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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, 1998
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 (IRS Employer ID Number)
incorporation or organization)
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 March 29, 1998, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $40,107,059.
As of March 29, 1999, the number of shares outstanding of the registrant's
common stock was 25,624,339 shares.
FLANDERS CORPORATION
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
PART I
Item 1. Business.........................................................3
Item 2. Properties......................................................13
Item 3. Legal Proceedings...............................................13
Item 4. Submission of Matters to a Vote of Security Holders.............14
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................................15
Item 6. Selected Consolidated Financial Data............................16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................17
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.....................................................25
Item 8. Financial Statements and Supplementary Data.....................25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................25
PART III
Item 10. Directors and Executive Officers of the Registrant..............26
Item 11. Executive Compensation..........................................27
Item 12. Security Ownership of Certain Beneficial Owners
and Management..................................................29
Item 13. Certain Relationships and Related Transactions..................31
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.............................................32
Signatures................................................................35
FINANCIAL STATEMENTS
Independent Auditor's Report.............................................F-2
Consolidated Balance Sheets..............................................F-3
Consolidated Statements of Income........................................F-4
Consolidated Statements of Stockholders' Equity..........................F-5
Consolidated Statements of Cash Flows....................................F-6
Notes to Consolidated Financial Statements...............................F-9
Financial Statement Schedules...........................................F-27
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PART I
Item 1. Business
OVERVIEW
Flanders Corporation (the "Company" or "Flanders") designs, manufactures and
markets a broad range of air filtration products, including (i) high efficiency
particulate air ("HEPA") filters, with at least 99.97% efficiency, and absolute
isolation barriers ("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, (ii) mid-range filters for individual and commercial
use, which fall under specifications which are categorized by efficiency ratings
established by the American Society of Heating, Refrigeration and Air
Conditioning Engineers ("ASHRAE"), and (iii) standard-grade, low cost filters
with efficiency ratings below 30% sold typically off-the-shelf for standard
residential and commercial furnace and air conditioning applications.
Approximately 70% of the Company's net sales are from products with high
replacement potential. The Company's air filtration products 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. The
Company also designs and manufactures its own production equipment to allow for
highly automated manufacturing of these products. Furthermore, the Company
produces glass-based filter media for many of its products to maintain control
over the quality and composition of such media. The Company's customers include
Abbott Laboratories, Home Depot, Inc., Motorola, Inc., Merck & Co., Inc., Upjohn
Co., Wal-Mart Stores, Inc., Westinghouse Electric Corp., and several large
computer chip manufacturers.
Although the Company historically has specialized in HEPA and mid-range filters
through its subsidiary, Flanders Filters, Inc. ("FFI"), the Company has
positioned itself to offer to its customers a full range of air filtration
products. In 1996, the Company diversified its product line by implementing a
strategy of growth by acquisition through the purchase of three other companies:
Charcoal Service Corporation, now known as Flanders/CSC Corporation ("CSC"),
which specializes in charcoal filtration systems for the removal of gaseous
contaminants; Air Seal Filter Housings, Inc. ("Air Seal"), which specializes in
filter housings and customized industrial HVAC equipment, and Precisionaire,
Inc. ("Precisionaire"), which specializes in the manufacture and sale of filter
products ranging from mid-range through standard-grade filters. The Company
continued its growth through acquisition in 1998 by purchasing Eco-Air Products,
Inc. ("Eco-Air"), a West Coast regional supplier of air filtration products
(hereinafter, the purchases of the four companies shall be referred to as the
"Acquisitions"). As a result of the Company's diversified product line, the
Company expects to benefit from growth in all air filtration markets.
GENERAL DEVELOPMENT OF BUSINESS
The Company was incorporated on July 2, 1986 in the State of Nevada. The Company
is currently domiciled in North Carolina. Effective May 1996, the Company
acquired all of the outstanding stock of CSC, a charcoal filter manufacturer
based in North Carolina specializing in activated charcoal filters and
containment environments. In June 1996, the Company acquired all of the
outstanding stock of Air Seal, a mid-range custom filter housing manufacturer
based in Stafford, Texas. Also in June 1996, the Company formed a wholly owned
subsidiary in Singapore, Flanders International Pte., Ltd. ("FIL"), to market
and eventually manufacture the Company's products in the Pacific Rim. In
September 1996, the Company acquired all of the outstanding stock of
Precisionaire, a manufacturer of air filter products for commercial and
residential HVAC systems, headquartered in St. Petersburg, Florida.
In February 1997, the Company organized Airseal West, Inc. ("Airseal West"), an
80% owned subsidiary of Flanders. In March 1997, the Company acquired, through
Airseal West, the majority of the assets of Intermountain Paint and
Sub-Assembly, Inc. and BB&D Manufacturing, Inc. (collectively "BB&D"). Airseal
West manufactures specialty and standard housings for air filtration and HVAC
systems, as well as integrated custom industrial-grade HVAC systems and other
specialty products for sale and distribution in the western United States. In
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December 1997, the Company acquired GFI, Inc. ("GFI"). GFI manufactures
glass-based filter media and specialty filters.
Effective June 30, 1998, pursuant to a stock purchase agreement, the Company
acquired substantially all the outstanding stock of Eco-Air. The purchase price,
including expenses, was approximately $15,677,419, plus up to $5,000,000 payable
in cash or the Company's common stock (at sellers' option) if certain
performance criteria are met. If Eco-Air achieves certain performance criteria,
Flanders will issue common stock or record a liability for the cash payment over
a five year period and Flanders will add the amount to goodwill associated with
the purchase transaction and amortize it over the remaining amortization period
of the 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, 1998, Flanders has not recorded a liability or issued
shares to the Eco-Air sellers as a result of Eco-Air achieving the performance
criteria.
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.
These forward-looking statements are based largely on the current expectations
of management and are subject to a number of risks and uncertainties. The
Company's 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
Frost & Sullivan, a leading industry analyst, estimated that the total domestic
industrial air filtration market would be approximately $1.02 billion in 1997
and $1.05 billion in 1998. Additionally, management believes the domestic market
for retail and wholesale off-the-shelf air filters and related products used in
residential and commercial HVAC applications exceeded $500 million in 1998. The
forces driving the air filtration market have evolved over the past decade from
concerns related to the preservation of machinery and equipment to industry
goals of maintaining productivity and present day concerns and governmental
requirements related to employee health. Because of these requirements, air
filtration products are essential to many industries, including those associated
with semiconductor manufacturing, commercial and residential HVAC systems,
ultra-pure materials manufacturing, biotechnology, pharmaceuticals, synthetics,
nuclear power and nuclear materials processing. Increasingly, companies are
devoting resources to air filtration products to enhance efficiency and
productivity.
Air filtration products are used in many different applications, including the
following:
Industrial. Air filtration products 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 particulates from the air.
Semiconductor Manufacturing. Air filtration products are necessary to meet
the increasingly stringent manufacturing environment requirements of
semiconductor manufacturers. Laminar flow grade final filters are an
essential component of a semiconductor manufacturers' cleanrooms.
Pharmaceutical. 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.
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Biotechnology. Containment systems for the manipulation of viruses and
bacteria using genetic engineering techniques are critical to the
biotechnology industry.
Nuclear Power and Materials Processing. Filtration systems are necessary to
radioactive containment procedures for all nuclear facilities.
Commercial and Residential HVAC Systems. Replacement filters are an
essential requirement for the efficient operation of commercial and
residential HVAC systems.
RECENT TRENDS
Recent trends in 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:
Indoor Air Quality and Health. The Company believes there is an increase in
public concern regarding the effects of indoor air quality ("IAQ") on
employee productivity and health, as well as an increase in interest in
standards for detecting and solving IAQ problems. For example, ASHRAE has
recently established certain minimum standards for ventilation and indoor
air quality for commercial and industrial settings. During 1998, the Company
developed two new lines of products which offer off-the-shelf methods of
dealing with two different aspects of the indoor air quality problem. The
two new lines are: (1) Arm & Hammer Pleated Filters - a retail product
designed to reduce airborne odors in residences which works in place of a
standard spun-glass furnace or air conditioner filter; and (2) Environmental
Tobacco Smoke systems - a specialty product to be sold through HVAC
distributors which offers an off-the-shelf solution for the control of
second-hand smoke in restaurants, taverns and commercial areas by
incorporating HEPA filters with proprietary bonded carbon filter technology
to cleanse impurities such as second-hand smoke, allergens and particles
which provoke asthma, hay fever and similar health conditions.
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 ("SBS"), 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 the solutions to SBS, 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.
STRATEGIES
The Company's business strategy is to (i) increase the Company's market share,
(ii) expand the Company's market through the introduction of new products with
high replacement potential, and (iii) improve operating efficiencies.
Increase Market Share
Strategic Acquisitions. The Company intends to continue to increase its
market share through strategic acquisitions of synergistic businesses. The
Company seeks to identify potential acquisition targets with (i) dominant
positions in local or regional markets, (ii) a stable customer base distinct
from the
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Company's existing customers, (iii) financial stability, (iv) an ability to
add new product lines to the Company's business, and (v) significant asset
value to enable the Company to obtain debt financing or non-dilutive equity
financing for the acquisition. The Company is continuously evaluating
acquisition opportunities in light of the above criteria. The Company
focuses on those acquisition targets which complement the Company's existing
technology, increase market share, or broaden distribution channels. The
Company also seeks acquisition targets which provide vertical integration
opportunities. At the present time, the Company has no binding agreements
with respect to future acquisitions.
Increase Sales to Existing and New Customers. The Company sells its products
through a direct sales force and manufacturers' representatives.
Historically, manufacturers' representatives have only sold certain of the
Company's products. With the recent expansion of the Company's product lines
through acquisition, these representatives can now purchase from the Company
a full line of air filtration products instead of buying a mix of air
filtration products from a range of manufacturers, and thereby use the
Company as a "one stop" purchasing source.
Use Facilities Located Throughout the United States to Increase Market
Share. The Company has recently established facilities in Illinois and North
Carolina which will manufacture mid-range and standard-grade filters and
equipment. The Company believes this ability to regionalize production and
distribution will improve its business in several ways: (i) Decrease cost of
sales by reducing the average distance between the Company's plants and its
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 the Company's share of national accounts'
total business by having manufacturing facilities in closer proximity to
customers' regional distribution centers.
Continued Emphasis on Quality and Performance. The Company's continued
emphasis on product quality has allowed it to capture market share serving
several industries in recent years.
Expand Market with New Products
The Company is developing new products for emerging markets by applying
technology developed for high-technology niche markets to more generally
useful applications. During 1998, the Company developed three product lines
which use these types of technology in a broader market application. The
Company may also work on similar projects as opportunities present
themselves. The following new products are at the center of the Company's
efforts to expand its market.
Arm & Hammer Pleated Filters. The Company's Arm & Hammer Pleated Filters,
developed in cooperation with Church & Dwight, the manufacturer of Arm &
Hammer Baking Soda and related products, use a proprietary filter media
impregnated with baking soda to enhance the performance of the Company's
retail pleated filter lines. The Company believes the proper introduction of
these filters will expand its market by increasing the frequency with which
its filters are replaced. The Company believes that replacement periods on
these filters will more closely approach the recommended three-month period,
as the efficacy of the odor-absorbing media decreases over time, and thus
the performance difference between a new and an older filter is more
obvious.
Environmental Tobacco Smoke Systems. The Company has developed a new line of
off-the-shelf products designed to remove environmental tobacco smoke and
other contaminants from restaurants, taverns and commercial buildings. The
units, which will be marketed through HVAC specialty contractors and
distributors, will also serve as a high-profile lead-in product line used to
secure additional sales and distribution channels for the Company's other
mid-range products. These units are designed to be used in conjunction with
standard environmental control systems which typically do not address
airborne contaminants. These units will also generate after-market business,
as their proprietary filter elements must be replaced periodically to
maintain effectiveness.
Retrofit Air Handlers. Many commercial and industrial buildings have
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outdated HVAC equipment which is inefficient or does not provide adequate
levels of ventilation necessary to meet the new standards for indoor air
quality. Many of these HVAC systems were placed in difficult to reach areas
which make adding capacity or replacing older units with higher-efficiency
units a complex undertaking. The Company has developed a line of
prefabricated industrial and commercial air handlers which may be moved
through a man-sized door, and readily assembled in place. The Company
believes this product will effectively expand the market for custom HVAC
systems by significantly lowering the cost barriers associated with
renovating existing environmental control systems.
Synthesized Manufacturing Environments. The Company is marketing its
Absolution Isolation Barriers, in combination with gas-phase filtration
technologies, to industries which require specialized environments,
typically involving oxygen-free or noble gas atmospheres. Several industries
are already using or are moving toward using these types of specialized
environments for their new products and processes. For example, the
semiconductor industry is considering using noble gas environments for
processes to eliminate microscopic flaws caused by oxidation and other
chemical reactions with ambient air during microcircuit production. The use
of these units in semiconductor or other manufacturing environments would
significantly expand the Company's involvement in new fab construction, from
supplying the filters to supplying specialized enclosures and integrated
filter elements, with much higher associated revenues per project.
Increase Operating Efficiency
Automation. In an effort to increase gross margins, the Company commenced,
in 1997, a program to automate portions of its production lines at FFI and
Precisionaire using technology developed and produced internally. Currently,
this process is substantially complete for its standard-grade spun-glass
filters, the Company's largest volume product line. The Company estimates
that it has expended approximately 90% of the amount required to complete
its automation program.
Centralize Overhead Functions. The Company is implementing plans to
centralize and eliminate duplication of efforts between its subsidiaries in
the following areas: purchasing, production planning, shipping coordination,
marketing, accounting, personnel management, risk management and benefit
plan administration. During the fourth quarter of 1998, the Company combined
its Airpure facility in Selma, North Carolina, into its facility in nearby
Smithfield, North Carolina, which decreased costs associated with plant
administration, production planning, shipping coordinating and personnel
management.
MARKETING
The Company sells its products through manufacturers' representatives,
distributors and a direct sales force. Sales to the semiconductor, biotechnology
and general industrial markets are typically made through manufacturers'
representatives. The direct sales force sells primarily to wholesale
distributors, large retail chains, original equipment manufacturers, end users
and government organizations.
Each of the Company's subsidiaries has historically used manufacturers'
representatives for their respective product lines. Each representative
typically represents a group of end users with similar filtration needs, in a
relatively small geographical region. For example, FFI typically has at least
one "exclusive" representative with respect to its HEPA products in each major
urban center in the United States, whose customers are the high-technology firms
who use FFI's products, or the specialty HVAC contractors who serve these end
users. These representatives have historically also sold mid-range ASHRAE
filters, standard-grade filters and related products and housings from other
manufacturers to complete their product offerings. Now that the Company offers
all of these products, management believes that many of these representatives
will elect to offer the Company's line of products exclusively, and discontinue
offering competitors' products; however, the Company currently has no such
exclusive agreements.
The Company is also establishing direct sales offices in areas where it does not
currently have strong distributors and manufacturers' representatives.
The Company is currently focused on expanding its business with each of these
representatives to include all of the Company's products. The Company believes
it will be successful with the majority of its current representatives for
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the following reasons:
Product Quality. The Company manufacturers high performance air filtration
products. It currently offers filters of 99.999997% on particles 0.1 microns
or larger, which the Company believes is the highest efficiency rating
available anywhere.
Name Recognition. The Company believes that each of its product lines has
high name recognition in its target markets. The Company's representatives
have indicated that they believe their sales will be increased with
additional products associated with the Company.
Single-Source Supplier. The Company provides 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. The Company plans to introduce the public
to new applications it is developing for filtration products.
Representatives will be able to take advantage of the additional name
recognition and public knowledge associated with the marketing of the new
products; the Company believes their representatives will see this as a
competitive advantage to selling the Company's products.
The Company is also seeking to consolidate its share of its direct customers'
business in the same fashion. For example, CSC has historically sold high-end
radiation containment filtration systems for radioactive containment and exhaust
purposes to United States Department of Energy nuclear facilities. These
facilities also use standard and industrial-grade filters for air intake systems
and control areas. The Company believes each of its subsidiaries will be able to
sell its direct customers additional products from the other subsidiaries for
many of the same reasons given above: perception of product quality, convenience
of a single-source supplier, name recognition, and public knowledge of product
innovations and technical superiority.
PRODUCTS
The Company's products are high-end, mid-range and standard-grade air filtration
products and related equipment and hardware. These principal products are
divided into product lines and each product line is marketed separately through
a combination of direct sales and a network of regional distributors and
specialized technical representatives and contractors.
"High-End" Products
The Company manufactures and sells "high-end" air filtration products for
use in applications requiring HEPA filters, or absolute control of other
contaminants or toxic gases, with at least 99.97% efficiency. Set forth
below is a description of some of the Company's high-end products.
HEPA Filters. The Company manufactures a full line of commercial-grade and
specialty HEPA filters, in a variety of styles, including bag filters, fluid
seal filters and clamp-down ceiling filters. These filters are used to
remove extremely small particles from air and other gases for a variety of
applications ranging from removing radioactive particles in the event of a
nuclear containment breach to removing oil mist from the air of automobile
plants to meet OSHA requirements, to removing cigarette smoke from the air
of smoking areas at airport terminals before it is mixed with the general
airport air. The Company holds patents relating to certain of its HEPA
filters and to certain related proprietary particle scanning technologies
used for testing such products.
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Laminar Flow Grade Filters. The Company manufactures an extensive line of
high-performance air filters designed to meet the additional requirements of
cleanrooms. Efficiencies for various laminar flow filter types range from
99.99% to 99.999997% for particle removal. The performance of these product
lines forms the basis for the Company's reputation among high-end users. The
Company produces its own glass-based filter media so that it can maintain
quality control over the production of the media. Besides allowing more
immediate and effective product quality control, the Company has developed
unique processes which enable them to manufacture "completely separatorless"
filters, while competing filters use aluminum, tape, glue or strings to
separate adjacent pleats of the media which obstruct air flow and contribute
to off-gassing and particle generation. Laminar flow grade filters are
essential for the production of semiconductors, pharmaceuticals and many
other high-technology products.
HEGA Products. High-efficiency gas adsorbers ("HEGAs") collect gaseous
contaminants through "adsorption," or collecting contaminants in a condensed
form on a surface. HEGA filters are used to control or eliminate gaseous
contaminants, odors, bacteria and toxic chemicals. HEGA products typically
contain one of several forms of activated charcoal, selected to match the
types of contaminant which need to be filtered for the particular
application. HEGA filters, in combination with ASHRAE-grade and HEPA
filters, are critical to many applications, including the production and
disposal of chemical and biological warfare agents, the removal of
radioactive gases from the exhaust of nuclear facilities and the removal of
volatile organic compounds generated by many industries including hospital
operating rooms.
Synthesized Manufacturing Environments. The Company manufactures specialized
containment environments, called Absolute Isolation Barriers, for a variety
of high technology applications. These environments typically combine
stainless steel housings with HEPA filters, activated carbon filters and
self-contained fan-filter units. Depending on the application, Absolute
Isolation Barriers generate specialized environments meeting requirements
for a combination of temperature, humidity, oxygen levels, air pressure,
ambient noise and chemical make-up. They typically also include measures to
protect personnel and equipment located outside the barriers from toxic
chemicals, poisonous atmospheres or infectious organisms contained within
the environment. They are currently used in applications including
pharmaceutical development, recombinant DNA research and contagion isolation
in critical care and quarantine facilities. The Company believes they will
become the norm for state-of-the-art pharmaceutical production facilities in
the near future. The Company also believes they offer semiconductor
manufacturers sizable advantages over their current productions methods.
ASHRAE-RATED MID-RANGE PRODUCTS
The Company also manufactures and sells products intended for "mid-range"
applications. These filters are also known as ASHRAE filters because they
fall under specifications and are categorized by efficiency ratings
established by the American Society of Heating, Refrigeration and
Air-Conditioning Engineers. These applications are generally characterized
by requiring filtration of at least 20% efficiency.
The Company's mid-range industrial grade products include Pureform
Separatorless Filters, Separator-Type filters with corrugated aluminum
separators, electrostatic precipitators, high-temperature HEPA filters, and
95% dioctylphthalate ("DOP") high-efficiency filters in a variety of styles,
including nipple-connected, square gasketed with gel-seal and round with or
without faceguards. Other major ASHRAE-rated products include Precision
PakTM extended surface area "bag" type filters, Rigi-Pleat deep-pleated
filters, Multi-Fold Collapsible medium and high-efficiency air filter
cartridges, and Multi-Cap and Multi-Flo collapsible air filter cartridges
for replacement of competitors' filters.
"Standard-Grade" Products
The Company manufactures and sells standard-grade products for use in
conventional commercial and residential HVAC systems. These products are
typically sold off-the-shelf to HVAC distributors, retail outlets,
industrial wholesalers and specialty contractors. These filters are
characterized by their low cost, and typically have efficiency ratings below
30%. The Company's product lines in this category include a full range of
filters and media for standard residential and commercial furnace and air
conditioning applications.
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The Company's standard-grade filters are sold under more than 20 different
brand names, including Arm & Hammer Pleated Filters, NaturalAire,
Precisionaire Industrial Grade, Tri-Bond, EZ FLOW(R), Dustgard, Kwik Kut,
SMILIE(R), Permaire, Kwik Kleen, Pre-Foam Kleen, Kwik Kleen Synthetic,
Pre-Pleat and Micro-Particle Pleated Home Air Filters.
Other Products and Services
In addition to filters, the Company also sells related products, including
environmental tobacco smoke systems, filter housings, lay-in grid cleanroom
ceilings, custom air handlers and blowers, isolation dampers, adhesives,
caulk, filter media and sealants. The Company also has a limited number of
service clients, where the Company will replace or recharge media and
perform related maintenance services.
The Company has recently adapted testing procedures and equipment developed
for the semiconductor industry, along with newly developed bonded carbon
filtration technology, to offer customized IAQ diagnosis, remediation,
control and monitoring for commercial and public buildings.
MANUFACTURING
The Company manufactures its 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. 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 ASHRAE-rated medium
efficiency filters and standard-grade filters. FFI's facility in Washington,
North Carolina, produces high-end HEPA products. 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. 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. Air Seal's
facility, located in Stafford, Texas, produces mid-range custom filter housings.
Airseal West's facility, located in Salt Lake City, Utah, manufactures custom
filter housings, mini-pleat filters, and other miscellaneous products. 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, the Company designs, manufactures and
assembles the majority of its own automation production equipment.
The Company's manufacturing operations are subject to periodic inspection by
regulatory authorities. Because of the nature of some of the Company's 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.
Each of the Company's manufacturing facilities utilize testing and design
strategies appropriate to the products manufactured. These range from standard
statistical process quality controls for standard-grade residential replacement
filters to individual testing and certification with patented proprietary
particle scanning technologies for each laminar-grade HEPA filter. The Company
believes that its ability to comprehensively test and certify its filters
provides it with a competitive advantage.
SOURCE AND AVAILABILITY OF RAW MATERIALS
The Company's 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.
10
COMPETITION
The air-filtration market is fragmented and highly competitive. There are many
companies which compete in the Company's market areas. The Company believes that
the principal competitive factors in the air filtration business include product
performance, price, product knowledge, reputation, customized design, timely
delivery and product maintenance. The Company believes it competes favorably in
all of these categories. The Company's competitors include successful companies
with resources, assets, financial strength and market share which may be greater
than the Company's. 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
The Company currently holds 17 patents relating to filtration technology,
including patents relating to HEPA filters and fabrication methods, filter leak
testing methods and laminar flow cleanrooms. The Company has patents pending for
one of the components related to its Absolute Isolation Barriers, and the
impregnation method used in the manufacture of its Arm & Hammer Pleated Filters.
The Company has obtained and owns 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 the Company's various product lines and subsidiaries are
valuable to the Company, it does not consider any of them to be essential to its
business.
The Company currently licenses some of its manufacturing products to specialty
HVAC and ASHRAE filter manufacturers who produce products under their own name
and with their own identifying labels.
CUSTOMERS
The Company is not dependent upon any single customer. One customer, Wal-Mart
Stores, Inc., accounted for 10% and 11% of net sales during the years ended
December 31, 1998 and 1997, respectively. Home Depot, Inc., accounted for 10%
and 8% of net sales during the years ended December 31, 1998 and 1997,
respectively. No other single customer accounted for net sales equal to or
greater than 10% of the total net sales of the Company. The Company's other
significant customers include Abbott Laboratories, Motorola, Inc., Merck & Co.,
Inc., Upjohn Co., Westinghouse Electric Corp., and several large computer chip
manufacturers.
BACKLOG
The Company had approximately $11,084,000 in firm backlog on December 31, 1998,
compared to $12,941,000 at December 31, 1997. 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, 1998, is expected to be
shipped by the end of the second quarter of 1999.
EMPLOYEES
The Company employed 2,152 full-time employees on December 31, 1998; 1,861 in
manufacturing, 33 in development and technical staff, 62 in sales and marketing,
and the remaining 196 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
The Company's research and development is focused in the following areas:
11
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 fiscal years 1998, 1997 and 1996 were
approximately $2,250,000, $373,000 and $460,000, 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
The Company's operations are subject to certain federal, state and local
requirements relating to environmental, waste management, health and safety
regulations. The Company believes its business is operated in compliance with
all applicable government, environmental, waste management, health and safety
regulations and that its products meet standards from applicable government
agencies. There can be no assurance that future regulations will not require the
Company to modify its products to meet revised particulate or other
requirements.
SEASONALITY
Historically, the Company's business has been seasonal, with a substantial
percentage of its sales occurring during the second and third quarters of each
year. In addition, demand for the Company's standard-grade 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
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 through FIL, which sells to customers in the Far East.
Sales through foreign distributors and FIL amounted to less than 5% of net sales
for each of the last three fiscal years. Assets held outside the United States
are negligible.
12
Item 2. Properties
The following table lists the principal facilities owned or leased by the
Company. The Company believes that these properties are adequate for its current
operational needs, but 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, service and Bath, North Carolina 44,282 N/A Owned
office facility
Manufacturing plant Bartow, Florida 175,000 $29,121 Owned1
R&D & Warehouse Lakeland, Florida 40,000 $ 6,559 Lease
Manufacturing plant Terrell, Texas 146,256 $29,858 Owned1
Manufacturing plant Auburn, Pennsylvania 91,000 $ 7,097 Owned1
Office space and St. Petersburg, 18,000 N/A Owned
headquarters Florida
Warehouse South Holland, 33,226 $ 8,307 Lease
Illinois
Manufacturing plant Henderson, Nevada 100,000 $26,000 Lease
Manufacturing plant Momence, Illinois 210,000 $44,062 Owned1,2
Sales office and warehouse Singapore 10,000 $ 3,350 Lease
Manufacturing and office Stafford, Texas 18,000 N/A Owned
facility
Manufacturing plant Salt Lake City, Utah 60,000 $14,400 Lease
Manufacturing plant Salt Lake City, Utah 70,805 $21,963 Lease
Manufacturing plant Smithfield, North 399,090 N/A3 Owned
Carolina
Plant and office facility San Diego, California 96,660 $36,435 Lease
Manufacturing plant Tijuana, Mexico 49,000 $14,420 Lease
1 This property is encumbered by a mortgage.
2 This mortgage is paid quarterly rather than monthly; the quarterly payments
are $132,187.
3 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, 1998, the interest rate on the bond was 4.1%.
Item 3. Legal Proceedings
The Company is involved in a dispute with a customer involving a trade account
receivable of approximately $2.6 million, filed as Case No. CV 98-19817 on
October 10, 1998 in the Superior Court of the State of Arizona in and for
13
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 that the receivable is fully collectible.
However, it is reasonably possible the estimate of collection may change in the
near term.
The Company is currently being monitored by the United States Environmental
Protection Agency ("EPA") for possible environmental contamination at one of its
facilities. The Company is in the process of completing negotiations with the
EPA to resolve issues related to monthly monitoring of groundwater. The Company
estimates the monitoring will last from 3-5 years, and believes the total cost
for such monitoring will not exceed $45,000. The Company has received a limited
indemnification from Thomas T. Allan, a former officer and director of the
Company, and Robert R. Amerson and Steven K. Clark, both directors, officers and
shareholders of the Company, of approximately $975,000 with respect to the
claims of the EPA; however, there can be no assurance that the amount of this
indemnification will be sufficient to cover the aggregate of liabilities
asserted by the EPA.
In 1997, the Company purchased property in Momence, County of Kankakee, Illinois
(the "Illinois Property") for a new air filter manufacturing facility. In
connection with such purchase, the Company agreed to assume all risk of
environment liability for past, present or future conditions on the Illinois
Property except for any liability for environmental problems related to ground
water. The Illinois Property had certain environmental problems which required
remediation under federal and Illinois law. The seller of the Illinois Property
has worked extensively with the Illinois Environmental Protection Agency
("IEPA") with regard to the environmental matters and the Company has completed
Phase I and Phase II environmental surveys with respect to the property, and it
appears that the environmental matters have been resolved, except for certain
monitoring procedures required by the IEPA. However, resolution of state issues
has no effect on any potential federal or common law claims, and there can be no
assurance that such claims will not be made.
Additionally, from time to time, the Company is also a party to various legal
proceedings incidental to its business. None of these proceedings are material
to the conduct of the Company's business, operations or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on December 10, 1998. During
the meeting, holders of 16,444,117 shares, out of 25,163,339 shares outstanding
on the record date, attended either in person or by proxy. Holders of 12,169,449
shares voted to elect as members of the Board of Directors of the Company Robert
R. Amerson and William H. Clark, with no votes against, and holders of 4,274,668
shares abstaining.
Holders of 11,631,753 shares voted to elect as members of the Board of Directors
Steven K. Clark and William C. Gibbs, with no votes against, and holders of
4,812,364 abstaining.
Holders of 16,274,519 shares voted to ratify the firm of McGladrey & Pullen, LLP
as the Company's independent auditors for the fiscal year ended December 31,
1998, with holders of 27,100 shares voting against the ratification, and holders
of 142,498 shares abstaining.
14
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 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
Fiscal 1997
Fourth Quarter ended December 31, 1997 9 1/4 6 15/16
Third Quarter ended September 30, 1997 8 1/4 6 3/4
Second Quarter ended June 30, 1997 9 7/8 5 7/8
First Quarter ended March 31, 1997 12 9 3/8
Approximate Number of Equity Securityholders
On March 29, 1999, the closing price for the Company's common stock was $2.75
per share. As of March 29, 1999, there were approximately 300 holders of record
of the Company's common stock. The Company estimates there are in excess of 600
beneficial owners of the Company's common stock.
Dividends
The Company has not declared or paid cash dividends on its common stock. The
Company currently intends to retain any future earnings to finance the growth
and development of its business and therefore does not anticipate paying cash
dividends in the foreseeable future. Any future determination to pay cash
dividends will be made by the Board of Directors in light of the Company's
earnings, financial position, capital requirements and such other factors as the
Board of Directors deems relevant. Under the terms of its revolving credit line
with SunTrust Bank, N.A. and Zions First National Bank, N.A. (together referred
to hereinafter as "SunTrust"), the Company cannot pay dividends without the
prior written consent of SunTrust. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
and "Notes to Consolidated Financial Statements - Note 6."
15
Item 6. Selected Consolidated 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)
Fiscal Year Ended December,
--------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- ------- ------- --------
Net sales $157,822 $134,135 $73,056 $38,636 $ 26,706
Gross profit 36,380 33,323 19,459 9,682 7,861
Operating expenses 28,408 24,156 13,460 7,263 7,239
Operating income 7,971 9,167 5,999 2,419 622
Earnings before income taxes 8,886 9,544 5,771 1,830 171
Income taxes 3,598 3,705 2,178 685 176
======== ======== ======= ======= ========
Net income (loss) $ 5,289 $ 5,839 $ 3,594 $ 1,146 $ (5)
======== ======== ======= ======= ========
Earnings per common share
Basic $ 0.21 $ 0.32 $ 0.27 $ 0.12 $ --
======== ======== ======= ======= ========
Diluted $ 0.20 $ 0.27 $ 0.23 $ 0.12 $ --
======== ======== ======= ======= ========
Weighted average common
shares outstanding
Basic 25,134 18,509 13,171 9,832 9,693
======== ======== ======= ======= ========
Diluted 27,107 22,477 16,384 9,832 9,693
======== ======== ======= ======= ========
Selected Historical Balance Sheet Data (In thousands)
1998 1997 1996 1995 1994
-------- -------- ------- ------- --------
Working capital $ 47,972 $ 55,179 $22,570 $ 4,108 $ 349
Total assets 167,780 145,881 86,518 18,529 14,414
Long-term obligations1 31,371 14,771 42,156 1,761 1,892
Total shareholders'
equity2 109,603 106,207 25,353 8,208 3,953
- --------------------
1 Long-term obligations include long-term notes payable, current maturities of
long-term debt, long-term debt, convertible debt, and committed capital.
2 Comparisons of year-to-year balance sheet data should be made in conjunction
with a comparison of the effect of the Acquisitions. See "Management's
Discussions and Analysis of Financial Condition and Results of Operations."
16
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 the Company's Consolidated Financial Statements
and the notes thereto, 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 could cause actual results to differ materially from
those contained in the forward-looking statements below.
Overview
The Company 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. The Company
focuses on those products with high replacement potential. The Company designs
and manufactures its own production equipment and also produces glass-based
media for many of its products. From 1996 to 1998, the Company experienced
significant growth from the acquisition of other air filtration related
companies. As of June 30, 1998, the Company 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
the Company's financial statements only from the applicable date of acquisition.
As a result, the Company's historical results of operations for the periods
presented should be evaluated specifically in the context of the Acquisitions.
Additionally, the historical results of operations do not fully reflect the
operating efficiencies and improvements expected from upgrading and integrating
the acquired businesses into the Company's operations. There can be no guarantee
that the Company will be able to achieve these objectives and gains in
efficiency. The Company believes the Acquisitions will have a positive impact on
its future results of operations.
Results of Operations
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.
Year ended
-------------------------------------
December 31, 1998 December 31, 1997
----------------- -----------------
Net sales ........................... $157,822 100.0% $134,135 100.0%
Gross profit ........................ 36,380 23.1 33,323 24.8
Operating expenses .................. 28,408 18.0 24,156 18.0
Operating income .................... 7,971 5.1 9,167 6.8
Income before income taxes .......... 8,886 5.6 9,544 7.1
Income taxes ........................ 3,598 2.3 3,705 2.8
Net income .......................... 5,289 3.4 5,839 4.4
Net Sales: Net sales for 1998 increased by $23,687,000, or 17.7%, to
$157,822,000 for 1998, from $134,135,000 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 8.2%
between 1998 and 1997 and contributed an additional $10,969,000 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 $3,057,000, or 9.2%, to
$36,380,000, which represented 23.1% of net sales, compared to $33,323,000,
which represented 24.8% 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
17
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 the year ended December 31,
1998 increased $4,252,000, or 17.6% to $28,408,000, representing 18.0% of
net sales, compared to $24,156,000 for the year ended December 31, 1997,
which represented 18.0% 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 $532,000 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 the year ended December 31, 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 the
year ended December 31, 1997. The decrease in net income is primarily
attributable to the Company's decrease in profit margin as a percentage of
sales.
Year Ended December 31, 1997 Compared to Year Ended December 30, 1996
The following table summarizes the Company's results of operations as a
percentage of net sales for the years ended December 31, 1997 and December
30, 1996.
Year ended
------------------------------------
December 31, 1997 December 30, 1996
----------------- -----------------
Net sales ............................. $134,135 100.0% $ 73,056 100.0%
Gross profit .......................... 33,323 24.8 19,459 26.6
Operating expenses .................... 24,156 18.0 13,460 18.4
Operating income ...................... 9,167 6.8 5,999 8.2
Income before income taxes ............ 9,544 7.1 5,771 7.9
Income taxes .......................... 3,705 2.8 2,178 3.0
Net income ............................ 5,839 4.4 3,594 4.9
Net Sales: Net sales for 1997 increased by $61,079,000, or 83.6%, to
$134,135,000, from $73,056,000 for 1996. The increase in net sales was due
to the Acquisitions and establishment of new subsidiaries, which contributed
approximately $60,750,000 of net sales. Excluding the Acquisitions,
comparable sales from the Company's business at December 31, 1996 to
December 31, 1997 were up approximately $329,000, or 0.5%. The Company
believes this is slower than normal growth for its industry, which it
estimates grew between 3% and 4% during 1997, and attributes its lower than
expected growth to a cyclical downturn in demand for new semiconductor
production facilities. Because of this cyclical slowdown, the Company
redirected underutilized capacity normally used in the manufacture of
high-end filtration products for semiconductor cleanrooms to containment
environments for the pharmaceutical industry and mid-range industrial HEPA
products.
Gross Profit: Gross profit for 1997 increased by $13,864,000, or 71.2%, to
$33,323,000, which represented 24.8% of net sales, from $19,459,000 in 1996,
which represented 26.6% of net sales. The primary reasons for the decrease
in gross margin percentage were (i) higher than normal costs associated with
opening new
18
facilities in Momence, Illinois and Henderson, Nevada, which consisted
primarily of labor inefficiencies associated with training new production
employees; (ii) higher than normal freight costs associated with shipping
products from facilities on the East Coast to meet demand from new customers
while the new facilities were in their startup phase; and (iii) higher than
normal costs associated with changing portions of the Company's high-end
production facilities to emphasize production of containment environments
for the pharmaceutical industry and mid-range industrial HEPA filters
instead of high-end filtration products for the semiconductor industry.
Operating Expenses: Operating expenses for 1997 increased by $10,696,000, or
79.5%, to $24,156,000, which represented 18.0% of net sales, from
$13,460,000 in 1996, which represented 18.4% of net sales. The primary
reasons for the overall increase in operating expenses were the Acquisitions
and the establishment of Airseal West, which together accounted for
$10,785,000 of the increase. Operating expenses decreased as a percentage of
net sales compared to 1996, primarily due to the impact of savings
associated with the consolidation of operations of the various subsidiaries.
Other factors affecting operating expenses included: An increase in sales
commissions related to the increase in sales volume; additional travel and
management expenses associated with establishing new facilities; and
expenses incurred developing and marketing new containment and filtration
products. See "Industry Outlook."
Net Income: Net income for 1997 increased by $2,245,000, or 62.5%, to
$5,839,000, or $0.32 per share basic ($0.27 diluted), from $3,594,000, or
$0.27 per share basic ($0.23 diluted) for 1996.
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 $47,972,000 at December 31, 1998, compared to $55,179,000 at
December 31, 1997. This includes cash and cash equivalents of $13,673,000 and
$35,455,000 at December 31, 1998 and 1997, respectively.
Trade receivables increased $5,876,000, or 28.3%, to $26,671,000 at December 31,
1998 from $20,795,000 at December 31, 1997. The largest factor in the increase
in receivables is the acquisition of Eco-Air, which accounted for approximately
$2,585,000 of the increase. The remaining increase is primarily due to increases
associated with the increased volume in net sales (approximately $1,705,000) and
timing differences in shipments and payments received.
Operations used $797,000 of cash during the year ended December 31, 1998,
compared to generating $5,850,000 for the year ended December 31, 1997. The
difference in cash flows was associated with increased receivables and
inventories, partially offset by income net of depreciation and amortization.
Financing activities during 1998 generated $13,300,000 of cash, primarily from
debt financing. Investing activities during 1998 consumed $34,285,000 of cash,
consisting primarily of the purchase of property, plant and equipment, largely
consisting of machinery for the automation of the Company's production
facilities, and cash paid for the acquisition of Eco-Air, which was effective
June 30, 1998. The purchase price, including expenses, was approximately
$15,677,419, plus up to $5,000,000 payable in cash or the Company's common stock
(at sellers' option) if certain performance criteria are met. If Eco-Air
achieves certain performance criteria, Flanders will issue common stock or
record a liability for the cash payment over a five year period and Flanders
will add the amount to goodwill associated with the purchase transaction and
amortize it over the remaining amortization period of the 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, 1998, no shares have
been issued or liability recorded to the Eco-Air sellers as a result of
achieving performance criteria.
The Company has arranged a revolving line of credit facility with SunTrust. The
credit agreement is for a term of two years and provides the Company with a line
of credit up to a maximum principal amount of $30,000,000. Outstanding balances
on the credit line bear interest at the option of the Company, at either (a) the
"prime" rate of
19
interest publicly announced by SunTrust Bank, or (b) the "LIBOR" rate as
reported by the Wall Street Journal 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, 1998, this rate was 6.06%. As of December 31, 1998,
the Company had used $13,000,000 of the revolving credit facility. Unless this
line of credit is renewed, it will expire in February 2000. In addition,
Eco-Air, a subsidiary of the Company has a line of credit agreement with a bank
which allows for advances based on 80% of eligible accounts receivable up to a
maximum of $2,500,000, of which $1,300,000 was outstanding at December 31, 1998.
Borrowings under this arrangement are collateralized by substantially all of
Eco-Air's assets. Outstanding amounts on the line of credit bear interest at a
combination of LIBOR plus 1.8% and the bank's prime rate. Eco-Air may elect to
fix the rate for any or all advances under this line of credit agreement for a
term of 30 to 90 days at the then current LIBOR rate plus 1.8%, and has made
such an election at the 30-day LIBOR rate (5.06% at December 31, 1998).
As of April 1, 1998, the Company 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 to
the Company 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, 1998, was 4.1% per annum. The
Bonds are collateralized by a $4,500,000 letter of credit which expires October
16, 1999.
Continuing expansion of the Company will require substantial capital investment
for the manufacture of filtration products. Although the Company has 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 terms acceptable to the Company.
Failure to obtain sufficient capital could materially adversely impact the
Company's growth strategy.
In 1998, the Company's Board of Directors authorized the repurchase of up to two
million shares of the Company's common stock. As of March 29, 1999, the Company
has repurchased 731,350 shares of its common stock under this authorization;
thus, as of this date, up to an additional 1,268,650 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.
Outlook
The Company believes that 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 the
Company does expect capital spending for new semiconductor facilities to
increase in the future, it does not expect this to be a significant factor in
the Company's overall business during 1999, where sales for semiconductor plants
are expected to remain flat through at least the third quarter.
Data collected by the Company 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 the
Company's business.
The Company's 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, such as the
Company's anti-microbial or higher-efficiency filters for residential use, with
associated sales prices typically over $5.00 each. Any such trend would have a
beneficial effect on the Company's business. The Company's recent development,
in conjunction with Church & Dwight, the makers of Arm & Hammer baking soda
products, of its Arm & Hammer Pleated Filters for residential use, is also aimed
toward increasing consumer awareness of the benefits of using a more effective,
but more expensive, filter, and replacing it more frequently. The Company hopes
that the dramatic and readily recognizable difference in efficacy between a
fresh Arm & Hammer Pleated Filter, and one which has been in place for three or
more months
20
will help to encourage the public to become more aware of these issues.
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, the Company's penetration of this market has
been relatively small. The Company believes that its ability to offer a "one
stop" supply of air filtration products to HVAC distributors and wholesalers
will increase its share of this market segment. The Company also believes its
recently developed modular air handlers and environmental tobacco smoke systems
will enable it to expand sales to these customers; the new products will serve
as high profile entrants with distributors and manufacturers' representatives,
who can then be motivated to carry the Company's complete product line.
The foregoing contains forward-looking statements that involve risks and
uncertainties including: (i) the shortage of reliable market data regarding the
air filtration market; (ii) changes in external competitive market factors or in
the Company's internal budgeting process which might impact trends in the
Company's results of operations; (iii) anticipated working capital or other cash
requirements; (iv) changes in the Company's business strategy or an inability to
execute its strategy due to unanticipated changes in the market; (v) product
obsolescence due to the development of new technologies, (vi) various
competitive factors that may prevent the Company from competing successfully in
the marketplace and (vii) other risks described below in "Factors That May
Affect Future Results." 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
The Company operates in a highly competitive market and is subject to a number
of risks, some of which are beyond the Company's control. While the Company's
management is optimistic about the Company's long-term prospects, the following
discussion highlights some risks and uncertainties that should be considered in
evaluating its growth outlook. See "Part I - Business - Forward-Looking
Statements and Associated Risks."
Integration of Acquired Companies. Prior to their acquisition by the Company,
CSC, Air Seal, Precisionaire and Eco-Air operated under different management
philosophies, management teams and marketing strategies. These companies'
operations are currently being integrated into the Company's, and there can be
no assurance that the Company's systems, procedures and controls will be
adequate to accommodate integration of these companies. Failure to successfully
integrate these companies could materially adversely affect the Company's
business and results of operations.
Management of Growth. With the Company's recent acquisitions, the Company's net
sales increased by approximately 173.6% from the year ended December 30, 1994 to
the year ended December 31, 1996, and approximately 116.0% from the year ended
December 31, 1996 to the year ended December 31, 1998. There can be no assurance
that the Company will continue to expand at this rate, or at all. If the Company
continues to grow, the additional growth will place burdens on management to
manage such growth while maintaining the Company's profitability. Additional
growth may require the Company to recruit and train additional management
personnel in the areas of corporate management, sales, accounting, marketing,
research and development and operations. There can be no assurance that the
Company will be able to do so. Both the Company's growth by acquisition and any
further expansion may also significantly strain the Company's management,
financial and other resources. There can be no assurance that the Company's
systems, procedures and controls will be adequate to support the Company's
operations and growth.
Acquisition Strategy. The Company intends to continue to increase its market
share through strategic acquisitions of synergistic businesses. The Company
seeks to identify potential acquisition targets with (i) dominant positions in
local or regional markets, (ii) a stable customer base distinct from the
Company's existing customers, (iii) financial stability, (iv) an ability to add
new product lines to the Company's business, and (v) significant asset value to
enable the Company to obtain debt financing or non-dilutive equity financing for
the acquisition. The Company is continuously evaluating acquisition
opportunities in light of the above criteria. The Company focuses on those
acquisition targets which complement the Company's existing technology, increase
market share, or broaden distribution channels. The Company also seeks
acquisition targets which provide vertical integration opportunities. The
Company's strategy of growth through acquisition exposes the Company to the
potential risks inherent in assessing the value, strengths, weaknesses,
contingent or other liabilities and potential
21
profitability of acquisition candidates and in integrating the operations of
acquired companies. Although the Company generally has been successful in
pursuing these acquisition targets, there can be no assurance that acquisition
opportunities will continue to be available, that the Company will have access
to the capital required to finance potential acquisitions, that the Company will
continue to acquire businesses or that any business acquired will be integrated
successfully or prove profitable. The Company currently has no binding
agreements with respect to future acquisitions, but is continuing to investigate
potential acquisition opportunities.
Need for Additional Financing for Future Acquisitions. The Company believes that
the revenues from current operations will provide the Company with sufficient
capital to fund continuing operations for the foreseeable future. However, to
continue its growth through acquisition, substantial additional debt or equity
financing may be needed. Failure to obtain sufficient capital could materially
adversely affect the Company's acquisition strategy.
Need for Technical Employees. The Company's future operating results depend in
part upon its ability to retain and attract qualified engineering,
manufacturing, technical, sales and support personnel for its operations.
Competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting or retaining such personnel. The
failure to attract or retain such persons could materially adversely affect the
Company's business and results of operations.
Technological Change; New Product Introduction. As of December 31, 1998,
approximately 20% of the Company's net sales resulted from sales of high-end
filtration products which are especially vulnerable to new technology
development. The Company's ability to remain competitive will depend in part
upon its ability to anticipate technological changes, to develop new and
enhances filtration systems and to introduce these systems at competitive prices
in a timely and cost-efficient manner. There can be no assurance that the
Company will successfully anticipate future technological changes or that
technologies or systems developed by others will not render the Company's
technology obsolete. The Company also plans to develop new products as part of
its strategy to increase the size and customer base of the air filtration
market. There can be no assurance that the Company will be successful in
developing the new products or that any product developed will be commercially
viable.
Acquiring and Maintaining Equipment. The Company designs, manufactures and
assembles the majority of the automatic production equipment used in its
facilities. The Company also uses other technologically advanced equipment, for
which manufacturers may have limited production capability or service
experience, which could result in delays in the acquisition and installation of
such equipment or extended periods of down-time in the event of malfunction or
equipment failure. Any such extended period of down-time for any critical
equipment could have a material adverse impact on the Company, its financial
condition and operations.
Product Demand. Approximately 7% of the Company's net sales in 1998 were from
high-end products sold for use in the semiconductor industry. The Company
believes that new manufacturing plant construction for the semiconductor
industry, which typically occurs in large phases as new manufacturing capacity
is needed, is in a periodic slowdown. As such, the demand for the Company's
laminar flow HEPA products may be less in future years than previous years.
Potential Environmental Risks. The Company's business and products may be
significantly influenced by the constantly changing body of environmental laws
and regulations, which require that certain environmental standards be met and
impose liability for the failure to comply with such standards. While the
Company endeavors at each of its facilities to assure compliance with
environmental laws and regulations, there can be no assurance that the Company's
operations or activities, or historical operations by others at the Company's
locations, will not result in civil or criminal enforcement actions or private
actions that could have a materially adverse effect on the Company.
Competition. The Company currently faces significant competition in its business
activities, and 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 the Company. There can be
no assurance that the Company will be able to compete successfully with existing
or new entrant companies. In addition, new product introductions or enhancements
by the Company's competitors could cause a decline in sales or loss of market
acceptance of the Company's existing products. Increased competitive pressure
could also lead to intensified price-based competition resulting in lower prices
and profit margins, which could adversely affect the Company's business and
results of operations.
Dependence on Key Personnel. The Company's success will depend in significant
part upon the continued
22
contributions of its officers and key personnel, many of whom would be difficult
to replace. The Company has entered into employment agreements with Robert R.
Amerson, its President and Chief Executive Officer, Steven K. Clark, its Chief
Financial Officer and Chief Operating Officer, and Leonard J. Fetcho, its Vice
President of Operations. The loss of any key person could have a material
adverse effect on the business, financial condition and results of operations of
the Company.
Distribution Channels. The Acquisitions give the Company a broader assortment of
air filtration products. As part of the integration of the Acquisitions, the
Company has adopted a strategy of increasing its market share by providing its
manufacturers' representatives with the ability to offer a full product line of
the Company's products and "one stop" purchasing of air filtration products to
existing and new customers. Many of the Company's representatives have indicated
a willingness to offer the Company's products exclusively now that the Company
offers a broader range of products; however, these representatives may decide to
work exclusively with some other company for various reasons; thus, the current
distribution channels would be unavailable.
Automation. In 1997, the Company began a program to increase its gross margins
by automating portions of its production lines at FFI and Precisionaire using
technology and designs developed in-house. Currently, this process is
substantially complete for its standard-grade spun-glass filters, the Company's
largest volume product line. The Company estimates that it has expended
approximately 90% of the amounts required to complete its automation program.
Although the designs have been extensively tested in the field, there can be no
assurance that the new equipment will have the beneficial results on gross
margins that have been budgeted, or that any increases in efficiencies will not
be offset in the marketplace by competitors making similar improvements to their
facilities.
New Products and New Markets. The Company has recently invested a significant
amount of time, money and reputation on the development of new product lines to
(i) control indoor tobacco smoke; (ii) remove airborne odors in residences using
impregnated baking soda in filters; and (iii) allow replacement of certain
classes of outdated HVAC equipment without structural demolition or rework. The
Company believes there is currently a gradually increasing public awareness of
the issues surrounding IAQ, and that this trend will continue for the next
several years. The Company believes there is an increase in public concern
regarding the effects of IAQ on employee productivity, as well as an increase in
interest by standards-making bodies in creating specifications and techniques
for detecting, defining and solving IAQ problems. The Company believes there
will be an increase in interest in its Absolute Isolation Barriers in the future
because these products prevent cross-contamination between different lots and
different processes being performed at the same facility, as well as increasing
production yields in many applications. There can be no assurance that these
products will gain acceptance in the marketplace, or that any new products
developed by the Company will be successful. There can be no assurance that in
the future the Company will be able to recoup the expenditures associated with
the development of these products.
Centralize Overhead Functions. The Company has begun to implement plans to
centralize and eliminate duplication of efforts between its subsidiaries in the
following areas: Purchasing, production planning, shipping coordination,
marketing, accounting, personnel management, risk management and benefit plan
administration. There can be no assurance that cutting overhead in this fashion
will have the anticipated benefits, or that these reorganizations will not
significantly disrupt the operations of the affected subsidiaries. The Company
believes centralizing these overhead functions will have a beneficial impact
upon its future operating results.
Year 2000
The Problem
The Year 2000 issue is the result of potential problems with computer
systems or any equipment with computer chips that store that year portion of
the date as just two digits (e.g., 98 for 1998). Systems using this
two-digit approach will not be able to determine whether "00" represents the
year 2000 or 1900. The problem, if not corrected, will make those systems
fail altogether or, even worse, allow them to generate incorrect
calculations causing a disruption of normal operations.
Readiness Efforts
In 1997, the Company began a comprehensive project plan to address the Year
2000 issue as it relates to its operations. This plan was developed,
approved by the Board of Directors, and implemented. The scope of the plan
includes five phases: Awareness, Evaluation, Hardware Implementation, Phased
Software
23
Implementation and Validation. A project team that consists of key members
of the technology staff, representatives of functional business units and
senior management was developed. Additionally, the duties of the Director of
Information Technology were realigned to serve primarily as the Year 2000
project manager.
An assessment of the impact of the Year 2000 issue on the Company's computer
systems has been completed. The scope of the project also includes other
operational and environmental systems since they may be impacted if embedded
computer chips control the functionality of those systems. From the
assessment, the Company has identified and prioritized those systems deemed
to be mission critical or those that have a significant impact on normal
operations.
The Company relies on third party vendors and service providers for its data
processing capabilities and to maintain its computer systems. Formal
communications with these providers and other external parties were
initiated in 1997 to assess the Year 2000 readiness of their products and
services. Their progress in meeting their targeted schedules is being
monitored for any indication that they may not be able to address the
problems in time. Thus far, responses indicate that most of the significant
providers currently have compliant versions available or are well into the
renovation and testing phases with completion scheduled for some time in
early 1999. However, the Company can give no guarantee that the systems of
these service providers and vendors on which the Company's systems rely will
be timely renovated.
Additionally, the Company has implemented a plan to manage the potential
risk posed by the impact of the Year 2000 issue on its major customers.
Formal communications have been initiated, software modifications have been
initiated, and testing has been successfully completed with several of the
Company's major customers. Testing is scheduled to be substantially complete
by June 30, 1999.
Current Status
The project team estimates that the Company's Year 2000 readiness project is
86% complete, and that the activities involved in assessing external risks
and operational issues are 80% completed overall. The following table
provides a summary of the current status of the five phases involved and a
projected timetable for completion.
Project Phase % Completed Scheduled Completion
Awareness 100% Completed
Evaluation 100% Completed
Hardware Implementation 95% January 1999
Phased Software Implementation 85% May 1999
Final Validation 50% August 1999
---------------------------------------------------------------------------
Overall 86%
Costs
The Company has thus far primarily used and expects to continue to primarily
use internal financial resources to implement its readiness plan and to
upgrade or replace and test systems affected by the Year 2000 issue. The
total cost to the Company of these Year 2000 compliance activities has not
been and is not anticipated to be material to its financial position or
results of operations in any given year. In total, the Company estimates
that its costs, excluding personnel expenses, for Year 2000 remediation and
testing of its computer systems will amount to less than $275,000 over the
three-year period from 1997 through 1999. Not included in this estimate is
the cost to replace fully depreciated systems during this period, which
occurs in the normal course of business and is not directly attributable to
the Year 2000 issue.
The costs and the timetables in which the Company plans to complete the Year
2000 readiness activities are based on management's best estimates, which
were derived using numerous assumptions of future events including the
continued availability of certain resources, third party readiness plans and
other factors. The Company can make no guarantee that these estimates will
be achieved, and actual results could differ from such plans.
24
Risk Assessment
Based upon current information related to the progress of its major vendors
and service providers, management has determined that the Year 2000 issue
will not pose significant operational problems for its computer systems.
This determination is based on the ability of those vendors and service
providers to renovate, in a timely manner, the products and services on
which the Company's systems rely. However, the Company can give no guarantee
that the systems of these suppliers will be timely renovated.
Contingency Plan
Realizing that some disruption may occur despite its best efforts, the
Company is in the process of developing contingency plans for each critical
system in the event that one or more of those systems fail. While this is an
ongoing process, the Company expects to have its plan substantially
documented by May 1999.
Because of the foregoing factors, as well as other variables affecting the
Company's 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.
NEW ACCOUNTING STANDARDS
In 1998, the American Institute of Certified Public Accountants issued Statement
of Position 98-5, reporting on the Costs of Start-Up Activities. This statement,
which is effective for fiscal years beginning after December 15, 1998, requires
costs of start-up activities and organization costs to be expensed. The Company
has not determined the impact on its financial statements of adopting the new
accounting standard.
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, 1998 was
approximately $32,671,000. 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, 1998. 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 exchanges 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
None.
25
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
Steven K. Clark 46 Chief Operating Officer, Vice President of
Finance/Chief Financial Officer and Director
Steven D. Klocke 38 Vice President of Engineering
C. W. "Andy" Wood 59 Vice President of Sales
Leonard J. Fetcho 59 Vice President of Operations
William C. Gibbs 41 Director
William H. Clark 56 Director
Robert R. Amerson. Mr. Amerson has been President and Chief Executive Officer of
the Company since 1988. Mr. Amerson is also a Director, a position he has held
since 1988. He joined the Company in 1987 as Chief Financial Officer. Mr.
Amerson has a Bachelor of Science degree in Business Administration from
Atlantic Christian College.
Steven K. Clark. Mr. Clark was named as Vice President and Chief Financial
Officer of the Company as of December 15, 1995, and a director of the Company as
of December 29, 1995. Mr. Clark acted as a consultant to the Company from
November 15, 1995 through December 15, 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.
Stephen D. Klocke. Mr. Klocke has been Vice President of Engineering for the
Company since March 1997. He is responsible for all aspects of filter and
equipment design, directs the engineering staff and is directly in charge of all
product and technical literature. Mr. Klocke is a member of the Institute of
Environment Science, the primary technical standards body for this industry,
where he has chaired many of the committees which make filtration and cleanroom
standards. He has been with Flanders since 1986. Mr. Klocke received a Bachelor
of Science degree in Mechanical Engineering from the University of Kentucky and
a Bachelor of Arts degree in Physics from Thomas Moore College.
C.W. "Andy" Wood. Mr. Wood has been Vice President of Sales for the Company
since 1998 and Vice President of Sales for Precisionaire, a subsidiary of the
Company, 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.
26
Leonard J. Fetcho. Mr. Fetcho has been Vice President of Operations for the
Company since December 1998 and has been President of Eco-Air, a subsidiary of
the Company acquired in June 1998, since 1993. Mr. Fetcho has also been a
Director of Eco-Air since 1994. Mr. Fetcho is a graduate of Morrisville College.
William C. Gibbs. Mr. Gibbs has been an outside director of the Company since
December 1998. Since December 1998, he has been Vice President in charge of
Corporate Development at Evans & Sutherland Computer Corporation. From 1990
until December 1998, he was a partner in the law firm of Snell & Wilmer, L.L.P.
Mr. Gibbs has a Bachelor of Science Degree and Juris Doctorate, both from the
University of Utah. He also obtained an LL.M. in Securities Regulations from
Georgetown University.
William H. Clark. Mr. Clark has been an outside Director of Flanders since June
1996. He is and has been since 1977, the President and Owner of Bill Clark
Construction Co., Inc., a construction company located in Greenville, North
Carolina specializing in residential development. He is currently a member of
the Business Advisory Council of the East Carolina University School of
Business. Mr. Clark has a Bachelor of Arts degree and a Masters of Business
Administration degree, both from East Carolina University.
Compliance with SEC Reporting Requirements
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the SEC
reports of ownership and changes in ownership of common stock and other equity
securities of the Company. Officers, directors and greater than ten percent
shareholders are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms they file.
Based solely on its review of the copies of such reports furnished to the
Company and written representations that no other reports were required, the
Company believes that, during the 1998 fiscal year, all filing requirements
applicable to its officers, directors and greater than ten percent beneficial
owners were complied with, except that Andy Wood, Len Fetcho and William Gibbs
each filed a Form 3 late, and Steve Klocke filed a Form 5 late.
Item 11. Executive Compensation
Compensation Committee Interlocks and Insider Participation
The sole member of the Compensation Committee of the Company's Board of
Directors is Messr. William Clark, a non-employee director.
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 $100,000 in 1998.
27
Annual Compensation Long-Term Compensation
---------------------------------- --------------------------------
Awards Payouts
----------------------- -------
Other Restricted
Annual Stock Options/ LTIP
Compen- Award(s) SARs Payouts
Name and Principal Position Year Salary ($) Bonus ($) sation ($) ($) (#) ($)
- ----------------------------- ---- ---------- ---------- ---------- ---------- ---------- -------
Robert R. Amerson 1998(1) $250,000 $ -- $ -- $ -- -- $ --
President and CEO 1997 250,000 -- 5,500 -- -- --
1996 212,550 -- -- -- 2,000,000 --
Steven K. Clark 1998(2) 250,000 -- -- -- -- --
Vice President Finance/CFO 1997 250,000 -- -- -- -- --
1996 150,192 -- -- -- 2,000,000 --
C.W. "Andy" Wood 1998 183,558 -- -- -- -- --
Vice President Sales 1997 169,856 -- 4,965 -- -- --
1996 164,677 -- 27,218 -- -- --
Leonard J. Fetcho 1998(3) 206,008 2,000,000 -- -- 40,000 --
Vice President Operations 1997 265,927 -- -- -- --
1996 201,034 -- -- -- -- --
1 Mr. Amerson's annual salary is $250,000, plus a possible bonus each year,
under his Employment Agreement, as amended. See "Employment Agreements."
2 Mr. Clark's annual salary is $250,000, plus a possible bonus each year,
under his Employment Agreement, as amended. See "Employment Agreements."
3 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.
OPTIONS/SARs GRANTED IN LAST FISCAL YEAR
The following table sets forth the aggregate number and value of stock options
and SARs granted by the Company for services rendered during the last year to
the Company's Chief Executive Officer and to each of the Company's other
executive officers whose annual salary, bonus and other compensation exceed
$100,000.
Potential Realizable
Value at
Assumed/Annual
% of Total Rates of Stock
Options/SARs Price Appreciation
Granted to Exercise or for Option Term
Options/SARs Employees in Base Price Expiration -----------------------
Name Granted (#) Fiscal Year ($/Sh) Date 5% ($)1 10% ($)1
---- ------------ ------------ ----------- ---------- ----------- ----------
Robert R. Amerson -- -- -- -- -- --
Steven K. Clark -- -- -- -- -- --
C.W. "Andy" Wood -- -- -- -- -- --
Len Fetcho 40,000 18.4% 5.38 2001 34,794 75,220
1 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.
28
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option 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 $100,000.
Shares Number of Unexercised Value of Unexercised
Acquired Options/SARs at Fiscal In-the-Money Options/
On Value Year-End (#) SARs at Fiscal Year-End
Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ------------------- ------------ ------------ ------------------------- -------------------------
Robert R. Amerson -- $ -- 3,150,000 / -- $ 5,084,375 / --
Steven K. Clark -- -- 3,150,000 / -- 5,084,375 / --
C.W. "Andy" Wood -- -- -- / -- -- / --
Leonard J. Fetcho -- -- 40,000 / -- -- / --
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 1998,
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 $3.9375 per share.
Employment Agreements
The Company has entered into employment agreements with Messrs. Amerson and S.K.
Clark 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 2005. 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.
The Company has entered into an employment agreement with Leonard Fetcho
effective as of June 30, 1998 ("Fetcho's Agreement"). Fetcho's Agreement
provides for an annual base salary of $165,000 and terminates in 2003. The
Fetcho Agreement also provides that Mr. Fetcho shall be entitled to 200% of his
current base salary if the employment is terminated by the executive for good
reason, or if the employment is terminated by the Company as a result of Mr.
Fetcho's death or disability or for any other reason except cause.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth all individuals known 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 owed, as of
March 29, 1999. 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.
Percentage of
Name and Address Shares of Common Stock Outstanding Shares of
of Beneficial Owner Beneficially Owned Common Stock1
Robert R. Amerson2 7,914,370 27.50%
2399 26th Avenue North
St. Petersburg, FL 33713
29
Steven K. Clark2 5,193,088 18.05%
2399 26th Avenue North
St. Petersburg, FL 33713
Stephen Klocke3 119,427 *
2399 26th Avenue North
St. Petersburg, FL 33713
C.W. "Andy" Wood4 400 *
2399 26th Avenue North
St. Petersburg, FL 33713
Leonard J. Fetcho5 40,000 *
2399 26th Avenue North
St. Petersburg, FL 33713
William C. Gibbs6 50,000 *
2399 26th Avenue North
St. Petersburg, FL 33713
William H. Clark7 93,069 *
2399 26th Avenue North
St. Petersburg, FL 33713
Dimensional Fund Advisors, Inc.8 1,418,800 5.54%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Becker Capital Management, Inc. 9 2,032,100 7.93%
1211 SW Fifth Avenue, Suite 2185
Portland, OR 97204
Crabbe Huson Group, Inc.10 4,131,400 16.12%
121 SW Morrison, Suite 1400
Portland, OR 97204
Officers and Directors as a Group 13,410,354 41.74%
2,3,4,5,6,7
- -----------------------------------
* Represents less than 1% of the total issued and outstanding shares of common
stock.
1 Applicable percentage of ownership is based on 25,624,339 shares of common
stock outstanding as of March 29, 1999, together with all applicable options
for unissued securities for such stockholders 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.
2 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.
3 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 $3.9375 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.
4 Consists of 400 shares held by spouse.
5 Consists of 40,000 shares which are subject to an option to purchase such
shares from the Company at $5.375 per share.
30
6 Consists of 50,000 shares which are subject to an option to purchase such
shares from the Company at $3.9375 per share.
7 Includes 5,000 shares which are subject to an option to purchase such shares
from the Company at $7.375 per share, 5,000 shares which are subject to an
option to purchase such shares from the Company at $8.50 per share, 50,000
shares which are subject to an option to purchase such shares at $3.9375 per
share and 5,000 shares which are subject to an option to purchase such
shares from the Company at $4.00 per share.
8 According to Schedule 13-G filed with the Securities and Exchange Commission
dated February 12, 1999, Dimensional Fund Advisors, Inc., is an investment
advisor and does not directly own any shares of the Company, but possesses
sole voting and dispositive authority over 1,418,800 shares jointly owned by
approximately four of its clients.
9 According to Schedule 13-G filed with the Securities and Exchange Commission
dated February 10, 1999, Becker Capital Management, Inc. is an investment
advisor and does not directly own any shares of the Company, but possesses
sole voting and dispositive power over 2,032,100 shares jointly owned by its
clients.
10 According to Schedule 13-G filed with the Securities and Exchange Commission
dated February 12, 1999, Crabbe Huson Group, Inc., is an investment advisor
and does not directly own any shares of the Company, but possesses shared
voting power over 3,706,800 shares and shared dispositive authority over
4,131,400 shares jointly owned by its clients.
Item 13. Certain Relationships and Related Transactions
At December 31, 1998, Steven K. Clark owed the Company $2,349,372 (not including
interest) which he 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 (6.9% at December 31, 1998), calculated on the basis of a 360-day year
and a 30-day month. Both the interest and principal due under the note are
payable 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-described interest rate and both
the interest and principal due under the note are payable on April 24, 1999. On
September 5, 1997, Mr. Clark assumed $409,750 of Mr. Allan's debt owed to the
Company, in consideration for the exercise of 163,900 options under certain
option agreements between the parties. The interest rate due on the assumed
loans is at the variable rate of LIBOR plus 1.25% per annum, and both the
principal and interest due are payable 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, calculated on the basis of a 360-day year and a
30-day month. Both interest and principal due under the note are payable on
December 31, 2003.
At December 31, 1998, Robert R. Amerson owed the Company $1,208,957 (not
including interest) which he 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
variable rate of LIBOR plus 1.25% per annum, calculated on the basis of a
360-day year and a 30-day month. Both the interest and principal due under the
note are payable 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 and both the interest and principal due under the note are payable on April
24, 1999. On September 25, 1997, Mr. Amerson assumed $409,750 of Mr. Allan's
debt owed to the Company, in consideration for the exercise of 163,900 options
under certain option agreements between the parties. The interest rate due on
the assumed loans is at the variable rate of LIBOR plus 1.25% per annum, and
both the principal and interest due are payable on September 4, 1999. On May 21,
1998, Mr. Amerson issued a note to the Company in the amount of $440,194 with
interest at the rate of 7% per annum, calculated on the basis of a 360-day year
and a 30-day month. Both interest and principal due under the note are payable
on December 31, 2003.
William C. Gibbs is a Company director. Mr. Gibbs was a partner in the law firm
of Snell & Wilmer which is counsel to the Company, until December 1998, at which
time he became a Vice President of Evans and Sutherland.
31
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:
Independent Auditor's Report................................... F-2
Consolidated Balance Sheets at December 31, 1998 and 1997...... F-3
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996............................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1997 and 1996................... F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996......................... F-6
Notes to Consolidated Financial Statements..................... F-9
(a)(2) Financial Statement Schedules
Independent Auditor's Report...................................F-28
Schedule II. Valuation and Qualifying Accounts................F-29
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.
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.
32
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 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.
10.11 Flanders Corporation 1996 Director Option Plan, filed with the Form
10-K dated December 31, 1995, and incorporated herein by reference.
10.12 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.
10.13 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.
10.14 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.
10.15 Stock Option Agreement between Elite Acquisitions, Inc., and Steven
K. Clark, filed with the December 31, 1995 Form 10-K, incorporated
herein by reference.
10.16 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.
10.17 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.
10.18 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.
10.19 Stock Option Agreement between Elite Acquisitions, Inc. and Robert
R. Amerson, filed with the December 31, 1995 Form 10-K, incorporated
herein by reference.
10.20 Employment Agreement between Eco-Air Products, Inc., and Leonard J.
Fetcho.
10.21 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.
10.22 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.
10.23 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.
33
10.24 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.
21 Subsidiaries of the Registrant.
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.
34
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 8th day of April, 1999.
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 April 8, 1999
- ------------------------ and Director ________________
Robert R. Amerson
Chief Operating Officer, Vice
President/Chief Financial Officer,
/s/ Steven K. Clark Principal Accounting Officer and April 8, 1999
Steven K. Clark Director ________________
/s/ William C. Gibbs Director April 8, 1999
William C. Gibbs ________________
/s/ William H. Clark Director April 8, 1999
William H. Clark ________________
35
CONSOLIDATED FINANCIAL STATEMENTS
OF
FLANDERS CORPORATION
For the Years ended December 31, 1998, 1997 and 1996
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Flanders Corporation
Washington, North Carolina
We have audited the accompanying consolidated balance sheets of Flanders
Corporation and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1998. 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 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
New Bern, North Carolina
March12, 1999, except for item (A) in Note 6 and the last paragraph of Note 6,
as to which the date is March 31, 1999
F-2
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
ASSETS 1998 1997
- ------------------------------------------------- ------------ ------------
Current assets
Cash and cash equivalents $ 13,672,685 $ 35,454,580
Receivables:
Trade, less allowance for doubtful accounts:
1998 $551,725; 1997 $380,566 (Note 6) 26,670,650 20,794,675
Other 2,177,301 1,336,282
Inventories (Notes 2 and 6) 25,518,804 16,520,154
Deferred taxes (Note 10) 1,421,847 1,057,383
Income tax refund -- 217,737
Other current assets 860,310 870,897
------------ ------------
Total current assets 70,321,597 76,251,708
Related party receivables (Note 14) 4,263,409 1,861,005
Other assets (Note 3) 3,114,844 2,842,767
Intangible assets (Notes 4 and 6) 28,990,924 17,164,629
Property and equipment, net (Notes 5 and 6) 61,089,420 47,760,407
------------ ------------
$167,780,194 $145,880,516
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------
Current liabilities
Notes payable, banks (Note 6) $ 1,300,000 $ --
Current maturities of long-term debt (Note 6) 1,265,014 1,092,442
Accounts payable (Note 7) 15,851,087 16,940,981
Accrued expenses (Note 8) 3,933,918 3,038,800
------------ ------------
Total current liabilities 22,350,019 21,072,223
------------ ------------
Long-term debt, less current maturities (Note 6) 30,105,714 13,679,052
------------ ------------
Deferred taxes (Note 10) 5,721,647 4,922,383
------------ ------------
Commitments and contingencies (Notes 6, 12
and 13)
Stockholders' equity (Notes 6, 9 and 16)
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:
1998 25,624,339; 1997 25,663,425 25,624 25,663
Additional paid-in capital 90,077,257 91,969,830
Retained earnings 19,499,933 14,211,365
------------ ------------
109,602,814 106,206,858
------------ ------------
$167,780,194 $145,880,516
============ ============
See Notes to Consolidated Financial Statements
F-3
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------- ------------- ------------
Net sales $ 157,821,876 $ 134,135,433 $ 73,056,197
Cost of goods sold (Notes 12, 13 and 14) 121,442,367 100,812,262 53,597,621
------------- ------------- ------------
Gross profit 36,379,509 33,323,171 19,458,576
Operating expenses (Notes 12, 13 and 14) 28,408,118 24,156,197 13,459,721
------------- ------------- ------------
Operating income 7,971,391 9,166,974 5,998,855
------------- ------------- ------------
Nonoperating income (expense):
Other income 1,858,732 1,234,541 975,750
Interest expense (943,720) (857,527) (1,203,226)
------------- ------------- ------------
915,012 377,014 (227,476)
------------- ------------- ------------
Income before income taxes 8,886,403 9,543,988 5,771,379
Income taxes (Note 10) 3,597,835 3,704,723 2,177,591
------------- ------------- ------------
Net income $ 5,288,568 $ 5,839,265 $ 3,593,788
============= ============= ============
Earnings per common share (Note 17)
Basic $ 0.21 $ 0.32 $ 0.27
============= ============= ============
Diluted $ 0.20 $ 0.27 $ 0.23
============= ============= ============
Weighted average common shares
outstanding (Note 17)
Basic 25,133,820 18,508,763 13,171,440
============= ============= ============
Diluted 27,106,924 22,477,184 16,383,962
============= ============= ============
See Notes to Consolidated Financial Statements
F-4
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
Additional
Common Paid-In Retained
Stock Capital Earnings
-------- ------------ -----------
Balance, January 1, 1996 $ 11,434 $ 3,418,671 $ 4,778,312
Issuance of 3,371,204 shares of common stock
related to the Private Offerings (Note 9) 3,372 18,760,986 --
Less committed capital (Note 9) -- (8,000,005) --
Issuance of 1,036,885 shares of common stock
related to the Acquisitions 1,037 (1,037) --
Valuation and release from escrow of 282,295
shares of common stock related to the
Acquisitions -- 2,681,803 --
Issuance of 96,280 shares of common stock upon
exercise of warrants 96 240,604 --
Issuance of 13,200 shares of common stock upon
exercise of options 13 32,987 --
Income tax benefit from stock options exercised -- 37,433 --
Fair value of warrants issued with convertible
debt -- 33,971 --
Receivables secured by stock related to
exercise of warrants -- (240,700) --
Net income -- -- 3,593,788
-------- ------------ -----------
Balance, December 31, 1996 15,952 16,964,713 8,372,100
Release of committed capital (Note 9) -- 8,000,005 --
Issuance of 8,377,000 shares of common stock
(Note 9) 8,377 57,045,636 --
Issuance of 722,375 shares of common stock upon
conversion of convertible debt (Note 9) 722 4,381,689 --
Issuance of 425,000 shares of common stock upon
exercise of options (Note 16) 425 1,262,075 --
Valuation and release from escrow of 344,691
shares of common stock related to the
Acquisitions -- 2,984,635 --
Issuance of 187,502 shares of common stock related
to the Acquisitions (Note 11) 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 income -- -- 5,839,265
-------- ------------ -----------
Balance, December 31, 1997 25,663 91,969,830 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 income -- -- 5,288,568
-------- ------------ -----------
Balance, December 31, 1998 $ 25,624 $ 90,077,257 $19,499,933
======== ============ ===========
See Notes to Consolidated Financial Statements
F-5
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,288,568 $ 5,839,265 $ 3,593,788
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,120,043 3,799,957 1,485,740
Provision for doubtful accounts 111,159 9,086 (120,423)
Allowance for obsolete inventory 32,414 17,000 (115,000)
(Gain) loss on sale of property and equipment (41,221) 31,942 (54,002)
Gain on sale of real estate (48,767) -- --
Gain on disposition of cash value of life
insurance -- -- (24,600)
Realized gain on sale of marketable securities -- -- 12,123
Deferred income taxes 185,814 (34,555) (113,520)
Income tax benefit from exercise of stock
options 253,795 969,125 37,433
Change in working capital components, net of
effects from
acquisitions:
Receivables (4,152,080) (3,245,972) (871,440)
Inventories (6,236,258) (6,554,150) (504,576)
Other current assets 131,515 (183,373) (520,092)
Accounts payable (2,267,358) 5,920,363 (997,168)
Accrued expenses (99,649) (22,597) 302,682
Income tax (payable) refund 925,243 (696,450) (497,767)
------------ ------------ ------------
Net cash provided by (used in)
operating activities (796,782) 5,849,641 1,613,178
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash acquired (15,455,160) -- (31,971,448)
Purchase of equipment (16,877,214) (20,287,003) (2,501,308)
Proceeds from sale of marketable equity securities -- -- 823,396
Proceeds from sale of property and equipment 96,005 92,572 226,234
Proceeds from sale of real estate 259,253 -- --
Proceeds from disposition of cash value of life
insurance -- -- 884,895
Disbursements on notes receivables, stockholders (2,402,404) (955,075) (905,930)
Proceeds from repayment of notes receivable,
stockholders -- -- 458,428
Disbursements on trademarks and trade names (9,224) -- (17,246)
Disbursement on deferred expenses (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) --
Disbursements on prepaid commissions (348,058) (491,273) --
Disbursements for deposits (385,067) (415,464) --
Increase in cash value of life insurance (6,071) (21,054) (25,272)
------------ ------------ ------------
Net cash used in investing activities (34,284,722) (23,165,562) (33,028,251)
------------ ------------ ------------
- Continued -
See Notes to Consolidated Financial Statements
F-6
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on revolving credit agreement $ (26,100,000) $ (62,320,442) $(58,637,083)
Proceeds from revolving credit agreement 39,000,000 46,378,297 67,618,777
Proceeds from long-term borrowings 4,500,000 10,050,118 9,340,200
Principal payments on long-term borrowings (1,167,346) (8,781,901) (2,782,871)
Proceeds from issuance of common stock, net of
committed capital -- 57,054,013 11,894,353
Release of committed capital -- 8,000,005 --
Disbursement of loan origination fees -- -- (634,689)
Purchase of common stock for retirement (3,285,558) -- --
Proceeds from exercise of options and warrants 430,000 -- 33,000
Proceeds from issuance of convertible debt -- -- 4,000,000
Cost to register common stock (77,487) -- --
------------- ------------- ------------
Net cash provided by financing activities 13,299,609 50,380,090 30,831,687
------------- ------------- ------------
Net increase (decrease) in cash
and cash equivalents (21,781,895) 33,064,169 (583,386)
CASH AND CASH EQUIVALENTS
Beginning 35,454,580 2,390,411 2,973,797
------------ ------------ ------------
Ending $ 13,672,685 $ 35,454,580 $ 2,390,411
============= ============= ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest, net of $295,089 and $424,332 interest
capitalized to property and equipment for 1998
and 1997, respectively $ 837,576 $ 1,328,380 $ 732,976
============= ============= ============
Income taxes $ 2,486,778 $ 4,435,728 $ 2,293,555
============= ============= ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Fair value of warrants issued with convertible
debt $ -- $ -- $ 33,971
============= ============= ============
Valuation and release from escrow of 7,000, 344,691 and 282,295 shares of
common stock related to the Acquisitions for the years ended
December 31, 1998, 1997 and 1996, respectively $ 28,438 $ 2,984,635 $ 2,681,803
============= ============= ============
Commissions payable on gross proceeds from
issuance of common stock $ -- $ -- $ 1,130,000
============= ============= ============
Issuance of 96,280 shares of common stock upon
exercise of warrants in exchange for receivables $ -- $ -- $ 240,700
============= ============= ============
Issuance of 289,000 and 425,000 shares of common stock upon exercise of
options in exchange for receivable for the years ended December 31, 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 -
See Notes to Consolidated Financial Statements
F-7
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ ------------
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING
ACTIVITIES (Continued)
Cancellation of capital lease $ -- $ 2,764,634 $ --
============ ============ ============
Capital lease obligation incurred for use of
property and equipment $ 116,580 $ -- $ 284,250
============ ============ ============
Issuance of stock in exchange for minority
interest $ 522,500 $ -- $ --
============ ============ ============
ACQUISITION OF COMPANIES (Note 11)
Working capital acquired, net of cash and cash
equivalents received $ 2,635,781 $ 270,646 $ 4,677,588
Fair value of other assets acquired, principally
property and equipment 1,742,794 930,000 25,152,612
Goodwill 11,106,585 547,393 10,823,053
Long-term debt assumed (30,000) (353,400) (8,681,805)
------------ ------------ ------------
$ 15,455,160 $ 1,394,639 $ 31,971,448
============ ============ ============
See Notes to Consolidated Financial Statements
F-8
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business: Flanders Corporation (the "Company") designs, manufactures
and markets a broad range of air filtration products, including (i) high-end
High Efficiency Particulate Air ("HEPA") filters, with at least 99.97%
efficiency, and 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; (ii) mid-range filters for individual and commercial use, which fall
under specifications which are categorized by efficiency ratings established by
the American Society of Heating Refrigeration and Air Conditioning Engineers
("ASHRAE"); and (iii) standard-grade, low cost filters with efficiency ratings
below 30% sold typically off-the-shelf for standard residential and commercial
furnace and air conditioning applications. Approximately 70% of the Company's
net sales are from products with high replacement potential. 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 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.
Net sales for the years ended December 31, 1998 and 1997 included sales to the
following major customers, together with the receivables due from those
customers:
Amount of Net Sales Trade Receivable Balance
Year Ended December 31, As of December 31,
----------------------- ------------------------
1998 1997 1998 1997
---------- ---------- ---------- -----------
Customer A ............. 16,030,892 14,962,349 1,112,788 1,156,094
Customer B ............. 16,197,490 10,466,677 2,286,944 1,157,019
Although the Company historically has specialized in HEPA and mid-range filters,
the Company has positioned itself to offer its customers a full range of air
filtration products. As a result of certain acquisitions and its operation of
various subsidiaries, the Company has the ability to design, manufacture and
market high-end, mid-range and standard-grade air filtration products and
related equipment and hardware.
Principles of consolidation: The consolidated financial statements include the
accounts of the Company and its subsidiaries, all of which are wholly owned,
except for one subsidiary which was 80 percent owned for the years ended
December 31, 1998 and 1997. The Company acquired the remaining interest in a
subsidiary during the year ended December 31, 1998, which was 63.0 percent owned
by one of the Company's subsidiaries for the years ended December 31, 1997 and
1996. All material intercompany accounts and transactions have been eliminated
in consolidation. Amounts of minority interest are insignificant.
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.
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.
Inventories: Inventories are valued at lower of cost (first-in, first-out
method) or market.
F-9
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies - Continued
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, 1998.
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 trade names for each trademark or trade
name having a material unamortized balance. Based upon its most recent analysis,
the Company believes that no impairment of trademarks and trade names exists at
December 31, 1998.
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, 1998.
Revenue recognition: All sales are recognized when shipments are made to
customers.
Export sales: 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 subsidiary total less than 5% of net sales. Assets held outside the United
States are negligible.
Self insurance expenses: The Company has elected to self-insure its employees'
health and accident insurance up to a maximum of $30,000 to $80,000 per
occurrence, depending on the subsidiary. Expenses related to health claims are
accrued during the period when the Company is notified of a claim or probable
claim under the policy, including incurred but not reported claims, and adjusted
when the actual claim is submitted.
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.
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 $2,250,000, $373,000 and $460,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
Reclassifications: Certain account balances for the years ended December 31,
1997 and 1996 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, 1998.
F-10
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Inventories
Inventories consists of the following at December 31, 1998 and 1997:
1998 1997
------------ ------------
Finished goods $ 12,988,501 $ 7,456,542
Work in progress 1,036,809 1,924,024
Raw materials 11,587,908 7,201,588
------------ ------------
25,613,218 16,582,154
Less allowance for obsolete raw materials 94,414 62,000
------------ ------------
$ 25,518,804 $ 16,520,154
============ ============
Note 3. Other Assets
Other assets consist of the following at December 31, 1998 and 1997:
1998 1997
------------ ------------
Real estate held for sale $ 56,000 $ 266,486
Cash value of officers' life insurance 104,921 98,850
Cash designated for equipment acquisitions -- 856,441
Prepaid commissions 839,331 491,273
Deposits 800,531 415,464
Deferred expenses, net of accumulated amortization
$108,643 1998; $49,207 1997 903,740 714,253
Other 410,321 --
============ ============
$ 3,114,844 $ 2,842,767
============ ============
Note 4. Intangible Assets
Intangible assets consist of the following at December 31, 1998 and 1997:
1998 1997
------------ ------------
Goodwill, net of accumulated amortization $980,253
1998; $415,468 1997 $ 28,095,134 $ 16,217,984
Trademarks and trade names, net of accumulated
amortization of $135,178 1998; $75,099 1997 895,790 946,645
------------ ------------
$ 28,990,924 $ 17,164,629
============ ============
F-11
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Property and Equipment
Property and equipment consist of the following at December 31, 1998 and 1997:
Estimated
1998 1997 Useful Lives
----------- ----------- ------------
Land $ 1,018,007 $ 1,018,007
Buildings 29,374,879 24,026,169 15-40 years
Machinery and equipment, including assets acquired
under capital lease: 1998 $1,133,980;
1997 $1,007,144 35,605,613 23,645,191 10 years
Office equipment 4,557,195 3,115,607 5 years
Vehicles 963,289 635,844 5 years
Construction in progress 3,640,045 4,966,421
----------- -----------
75,159,028 57,407,239
Less accumulated depreciation, including
amortization applicable to assets acquired under
capital lease: 1998 $264,312; 1997 $158,354 14,069,608 9,646,832
----------- -----------
$61,089,420 $47,760,407
=========== ===========
Total depreciation expense charged to operations totaled $4,435,744, $3,103,271
and $1,382,741 for the years ended December 31, 1998, 1997 and 1996,
respectively.
Note 6. Pledged Assets and Debt
A summary of the Company's debt, and collateral pledged thereon, consists of the
following at December 31, 1998 and 1997:
1998 1997
---------- ----------
Short-term debt:
Lower of Prime or LIBOR plus defined percentage
line of credit agreements (A) ..................... $1,300,000 $ --
========== ==========
F-12
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Pledged Assets and Debt - Continued
1998 1997
----------- ----------
Long-term debt:
Lower of Prime or LIBOR plus defined percentage
line of credit agreements (A) .................... $13,000,000 $ --
Prime 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, 1998 .................. 1,795,731 1,988,226
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, 1998, and a second security
interest in certain machinery and equipment ....... 693,513 783,519
Various notes payable to a bank with interest at prime 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, 1998 .................. 1,180,226 1,228,372
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, 1998 .................. 5,845,000 6,000,000
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, 1998 .... 849,751 866,335
Industrial revenue bond with a variable tax exempt interest rate as determined
by a remarketing agent which was 4.1% at December 31, 1998, collateralized by
a $4,500,000 letter of credit
which expires February 2000 ....................... 4,500,000 --
F-13
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Pledged Assets and Debt - Continued
1998 1997
----------- -----------
Note payable to industrial development authority,
with an interest rate of 83 percent of prime rate, 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, 1998 ................. $ 838,810 $ 963,477
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, 1998 ................. 1,849,920 2,081,161
Various contracts payable including capital lease obligations; interest rates
from 6.3 percent to 9.6 percent and 5.9 percent to 9.6 percent at December 31,
1998 and 1997, respectively, collateralized by certain equipment; due in
monthly payments of approximately$40,000 and $30,000 including interest at
December 31, 1998 and 1997, respectively, expiring at various
times through May 2003 .......................... 817,777 860,404
----------- -----------
31,370,728 14,771,494
Less current maturities ............................ 1,265,014 1,092,442
----------- -----------
$30,105,714 $13,679,052
=========== ===========
(A) At December 31, 1998, the Company has revolving credit facilities with
banks which provide lines of credit up to a maximum principal amount of
$33,000,000 and $30,000,000 at December 31, 1998 and 1997, respectively.
The lines of credit bear interest rates at the option of the Company at
either 1) prime rate, which was 7.75% at December 31, 1998, or 2) LIBOR,
which was 5.06% at December 31, 1998, 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 in February 2000.
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.
The Company was in violation of certain covenants with a lender as of December
31, 1998; however, these violations have been waived by the lender through
January 1, 2000.
F-14
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Pledged Assets and Debt - Continued
Aggregate maturities required on long-term debt as of December 31, 1998 are due
in future years as follows:
Fiscal Years Ending
-------------------
1999 $ 1,265,014
2000 18,707,863
2001 1,114,798
2002 2,377,988
2003 990,142
Later years 6,914,923
-----------
$31,370,728
===========
Note 7. Accounts Payable
Accounts payable consist of the following at December 31, 1998 and 1997:
1998 1997
------------ ------------
Accounts payable, trade $ 13,889,388 $ 14,589,651
Commissions payable 1,577,470 1,795,944
Customer deposits 384,229 555,386
------------ ------------
$ 15,851,087 $ 16,940,981
============ ============
Note 8. Accrued Expenses
Accrued expenses consists of the following at December 31, 1998 and 1997:
1998 1997
------------ ------------
Payroll $ 1,618,197 $ 1,051,981
Insurance, including workers compensation 1,133,331 939,548
Sales and use taxes 65,679 186,015
Interest 137,424 31,281
Income tax payable 298,458 --
Other 680,829 829,975
------------ ------------
$ 3,933,918 $ 3,038,800
============ ============
F-15
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Stockholders' Equity
During the year ended December 31, 1996, the Company raised $18,764,358 through
the sale of 3,371,204 shares of common stock in three private placements to
accredited investors. Net proceeds, after commissions and expenses, for each
offering consisted of: (i) $10,352,131 from an offering of 1,333,889 shares of
its common stock at $9.00 per share completed in October 1996 (the "October
Offering"); (ii) $7,339,573 from an offering of 1,537,315 shares of its common
stock at $5.00 per share, completed in June 1996; and (iii) $1,072,654 from an
offering of 500,000 shares of its common stock at $2.50 per share completed in
January 1996. At December 31, 1996, $8,000,005 of the funds raised in the
October Offering was subject to certain potential rights of rescission in favor
of two investors, such that if a Registration Statement under the Securities Act
of 1933 registering certain shares held by the two investors was not declared
effective by January 15, 1997, the investors would have had the right to return
their shares to the Company for the original price of the shares; such a
Registration Statement was declared effective on January 6, 1997, and hence
these potential rights of rescission were never realized.
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.
In September 1996, the Company issued $4,000,000 of 10% Convertible Notes
pursuant to Regulation S to certain unrelated offshore investors. The notes were
payable on September 20, 1999 and were convertible at any time commencing
forty-one (41) days after issuance into shares of common stock. During the year
ended December 31, 1997, all $4,000,000 of Convertible Notes were converted into
722,375 shares of common stock. In connection with the 10% Convertible Notes,
certain unrelated offshore investors were given a contractual right to receive,
on the date of the conversion of the Notes into common stock, warrants to
purchase such number of shares of common stock equal to ten percent (10%) of the
number of common shares issued upon any such conversion. During the year ended
December 31, 1997, 72,239 warrants were issued due to the conversion of
convertible debt into common stock. The exercise price of the warrants was equal
to the amount per share at which the 10% Convertible Notes were converted into
common stock.
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 Company common stock from the two stockholders on December
1, 1997. The remaining options were not exercised and expired on December 15,
1997.
F-16
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Income Tax Matters
The components of income tax expense for the years ended December 31, 1998, 1997
and 1996 are as follows:
1998 1997 1996
------------- ------------- ------------
Current:
Federal $ 2,655,933 $ 3,266,645 $ 1,750,374
State 756,088 472,633 540,737
------------- ------------- ------------
3,412,021 3,739,278 2,291,111
------------- ------------- ------------
Deferred:
Federal 162,098 (151,017) (42,509)
State 23,716 116,462 (71,011)
------------- ------------- ------------
185,814 (34,555) (113,520)
------------- ------------- ------------
$ 3,597,835 $ 3,704,723 $ 2,177,591
============= ============= ============
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 for years
ended December 31, 1998, 1997 and 1996 due to the following:
1998 1997 1996
------------ ------------ ------------
Computed "expected" tax expense $ 3,021,374 $ 3,244,956 $ 1,962,269
Increase (decrease) in income taxes resulting
from:
Nondeductible expenses 150,210 82,051 33,158
Nontaxable income (23,874) -- --
State income taxes net of federal tax benefit 515,233 435,000 115,027
Change in valuation allowance (17,479) (19,224) 22,822
Tax credits (47,629) (5,396) (10,914)
Other -- (32,664) 55,229
------------ ------------ ------------
$ 3,597,835 $ 3,704,723 $ 2,177,591
============ ============ ============
Net deferred tax assets and liabilities consist of the following components as
of December 31, 1998 and 1997:
1998 1997
------------ ------------
Deferred tax assets:
Accounts receivable allowance $ 103,454 $ 56,711
Inventory allowances 547,446 418,028
Accrued expenses 773,041 564,398
Loss carryforwards -- 37,819
------------ ------------
1,423,941 1,076,956
Less valuation allowance 2,094 19,573
------------ ------------
1,421,847 1,057,383
Deferred tax liabilities:
Property and equipment (5,721,647) (4,922,383)
------------ ------------
$ (4,299,800) $ (3,865,000)
============ ============
F-17
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Income Tax Matters - 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, 1998 and 1997 as follows:
1998 1997
------------ ------------
Current assets $ 1,421,847 $ 1,057,383
Noncurrent liabilities (5,721,647) (4,922,383)
------------ ------------
$ (4,299,800) $ (3,865,000)
============ ============
Note 11. Mergers and Acquisitions
On May 31, 1996, the Company completed the acquisition of all the outstanding
stock of Charcoal Service Corporation ("CSC"), a competing carbon filter and
containment manufacturer, as well as the land and building on which CSC operates
that was owned by the stockholders of CSC. The total cost of acquisition, net of
cash acquired, was approximately $4,497,000, and up to 100,000 shares of the
Company's common stock, which are being held in escrow pending the evaluation of
certain future performance criteria. Upon achieving certain performance
criteria, the common stock released from escrow is valued at the market price on
the date of release and added to the goodwill associated with the purchase
transaction and amortized over the remaining amortization period of the
respective goodwill asset. The acquisition was funded by private placement of
the Company's common stock which was completed in June 1996. The effective date
of the acquisition was March 1, 1996, and the Company's financial statements
include the operating activities and assets of CSC from that date. As of
December 31, 1998, 86,000 CSC escrow shares with a market value of $656,938 were
released from escrow to the CSC sellers.
On June 15, 1996, the Company completed the acquisition of all the outstanding
stock of Air Seal Filter Housings, Inc. ("Airseal"), as well as the land and
building on which Airseal operates that was owned by the stockholders of
Airseal. The total cost of acquisition, net of cash acquired, was approximately
$2,270,000 and up to 150,000 shares of the Company's common stock, which are
being held in escrow pending the evaluation of certain future performance
criteria. Upon achieving certain performance criteria, the common stock released
from escrow is valued at the market price on the date of release and added to
the goodwill associated with the purchase transaction and amortized over the
remaining amortization period of the respective goodwill asset. The acquisition
was funded by a private placement of the Company's common stock completed in
June 1996. The effective date of the acquisition was May 31, 1996, and the
Company's financial statements include the operating activities and assets of
Airseal from that date. As of December 31, 1998, no shares have been released
from escrow to the Airseal sellers.
F-18
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Mergers and Acquisitions - Continued
On September 23, 1996, the Company acquired all the outstanding stock of
Precisionaire, Inc. ("Precisionaire"), a manufacturer of precision air filters,
containment systems and filtration equipment, as well as a tract of land and a
building on which Precisionaire operates that was owned effectively by the
majority stockholders of Precisionaire. The total cost of acquisition, net of
cash acquired, was approximately $25,205,000 with a post closing valuation
allowance of up to 786,885 shares of the Company's common stock, which were
placed in escrow, to be released only if certain performance criteria are met.
Upon achieving certain performance criteria, the common stock released from
escrow is valued at the market price on the date of release and added to the
goodwill associated with the purchase transaction and amortized over the
remaining amortization period of the respective goodwill asset. The acquisition
of Precisionaire, Inc. was funded by a private placement of the Company's common
stock, subordinated debentures and convertible debt closed on October 16, 1996,
a credit facility provided by NationsBank consisting of (1) a revolving credit
facility in the maximum principal amount of $25,000,000 and (2) a term loan
facility in the maximum principal amount of $6,500,000, and the assumption of
approximately $2,200,000 of debt associated with a mortgage on the purchased
land and building. The effective date of the acquisition for financial statement
purposes was September 30, 1996, and the Company's financial statements include
the operating activities and assets of Precisionaire from that date. As of
December 31, 1998, 547,956 Precisionaire escrow shares with a market value of
$5,037,938 were released from escrow to the Precisionaire sellers, and the
remainder of the escrow shares have expired.
On May 7, 1998, the Company agreed to acquire substantiall all of the
outstanding stock of Eco-Air Products, Inc. ("Eco-Air"). 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. 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, 1998, no shares have been issued or liability recorded
to the Eco-Air sellers as a result of achieving performance criteria.
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, and Precisionaire, CSC and Airseal had been acquired at
the beginning of the fiscal year ended December 31, 1996.
1998 1997 1996
------------- ------------- ------------
Revenues $ 181,530,726 $ 156,487,071 $128,221,517
============= ============= ============
Net income $ 5,341,880 $ 6,131,672 $ 5,678,195
============= ============= ============
Net income per common share, basic $ 0.21 $ 0.33 $ 0.38
============= ============= ============
Net income per common share, diluted $ 0.20 $ 0.27 $ 0.30
============= ============= ============
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. 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. Pro forma results of operations of the Company as though GFI had been
acquired as of January 1, 1996 are not presented because amounts of pro forma
differences are not significant.
F-19
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Commitments and Contingencies
Employment Agreements and Discretionary Bonuses:
The Company has employment agreements with its President and Chief Executive
Officer, its Chief Operating Officer/Vice President Finance/Chief Financial
Officer and its Vice President of Operations, which expire at various times from
March 2003 to December 2005. In addition to a base salary, the agreements
provide for a termination payment ranging from one hundred to two hundred and
fifty percent of their base compensation in the event the officers' employment
is terminated under various circumstances.
The Company pays discretionary cash bonuses to its employees. The amount of
these cash bonuses included in cost of goods sold and operating expenses totaled
approximately $296,000 for the year ended December 31, 1996. The Company did not
pay bonuses for the years ended December 31, 1998 and 1997.
Litigation:
The Company is involved in a dispute with a customer involving a trade account
receivable of approximately $2.6 million. The customer contends that certain
filters manufactured by the Company did not conform to specifications.
Independent testing and other information available to management indicate the
receivable should be fully collectible. However, it is reasonably possible the
estimate of collection may change in the near term.
Lease Commitments and Total Rental Expense:
Certain equipment and buildings are leased under agreements expiring between
1999 and 2003. The following is a schedule for the total rental commitments
under these leases as of December 31, 1998:
Fiscal Years Ending
- ------------------------
1999 $ 1,672,908
2000 1,065,484
2001 720,626
2002 237,041
2003 80,364
============
$ 3,776,423
============
The total rental expense charged to operations totaled approximately 2,000,000,
$2,300,000 and $465,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
Note 13. Employee Benefit Plans
During 1996, due to the Acquisitions, the Company had four defined contribution
401(k) salary reduction plans intended to qualify under section 401(a) of the
Internal Revenue Code of 1986, as amended; one for each of Flanders Filters,
Inc. ("FFI"), CSC, Airpure and Precisionaire (collectively, the "401(k) Plans").
The 401(k) plans allow employees to defer up to the lessor of a plan defined
limit ranging from 12 percent to 20 percent of their salary, depending on which
of the 401(k) the employees participate, or such amount as determined by the
U.S. Secretary of the Treasury, with the Company contributing an amount
determined by its Board of Directors each year. Effective January 1, 1997, the
Company combined the 401(k) Plans into the Flanders Corporation 401(k) Salary
Savings Plan ("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 $168,000, $145,000 and $44,000 to the Salary Savings
Plan and the 401(k) Plans for the years ended December 31, 1998, 1997 and 1996,
respectively.
F-20
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Employee Benefit Plans - Continued
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 $80,000 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 $1,160,000, $650,000 and $222,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
During the year ended December 31, 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
1,986,000 shares of Common Stock reserved for award under the LTI Plan. During
the years ended December 31, 1998, 1997 and 1996, the Company awarded options to
purchase 316,850, 95,600 and 236,520 shares of Common Stock under the LTI Plan,
respectively. See Note 16.
During the year ended December 31, 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 the years ended December 31, 1998 and 1997, the Company
awarded options to purchase 115,000 and 5,000, respectively, shares of Common
Stock under the 1996 Director Option Plan. See Note 16.
During the year ended December 31, 1996, the Company also awarded options to
purchase a total of 4,000,000 shares of its common stock to two of its officers
and directors and options to purchase a total of 900,000 shares of its common
stock to consultants to the Company. See Note 16.
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 income and
earnings per common share would have been reduced to the pro forma amounts shown
below for the years ended December 31, 1998, 1997 and 1996:
F-21
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Employee Benefit Plans - Continued
1998 1997 1996
------------ ------------ ------------
Net income:
As reported $ 5,288,568 $ 5,839,265 $ 3,593,788
Pro forma $ 4,962,085 $ 5,766,265 $ 765,682
Basic earnings per share:
As reported $ 0.21 $ 0.32 $ 0.27
Pro forma $ 0.20 $ 0.31 $ 0.06
Diluted earnings per share:
As reported $ 0.20 $ 0.27 $ 0.23
Pro forma $ 0.18 $ 0.26 $ 0.05
Weighted average fair value per option of options
granted during the year $ 1.40 $ 2.11 $ 0.89
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 1998, 1997 and
1996 were as follows: Dividend rate of 0%; average risk-free interest rate of
5.18%, 6.11% and 5.46%, respectively; average expected lives of 4.3, 2.5 and 2.4
years, respectively; and average expected price volatility of 40%, 40% and 20%,
respectively.
Note 14. Related Party Transactions and Balances
ABB Partnership, as landlord, and Flanders Airpure Products, a subsidiary of
FFI, as tenant, entered into a Lease Agreement, dated July 31, 1995. ABB
Partnership is controlled by the president of the Company. The lease, which is a
month to month lease of $10,938 per month, was entered into on terms believed by
Airpure to be fair and reasonable and generally reflective of market conditions.
The expense for this lease for the years ended December 31, 1997 and 1996
amounted to $41,607 and $84,375, respectively. In May 1997, the Company
purchased the property from ABB Partnership for $879,862.
LHB Realty, as landlord, and Precisionaire, as tenant, entered into a
year-to-year Lease Agreement. A former Director of the Company is the managing
partner of LHB Realty. The year-to-year lease was entered into on terms believed
by the Company to be fair and reasonable and generally reflective of market
conditions. The expense for this lease for the years ended December 31, 1997 and
1996 amounted to approximately $81,000 and $49,000, respectively. In June 1997,
the Company purchased the property from LHB Partnership for $910,000.
At December 31, 1998 and 1997, the Company had notes receivable of $4,263,409
and $1,861,005 due from various directors, officers and employees with interest
thereon varying between 6.31% and 8.75%, maturing at various dates to June 2003.
F-22
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash equivalents: The carrying amount approximates fair value at December 31,
1998 and 1997 because of the short maturity of those instruments.
Notes receivable, related party: Based on the investing rates currently
available to the Company from financial institutions with similar maturities,
the fair value of notes receivable, related party, approximates the carrying
value.
Notes payable, long-term debt and convertible debt: 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, 1998 and 1997.
Note 16. Stock Options and Warrants
During the year ended December 31, 1998, the Company granted options to purchase
316,850 shares of common stock under its LTI Plan at a weighted average exercise
price of $4.64 per share. The Company issued options to purchase 10,000 shares
under the Director Option Plan, at a weighted average exercise price of $8.50
per share. The Company also issued options to purchase 5,000 shares at a
weighted average exercise price of $8.50 per share. All options granted during
the year ended December 31, 1998 were non-qualified fixed price options, and
176,850 options were not exercisable at December 31, 1998.
The following table summarizes the activity related to the Company's stock
options and warrants for the years ended December 31, 1998, 1997 and 1996:
Shares Weighted Average
---------------------- Exercise Price Exercise Price
per Share per Share
Stock --------------------------------------------------
Warrants Options Warrants Options Warrants Options
------------------------------------------------------------------------
Outstanding at January 1, 1996 61,280 2,500,000 $ 2.50 $ 1.00 $ 2.50 $ 1.00
Granted 97,712 5,136,520 $ 2.50 - 9.63 $2.50 - 9.50 $ 5.29 $ 4.61
Exercised 96,280 13,200 $ 2.50 $ 2.50 $ 2.50 $ 2.50
Canceled or expired 37,712 -- $ 5.00 $ -- $ 5.00 $--
-------------------
Outstanding at December 31, 1996 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
===================
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
===================
Exercisable at December 31, 1996 25,000 7,623,320 $ 9.63 $1.00 - 9.50 $ 9.63 $ 3.43
===================
F-23
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16. Stock Options and Warrants - Continued
The warrants and options expire at various dates ranging from September 1999 to
December 2008. A further summary of information related to fixed options
outstanding at December 31, 1998 is as follows:
Weighted Average Weighted Average
Range of Exercise Number Remaining Contractual Exercise Price
Prices Outstanding / Exercisable Life Outstanding / Exercisable
- ----------------- ------------------------- ----------------------- ----------------------------
$1.00 2,300,000 / 2,300,000 1.88 Years $ 1.00 / 1.00
2.50 to 4.75 2,282,770 / 2,105,920 3.17 2.62 / 2.50
5.38 to 7.50 2,301,600 / 2,301,600 2.47 7.35 / 7.35
8.50 to 9.50 46,000 / 46,000 3.36 9.28 / 9.28
The weighted-average grant-date fair value of warrants granted was $8.40 and
$9.88 for the years ended December 31, 1997 and 1996, respectively.
F-24
Note 17. Earnings per Share
Following is information about the computation of the earnings per share data
for the years ended December 31, 1998, 1997 and 1996:
Per Share
Amounts
------------
Numerator Denominator Net Income
------------ ------------ ------------
Year Ended December 31, 1998
--------------------------------------------
Basic earnings per share, income available to
common stockholders $ 5,288,568 25,133,820 $ 0.21
============
Effect of Dilutive securities:
Options -- 1,949,177
Contingent shares -- 21,000
Warrants -- 2,927
------------ ------------
Diluted earnings per share, income available to common stockholders plus assumed
exercise of options and warrants and issuance of contingent
shares $ 5,288,568 27,106,924 $ 0.20
============ ============ ============
Year Ended December 31, 1997
--------------------------------------------
Basic earnings per share, income available to
common stockholders $ 5,839,265 18,508,763 $ 0.32
============
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, income available to common stockholders plus assumed
exercise of options and warrants, conversion of debt and
issuance of contingent shares $ 6,003,221 22,477,184 $ 0.27
============ ============ ============
Year Ended December 31, 1996
--------------------------------------------
Basic earnings per share, income available to
common stockholders $ 3,593,788 13,171,440 $ 0.27
============
Effect of Dilutive securities:
Options -- 2,378,008
Contingent shares -- 590,652
Convertible debt 148,110 227,086
Warrants -- 16,776
------------ ------------
Diluted earnings per share, income available to common stockholders plus assumed
exercise of options and warrants, conversion of debt and
issuance of contingent shares $ 3,741,898 16,383,962 $ 0.23
============ ============ ============
F-25
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17. Earnings per Share - Continued
The Company had options to employees to purchase approximately 524,000 and
40,000 shares of common stock at prices ranging from $3.94 to $9.50 per share
for the years ended December 31, 1998 and 1997, respectively. The Company had
warrants outstanding to purchase approximately 550,000 shares of common stock at
prices ranging from $8.15 per share to $14.73 per share during the years ended
December 31, 1998 and 1997, respectively. These options and warrants were not
included in the computation of diluted earnings per share for the years ended
December 31, 1998 and 1997, respectively, because effect of the inclusion of the
exercise of these options and warrants would have been anti-dilutive.
Note 18. Quarterly Financial Data (Unaudited)
Quarters Ended
---------------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
-------------- -------------- -------------- ------------
Net sales $ 30,685,093 $ 39,687,179 $ 49,669,341 $ 37,780,263
Gross profit 7,549,266 9,245,046 12,446,294 7,138,903
Operating income (loss) 1,961,823 3,467,364 3,561,164 (1,018,960)
Net income (loss) $ 1,359,001 $ 2,404,309 $ 2,190,490 $ (665,232)
============== ============== ============== ============
Basic earnings per share $ 0.05 $ 0.10 $ 0.09 $ (0.02)
============== ============== ============== ============
Diluted earnings per share $ 0.05 $ 0.09 $ 0.08 $ (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
============== ============== ============== ============
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
-------------- -------------- -------------- ------------
Net sales $ 27,866,841 $ 33,383,196 $ 39,232,931 $33,652,465
Gross profit 7,003,564 8,940,061 9,344,956 8,034,590
Operating income 1,260,961 2,829,274 3,217,132 1,859,652
Net income $ 795,264 $ 1,870,140 $ 2,126,063 $ 1,047,798
============== ============== ============== ===========
Basic earnings per share $ 0.05 $ 0.11 $ 0.12 $ 0.05
============== ============== ============== ===========
Diluted earnings per share $ 0.04 $ 0.09 $ 0.10 $ 0.04
============== ============== ============== ===========
Common stock prices:
High 12 9 7/8 8 1/4 9 1/4
============== ============== ============== ===========
Low 9 3/8 5 7/8 6 3/4 6 15/16
============== ============== ============== ===========
Note 19. New Accounting Standard
In 1998, the American Institute of Certified Public Accountants issued Statement
of Position 98-5, reporting on the Costs of Start-Up Activities. This statement,
which is effective for fiscal years beginning after December 15, 1998, requires
costs of start-up activities and organization costs to be expensed. The Company
has not determined the impact on its financial statements of adopting the new
accounting standard.
F-26
FLANDERS CORPORATION
FINANCIAL STATEMENT SCHEDULES
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 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, 1998, 1997 and 1996
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, 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
======== ======== ======== ========= ========
For the year ended December 31, 1996
Allowance for doubtful accounts $148,000 -- $318,903(3) $(120,423)(2) $346,480
Allowance for inventory value 60,000 -- 100,000(3) (115,000)(2) 45,000
Valuation allowance for deferred tax assets 15,975 38,797 3,404(3) (19,379)(2) 38,797
======== ======== ======== ========= ========
Total $223,975 $ 38,797 $422,307 $(254,802) $430,277
======== ======== ======== ========= ========
- ----------
(1) Uncollected receivables written-off, net of recoveries.
(2) Reduction in allowance.
(3) Increase due to acquisition of subsidiaries.
F-29