein by reference.
10.27 Stock Option Agreement between Elite Acquisitions, Inc., and Steven
K. Clark, filed with the December 31, 1995 Form 10-K, incorporated
herein by reference.
10.28 Stock Option Agreement between Flanders Corporation and Steven K.
Clark dated February 22, 1996, filed with Form S-8 on July 21, 1997,
incorporated herein by reference.
10.29 Amendment to Stock Option Agreement between Flanders Corporation and
Steven K. Clark dated December 22, 1999, filed herewith.
10.30 Stock Option Agreement between Flanders Corporation and Steven K.
Clark dated June 3, 1996, filed with Form S-8 on July 21, 1997,
incorporated herein by reference.
10.31 Note Agreement between Steven K. Clark and Flanders Corporation,
dated April 24, 1999, filed herewith.
10.32 Note Agreement between Robert R. Amerson and Flanders Corporation,
dated April 24, 1999, filed herewith.
21 Subsidiaries of the Registrant.
23.1 Consent of Grant Thornton LLP for incorporation by reference of
their report into Form S-8 filed on July 21, 1997, filed herewith.
23.2 Consent of McGladrey & Pullen, LLP for incorporation by reference of
their report into Form S-8 filed on July 21, 1997, filed herewith.
24 Power of Attorney (included on Signature page of this report).
27 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
(c) Financial Statement Schedules: See (a)(2) above.
37
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) 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.
Dated this 13th day of April, 2000.
FLANDERS CORPORATION
By /s/ Robert R. Amerson
-----------------------------------------------
Robert R. Amerson
President, Chief Executive Officer,
and Director
By /s/ Steven K. Clark
-----------------------------------------------
Steven K. Clark
Vice President/Chief Financial Officer,
Principal Accounting Officer, Chief Operating
Officer and Director
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Steven K. Clark, his attorney-in-fact, to sign
any amendments to this report, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Commission, hereby
ratifying and confirming all the said attorney-in-fact may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Robert R. Amerson President, Chief Executive Officer 4/13/00
- ------------------------- and Director ------------
Robert R. Amerson
Chief Operating Officer, Vice
President/Chief Financial Officer,
/s/ Steven K. Clark Principal Accounting Officer and 4/13/00
- ------------------------- Director ------------
Steven K. Clark
/s/ Linwood Allen Hahn
- ------------------------- 4/13/00
Linwood Allen Hahn Director ------------
/s/ J. Russell Fleming
- ------------------------- 4/13/00
J. Russell Fleming Director ------------
38
FLANDERS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1999, 1998 and 1997
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Flanders Corporation
We have audited the accompanying consolidated balance sheet of Flanders
Corporation and Subsidiaries as of December 31, 1999, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
the year then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Flanders
Corporation and Subsidiaries as of December 31, 1999, and the consolidated
results of their operations and their consolidated cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Salt Lake City, Utah
March 8, 2000
F-2
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Flanders Corporation
We have audited the accompanying consolidated balance sheet of Flanders
Corporation and subsidiaries as of December 31, 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years ended December 31, 1998 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Flanders Corporation
and subsidiaries as of December 31, 1998, and the results of their operations
and their cash flows for the years ended December 31, 1998 and 1997 in
conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
New Bern, North Carolina
March 12, 1999, except for item (A) in Note H and the last paragraph of Note H,
as to which the date is March 31, 1999, and Note D, as to which the date is
December 31, 1999.
F-3
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1999 1998
- ---------------------------------------------------------------------------------
Current assets
Cash and cash equivalents $ 824,220 $ 13,672,685
Receivables:
Trade, less allowance for doubtful accounts:
1999 $487,321; 1998 $551,725 29,023,225 26,670,650
Other 1,415,794 2,177,301
Inventories (Note C) 25,901,700 25,518,804
Deferred taxes (Note L) 1,849,481 1,421,847
Other current assets 1,959,725 860,310
Net assets of discontinued operations (Note D) 5,217,737 --
------------- -------------
Total current assets 66,191,882 70,321,597
Related party receivables (Note O) 4,369,028 4,263,409
Other assets (Note E) 4,113,491 4,637,062
Intangible assets, net (Note F) 30,022,487 28,990,924
Property and equipment, net (Notes G and H) 65,253,828 59,567,202
------------- -------------
$ 169,950,716 $ 167,780,194
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------- ------------- -------------
Current liabilities
Notes payable, banks (Note H) $ -- $ 1,300,000
Current maturities of long-term debt (Note H) 1,115,184 1,265,014
Accounts payable (Note I) 15,760,022 15,851,087
Accrued expenses (Note J) 3,895,274 3,933,918
------------- -------------
Total current liabilities 20,770,480 22,350,019
Long-term debt, less current maturities (Note H) 31,212,985 30,105,714
Deferred taxes (Note L) 5,840,654 5,721,647
Commitments and contingencies (Notes G, M and N)
Stockholders' equity (Notes H, K and P)
Preferred stock, no par value, 10,000,000
shares authorized; none issued -- --
Common stock, $.001 par value; 50,000,000 shares
authorized; issued and outstanding:
1999 25,435,583; 1998 25,624,339 25,436 25,624
Additional paid-in capital 91,798,188 91,837,257
Notes receivable (2,014,094) (1,760,000)
Retained earnings 22,317,067 19,499,933
------------- -------------
112,126,597 109,602,814
------------- -------------
$ 169,950,716 $ 167,780,194
============= =============
The accompanying notes are an integral part of these financial statements.
F-4
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended December 31,
1999 1998 1997
------------- ------------- -------------
Net sales $ 171,392,281 $ 154,764,804 $ 131,898,603
Cost of goods sold (Notes M, N and O) 127,417,753 117,104,977 99,018,962
------------- ------------- -------------
Gross profit 43,974,528 37,659,827 32,879,641
Operating expenses (Notes M, N and O) 33,802,204 28,108,372 23,509,447
------------- ------------- -------------
Operating income from continuing operations 10,172,324 9,551,455 9,370,194
------------- ------------- -------------
Nonoperating income (expense) from continuing
operations:
Other income 1,258,440 2,014,881 1,230,991
Interest expense (1,257,157) (574,950) (751,499)
------------- ------------- -------------
1,283 1,439,931 479,492
------------- ------------- -------------
Earnings from continuing operations before
income taxes 10,173,607 10,991,386 9,849,686
Provision for income taxes (Note L) 4,670,682 4,450,079 3,751,399
------------- ------------- -------------
Earnings from continuing operations 5,502,925 6,541,307 6,098,287
Discontinued operations (Note D)
Loss from operations of discontinued
subsidiary (including tax benefit
of $1,134,799 in 1999, $852,244 in 1998
and $46,676 in 1997) (1,792,417) (1,252,739) (259,022)
Estimated loss on disposal of subsidiary
(including tax benefit of $565,604) (893,374) -- --
------------- ------------- -------------
Loss from discontinued operations (2,685,791) (1,252,739) (259,022)
------------- ------------- -------------
Net earnings $ 2,817,134 $ 5,288,568 $ 5,839,265
============= ============= =============
Earnings per share from continuing
operations (Note Q)
Basic $ 0.22 $ 0.26 $ 0.33
============= ============= =============
Diluted $ 0.21 $ 0.24 $ 0.28
============= ============= =============
Loss per share from discontinued operations
Basic $ (0.11) $ (0.05) $ (0.01)
============= ============= =============
Diluted $ (0.10) $ (0.04) $ (0.01)
============= ============= =============
Net earnings per share
Basic $ 0.11 $ 0.21 $ 0.32
============= ============= =============
Diluted $ 0.11 $ 0.20 $ 0.27
============= ============= =============
Weighted average common shares outstanding (Note Q)
Basic 25,344,433 25,133,820 18,508,763
============= ============= =============
Diluted 26,525,429 27,106,924 22,477,184
============= ============= =============
The accompanying notes are an integral part of these financial statements.
F-5
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
Additional
Common Paid-In Notes Retained
Stock Capital Receivable Earnings
--------- ------------- ------------ -----------
Balance, January 1, 1997 $ 15,952 $ 17,205,413 $ (240,700) $ 8,372,100
Release of committed capital (Note K) -- 8,000,005 -- --
Issuance of 8,377,000 shares of common stock (Note K) 8,377 57,045,636 -- --
Issuance of 722,375 shares of common stock upon
conversion of convertible debt (Note K) 722 4,381,689 -- --
Issuance of 425,000 shares of common stock upon
exercise of options (Note P) 425 1,262,075 -- --
Valuation and release from escrow of 344,691 shares
of common stock related to acquisitions -- 2,984,635 -- --
Issuance of 187,502 shares of common stock related to
acquisitions (Note B) 187 1,394,452 -- --
Income tax benefit from stock options exercised -- 969,125 -- --
Issuance of receivables related to exercise of options -- -- (1,262,500) --
Payment on receivables related to exercised warrants
and options -- -- 230,000 --
Net earnings -- -- -- 5,839,265
-------- ------------ ----------- -----------
Balance, December 31, 1997 25,663 93,243,030 (1,273,200) 14,211,365
Issuance of 110,000 shares of common stock to acquire
remaining interest in a subsidiary from minority
stockholders 110 522,390 -- --
Issuance of 121,264 shares of common stock upon
non-cash exercise of stock options 121 (121) -- --
Purchase and retirement of 731,350 shares of common
stock (731) (3,284,827) -- --
Issuance of 461,000 shares of common stock upon
exercise of options 461 1,152,039 -- --
Issuance of receivables related to exercise of options -- -- (722,500) --
Payment on receivables related to exercised options -- -- 235,700 --
Income tax benefit of stock options exercised -- 253,795 -- --
Registration of Company common stock -- (77,487) -- --
Valuation and release from escrow of 7,000 shares of
common stock related to the acquisitions -- 28,438 -- --
Net earnings -- -- -- 5,288,568
-------- ------------ ----------- -----------
Balance, December 31, 1998 25,624 91,837,257 (1,760,000) 19,499,933
Issuance of 94,544 shares of common stock related to
certain acquisitions 95 (95) -- --
Interest on notes receivable secured by common shares -- -- (254,094) --
Issuance and release from escrow of 245,899 shares of
common stock related to certain acquisitions -- 988,028 -- --
Purchase and retirement of 283,300 shares of common
stock (283) (1,027,002) -- --
Net earnings -- -- -- 2,817,134
-------- ------------ ----------- -----------
Balance, December 31, 1999 $ 25,436 $ 91,798,188 $(2,014,094) $22,317,067
======== ============ =========== ===========
The accompanying notes are an integral part of these financial statements.
F-6
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1999 1998 1997
------------ ------------ ------------
Increase (decrease) in cash and cash equialents
CASH FLOWS FROM OPERATING ACTIVITIES
Earnings from continuing operations $ 5,502,925 $ 6,541,307 $ 6,098,287
Adjustments to reconcile earnings from continuing
operations to net cash provided by (used in)
operating activities:
Depreciation and amortization 6,122,134 4,854,043 3,695,445
Provision (credit) for doubtful accounts (64,404) 111,159 9,086
Allowance for obsolete inventory 93,586 32,414 17,000
(Gain) loss on sale of property and equipment 127,703 (41,221) 31,942
Gain on sale of real estate -- (48,767) --
Deferred income taxes (308,627) 185,814 (34,555)
Income tax benefit from exercise of stock options -- 253,795 969,125
Interest income on notes receivable (254,094) -- --
Change in working capital components, net of
effects from acquisitions:
Receivables (3,607,050) (2,898,821) (2,455,755)
Inventories (1,480,901) (6,245,876) (5,040,280)
Other current assets (365,743) (326,868) 325,027
Accounts payable 173,435 (2,628,592) 5,410,082
Accrued expenses (350,953) 135,699 (50,353)
Income tax payable (298,458) 925,243 (696,450)
------------ ------------ ------------
Net cash provided by continuing operations 5,289,553 849,229 8,278,601
Net cash used in discontinued operations (1,153,100) (1,646,011) (2,428,960)
------------ ------------ ------------
Net cash provided by (used in) operating
activities 4,136,453 (796,782) 5,849,641
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash acquired (1,786,692) (15,455,160) --
Purchase of property and equipment (9,301,802) (15,050,371) (18,788,048)
Proceeds from sale of property and equipment 39,000 96,005 92,572
Proceeds from sale of real estate -- 259,253 --
Disbursements on notes receivables (960,709) (2,402,404) (955,075)
Disbursements for trademarks and trade names (6,216) (9,224) --
Disbursement on deferred expenses (318,855) (248,923) (461,824)
Proceeds from repayment of notes receivable related
to exercise of options and warrants -- 235,700 230,000
Decrease (increase) in cash designated for equipment
additions -- 856,441 (856,441)
Decrease (increase) in other assets 1,125,027 (347,856) (927,791)
------------ ------------ ------------
Net cash used in investing activities
of continuing operations (11,210,247) (32,066,539) (21,666,607)
Net cash used in investing activities
of discontinued operations (424,769) (2,218,183) (1,498,955)
------------ ------------ ------------
Net cash used in investing activities (11,635,016) (34,284,722) (23,165,562)
------------ ------------ ------------
- Continued -
The accompanying notes are an integral part of these financial statements.
F-7
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
Years Ended December 31,
1999 1998 1997
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds (payments) from revolving credit
agreement (1,630,250) 12,900,000 (15,942,145)
Proceeds from long-term borrowings -- 4,500,000 9,725,659
Principal payments on long-term borrowings (2,604,392) (1,096,416) (8,781,901)
Proceeds from issuance of common stock, net of
committed capital -- -- 57,054,013
Release of committed capital -- -- 8,000,005
Purchase and retirement of common stock (1,027,285) (3,285,558) --
Proceeds from exercise of options and warrants -- 430,000 --
Cost to register common stock -- (77,487) --
------------ ------------ ------------
Net cash provided by (used in) financing
activities of continuing operations (5,261,927) 13,370,539 50,055,631
Net cash provided by (used in) financing
activities of discontinued operations (87,975) (70,930) 324,459
------------ ------------ ------------
Net cash provided by (used in) financing
activities (5,349,902) 13,299,609 50,380,090
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents (12,848,465) (21,781,895) 33,064,169
CASH AND CASH EQUIVALENTS
Beginning 13,672,685 35,454,580 2,390,411
------------ ------------ ------------
Ending $ 824,220 $ 13,672,685 $ 35,454,580
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest, net of $395,074, $295,089 and $424,332
interest capitalized to property and equipment
for 1999, 1998 and 1997, respectively:
Continuing operations $ 1,365,866 $ 814,934 $ 1,222,352
============ ============ ============
Discontinued operations $ 20,492 $ 22,642 $ 106,028
============ ============ ============
Income taxes:
Continuing operations $ 3,257,773 $ 2,486,778 $ 4,435,728
============ ============ ============
Discontinued operations $ -- $ -- $ --
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Valuation and release from escrow of 245,899,
7,000 and 344,691 shares of common stock related
to acquisitions for 1999, 1998 and 1997,
respectively $ 970,528 $ 28,438 $ 2,984,635
============ ============ ============
Issuance of 289,000 and 425,000 shares of common
stock upon exercise of options in exchange for
receivable in 1998 and 1997, respectively $ -- $ 722,500 $ 1,262,500
============ ============ ============
Issuance of 722,375 shares of common stock upon
conversion of $4,000,000 of convertible debt and
$382,411 of related accrued interest $ -- $ -- $ 4,382,411
============ ============ ============
Acquisition of property through assumption of debt $ -- $ -- $ 1,642,099
============ ============ ============
- Continued -
The accompanying notes are an integral part of these financial statements.
F-8
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
Years Ended December 31,
1999 1998 1997
------------ ------------ ------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES (Continued)
Cancellation of capital lease $ -- $ -- $ 2,764,634
============ ============ ============
Capital lease obligation incurred for use of
property and equipment $ -- $ 116,580 $ --
============ ============ ============
Issuance of stock in exchange for minority interest $ -- $ 522,500 $ --
============ ============ ============
Exchange of assets for minority interest $ 866,139 $ -- $ --
============ ============ ============
ACQUISITION OF COMPANIES (Note 11)
Working capital acquired, net of cash and cash
equivalents received $ 592,288 $ 2,635,781 $ 270,646
Fair value of other assets acquired, principally
property and equipment 698,647 1,742,794 930,000
Goodwill 647,369 11,106,585 547,393
Long-term debt assumed (151,612) (30,000) (353,400)
------------ ------------ ------------
$ 1,786,692 $ 15,455,160 $ 1,394,639
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-9
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A. Nature of Business and Significant Accounting Policies
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows.
1. Financial statement presentation
The accounting and reporting policies of Flanders Corporation and
Subsidiaries (the Company) conform with generally accepted accounting
principles and with general practices in the manufacturing industry.
2. Principles of consolidation
The consolidated financial statements include the accounts and operations of
the Company and its subsidiaries, all of which are wholly owned, except for
one subsidiary which was 80 percent owned for the year ended December 31,
1998. All material intercompany accounts and transactions have been
eliminated in consolidation. Amounts of minority interest are insignificant.
3. Nature of business
The Company designs, manufactures and markets a broad range of air
filtration products, including high-end High Efficiency Particulate Air
("HEPA") filters, with at least 99.97% efficiency, Absolute Isolation
Barriers for the creation of synthesized atmospheres to control
manufacturing environments and for the absolute control and containment of
contaminants and toxic gases in certain manufacturing processes, mid-range
filters for individual and commercial use, custom air filter housings,
industrial air handlers and standard low cost residential and commercial
furnace and air conditioning filters. The Company's air filtration products
are utilized by many industries, including those associated with commercial
and residential heating ventilation and air conditioning systems ("HVAC"
systems), semiconductor manufacturing, ultra-pure materials, biotechnology,
pharmaceuticals, synthetics, nuclear power and nuclear materials processing.
The Company also designs and manufactures much of its own production
equipment to allow for highly automated manufacturing of these products.
Furthermore, the Company produces glass-based filter media for some of its
products to maintain control over the quality and composition of such media.
The Company has only one segment, filtration products. The Company sells
some products for end users outside of the United States through domestic
specialty cleanroom contractors. These sales are accounted for as domestic
sales. The Company also sells products through foreign distributors,
primarily in Europe, and a wholly owned subsidiary, which sells to customers
in the Far East. Sales through foreign distributors and its wholly owned
foreign subsidiary total less than 5% of net sales. Assets held outside the
United States are negligible.
4. Significant customers
Net sales for the years ended December 31, 1999, 1998 and 1997 included
sales to the following major customers, together with the receivables due
from those customers:
Trade Receivable Balance
Amount of Net Sales As of December 31,
---------------------------------------- ------------------------------------
1999 1998 1997 1999 1998 1997
------------ ------------ ------------ ----------- ---------- -----------
Customer A $ 16,441,644 $ 16,030,892 $ 14,962,349 $ 1,385,692 $1,112,788 $ 1,156,094
Customer B 21,148,340 16,197,490 10,466,677 2,937,626 2,286,944 1,157,019
F-10
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A. Nature of Business and Significant Accounting Policies - Continued
5. 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.
6. Cash and cash equivalents
The Company maintains its cash in bank deposit accounts, which at times
exceed federally insured limits. The Company has not experienced any losses
in such accounts. The Company believes it is not exposed to any significant
credit risk on cash and cash equivalents. For purposes of reporting cash
flows, the Company considers all cash accounts which are not subject to
withdrawal restrictions or designated for equipment acquisitions and
certificates of deposit which have an original maturity of three months or
less to be cash equivalents.
7. Fair value of financial instruments
The carrying amount of cash equivalents approximates fair value at December
31, 1999 and 1998 because of the short maturity of those instruments. Based
on the borrowing rates currently available to the Company for bank loans
with similar maturities and similar collateral requirements, the fair value
of notes payable and long-term debt approximates the carrying amounts at
December 31, 1999 and 1998.
8. Inventories
Inventories are valued at lower of cost (first-in, first-out method) or
market.
9. Goodwill
The Company has classified as goodwill the cost in excess of fair value of
the net assets (including tax attributes) of companies acquired in purchase
transactions. Goodwill is being amortized on a straight line basis over 40
years. At each balance sheet date, the Company evaluates goodwill for
impairment by comparing expectations of non-discounted future cash flows
excluding interest costs with the carrying value of goodwill for each
subsidiary having a material goodwill balance. Based upon its most recent
analysis, the Company believes that no impairment of goodwill exists at
December 31, 1999.
10. Trademarks and trade names
Trademarks and trade names are being amortized on a straight line basis over
17 years. At each balance sheet date, the Company evaluates the value of
trademarks and tradenames for impairment by comparing expectations of
non-discounted future cash flows excluding interest costs with the carrying
value of trademarks and tradenames for each trademark or tradename having a
material unamortized balance. Based upon its most recent analysis, the
Company believes that no impairment of trademarks and tradenames exists at
December 31, 1999.
F-11
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A. Nature of Business and Significant Accounting Policies - Continued
11. Property and equipment
Property and equipment are stated at cost. Depreciation is computed by the
straight-line method over estimated useful lives. Amortization of capital
leases is included in depreciation expense. The carrying amount of all
long-lived assets is evaluated periodically to determine if adjustment to
the depreciation and amortization period or to the unamortized balance is
warranted. Based upon its most recent analysis, the Company believes that no
impairment of property and equipment exists at December 31, 1999.
12. Revenue recognition
All sales are recognized when shipments are made to customers.
13. Income taxes
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their
tax bases. Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on
the date of enactment.
14. Research and development
Research and development expenses and ongoing costs associated with
improving existing products and manufacturing processes are expensed in the
period incurred. Costs associated with research and development amounted to
approximately $763,000, $2,250,000 and $373,000 for 1999, 1998 and 1997,
respectively.
15. Earnings (loss) per share
The Company follows the provisions of Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" (SFAS No. 128). SFAS No. 128 requires
the presentation of basic and diluted EPS. Basic EPS are calculated by
dividing earnings (loss) available to common shareholders by the weighted
average number of common shares outstanding during each period. Diluted EPS
are similarly calculated, except that the weighted average number of common
shares outstanding includes common shares that may be issued subject to
existing rights with dilutive potential.
16. Stock Options
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options rather than
adoptiong the alternative fair value accounting provided for under FASB
Statement 123, "Accounting for Stock-Based Compensation" (SFAS 123).
17. Advertising
The costs of advertising are expensed as incurred.
18. Warranty
The costs of warranties on the Company's products have not been historically
significant and are expensed as incurred.
F-12
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A. Nature of Business and Significant Accounting Policies - Continued
19. Reclassifications
Certain account balances for 1998 and 1997 have been reclassified with no
effect on net income or retained earnings to be consistent with the
classification adopted for the year ended December 31, 1999.
Note B. Mergers and Acquisitions
Effective April 1, 1999, the Company purchased the Tidewater group of
companies, consisting of Tidewater Air Filter Fabrication Company, Inc.,
Newport Manufacturing, Inc., and Bio-Tec Inc., for a total cost of
acquisition, net of cash received, of approximately $1,787,000 in a
transaction which has been recorded as a purchase. Goodwill of approximately
$647,000 has been recognized in this transaction. Tidewater is an air filter
distributor and service organization. Prior to the acquisition, Tidewater
was an exclusive distributor of a competitor's products. Newport
Manufacturing is an air filter manufacturer with some limited manufacturing
capacity for specialty products. Bio-Tec is an indoor air quality consulting
firm. The Company's financial statements include the operating results of
the Tidewater group of companies from April 1, 1999.
On May 7, 1998, the Company agreed to acquire substantially all of the
outstanding stock of Eco-Air Products, Inc. ("Eco-Air") in a transaction
which has been recorded as a purchase. The total cost of the acquisition,
net of cash acquired, was approximately $15,455,160, plus the Company's
common stock equivalent in value to $5,000,000 or cash if certain
performance criteria are met. In connection with this purchase, the Company
recorded approximately $11,107,000 of goodwill. Upon achieving certain
performance criteria, common stock will be issued or a liability recorded
for cash payment over a five year period and will be added to goodwill
associated with the purchase transaction and amortized over the remaining
amortization period of the respective goodwill asset. The acquisition of
Eco-Air was funded by utilizing a revolving credit facility which provides a
line of credit up to a maximum principal amount of $30,000,000. The
effective date of the acquisition for financial statement purposes was June
30, 1998, and the Company's financial statements include the operating
activities and assets of Eco-Air from that date. As of December 31, 1999, no
shares have been issued or liability recorded to the Eco-Air sellers as a
result of not having met the performance criteria.
Effective December 1, 1997, the Company acquired all the outstanding stock
of Glass Fiber Industries, Inc. ("GFI"), a manufacturer of glass fiber, by
exchanging 187,502 shares of the Company's stock for all the outstanding
stock of GFI in a tax free merger in a transaction which has been recorded
as a purchase. The total cost of acquisition was $1,394,639, based on the
price of the Company's stock on November 26, 1997, of approximately $7.44.
In connection with the purchase, the Company recorded approximately $547,000
of goodwill.
Summarized below are the unaudited pro forma results of operations of the
Company as though Eco-Air had been acquired at the beginning of the fiscal
year ended December 31, 1997.
1998 1997
------------- -------------
Revenues $ 178,473,654 $ 154,250,241
============= =============
Earnings from continuing operations $ 6,594,619 $ 6,390,694
============= =============
Earnings per common share from continuing
operations:
Basic $ 0.26 $ 0.34
============= =============
Diluted $ 0.24 $ 0.29
============= =============
Pro forma results of operations of the Company as though Tidewater had been
acquired as of January 1, 1998 and GFI had been acquired as of January 1,
1997 are not presented because amounts of pro forma differences are not
significant.
F-13
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note C. Inventories
Inventories consists of the following at December 31:
1999 1998
----------- -----------
Finished goods $12,041,722 $12,988,501
Work in progress 1,665,953 1,036,809
Raw materials 12,382,025 11,587,908
----------- -----------
26,089,700 25,613,218
Less allowance for obsolete raw materials 188,000 94,414
----------- -----------
$25,901,700 $25,518,804
=========== ===========
Note D. Discontinued Operations
During 1997, the Company established a new subsidiary, Airseal West, Inc.,
to serve as a manufacturer of industrial air handlers, custom housings, and
related products for the western U.S. The market opportunities envisioned by
this venture failed to materialize, and Airseal West focused its primary
efforts on perceived opportunities in businesses and products unrelated to
air filtration, including sporting goods, vending equipment and other
general manufacturing.
In December 1999, the Company adopted a formal plan to close Airseal West, a
wholly owned subsidiary, and sell its various assets and product lines to
unrelated third parties. The anticipated date of closure is approximately
April 30, 2000. All dispositions of assets are expected to be completed
December 31, 2000. The assets to be sold consist primarily of non-filtration
assets consisting of inventories, manufacturing equipment, designs and
intellectual properties.
Operating results of Airseal West for 1999 are shown separately in the
accompanying statement of earnings. Revenues and expenses associated with
Airseal West for 1998 and 1997 have been reclassified and combined into the
heading, "Loss from operations of discontinued subsidiary."
The estimated loss on the disposal of the discontinued operations of
approximately $893,000 (net of income tax benefit of approximately $566,000)
represents the estimated loss on the disposal of the assets of Airseal West
and the write-off of goodwill associated with Airseal West.
Net sales of Airseal West for 1999, 1998 and 1997 were approximately
$2,354,000, $3,057,000 and $2,237,000, respectively. These amounts are not
included in net sales in the accompanying statement of earnings.
Net assets of Airseal West at December 31, 1999 consisted of the following:
Accounts receivable $ 952,379
Inventories 1,348,888
Other current assets 48,439
Property and equipment, net 3,487,864
Accounts payable (429,075)
Accrued liabilities (25,204)
Current portion long term debt (165,554)
-----------
Net assets of discontinued operations $ 5,217,737
===========
F-14
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note E. Other Assets
Other assets consist of the following at December 31:
1999 1998
----------- -----------
Real estate held for sale $ 1,578,218 $ 1,578,218
Notes receivable 960,709 --
Cash value of officers' life insurance -- 104,921
Prepaid commissions -- 839,331
Deposits 295,643 800,531
Deferred expenses, net of accumulated amortization
of $214,001 in 1999 and $108,643 in 1998 1,118,937 903,740
All other 159,984 410,321
----------- -----------
$ 4,113,491 $ 4,637,062
=========== ===========
Note F. Intangible Assets
Intangible assets consist of the following at December 31:
1999 1998
----------- -----------
Goodwill, net of accumulated amortization of
$1,773,144 in 1999 and $980,253 in 1998 $29,160,232 $28,095,134
Trademarks and trade names, net of accumulated
amortization of $174,929 in 1999 and
$135,178 in 1998 862,255 895,790
----------- -----------
$30,022,487 $28,990,924
=========== ===========
Note G. Property and Equipment
Property and equipment and estimated useful lives consist of the following
at December 31:
Estimated
1999 1998 Useful Lives
----------- ----------- ------------
Land $ 3,862,886 $ 1,018,007 --
Buildings 28,107,676 27,852,661 15-40 years
Machinery and equipment 38,411,695 35,605,613 10 years
Office equipment 6,187,553 4,557,195 5 years
Vehicles 1,141,145 963,289 5 years
Construction in progress 6,382,453 3,640,045 --
----------- -----------
84,093,408 73,636,810
Less accumulated depreciation 18,839,580 14,069,608
----------- -----------
$65,253,828 $59,567,202
=========== ===========
Total depreciation expense charged to operations totaled $5,544,018,
$4,435,744 and $3,103,271 for 1999, 1998 and 1997, respectively.
F-15
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note H. Pledged Assets and Debt
A summary of the Company's debt, and collateral pledged thereon, consists
of the following at December 31:
1999 1998
----------- -----------
Short-term debt:
Lower of prime or LIBOR plus defined percentage line
of credit agreements (A) $ -- $1,300,000
========== ==========
Long-term debt:
Lower of prime (8.5% at December 31, 1999) or LIBOR
plus defined percentage line of credit agreements (A) $11,369,750 $13,000,000
Prime(8.5% at December 31, 1999) plus 0.25 percent
notes payable to a mortgage company due in monthly
payments of $30,096 including interest through
January 2006, at which time all unpaid principal is
due, collateralized by a deed of trust on land and
buildings with a carrying value of approximately
$3,530,000 at December 31, 1999 1,570,104 1,795,731
Real estate contract payable to a company for purchase
of land and buildings 3,994,000 --
10.125 percent note payable to a mortgage company, due
in monthly payments of $13,775, including interest
through July 2004, collateralized by a first deed of
trust on real property with a carrying value of
approximately $974,000 at December 31, 1999, and a
second security interest in certain machinery and
equipment 593,818 693,513
Various notes payable to a bank with interest at prime
(8.5% at December 31, 1999) plus .25 percent due in
monthly installments of $12,038, including interest,
expiring at various times through April 2004,
collateralized by a deed of trust on property with a
carrying value of approximately $1,510,000 at
December 31, 1999 1,114,020 1,180,226
6.5 percent note payable to a regional development
authority, due in varying quarterly installments,
plus interest, through December 2017, collateralized
by a security agreement and financing statement on
real and personal property with a carrying value of
approximately $5,400,000 at December 31, 1999 5,680,000 5,845,000
Note payable to a bank with interest at 7.9 percent
until June 2001 when interest rate changes to prime
plus 0.25 percent, due in monthly payments of $7,098
including interest through June 2017 subject to a
call option in June 2007, collateralized by a deed
of trust on real properties with a carrying value of
approximately $1,870,000 at December 31, 1999 833,623 849,751
Industrial revenue bond with a variable tax exempt
interest rate as determined by a remarketing agent
which was 3.2% at December 31, 1999, collateralized
by a $4,500,000 letter of credit which expires June
28, 2002 4,500,000 4,500,000
Note payable to an industrial development authority,
with an interest rate of 83 percent of prime rate
(8.5% at December 31, 1999), due in monthly
installments of $11,333 plus interest through
January 2005, collateralized by a deed of trust on
real property with a carrying value of approximately
$2,900,000 at December 31, 1999 702,810 838,810
F-16
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note H. Pledged Assets and Debt - Continued
1999 1998
------------ ------------
Note payable to a bank with interest at LIBOR plus an
adjusted base rate, as defined, due in monthly
installments of $17,788 plus interest, with a
balloon payment due on June 30, 2002, of $1,120,625,
collateralized by a second deed of trust and
security agreement on real property with a carrying
value of approximately $2,900,000 at December 31,
1999 1,654,256 1,849,920
Various contracts payable including capital lease
obligations; interest rates from 6.3 percent to 9.6
percent at December 31, 1999 and 1998,
collateralized by certain equipment; due in monthly
payments aggregating approximately $40,000 including
interest, expiring at various dates through May
2003 315,788 817,777
------------ ------------
32,328,169 31,370,728
Less current maturities 1,115,184 1,265,014
------------ ------------
$ 31,212,985 $ 30,105,714
============ ============
(A) These are amounts outstanding on revolving credit facilities with banks
which provide lines of credit up to a maximum principal amount of
$45,000,000 and $33,000,000 at December 31, 1999 and 1998, respectively. The
lines of credit bear interest rates at the option of the Company at either
1) prime rate, which was 8.5% at December 31, 1999, or 2) LIBOR, which was
5.3% at December 31, 1999, plus an amount equal to 1.00% to 1.95%, depending
on the ratio of total liabilities of the Company to its tangible net worth.
The line of credit agreements expire June 28, 2002. The lines of credit are
collateralized by the pledge of all common stock of the subsidiaries owned
by the Company.
In connection with the line of credit agreements and notes payable to a regional
development authority and bank, the Company has agreed to certain restrictive
covenants which include, among other things, not paying dividends and
maintenance of certain financial ratios at all times including a minimum current
ratio, minimum tangible net worth, a maximum ratio of total liabilities to
tangible net worth and a minimum fixed charge coverage ratio.
Aggregate maturities required on long-term debt as of December 31, 1999 are due
in future years as follows:
Years Ending December 31,
-------------------------
2000 $ 1,115,184
2001 1,002,232
2002 13,774,451
2003 1,075,354
2004 1,108,414
Later years 14,252,534
------------
$ 32,328,169
============
F-17
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note I. Accounts Payable
Accounts payable consist of the following at December 31:
1999 1998
----------- -----------
Accounts payable, trade $15,017,193 $13,889,388
Commissions payable 543,365 1,577,470
Customer deposits 199,464 384,229
----------- -----------
$15,760,022 $15,851,087
=========== ===========
Note J. Accrued Expenses
Accrued expenses consist of the following at December 31:
1999 1998
----------- -----------
Payroll $ 1,486,216 $ 1,618,197
Insurance, including workers compensation 1,053,794 1,133,331
Sales and use taxes 144,951 65,679
Interest 28,680 137,424
Income taxes payable -- 298,458
All other 1,181,633 680,829
----------- -----------
$ 3,895,274 $ 3,933,918
=========== ===========
Note K. Stockholders' Equity
During the year ended December 31, 1997, the Company raised $57,054,013, net
of offering commissions and expenses of $6,052,237, through the sale of
8,320,000 shares of common stock by underwritten public offerings dated
January 16, 1997 at $9.50 per share and October 16, 1997 at $7.00 per share
and the private placement of 57,000 shares of Common Stock at a weighted
average price of $4.67 per share. In conjunction with these offerings, the
Company granted warrants to purchase a total of 540,000 shares to the
underwriters with exercise prices between $8.40 and $14.725 per share,
expiring at various periods between January 2002 and October 2002.
The President and Vice President/Chief Financial Officer of the Company had
options to purchase 3,321,021 and 2,214,014 shares, respectively, of the
Company's common stock from two stockholders of the Company at an option
price of $2.50 per share. The President and Vice President/Chief Financial
Officer of the Company exercised options to acquire 2,830,732 and 1,799,188
shares, respectively, of the common stock from the two stockholders on
December 1, 1997. The remaining options were not exercised and expired on
December 15, 1997.
F-18
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note L. Income Taxes
The components of income tax expense (benefit) are as follows for the years
ended December 31:
1999 1998 1997
----------- ----------- -----------
Current:
Federal $ 2,485,920 $ 2,655,933 $ 3,266,645
State 792,986 756,088 472,633
----------- ----------- -----------
3,278,906 3,412,021 3,739,278
----------- ----------- -----------
Deferred:
Federal (250,675) 162,098 (151,017)
State (57,952) 23,716 116,462
----------- ----------- -----------
(308,627) 185,814 (34,555)
----------- ----------- -----------
Total 2,970,279 3,597,835 3,704,723
Allocated to discontinued operations (1,700,403) (852,244) (46,676)
----------- ----------- -----------
Total provision from continuing operations $ 4,670,682 $ 4,450,079 $ 3,751,399
=========== =========== ===========
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate of 34% to pretax income due to the
following for years ended December 31:
1999 1998 1997
----------- ----------- -----------
Computed "expected" tax expense $ 1,967,719 $ 3,021,374 $ 3,244,956
Increase (decrease) in income taxes resulting from:
Nondeductible expenses 377,919 150,210 82,051
Nontaxable income (1,061) (23,874) --
State income taxes net of federal tax benefit 427,769 515,233 435,000
Change in valuation allowance (2,094) (17,479) (19,224)
Tax credits -- (47,629) (5,396)
Adjustment to estimated income tax accrual 200,000 -- --
All other -- -- (32,664)
----------- ----------- -----------
$ 2,970,252 $ 3,597,835 $ 3,704,723
=========== =========== ===========
Net deferred tax assets and liabilities consist of the following components
as of December 31:
1999 1998
----------- -----------
Deferred tax assets:
Accounts receivable allowance $ 181,935 $ 103,454
Inventory allowances 861,637 547,446
Accrued expenses 740,261 773,041
Prepaid expenses 65,648 --
----------- -----------
1,849,481 1,423,941
Less valuation allowance -- 2,094
----------- -----------
1,849,481 1,421,847
Deferred tax liabilities:
Property and equipment (5,840,654) (5,721,647)
----------- -----------
$(3,991,173) $(4,299,800)
=========== ===========
F-19
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note L. Income Taxes - Continued
The components giving rise to the net deferred tax assets and liabilities
described above have been included in the accompanying consolidated balance
sheets at December 31:
1999 1998
----------- -----------
Current assets $ 1,849,481 $ 1,421,847
Noncurrent liabilities (5,840,654) (5,721,647)
----------- -----------
$(3,991,173) $(4,299,800)
=========== ===========
Note M. Commitments and Contingencies
1. Employment Agreements:
The President and Chief Executive Officer, the Chief Operating Officer/Vice
President Finance/Chief Financial Officer, and the Vice President Operations
all have employment agreements which expire at various times from March 2003
to December 2010. In addition to a base salary and bonuses which may be paid
at the discretion of the Board of Directors, the agreements provide for a
termination payment ranging from one hundred percent of their base annual
compensation to the minimum amount due under the employment contract if the
officer had served their full term, in the event the officers' employment is
terminated under various circumstances.
The Company pays discretionary cash bonuses to its officers and employees.
The Company did not pay bonuses for 1999, 1998 and 1997.
2. Litigation
The Company is being sued by a customer regarding a purchase of
approximately $5 million in laminar-flow cleanroom-grade HEPA filters, with
approximately $2.6 million of related accounts receivable currently
uncollected. The customer contends that these filters were manufactured
using a defective urethane sealant and seeks reimbursement for replacement
costs and damages. The Company contends that the filters meet all the
specifications of the customer, and are not, in fact, defective. We believe
that in the event of an adverse decision, it is reasonably likely that we
would be able to successfully assert liability by the manufacturer of the
sealant, and we have filed a cross-complaint against the sealant
manufacturer. We also believe that any losses due to these lawsuits are
fully insured under both our general liability insurance policy and the
general liability policy of the sealant manufacturer. For these reasons, we
do not believe that the resolution of this matter will have a material
adverse impact upon our financial condition or results of operations.
From time to time, the Company is a party to various legal proceedings
related to our normal business operations. Management of the Company does
not believe that the ultimate outcome of this litigation will have a
material impact on the Company's results of operations or financial
condition.
F-20
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note M. Commitments and Contingencies - Continued
3. Lease Commitments and Total Rental Expense
Certain equipment and buildings are leased under agreements expiring between
2000 and 2004. The following is a schedule for the total rental commitments
under these leases as of December 31, 1999
Fiscal Years Ending
-------------------
2000 $ 2,012,281
2001 1,850,515
2002 1,505,735
2003 1,339,361
2004 1,350,570
---------------
$ 8,058,462
===============
The total rental expense charged to operations was approximately $2,900,000,
$2,000,000 and $2,300,000 for 1999, 1998 and 1997, respectively.
Note N. Employee Benefit Plans
The Company has a defined contribution 401(k) salary reduction plan intended
to qualify under section 401(a) of the Internal Revenue Code of 1986
("Salary Savings Plan"). The Salary Savings Plan allows the eligible
employees, as defined in the plan document, to defer up to 15 percent of
their eligible compensation, with the Company contributing an amount
determined at the discretion of the Company's Board of Directors. The
Company contributed approximately $195,000, $168,000 and $145,000 to the
Salary Savings Plan and the 401(k) Plans for the years ended December 31,
1999, 1998 and 1997, respectively.
The Company employee benefit program also includes health, accident, dental,
life insurance and disability benefits. Substantially all the Company's
subsidiaries have elected to self-insure the health and accident insurance
at an individual maximum ranging from $30,000 to $90,000 per employee per
claim year. A stop loss policy is maintained for subsidiaries that are
self-insured, which covers 100 percent of liability over amounts ranging
from $30,000 to $80,000 per occurrence per individual per plan year. The
employer's portion of claims charged to operations totaled approximately
$1,100,000, $1,160,000 and $650,000 for 1999, 1998 and 1997, respectively.
During 1996, the Company adopted the Long Term Incentive Plan ("LTI Plan")
to assist the Company in securing and retaining key employees and
consultants. The LTI Plan authorizes grants of incentive stock options,
nonqualified stock options, stock appreciation rights ("SARs"), restricted
stock performance shares and dividend equivalents to officers and key
employees of the Company and outside consultants to the Company. There are
1,986,800 shares of Common Stock reserved for award under the LTI Plan.
During 1999, 1998 and 1997, the Company awarded options to purchase 52,850,
316,850 and 95,600 shares of Common Stock under the LTI Plan, respectively
(Note P).
During 1996, the Company also adopted the 1996 Director Option Plan which
provides for the grant of stock options to outside directors of the Company
who were elected or appointed after February 1, 1996, and who were not
existing directors on the effective date of the plan. Each such outside
director who is serving as a director on January 1 of each calendar year
will automatically be granted an option to acquire up to 5,000 shares of
Common Stock on such date, assuming such outside director had been serving
for at least six months prior to the date of grant. The Company has reserved
500,000 shares of its Common Stock for issuance under the 1996 Director
Option Plan which expires in 2006. During 1999, 1998 and 1997, the Company
awarded options to purchase 105,000, 115,000 and 5,000 shares, respectively,
of Common Stock under the 1996 Director Option Plan (Note P).
F-21
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note O. Related Party Transactions and Balances
At December 31, 1999 and 1998, the Company had notes receivable of
$4,369,028 and $4,263,409, respectively, due from various directors,
officers and employees with interest thereon varying between 6.31% and
8.75%, maturing at various dates to December 2010 and callable on demand by
the Company (Note K).
Note P. Stock Options and Warrants
During 1999, the Company granted options to purchase 52,850 shares of common
stock under its LTI Plan at a weighted average exercise price of $3.76 per
share. The Company also granted options in 1999 to purchase 105,000 shares
under the Director Option Plan, at a weighted average exercise price of
$2.57 per share. All options granted during 1999 were non-qualified fixed
price options, and all 157,850 options were not exercisable at December 31,
1999.
The following table summarizes the activity related to all Company stock
options and warrants for 1999, 1998, and 1997:
Weighted Average
Shares Exercise Price Exercise Price
--------------------------- per Share per Share
Stock ----------------------------------------------------------
Warrants Options Warrants Options Warrants Options
-------------------------------------------------------------------------------------
Outstanding at January 1, 1997 25,000 7,623,320 $ 9.63 $1.00 - 9.50 $ 9.63 $ 3.43
Granted 612,239 100,600 5.54 - 14.73 7.13 - 7.38 9.57 7.14
Exercised - (425,000) - 2.50 - 3.50 - 2.97
Canceled or expired - (6,000) - 7.50 - 7.50
------------- ------------
Outstanding at December 31, 1997 637,239 7,292,920 5.54 - 14.73 1.00 - 9.50 9.57 3.51
Granted - 331,850 - 3.94 - 8.50 - 4.69
Exercised - (611,000) - 1.00 - 2.50 - 2.13
Canceled or expired - (83,400) - 1.00 - 9.50 - 2.83
------------- ------------
Outstanding at December 31, 1998 637,239 6,930,370 5.54 - 14.73 1.00 - 9.50 9.57 3.70
Granted - 157,850 - 2.50 - 4.75 - 2.97
Exercised - - - - - -
Canceled or expired (25,000) (82,520) 9.63 2.50 - 9.50 9.63 5.29
------------- ------------
Outstanding at December 31, 1999 612,239 7,005,700 5.54 - 14.73 1.00 - 9.50 9.57 3.66
============= ============
Exercisable at December 31, 1999 612,239 6,847,850 5.54 - 14.73 1.00 - 9.50 9.57 3.68
============= ============
Exercisable at December 31, 1998 637,239 6,753,520 5.54 - 14.73 1.00 - 9.50 9.57 3.69
============= ============
Exercisable at December 31, 1997 97,239 7,192,320 5.54 - 9.63 1.00 - 9.50 6.98 3.46
============= ============
During 1999, the expiration date of options to purchase 2,000,000 shares at
$2.50 per share was extended from February 2001 to February 2006, which
resulted in a new measurement date under interpretations to APB Opinion No.
25.
F-22
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note P. Stock Options and Warrants - Continued
The warrants and options expire at various dates ranging from February 2000
to December 2008. A further summary of information related to fixed options
outstanding at December 31, 1999 is as follows:
Weighted Average Weighted Average
Range of Exercise Number Remaining Contractual Exercise Price
Prices Outstanding / Exercisable Life (Years) Outstanding / Exercisable
- ---------------------- -------------------------- ------------------------- ----------------------------
$1.00 2,300,000 / 2,300,000 0.88 $ 1.00 / 1.00
2.50 to 4.75 2,377,600 / 2,219,750 6.01 2.67 / 2.65
5.38 to 7.50 2,282,100 / 2,282,100 1.58 7.33 / 7.33
8.50 to 9.50 46,000 / 46,000 1.96 9.19 / 9.19
As permitted under generally accepted accounting principles, grants under
the LTI Plan and other grants of options are accounted for following APB
Opinion No. 25 and related interpretations. Accordingly, no compensation
cost has been recognized for grants under the LTI Plan, since all options
granted had an exercise price at or above the market price of the Company's
common stock on the date of grant. Had compensation cost for the LTI Plan
been determined based on the grant date fair values of awards using the
Black-Scholes option pricing model (the method described in FASB Statement
No. 123), reported net earnings and earnings per common share would have
been reduced to the pro forma amounts shown below for the years ended
December 31:
1999 1998 1997
----------- ----------- -----------
Net earnings:
As reported $ 2,817,134 $ 5,288,568 $ 5,839,265
Pro forma $ 1,136,155 $ 4,962,085 $ 5,766,265
Basic earnings per share:
As reported $ 0.11 $ 0.21 $ 0.32
Pro forma $ 0.04 $ 0.20 $ 0.31
Diluted earnings per share:
As reported $ 0.11 $ 0.20 $ 0.27
Pro forma $ 0.04 $ 0.18 $ 0.26
Weighted average fair value per option of options
Granted during the year $ 1.53 $ 1.40 $ 2.11
In determining the pro forma amounts above, the value of each grant is
estimated at the grant date using the Black-Scholes option pricing method
prescribed in FASB Statement No. 123, with the following assumptions:
Dividend rate of 0%; risk-free interest rates based upon the zero-coupon
rate on the date of grant for the expected life of the option; and expected
price volatility on the date of grant. Weighted average assumptions for
options granted in 1999, 1998 and 1997 were as follows: Dividend rate of 0%;
average risk-free interest rate of 5.66%, 5.18% and 6.11%, respectively;
average expected lives of 5, 4.3 and 2.5 years, respectively; and average
expected price volatility of 67%, 40% and 40%, respectively.
F-23
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note Q. Earnings per Share
The following data show the amounts used in computing net earnings per
common share from continuing operations. The following data also show the
weighted average number of shares and dilutive potential common stock.
Per Share
Amounts
---------------
Numerator Denominator Net Earnings
---------------- ----------------- ---------------
Year Ended December 31, 1999
---------------------------------------------------------
Basic earnings per share, earnings from continuing
operations available to common stockholders $ 5,502,925 25,344,433 $ 0.22
===============
Effect of dilutive securities:
Options - 1,159,996
Contingent shares - 21,000
---------------- -----------------
Diluted earnings per share, earnings from continuing
operations available to common stockholders plus
assumed exercise of options and warrants and
issuance of contingent shares $ 5,502,925 26,525,429 $ 0.21
================ ================= ===============
Year Ended December 31, 1998
---------------------------------------------------------
Basic earnings per share, earnings from continuing
operations available to common stockholders $ 6,541,307 25,133,820 $ 0.26
===============
Effect of dilutive securities:
Options - 1,949,177
Contingent shares - 21,000
Warrants - 2,927
---------------- -----------------
Diluted earnings per share, earnings from continuing
operations available to common stockholders plus
assumed exercise of options and warrants and issuance
of contingent shares $ 6,541,307 27,106,924 $ 0.24
================ ================= ===============
Year Ended December 31, 1997
---------------------------------------------------------
Basic earnings per share, earnings from continuing
operations available to common stockholders $ 6,098,287 18,508,763 $ 0.33
===============
Effect of dilutive securities:
Options - 2,737,642
Contingent shares - 752,187
Convertible debt 163,956 470,250
Warrants - 8,342
---------------- -----------------
Diluted earnings per share, earnings from continuing
operations available to common stockholders plus
assumed exercise of options and warrants, conversion
of debt and issuance of contingent shares $ 6,262,243 22,477,184 $ 0.28
================ ================= ===============
F-24
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note R. Quarterly Financial Data (Unaudited)
Quarters Ended
---------------------------------------------------------
March 31, June 30, September 30, December 31,
1999 1999 1999 1999
------------ ------------ ------------ ------------
Net sales $37,629,851 $44,706,108 $48,658,081 $40,398,241
Gross profit 9,860,706 12,191,179 13,734,386 8,188,257
Operating income (loss)
from continuing operations 2,479,216 3,856,610 4,280,124 (443,626)
Earnings (loss) from
continuing operations $ 1,249,208 $ 2,008,580 $ 2,257,560 $ (12,423)
============ ============ ============ ============
Earnings (loss) from continuing
operations per share:
Basic $ 0.05 $ 0.08 $ 0.09 $ --
Diluted 0.05 0.08 0.09 --
Common stock prices:
High $ 5 1/8 $ 3 13/16 $ 3 3/8 $ 3 1/8
Low 2 9/16 2 1/2 2 3/8 2 1/4
March 31, June 30, September 30, December 31,
1999 1999 1999 1999
------------ ------------ ------------ ------------
Net sales $30,213,699 $38,771,247 $48,486,595 $ 37,293,263
Gross profit 7,479,158 9,106,988 12,569,942 8,503,739
Operating income from
continuing operations 1,929,177 3,461,093 3,780,532 380,653
Earnings (loss) from
continuing operations $ 1,359,001 $ 2,404,309 $ 2,190,490 $ (665,232)
=========== =========== =========== ============
Earnings (loss) from continuing
operations per share:
Basic $ 0.05 $ 0.08 $ 0.09 $ (0.02)
Diluted 0.05 0.08 0.09 (0.02)
Common stock prices:
High $ 8 1/2 6 $ 5 1/2 $ 4 3/16
Low 5 9/16 4 1/2 3 1/2 2 15/16
F-25
FLANDERS CORPORATION
FINANCIAL STATEMENT SCHEDULES
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON THE SUPPLEMENTAL SCHEDULE
Board of Directors
Flanders Corporation
Our audit was made for the purpose of forming an opinion on the 1999 basic
consolidated financial statements taken as a whole. The consolidated
Supplemental Schedule II is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our 1999 audit of the basic consolidated
financial statements and, in our opinion, the 1999 information is fairly stated
in all material respects in relation to the 1999 basic consolidated financial
statements taken as a whole.
/s/ Grant Thornton LLP
Salt Lake City, Utah
March 8, 2000
F-27
INDEPENDENT AUDITOR'S REPORT ON THE SUPPLEMENTAL SCHEDULE
To the Board of Directors
Flanders Corporation
Washington, North Carolina
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The consolidated
Supplemental Schedule II for the years ended December 31, 1998 and 1997 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in our audits of the basic consolidated financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
consolidated financial statements taken as a whole.
/s/ McGladrey & Pullen, LLP
New Bern, North Carolina
March 12, 1999
F-28
FLANDERS CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1999, 1998 and 1997
Additions
----------------------
Balance at Charged to Charged to Balance
Beginning Cost and Other at End
of Period Expense Accounts Deductions of Period
--------- -------- -------- ---------- ---------
For the year ended December 31, 1999
Allowance for doubtful accounts $551,725 $ 39,620 $ -- $(104,024)(1) $487,321
Allowance for inventory value 94,414 93,586 -- -- 188,000
Valuation allowance for deferred tax assets 2,094 -- -- (2,094)(2) --
-------- -------- ------- --------- --------
Total $648,223 $133,206 $ -- $(106,118) $675,321
======== ======== ======= ========= ========
For the year ended December 31, 1998
Allowance for doubtful accounts $380,566 $148,168 60,000 $ (37,009)(1) $551,725
Allowance for inventory value 62,000 32,414 -- -- 94,414
Valuation allowance for deferred tax assets 19,573 -- -- (17,479)(2) 2,094
-------- -------- ------- --------- --------
Total $462,139 $180,582 $60,000 $ (54,488) $648,233
======== ======== ======= ========= ========
For the year ended December 31, 1997
Allowance for doubtful accounts $346,480 $ 80,245 $25,000(3) $ (71,159)(1)(2) $380,566
Allowance for inventory value 45,000 17,000 -- -- 62,000
Valuation allowance for deferred tax assets 38,797 -- -- $ (19,224)(2) 19,573
-------- -------- ------- --------- --------
Total $430,277 $ 97,245 $25,000 $ (90,383) $462,139
======== ======== ======= ========= ========
- -----------------------------
(1) Uncollected receivables written-off, net of recoveries.
(2) Reduction in allowance.
(3) Increase due to acquisition of subsidiary.
F-29