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, 2001
or
[ ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to ______________
Commission File Number 0-27958
FLANDERS CORPORATION
(Exact name of registrant as specified in its charter)
North Carolina 13-3368271
(State or other jurisdiction of ----------
incorporation or organization) (IRS Employer ID Number)
2399 26th Avenue North, St. Petersburg, FL 33734
------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (727) 822-4411
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, $.001 per share par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of April 12, 2002, the aggregate market value of the voting stock held
by non-affiliates of the registrant was $30,267,044.
As of April 12, 2002, the number of shares outstanding of the registrant's
common stock was 26,033,153 shares.
FLANDERS CORPORATION
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
PART I ......................................................................3
Item 1. Business ........................................................3
Item 2. Properties .....................................................11
Item 3. Legal Proceedings ..............................................12
Item 4. Submission of Matters to a Vote of Security Holders ............12
PART II ....................................................................13
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ............................................13
Item 6. Selected Financial Data ........................................14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................15
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk ...................................................24
Item 8. Financial Statements and Supplementary Data ....................25
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure .........................25
PART III ...................................................................25
Item 10. Directors and Executive Officers of the Registrant ............26
Item 11. Executive Compensation ........................................28
Item 12. Security Ownership of Certain Beneficial Owners
and Management ................................................30
Item 13. Certain Relationships and Related Transactions ................32
PART IV ....................................................................33
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K ...................................................33
SIGNATURES .................................................................36
FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants ....................F-2
Consolidated Balance Sheets ...........................................F-3
Consolidated Statements of Operations .................................F-4
Consolidated Statements of Stockholders' Equity .......................F-5
Consolidated Statements of Cash Flows .................................F-6
Notes to Consolidated Financial Statements ............................F-8
Report of Independent Certified Public Accountants on
Schedule ...........................................................F-27
Financial Statement Schedule..........................................F-28
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PART I
Item 1. Business
OVERVIEW
We design, manufacture and market air filters and related products, and are
focused on providing complete environmental control systems for end uses ranging
from controlling contaminants in residences and commercial office buildings
through specialized manufacturing environments for semiconductors and
pharmaceuticals. Currently, we believe we are one of the largest domestic
manufacturers of air filters, which are utilized by many industries, including
those associated with commercial and residential heating, ventilation and air
conditioning systems (commonly known as "HVAC" systems), semiconductor
manufacturing, ultra-pure materials, biotechnology, pharmaceuticals, synthetics,
nuclear power and nuclear materials processing. We also design and manufacture
much of our own production equipment to automate our processes in order to
decrease labor costs associated with our standard products. We also produce
glass-based air filter media for many of our products. Our customers include
Abbott Laboratories, The Home Depot, Inc., Motorola, Inc., Merck & Co., Inc.,
Upjohn Co., Wal-Mart Stores, Inc., Westinghouse Electric Corp., and several
large computer chip manufacturers.
The vast majority of our current revenues come from the sale of after-market
replacement filters, since air filters are typically placed in equipment
designed to last much longer than the filters.
GENERAL DEVELOPMENT OF BUSINESS
Flanders Corporation was incorporated on July 2, 1986 in the State of Nevada,
and is currently domiciled in North Carolina.
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 Securities
Exchange Act of 1934, including, among others, those statements preceded by,
following or including the words "believe," "expect," "anticipate" 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. 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.
STRATEGY
We have embarked on a program to increase earnings, and hence shareholder value,
by improving our operating efficiency. We are seeking to grow primarily through
the introduction of qualitatively superior new products to our major
marketplaces, primarily through existing customers.
INTRODUCE NEW PRODUCTS
In the last three years, we have focused our development efforts into
products which address the actual technical requirements of maintaining
clean air to promote health. Maintaining ultra-clean air in residential
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and commercial settings requires continuous and complete replacement of
"used" air contaminated by contact with hair, skin, carpet, solvents,
cigarette smoke and other common particle sources with air filtered through
a combination of pre-filters, High Efficiency Particulate Air (commonly
called "HEPA") filtration, and odor removal, as well as controlling all air
inlets. This typically requires upgraded and augmented blowers for central
or zoned HVAC systems necessary to push air through more effective filters,
additional filtration placed at building air inlets, and enough additional
HVAC capacity to generate "over-pressure" so that the majority of air leaks
push clean air out, rather than allow dirty air inside.
We have also been able to provide an upgrade path for government buildings,
large commercial office buildings and other public venues wishing to utilize
HEPA filtration as part of a program to "harden" buildings against
bioterrorist attacks.
Most currently available air filters for commercial, industrial and
residential use are primarily useful for protecting motors, coils and other
components from airborne grease condensation and other contaminants which
reduce the life and energy-efficiency of the HVAC equipment, and have little
or no effect on reducing airborne contamination which is harmful to humans.
In fact, standard pleated filters, even those with "high-MIRV" ratings,
offer no appreciable benefit in terms of better air quality for the
inhabitants than the cheapest spun-glass filters. These pleated filters are
accompanied by increased heating and cooling costs caused by the decreased
amount of air flowing through the system, and decreased efficiency, which
may be accompanied by more frequent equipment breakdowns as equipment is
stressed by attempting to push higher volumes of air through "tighter"
filters. Our new products are designed to offer end-users substantial and
measurable benefits to health and productivity through substantially cleaner
air, and are properly engineered to avoid detrimental effects on equipment
life.
Comprehensive Indoor Air Cleaners for Residences. During 2000, we completed
the development of two lines of high-capacity indoor air cleaners intended
for residential use. In 2001, we continued limited-scale testing of these
products in residential and industrial settings. Airia Portable Room Air
Cleaners are stand- alone units which deliver ultra-clean air to a specific
area of a residence; and Airia Wholehouse Electronic Air Cleaners are
in-duct units installed as an integral part of a home's forced air heating
and cooling systems, which deliver ultra-clean air throughout an entire
house. The stand-alone units, to be offered through retailers and wholesale
distributors, offer several advantages over competing units including:
o High-speed blowers which reduce the problems experienced by
competing models which recirculate already-clean air through a small
volume of space, effectively providing clean air only to areas as small
as two feet square;
o A complete selection of high-end air filtration technologies,
including, depending on the model selected, HEPA filtration to remove
microscopic particles, pre-filters to remove large particles and extend
the life of the HEPA cartridges, carbon filtration to remove odors, and
electrostatic filtration to filter smoke and microscopic particles
without substantially obstructing air flow.
The in-duct units may be sold as home improvement projects through
retailers, HVAC wholesalers and specialty distributors, and will deliver
ultra-clean conditioned air to an entire residence through existing
forced-air heating or cooling systems. Both product lines will require users
to regularly purchase and install replacement filters.
Complete and Market Security Products for Government Buildings and
Commercial Office Buildingss. In 2001, we adapted our containment control
technology to be used in "hardening" government facilities, large commercial
office buildings and public venues against anthrax attacks and other
bioterrorist incidents. While these systems do not offer complete protection
against bioterrorist attacks, any credible multi-layered defense requires
HEPA filtration and related technologies, adapted to the unique requirements
of these facilities. Marketing for these products will include adapted sales
literature, technical seminars and electronic multimedia presentations.
Offer Indoor Air Quality Diagnosis and Remediation Services. During 1999, as
part of the acquisition of the Tidewater group of companies, we acquired a
small engineering firm specializing in monitoring air quality using
automated real-time data collection techniques over a period of months,
diagnosing any potential indoor air quality problems and suggesting
remediation programs. We believe we will be able to
4
leverage this expertise into value-added sales to our existing industrial
and commercial customers, and the filter sales and service companies which
supply them, thus increasing our revenues by adding value-added consulting
and monitoring services.
IMPROVE OPERATING EFFICIENCY
Centralize Overhead Functions. During 2001, we restructured our sales force
into four market-centered groups, each focusing on a different type of
customer, providing a consistent national sales team, eliminating
overlapping territories and duplication of literature while centralizing
travel coordination and adding focus to our sales efforts. We are continuing
to centralize and eliminate duplication of efforts between subsidiaries in
the following areas: purchasing, production planning, shipping coordination,
accounting and personnel management.
Rationalize West Coast Operations. We expect to complete the rationalization
of our West Coast operations, including the movement of the bulk of our
manufacturing capacity from plants in Nevada and California into Tijuana,
Mexico and Utah, by the end of September 2002.
Strategic Acquisitions. We continue to search for opportunities to acquire
new businesses, although our criteria for evaluating these businesses has
moved toward acquiring regional distributors and resellers, and away from
acquiring competing air filter manufacturers. We are looking for potential
acquisitions with the following characteristics: (i) dominant positions in
local or regional markets, (ii) a stable customer base distinct from our
existing customers, and (iii) a history of consistent and healthy earnings.
Acquiring resellers and distributors with these characteristics allows us to
increase operating margins by removing at least one layer of "middlemen,"
and their compounding mark-ups and commissions from the sales and
distribution process, allowing us to charge higher prices while maintaining
competitive pricing with end users. At the present time, we do not have any
binding agreements with respect to future acquisitions.
INCREASE MARKET SHARE
Use Facilities Located Throughout the United States to Increase Market
Share. Through acquisition and the establishment of new plants, we have
placed facilities within one day's over-the-road shipping of most major
population centers in the United States. We believe this ability to
regionalize production and distribution has improved our business in several
ways: (i) Decrease cost of sales by reducing the average distance between
our plants and our customers, and hence decrease the cost of outbound
freight; (ii) increase responsiveness by decreasing the average time
required to ship products to customers; and (iii) increase our share of
national accounts' total business by having manufacturing facilities in
closer proximity to customers' regional distribution centers. The ability to
service all major population centers with regional manufacturing centers is
critical for our business, allowing us to compete on price against less
broadly based competitors without sacrificing margins, as well as the
ability to respond more rapidly than most of our competition.
Continued Emphasis on Quality and Performance. A continued emphasis on
product quality and on-time shipments has allowed us to capture market share
serving several industries in recent years.
Utilize High Efficency Production and Logistics Systems to Dominate Niche
Markets. During the past several years we have invested heavily in upgrading
our production facilities, scheduling capacity, and logistics management
capabilities. We intend to continue using these advantages to capture market
share in niche markets with specialized products tailored to their exact
requirements. Many end users with specialized air filtration needs are
currently "making do" with standard products. It has been our experience
that minor changes made to our standard products to meet these requirements
may offer significant operational savings to these end users, although the
actual filters cost more.
AIR FILTER MARKET BACKGROUND
The air filtration market is mature, with market growth driven by a gradual
trend toward higher efficiency filters for residential, commercial and
industrial applications.
5
According to the McIlvaine Company, a leading industry analyst, concerns about
anthrax and other microbes will accelerate this trend over the next five years
as commercial buildings in large U.S. cities upgrade their ventilation systems
to install more efficient filters. They forecast that the world market for air
filters will grow to approximately $5 billion in 2005, up from $3.5 billion in
2000, with the United States being the largest market for air filters. Other
growth drivers include an increasing propensity towards using higher-performance
filters in commercial and residential spaces instead of current low-efficiency
models, and the use of HEPA filters in new applications.
Management believes the forces driving the air filtration market are evolving,
beginning in the past decade and continuing for the next several years, from
preserving machinery and equipment to maintaining indoor air quality. In
addition, we expect many high-growth technology industries to increase their
reliance on air filters to remove microscopic and gaseous contaminants from
sensitive manufacturing processes associated with semiconductor manufacturing,
pharmaceutical production, ultra-pure materials manufacturing and biotechnology.
Companies are devoting resources to air filtration products to enhance process
efficiency and employee productivity.
Air filters are used in many different applications, including the following:
o Commercial and Residential HVAC Systems. Replacement filters are an
essential requirement for the efficient operation of commercial and
residential HVAC systems.
o Residential air cleaners. Stand-alone air cleaners which produce
ultra-clean air in a defined area are also gaining in popularity among
allergy sufferers and asthmatics, although follow-up sales of
replacement filtration cartridges have been limited.
o General Industrial. Air filters are used in standard industrial
settings to provide cleaner work environments; for example, auto makers
use air filtration systems to remove "oil mist" contaminants from the
air in their plants, and industrial paint booth users utilize air
filtration to remove paint particles from the air.
o Semiconductors. HEPA and carbon filters are necessary to meet the
increasingly stringent manufacturing environment requirements of
semiconductor manufacturers, where microscopic airborne contaminants can
ruin microchips during production, having a large impact on
manufacturing yield and profitability. Carbon filters are also being
increasingly used to filter gaseous contaminants from semiconductor
manufacturing areas.
o Pharmaceuticals. Pharmaceutical companies are increasingly using
cleanrooms to prevent cross- contamination between different products
and different lots of the same product being manufactured at the same
facility. The increasing use of cultured microbes for drug production is
also expected to increase demand for high-end containment environments.
o Biotechnology. Containment systems for the manipulation of viruses and
bacteria using genetic engineering techniques are critical to the
biotechnology industry.
o Nuclear Power and Materials Processing. Filtration systems are
necessary to radioactive containment procedures for all nuclear
facilities.
RECENT TRENDS
Recent trends in the air filter industry, as well as changes in laws and
governmental regulations during the past five years, all encourage an increased
awareness of the benefits of the use of air filtration products. Some of these
trends and changes are:
Security Initiatives to Counter Terrorist Threats. According to the
McIlvaine Company, initiatives to "harden" buildings against bioterrorist
attacks and other security initiatives will result in many governmental and
commercial facilities upgrading their HVAC systems to incorporate HEPA
filters and other types of upgraded air control systems.
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Weak Economy and Semiconductor Downturn. Sales of air filtration products
for semiconductor facilities, historically a major market, are expected to
be slow again during 2002, with most analysts pushing recovery for this
sector out to at least 2003. The current weak economy is also expected to
have a dampening effect on sales of all of our products.
Indoor Air Quality and Health. We believe there is an increase in public
concern regarding the effects of Indoor Air Quality on employee productivity
and health, as well as an increase in interest in standards for detecting
and solving IAQ problems. For example, the American Society of Heating
Refrigeration and Air- Conditioning Engineers (ASHRAE) has recently
established certain minimum standards for ventilation and indoor air quality
for commercial and industrial settings. The World Health Organization has
recently been studying the effects of air quality on human health, including
widely publicized epidemiological studies indicating that airborne
contaminants kill more people than automobile accidents.
Lack of Legitimate Competing Products. We believe there is an increase in
public and regulatory frustration with spurious and misleading claims made
by other manufacturers in the air filtration industry. This trend is
evidenced by recent rulings by the Federal Trade Commission disallowing
claims of "cleaning the air in an entire room" made by several manufacturers
of "area HEPA filtration systems" as well as medical benefits claimed by
manufacturers of "passive electrostatic" washable synthetic filters.
Hazardous Working Environments. Several studies recognize that air quality
in working facilities has an impact upon human health. OSHA regulations, in
particular, have made IAQ a consideration in a wide variety of industries,
ranging from those industries using spray-paint booths to those using
automobile assembly lines.
Sick Building Syndrome. Sick Building Syndrome, which is characterized by
lethargy, frequent headaches, eye irritation and fatigue, has recently been
shown to be a valid concern, and is a major design consideration in new and
renovated commercial and industrial buildings. The identification of "sick"
buildings, and solutions for mitigation, involve complex issues which need
to be examined on a case-by-case basis by qualified engineers; solutions
typically include improving the HVAC and filtration systems of the "sick"
buildings.
Hazardous Emission Regulation and Resultant Liability. Electrical utilities
became subject to emissions regulations under Title 4 of the Clean Air Act.
In addition, OSHA's Hazardous Communication Standard, the Toxic Release
Inventory and community "right to know" regulations regarding liability for
claims made by employees or neighboring communities have made many
industries, in particular the chemical and semiconductor industries, more
aware of clean air regulations. As a result, these industries have taken
voluntary steps, including the utilization of air filtration systems, to
bring emissions of potentially hazardous substances into line with
regulatory standards.
MARKETING
Much of our marketing effort consists of personal visits to customers and
distributors through an extensive tiered network of contract salespeople.
Periodic visits are enhanced by mass mailings announcing new products,
participation in trade shows for exposure and lead generation, technical
articles and advertisements in trade periodicals, and a newly redesigned catalog
containing all Flanders products. During 2000, we restructured and unified all
of our product offerings, so that each subsidiary no longer generates its own
marketing literature. During 2001, we continued this idea by forming groups
focused on: foremarket sales, generally consisting of sales of products for new
or upgraded facilities; retail sales, generally consisting of sales through
retailers for use in residences and small businesses; air filter sales and
service, generally consisting of sales to air filter service companies, who
maintain industrial and commercial HVAC systems; and after-market sales,
generally consisting of sales to wholesalers and distributors for use by
industrial end users.
Besides developing new sales leads and contacts, we are also focused on
increasing the effectiveness of our existing distributors and contract salesmen,
by allowing them to offer our products as a complete "single-source" for air
filtration products.
7
PRODUCTS
We design, manufacture and market a broad range of air filters and related
products, including:
o Residential heating and air conditioning filters, typically sold
through retailers under the Flanders~Precisionaire brand name.
o Residential air cleaners, developed in 2000, which offer a range of
different filtration types ranging from single-room HEPA units which
clean the air in a room to near-cleanroom levels to in-duct
electrostatic precipitators which remove large quantities of airborne
contaminants from entire residences without negatively impacting the
efficiency of HVAC systems.
o Industrial specialty filters which fall under specifications which are
categorized by efficiency ratings established by ASHRAE, used in a wide
variety of industries, including paint facilities, automobile factories,
chemical treatment plants, mushroom farms, coal mines, oil refineries
and power plants.
o Commercial and industrial filters for use in office and general
manufacturing environments, typically sold through wholesalers and
distributors.
o High Efficiency Particulate Air (HEPA) filters (at least 99.97%
efficient) in various grades, for use in semiconductor facilities,
nuclear containment vessels, disease containment facilities, and other
critical applications.
o Absolute Isolation Barriers which are customized stand-alone units,
typically manufactured of stainless steel, used in various industries
which require absolute control over contaminants, atmospheric
composition and containment.
o Carbon filters, both in bonded panels and activated charcoal beds,
used to remove gaseous contaminants, odors and toxic chemical vapors in
various commercial and industrial applications.
o Specialized air filter housings, for use in multi-stage filtration
applications.
o Other related products, including ductwork and equipment cleaning
chemicals, custom air handlers and specialized filter housings.
MANUFACTURING
We manufacture air filters, housings, Absolute Isolation Barriers and related
equipment at several facilities in the United States and Mexico, which range in
size from 18,000 square feet to approximately 400,000 square feet. The major
plants are:
o Twelve separate manufacturing and warehousing facilities located in
Washington, North Carolina; Bartow, Florida; Terrell, Texas; Louisville,
Kentucky; Salt Lake City, Utah; Henderson, Nevada; Momence, Illinois;
Smithfield, North Carolina; San Diego, California; Tijuana, Mexico;
Stafford, Texas; and Auburn, Pennsylvania, produce a broad range of
HEPA, commercial, residential and industrial filters.
o One facility 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, including products used in
the production and containment of potentially dangerous biologically
engineered microorganisms.
In addition, we design and manufacture much of our automated production
equipment, as well as glass-based media used in many of our products.
Our manufacturing operations are subject to periodic inspection by regulatory
authorities. Because of the nature of some of our products, these agencies
include, in some cases, the Department of Energy, 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.
8
Each of our manufacturing facilities utilizes testing and design strategies
appropriate to the products manufactured. These range from standard statistical
process quality controls for residential replacement filters to individual
testing and certification with patented proprietary particle scanning
technologies for each laminar-grade HEPA filter. We believe that our ability to
comprehensively test and certify HEPA filters is a competitive advantage.
SOURCE AND AVAILABILITY OF RAW MATERIALS
Our principal raw materials are cardboard, fiberglass fibers, recyclable
waste-glass, extruded glass, sheet metal, extruded aluminum, adhesives, resins
and wood. All of these raw materials are readily available in sufficient
quantities from many suppliers.
COMPETITION
The air-filtration market is fragmented and highly competitive. There are many
companies which compete in our market areas. We believe that the principal
competitive factors in the air filtration business include product performance,
name recognition, price, product knowledge, reputation, customized design,
timely delivery and product maintenance. We believe that we compete favorably in
all of these categories. Competitors include successful companies with
resources, assets, financial strength and market share which may be greater than
ours. Major competitors include American Air Filter International, Farr Company,
HEPA Corporation, Purolator Products Air Filtration Company, Donaldson Company,
Inc. and Clark Corporation.
PATENTS, TRADEMARKS AND LICENSES
We currently hold 19 patents relating to filtration technology, including
patents relating to HEPA filters and fabrication methods, filter leak testing
methods, laminar flow cleanrooms, components of isolation barriers, and the
baking soda impregnation method used in the manufacture of Arm & Hammer Pleated
Filters.
We have obtained and own the following federal trademark registrations:
PRECISIONAIRE?, EZ FLOW?, SMILIE?, AIRVELOPE?, CHANNEL-CEIL?, CHANNEL-HOOD?,
PUREFORM?, ECONO-CELL?, GAS- PAK?, PUREFRAME?, DIMPLE PLEAT?, BLU-JEL?, VLSI?,
CHANNEL-SEAL-ADAPTER?, SUPERFLOW?, FLANDERS?, CHANNEL-WALL?, SUPERSEAL?,
AIRPURE? and PURESEAL?. The Company also has applied for federal trademark
protection for the following marks: FLANDERS ABSOLUTE ISOLATIONTM,
FLANDERS/CSCTM, TECH-SORBTM and FUTUREFLOTM. Although management believes that
the patents and trademarks associated with our various product lines and
subsidiaries are valuable, we do not consider any of them to be essential to our
business.
We currently license some of our products to foreign specialty HVAC and ASHRAE
filter manufacturers who produce products under their own name and with their
own identifying labels.
CUSTOMERS
We are not dependent upon any single customer. One customer, Wal-Mart Stores,
Inc., accounted for 8%, 9%, and 10% of net sales during 2001, 2000 and 1999,
respectively. Home Depot, Inc., accounted for 16%, 13% and 12% of net sales
during 2001, 2000 and 1999, respectively. No other single customer accounted for
10% or more of net sales during the past three years. Other significant
customers include Abbott Laboratories, Motorola, Inc., Intel Corporation, Merck
& Co., Inc., Upjohn Co., Westinghouse Electric Corp., and several U.S.
government agencies.
BACKLOG
We had approximately $15.5 million of firm backlog on December 31, 2001,
compared to $18.4 million on December 31, 2000. Firm backlog includes orders
received and not begun and the unfinished and unbilled portion of special
orders. 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. The difference in backlog between December 31, 2001 and 2000
is not considered to be meaningful, and is within the normal range of
week-to-week variation. All backlog at December 31, 2001, is expected to be
shipped by the end of the second quarter of 2002.
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EMPLOYEES
The Company employed 1,840 full-time employees on December 31, 2001; 1,512 in
manufacturing, 32 in development and technical staff, 61 in sales and marketing,
and the remaining 235 in support staff and administration. The Company believes
that its relationship with its employees is satisfactory. Manufacturers'
representatives are not employees of the Company.
RESEARCH AND DEVELOPMENT
Our research and development is focused in the following areas:
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; the Company's in-house air cleaners are an
application of this type of research.
GOVERNMENT REGULATION
Our operations are subject to certain federal, state and local requirements
relating to environmental, waste management, health and safety regulations. We
attempt to operate our business in compliance with all applicable government,
environmental, waste management, health and safety regulations and we believe
that our products meet standards from applicable government agencies. There can
be no assurance that future regulations will not require us to modify our
products to meet revised safety or other requirements.
SEASONALITY
Historically, our business has been seasonal, with a substantial percentage of
sales occurring during the second and third quarters of each year. In addition,
demand for our general commercial and industrial products appears to be highly
influenced by the weather, with higher sales generally associated with extremes
of either hot or cold weather, and lower sales generally associated with
temperate weather. Because of these seasonal and weather-related demand
fluctuations, quarter-to-quarter performance may not be a good predictor of
future results.
EXPORT SALES
We sell products for and to end users outside of the United States through
domestic specialty cleanroom contractors. These sales are counted as domestic
sales. We also sell products through foreign distributors, primarily in Europe,
and through Flanders International, Ltd., a wholly-owned subsidiary located in
Singapore which sells to customers in the Far East. Sales through foreign
distributors and Flanders International amounted to less than 5% of net sales
for each of the last three fiscal years. Assets held outside the United States
are negligible.
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Item 2. Properties
The following table lists our principal facilities. Management believes that
these properties are adequate for its current operational needs, but we may at
some point relocate, reorganize or consolidate various facilities for reasons of
operating efficiencies, or may open new plants to take advantage of perceived
new economic opportunities.
Approximate Floor Monthly
Principal Facility Location Space (sq. ft.) Expense Lease/Type
----------------------- -------------------- ----------------- --------- ----------
Manufacturing and Washington, North 251,000 $ 13,775 Owned(1)
office facility Carolina
Manufacturing, service Bath, North Carolina 44,282 N/A Owned
and office facility
Manufacturing plant Bartow, Florida 175,000 29,121 Owned(1)
Manufacturing plant Terrell, Texas 168,000 29,858 Owned(1)
Manufacturing plant Auburn, Pennsylvania 91,000 7,097 Owned(1)
Office space and St. Petersburg, 18,000 N/A Owned
headquarters Florida
Office space and Richmond, VA 10,000 2,200 Leased
Warehouse
Office space and Virginia Beach, VA 25,000 6,850 Leased
Warehouse
Warehouse and Henderson, Nevada 100,000 26,000 Leased
distribution center
Manufacturing plant Momence, Illinois 210,000 44,062 Owned(1),(2)
Sales office and Singapore 10,000 3,350 Leased
warehouse
Manufacturing and Smithfield, North 138,000 27,520 Leased(4)
warehouse Carolina
Manufacturing plant Smithfield, North 399,090 N/A(3) Owned
Carolina
Manufacturing and Stafford, Texas 18,000 N/A Owned
office facility
Manufacturing plant Salt Lake City, Utah 170,000 N/A Owned
Manufacturing plant Louisville, Kentucky 500,000 N/A Owned(1)
Manufacturing plant San Diego, California 97,000 37,697 Leased
and office facility
Manufacturing plant Tijuana, Mexico 118,000 42,800 Leased
(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, 2001, the interest rate on the bond was 5.14%.
(4) This building is owned by a partnership consisting of two of the Company's
officers and directors.
11
Item 3. Legal Proceedings
We have sued Conap (U.S. District Court for the Eastern District of North
Carolina, Case No. 4-99-CV-93-H(3)), a supplier of urethane sealant used in some
of our HEPA filtration products, for supplying a sealant which did not meet
specifications for use in semiconductor facilities. The amount and probability
of any settlement or award is unknown at this time.
We are involved in a dispute with a benefit plan administrator (U.S. District
Court, Middle District of Florida, Tampa Division, Case No. CIV 1971-T-17-F,
Liberty Mutual v. Flanders Corporation et al). Liberty Mutual was the Workers'
Compensation administrator and stop-loss insurer for some of the Company's
subsidiaries. They have alleged that they are entitled to be reimbursed for
certain costs incurred in administering various insurance claims. We have
counter-sued, claiming that Liberty Mutual was negligent in its duties as
administrator of our claims, that it made payments on our behalf which were
specifically disallowed, that they refused to follow instructions given to them
by us, that they failed to meet minimal acceptable standards for administering
claims, and that such failures constituted a material dereliction of their
responsibilities as administrator, as well as other claims related to
malfeasance and negligence. In addition, we claimed Liberty Mutual charged
certain administrative fees over and above the actual costs incurred. The amount
and probability of any settlement or award related to this litigation is unknown
at this time. Among the issues being considered is the matter of currently
unresolved workers' compensation claims whose estimate of potential loss may
change as a result of this litigation. While management believes it has reserved
an adequate amount for settlement of these claims, there is no guarantee that
the Company's actual liability will not exceed its current estimate.
Accordingly, these matters, if resolved in a manner different from management's
estimate, could have a material effect on the operating results or cash flows in
the future.
Additionally, from time to time, we are a party to various legal proceedings
incidental to our business. None of these proceedings are material to our
business, operations or financial condition.
In the opinion of the Company, although the outcome of any legal proceeding
cannot be predicted with certainty, the ultimate liability of the Company in
connection with currently known legal proceedings will not have a material
adverse effect on the Company's financial position, but could be material to the
results of operations in any one future accounting period.
Item 4. Submission of Matters to a Vote of Security Holders.
We held our annual meeting of shareholders on December 28, 2001. During the
meeting, holders of 18,187,843 shares, representing approximately 70% of
26,033,153 shares outstanding on the record date, attended either in person or
by proxy. Holders of 18,170,895 shares (approximately 99.9% of shares present)
voted to elect as members of the Board of Directors each of Robert R. Amerson,
Steven K. Clark, J. Russell Fleming and Linwood Allen Hahn; holders of 10,244
shares chose to vote against the election of each of the above-named directors;
holders of 6,704 shares chose to abstain from voting. As a result, Messrs.
Amerson, Clark, Fleming and Hahn were elected for an additional one-year term as
directors.
12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
PRICE RANGE OF COMMON STOCK
The Company's common stock is listed on the Nasdaq National Market System under
the symbol "FLDR." The following table sets forth, for the periods indicated,
the high and low closing prices of the Company's common stock as reported by the
Nasdaq National Market System. Such quotations do not include retail mark-ups,
mark-downs, or other fees or commissions.
High Low
--------- ---------
2001
Fourth Quarter ended December 31, 2001 $ 2.72 $ 1.56
Third Quarter ended September 30, 2001 2.45 1.61
Second Quarter ended June 30, 2001 2.15 1.16
First Quarter ended March 31, 2001 3.69 1.30
2000
Fourth Quarter ended December 31, 2000 $ 2 19/32 $ 1 3/8
Third Quarter ended September 30, 2000 3 11/16 1 5/8
Second Quarter ended June 30, 2000 4 1/8 1 5/16
First Quarter ended March 31, 2000 4 1/8 2 9/16
1999
Fourth Quarter ended December 31, 1999 $ 3 1/8 $ 2 1/4
Third Quarter ended September 30, 1999 3 3/8 2 3/8
Second Quarter ended June 30, 1999 3 13/16 2 1/2
First Quarter ended March 31, 1999 5 1/8 2 9/16
APPROXIMATE NUMBER OF EQUITY SECURITYHOLDERS
On April 12, 2002, Flanders' common stock closed at $1.79. As of April 12, 2002,
there were approximately 350 holders of record of the Company's common stock.
The Company estimates there are approximately 2,500 beneficial owners of the
Company's common stock.
DIVIDENDS
We have not declared or paid cash dividends on our common stock. Currently, we
intend to retain any future earnings to finance the growth and development of
the business, therefore we do not anticipate paying cash dividends in the
foreseeable future. In the future, the Board of Directors may decide to change
this policy, based upon its evaluation of our earnings, financial position,
capital requirements and any factors the Board of Directors may consider to be
relevant. Under the terms of our revolving credit line we cannot pay dividends
without the prior written consent of the bank. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" and "Notes to Consolidated Financial Statements - Note H."
SALES OF UNREGISTERED SECURITIES
The Company did not sell any unregistered common shares or other unregistered
securities during 2001, 2000 or 1999.
13
Item 6. Selected Financial Data
The following financial data is an integral part of, and should be read in
conjunction with, the "Consolidated Financial Statements" and notes thereto.
Information concerning significant trends in the financial condition and results
of operations is contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SELECTED HISTORICAL OPERATIONS DATA (In thousands, except per share data)
Year Ended December 31,
---------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
Net sales $ 189,077 $ 194,072 $ 171,392 $ 154,765 $ 131,899
Gross profit 39,783 36,917 43,975 37,660 32,880
Operating expenses 36,311 40,733 33,802 28,108 23,510
Operating income (loss) from continuing
operations 3,471 (3,816) 10,172 9,551 9,370
Earnings (loss) from continuing operations
before income taxes 1,489 (6,940) 10,174 10,991 9,850
Provision (benefit) for income taxes 930 (2,443) 4,671 4,450 3,751
Earnings (loss) from continuing operations 559 (4,497) 5,503 6,541 6,098
Loss from discontinued operations (175) (2,702) (2,686) (1,253) (259)
Net earnings (loss) $ 384 $ (7,199) $ 2,817 $ 5,289 $ 5,839
========== ========== ========== ========== ==========
Earnings (loss) per share from continuing
operations
Basic $ 0.02 $ (0.18) $ 0.22 $ 0.26 $ 0.33
========== ========== ========== ========== ==========
Diluted $ 0.02 $ (0.18) $ 0.21 $ 0.24 $ 0.28
========== ========== ========== ========== ==========
Net earnings (loss) per share
Basic $ 0.01 $ (0.28) $ 0.11 $ 0.21 $ 0.32
========== ========== ========== ========== ==========
Diluted $ 0.01 $ (0.28) $ 0.11 $ 0.20 $ 0.27
========== ========== ========== ========== ==========
Weighted average common shares outstanding
Basic 26,036 25,298 25,344 25,134 18,509
========== ========== ========== ========== ==========
Diluted 26,038 25,298 26,525 27,107 22,477
========== ========== ========== ========== ==========
SELECTED HISTORICAL BALANCE SHEET DATA (In thousands)
December 31,
---------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
Working capital $ 13,949 $ 13,644 $ 45,421 $ 47,972 $ 55,179
Total assets 180,255 180,222 165,642 167,780 145,881
Long-term obligations(1) 52,045 49,370 32,328 31,406 14,771
Total shareholders' equity 96,879 98,151 107,817 109,603 106,207
____________________
1 Long-term obligations include long-term notes payable, long-term debt,
including current maturities, convertible debt, and committed capital.
14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with "Item 6 - Selected
Financial Data" and our "Consolidated Financial Statements," all included
elsewhere herein. The information set forth in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" includes
forward-looking statements that involve risks and uncertainties. Many factors,
including but not limited to those discussed below under "Factors That May
Affect Future Results" could cause actual results to differ materially from
those contained in these forward-looking statements.
OVERVIEW
Flanders is a full-range air filtration product company engaged in designing,
manufacturing and marketing high performance air filtration products and certain
related products and services. Our focus has evolved from expansion through
acquisition to increasing the quality and efficiency of our high-volume
replacement filtration products, and using these benefits to compete more
effectively in the marketplace. We also design and manufacture much of our own
production equipment as well as glass-based media for many of our air filtration
products.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The following discussion and analysis is based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of our
financial statements requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses, and assets and liabilities
during the periods reported. Estimates are used when accounting for certain
items such as revenues, allowances for returns, early payment discounts,
customer discounts, doubtful accounts, employee compensation programs,
depreciation and amortization periods, taxes, inventory values, insurance
programs, and valuations of investments, goodwill, other intangible assets and
long-lived assets. We base our estimates on historical experience, where
applicable, and other assumptions that we believe are reasonable under the
circumstances. Actual results may differ from our estimates under different
assumptions or conditions.
We believe that the following critical accounting policies affect our more
significant judgments and estimates used in preparation of our consolidated
financial statements. We maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make required payments.
We base our estimates on the aging of our accounts receivable balances and our
historical write-off experience, net of recoveries. If the financial condition
of our customers were to deteriorate, additional allowances may be required. We
value our inventories at the lower of cost or market. We write down inventory
balances for estimated obsolescence or unmarketable inventory equal to the
difference between the cost of the inventory and the estimated market value
based upon assumptions about future demand and market conditions. If actual
market conditions are less favorable than those projected by management,
additional inventory write-downs may be required. Our insurance costs are
developed by management evaluation of the likelihood and probable amount of
potential claims based on historical experience and evaluation of each claim.
Changes in the key assumptions may occur in the future, which would result in
changes to related insurance costs. We also have recorded goodwill and
intangible assets related to previous acquisitions. We assess impairments
associated with these assets when we determine that the undiscounted expected
future cash flows decline below their carrying value. Poor operating performance
of the business activities related to goodwill, other intangible assets, or
long-lived assets could result in future cash flows of these assets declining
below carrying values.
15
RESULTS OF OPERATIONS
2001 Compared to 2000
The following table summarizes the Company's results of operations as a
percentage of net sales for 2001 and 2000 (Dollar amounts in thousands).
2001 2000
------------------ ------------------
Net sales $ 189,077 100.0% $ 194,072 100.0%
Gross profit 39,783 21.0 36,917 19.0
Operating expenses 36,311 19.2 40,733 21.0
Operating income (loss) from
continuing operations 3,471 1.8 (3,816) (2.0)
Earnings (loss) from continuing
operations before income taxes 1,489 0.8 (6,940) (3.6)
Provision (benefit) for income taxes 930 0.5 (2,443) (1.3)
Earnings (loss) from continuing operations 559 0.3 (4,497) (2.3)
Loss from discontinued operations (175) (0.1) (2,702) (1.4)
Net earnings (loss) $ 384 0.2 $ (7,199) (3.7)
Net Sales: Net sales for 2001 decreased by $4,995,000 or 2.6%, to
$189,077,000, from $194,072,000 for 2000. The decrease in net sales was due
to a large and unexpected drop-off in orders in the fourth quarter of 2001,
which resulted in revenues approximately $7.3 million lower than the fourth
quarter of 2000, primarily in our replacement business for standard
industrial and residential replacement filters, caused by a deferral of
standard HVAC system maintenance by a large number of end users. The
shortfall does not appear to be caused by a loss of market share or loss of
any significant number of customers.
Gross Profit. Gross profit for 2001 increased $2,866,000, or 7.8%, to
$39,783,000, which made up 21.0% of net sales, from $36,917,000 for 2000,
which made up 19.0% of net sales. Excluding approximately $7.9 million of
one-time charges booked to cost of sales in 2000, consisting primarily of
decreases in inventory valuations, increases in the allowance for doubtful
accounts, and other charges for write-offs of previously capitalized costs
and other miscellaneous items, gross profit for 2001 decreased by
$5,034,000, approximately $4.0 million of which was due to the unexpected
revenue shortfall in the fourth quarter of 2001. The remainder of the
decrease in gross profit was principally attributable to:
o Expanded facilities in Tijuana, which were brought partially online
during the first half of the year, experienced additional expenses
associated with completing expansions, reorganizing production
schedules, hiring and training additional laborers, and other
inefficiencies typical of expanded manufacturing operations, including
duplicate staffing at our San Diego and Nevada facilities.
o Increased price competition for several major retail accounts.
o Increased inbound freight costs for raw materials associated with fuel
price increases and fuel surcharges.
Operating Expenses. Operating expenses for 2001 decreased $4,422,000, or
10.9%, to $36,311,000, from $40,733,000 in 2000. The decrease in operating
expenses in 2001 was primarily attributable to reductions in administrative
headcount of approximately 17%, and a 10% salary reduction instituted in the
third quarter of 2001.
Nonoperating income (expense) from continuing operations: Nonoperating
expenses from continuing operations decreased approximately $1,871,000, to a
net expense of approximately $1,253,000 for 2001, compared to net expense of
3,124,000 in 2000. Excluding a one-time charge in 2000 for the settlement of
outstanding litigation with Intel of $1,500,000, nonoperating income
(expense) from continuing operations decreased approximately $371,000.
16
Provision for Taxes: Our effective state and federal tax rate, adjusted for
the effect of nondeductible expenses consisting primarily of amortization of
goodwill of approximately $900,000 per year, was approximately 39% and 40%
for 2001 and 2000, respectively.
Earnings (loss) from Continuing Operations: Earnings (loss) from continuing
operations for 2001 increased $5,077,000, to income of $580,000, or $0.02
per share, from a loss of $4,497,000, or ($0.18) per share for 2000. The
increase in earnings is primarily attributable to the benefits of
administrative savings and reductions in salary expenses in 2001.
2000 Compared to 1999
The following table summarizes the Company's results of operations as a
percentage of net sales for 2000 and 1999 (dollar amounts in thousands).
2000 1999
------------------ ------------------
Net sales $ 194,072 100.0% $ 171,392 100.0%
Gross profit 36,917 19.0 43,975 25.7
Operating expenses 40,733 21.0 33,802 19.7
Operating income (loss) from
continuing operations (3,816) (2.0) 10,172 5.9
Earnings (loss) from continuing
operations before income taxes (6,940) (3.6) 10,174 5.9
Provision (benefit) for income taxes (2,443) (1.3) 4,671 2.7
Earnings (loss) from continuing
operations (4,497) (2.3) 5,503 3.2
Loss from discontinued operations (2,702) (1.4) (2,686) (1.6)
Net earnings (loss) $ (7,199) (3.7) $ 2,817 1.6
Net Sales: Net sales for 2000 increased by $22,680,000 or 13.2%, to
$194,072,000, from $171,392,000 for 1999. The increase in net sales was due
to the Company's success in capturing additional market share, which was
achieved mainly through (i) attracting work from new customers through
offering superior pricing and service programs; (ii) securing additional
business from existing customers in expanded geographical regions; and (iii)
the development and placement of new lines of filtration products with new
customers for end users in new industries.
Other Charges and Special Items: During the last half of 2000, we formalized
our plan to consolidate our west coast operations, and recorded other
charges and special items totaling approximately $10,600,000 in connection
with settling our outstanding litigation with Intel, consolidating
operations, combining organizations, plant start-up expenses and for other
nonrecurring items arising during the period. These expenses were booked as
approximately $7,900,000 in cost of goods sold, $1,200,000 in operating
expenses and $1,500,000 in other expenses. Amounts booked for settlement of
the Intel litigation included repurchasing inventory at a loss and cash
payments - see "Legal Proceedings." Other one-time charges included costs
for inventory adjustments, write-offs, plant start-up expenses, duplicate
assets and other miscellaneous items.
Gross Profit. Gross profit for 2000 decreased $7,058,000, or 16.1%, to
$36,917,000, which made up 19.0% of net sales, from $43,975,000 for 1999,
which made up 25.7% of net sales. Excluding the one-time charges noted
above, gross profit for 2000 would have increased by $842,000, or 1.9%, to
$44,817,000, which represented 23.1% of net sales, compared to $43,975,000,
which represented 25.7% of net sales for 1999. The decrease in gross profit
percentage, excluding one-time charges for comparability between periods,
was principally attributable to:
o Delays in implementing our price increases associated with delays in
the production of marketing materials and associated reorganized and
consolidated marketing efforts. Anticipated benefits from this
reorganization, the first stage of which was completed in mid-September,
were not completed in time to have a material beneficial impact on our
2000 results.
17
o An increase in the percentage of our labor force employed through
temporary services compared to 1999, caused by the continued tightness
in the labor pool of qualified seasonal workers, which increased average
labor costs per hour during the period and resulted in a net increase in
comparable expenses of approximately $700,000.
o Price concessions made to secure new contracts with distributors for
mid-range industrial end- users led to a decrease in average selling
price to industrial distributors of approximately 2%.
o Expanded facilities in Salt Lake City, Utah and Tijuana, Mexico, which
were brought partially online during 2000, experienced additional
expenses associated with completing expansions, reorganizing production
schedules, hiring and training additional laborers, and other
inefficiencies typical of reorganized and expanded manufacturing
operations.
o Fuel surcharges for inbound shipments of raw materials, which were
attributable to a general increase in domestic diesel fuel costs caused
by escalating political instability in the Middle East as well as OPEC
supply constraints.
o During 1999 and 2000, we received national contracts from major
retailers which required our first exposure to new "point-of-sale"
distribution requirements. The contracts had pricing predicated upon
certain erroneous assumptions regarding the costs of these distribution
methods, and these problems were exacerbated by increases in fuel and
related shipping expenses.
o Labor overruns and redundant personnel.
Operating Expenses. Operating expenses for 2000 increased $6,931,000, or
20.5%, to $40,733,000, compared to $33,802,000 in 1999. Excluding one-time
charges, operating expenses for 2000 would have increased $5,731,000, or
17.0%, to $39,533,000, which represented 20.4% of net sales, from
$33,802,000, which represented 19.7% of net sales in 1999.
The increase in operating expenses, excluding one-time charges, was
principally attributable to:
o Fuel surcharges on outbound shipments of finished goods to customers
and other shipping cost increases primarily attributable to a sharp
increase in diesel fuel costs amounted to approximately $2,800,000.
o A reevaluation of accounts receivable reserves due to economic downturn
and an increase in the number of potentially bad receivables caused bad
debt expense in 2000 to be approximately $1,450,000 higher in 2000 than
in 1999, an increase of approximately 3800%.
o Other increases in operating expenses were held to 4.4%, with increases
in sales commissions, outbound freight and other expenses directly
related to sales volume balanced by reductions in redundant
administrative staff, consolidation of positions between subsidiaries
and other savings from our ongoing consolidation and cost reduction
program.
Nonoperating income (expense) from continuing operations: Net nonoperating
income (expense) from continuing operations decreased approximately
$3,125,000, to an expense of approximately $3,124,000 for 2000, from income
of $1,000 in 1999. Excluding the one-time charge for the settlement of our
outstanding litigation with Intel of $1,500,000, nonoperating income
(expense) from continuing operations decreased approximately $1,625,000,
which consisted primarily of an increase in interest expense of $1,537,000
caused by higher average balances on the Company's credit facilities and a
higher average interest rate on the Company's lines of credit, which have
variable rates linked to standard interest rate indices.
Discontinued Operations: In December 1999, the Company adopted a formal plan
to close Airseal West, a wholly owned subsidiary, and sell its various
assets and product lines to unrelated third parties. The closure was
completed in the first quarter of 2001, although various assets, consisting
primarily of non- filtration inventories, manufacturing equipment, designs
and intellectual properties, were not sold until later in the year. The
estimated net loss of the discontinued operations of approximately
$2,702,000 and $2,686,000 in 2000 and 1999, respectively, consists of net
losses from discontinued operations of $1,820,000 and $1,793,000,
respectively, approximately $893,000 of estimated losses on the disposal of
assets which were accrued in 1999, and an additional $883,000 of estimated
losses on the disposal of assets accrued in 2000.
18
Provision for Taxes: Our blended state and federal tax rate, excluding the
effect of nondeductible expenses consisting primarily of amortization of
goodwill of approximately $900,000 per year and approximately $600,000 of
one-time adjustments in 1999, was approximately 40.0% for both 2000 and
1999.
Earnings (loss) from Continuing Operations: Earnings (loss) from continuing
operations for 2000 decreased $10,000,000, or 182%, to a loss of $4,497,000,
or ($0.18) per share, from $5,503,000, or $0.22 per share basic ($0.21
diluted) for 1999. The decrease in earnings is primarily attributable to
one-time charges and decreases in gross profit percentage discussed above.
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 $13,949,000 at December 31, 2001, compared to $13,644,000 at
December 31, 2000. This included cash and cash equivalents of $3,878,000 and
$1,333,000 at December 31, 2001 and 2000, respectively.
Trade receivables decreased $3,485,000, or 10.4%, to $29,996,000 at December 31,
2001 from $33,481,000 at December 31, 2000. The decrease in receivables is
primarily due to the decreased volume of net sales during the fourth quarter of
2001 compared to the fourth quarter of 2000 and timing differences in shipments
and payments received.
Continuing operations generated $9,062,000 of cash in 2001, compared to
consuming $543,000 of cash in 2000. The difference in cash flows was primarily
related to the difference in net earnings from continuing operations. Investing
activities for continuing operations consumed $8,116,000 of cash during 2001,
compared to $9,659,000 consumed during 2000, consisting primarily of the
purchase of property, plant and equipment. Financing activities for continuing
operations provided $1,773,000 of cash in 2001, compared to $11,216,000 of cash
in 2000, primarily from advances on our revolving credit facility.
We currently have a $30 million working capital credit facility from two banks,
amended effective April 4, 2002. As of December 31, 2001, we had used
approximately $29.6 million of the $30 million working capital facility. The
working capital credit facility bears interest at LIBOR, which was 2.45% at
December 31, 2001, plus 3.5%. At times during 2000 and 2001, including at
December 31, 2001, the Company was in violation of certain of financial loan
covenants. The amendment extends the current credit facility and modifies
required financial ratios, other loan covenants, and waives prior loan covenant
violations. The agreement to amend and extend the working capital credit
facility calls for the facility to expire August 30, 2002, and is subject to
documentation acceptable to both the banks and the Company. The working capital
credit facility is collateralized by the pledge of all common stock of the
subsidiaries owned by the Company and other assets of the company.
In connection with the amended working capital credit facility 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,
not repurchasing its stock, 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. Unless this credit facility is renewed, it will expire in August
2002. Failure to negotiate an extension to this credit facility, enter into a
replacement facility, or obtain additional equity will materially adversely
impact our business and operations.
Continuing expansion may require substantial capital investment for the
manufacture of filtration products. Although we have been able to arrange debt
facilities or equity financing to date, there can be no assurance that
sufficient debt financing or equity will continue to be available in the future,
or that it will be available on acceptable terms. Failure to obtain sufficient
capital could materially adversely impact our growth strategy.
19
In 1998, the Board of Directors authorized the repurchase of up to two million
shares of our common stock, which repurchase was completed in September 2000. On
September 22, 2000, the Board of Directors authorized the repurchase of up to an
additional two million shares of common stock through open market or negotiated
transactions. Further repurchases under this program are restricted under our
current line of credit agreement. As of April 12, 2002, approximately 575,000
shares had been repurchased in the open market under this authorization.
Outlook
We recently announced that we had adapted our biocontainment products for use as
part of a system for hardening government buildings, commercial office complexes
and public venues against airborne bioweapons such as anthrax and smallpox.
There is currently a tremendous amount of interest in these products, and major
market analysts have indicated this will continue, but we do not know how
reliable this expectation is, whether this interest will be sustained for a long
period of time, or whether this interest will actually produce significant sales
of these products. Any significant trend towards requiring hardening these types
of facilities against airborne bioweapons could have a significant impact on our
business.
During the third quarter of 2001, base wages at all operating facilities and
departments, including corporate headquarters, were reduced by 10%, with base
wages restored to previous levels on a month-to-month basis if specific
month-to-month performance goals are met at the individual facilities. The
majority of our facilities and operating groups have had their wages restored
for at least some of the months this program has been in place.
We are currently introducing new products for the retail marketplace, our Airia
indoor air cleaners and wholehouse residential air cleaning systems. In contrast
to our standard retail filters, the bulk of which sell for unit prices between
$0.50 and $10, these new products will sell for substantially more (between $200
and $5,000, with replacement packs ranging from $3/mo. to $15/mo). These are new
products which are substantially different in features, appearance and
performance from competing products, and we have no actual market data on how
successful they will be, and hence have no way of estimating their impact on the
financial results of the Company. Any sales of these units in significant
quantities will require additional financial resources, either through equity or
debt financing, to finance working capital requirements for production and sale
of these products. For example, placement of an initial stocking order of the
lowest-priced unit by a national retailer with 5,000 locations would result in
new sales in excess of $15 million, with commensurate working capital
requirements. At this point, we cannot estimate when or how much working capital
may be required to finance these new products.
Sales of air filtration products for semiconductor facilities, historically a
major market, are expected to be slow again during 2002, with most analysts
pushing recovery for this sector out to at least 2003. The current weak economy
is also expected to have a dampening effect on sales of air filtration products
across all product lines and end-user categories. As long as the current
weakness in the economy continues, in individual market segments or the
marketplace as a whole, our results will be negatively affected.
We have collected data that indicates that residential filter users replace
their filters, on average, approximately once per year. Manufacturers of
residential furnace and air conditioning systems recommend that these filters be
changed every month. A minor trend toward increased maintenance of these
residential heating and cooling systems could have a positive impact on our
business.
Our most common products, in terms of both unit and dollar volume, are
residential throw-away spun-glass filters, which usually sell for prices under
$1.00. Any increase in consumer concern regarding air pollution, airborne
pollens, allergens, and other residential airborne contaminants could result in
replacement of some of these products with higher value products. Our higher
value products include our NaturalAire higher-efficiency filters for residential
use, with associated sales prices typically over $5.00 each. Any such trend
would have a beneficial effect on our business. If our residential air cleaners
are successful, we believe replacement filter sales, and the increased awareness
of indoor air quality engendered by the simple presence of the air cleaners,
will help to create and/or accelerate this trend.
We believe there is currently a gradually increasing public awareness of the
issues surrounding indoor air quality and that this trend will continue for the
next several years. We also believe there is an increase in public concern
regarding the effects of indoor air quality on employee productivity, as well as
an increase in interest by standards- making bodies in creating specifications
and techniques for detecting, defining and solving indoor air quality
20
problems. We further believe there will be an increase in interest in our
Absolute Isolation Barriers in the future because these products may be used in
both semiconductor and pharmaceutical manufacturing plants to prevent
cross-contamination between different lots and different processes being
performed at the same facility. These products also increase production yields
in many applications.
Currently, the largest domestic market for air filtration products is for
mid-range ASHRAE-rated products and HVAC systems, typically used in commercial
and industrial buildings. To date, our penetration of this market has been
relatively small. We believe our ability to offer a "one stop" supply of air
filtration products to HVAC distributors and wholesalers may increase our share
of this market. We also believe that our recently developed modular air handlers
and environmental tobacco smoke systems will enable us to expand sales to these
customers. We intend our new products to serve as high profile entrants with
distributors and manufacturers' representatives, who can then be motivated to
carry our complete product line.
This Outlook section, and other portions of this document, include certain
"forward-looking statements" within the meaning of that term in Section 27A of
the Securities Act of 1933, and Section 21E of the Securities Exchange Act of
1934, including, among others, those statements preceded by, following or
including the words "believe," "expect," "intend," "anticipate" or similar
expressions. These forward-looking statements are based largely on the current
expectations of management and are subject to a number of assumptions, risks and
uncertainties. Our actual results could differ materially from these
forward-looking statements. Important factors to consider in evaluating such
forward-looking statements include those discussed below under the heading
"Factors That May Affect Future Results" as well as:
o the shortage of reliable market data regarding the air filtration market,
o changes in external competitive market factors or in our internal budgeting
process which might impact trends in our results of operations,
o anticipated working capital or other cash requirements,
o changes in our business strategy or an inability to execute our strategy
due to unanticipated changes in the market,
o product obsolescence due to the development of new technologies, and
o various competitive factors that may prevent us from competing successfully
in the marketplace.
In light of these risks and uncertainties, there can be no assurance that the
events contemplated by the forward- looking statements contained in this Form
10-K will in fact occur.
Factors That May Affect Future Results
Failure to Manage Future Growth Could Adversely Impact Our Business Due to the
Strain on Our Management, Financial and Other Resources
If our business continues to grow, the additional growth will place burdens on
management to manage such growth while maintaining profitability. We have no
guarantee that we will be able to do so. Due to our recent acquisitions and
expansions, our net sales increased by approximately 400% from 1995 through
2001, (a compound annual growth rate of 25%). We may not continue to expand at
this rate. Our ability to compete effectively and manage future growth depends
on our ability to:
o recruit, train and manage our work force, particularly in the areas of
corporate management, accounting, research and development and operations,
o manage production and inventory levels to meet product demand,
o manage and improve production quality,
o expand both the range of customers and the geographic scope of our customer
base, and
o improve financial and management controls, reporting systems and procedures.
Any failure to manage growth effectively could have a material adverse effect on
our business, financial condition and results of operations.
21
Any Delay in Procuring Financing for New Products or Failure to Adequately
Ramp-Up Production Capacity to Meet Demand Could Adversely Impact Our Business
Due to Strain on Financial Resources.
During 2002 we plan to introduce and mass market products which, if successful,
will require large amounts of additional financing and/or capital. This
financing may need to be available on short notice. Any failure to obtain such
financing, or delay in financing, could cause the failure of the new products
due to inability to deliver on time, and could adversely impact relationships
with current major accounts. In addition, delays in an untried supply chain, new
production chains, and other delays common to the launch of a new product line
could also adversely impact the success of the products, as well as current
relationships with major accounts.
Failure to Negotiate Appropriate Loan Extensions or Obtain Alternate Financing
on Beneficial Terms Could Negatively Impact Our Business and Shareholders
Our $30 million operating capital line expires in August 2002. If our current
and ongoing attempts to obtain extensions from our banks or refinancing from
other parties are unsuccessful, and we are unable to obtain alternate financing
on beneficial terms, we could be forced to obtain financing or raise equity
under terms which would not be favorable to us in order to continue to operate
our business, which could have a significant adverse impact on our business and
operations or lead to significant dilution to our existing shareholders.
Our Business May Suffer If Our Competitive Strategy is Not Successful
Our continued success depends on our ability to compete in an industry that is
highly competitive. This competition may increase as new competitors enter the
market. Several of these competitors may have longer operating histories and
greater financial, marketing and other resources than we do. Additionally, our
competitors may introduce new products or enhancements to products that could
cause a decline in sales or loss of market acceptance of our existing products.
Under our current competitive strategy, we endeavor to remain competitive by:
o increasing our market share,
o expanding our market through the introduction of new products which require
periodic replacement, and
o improving operating efficiencies.
Although our executive management team continues to review and monitor our
strategic plans, we have no assurance that we will be able to follow our current
strategy or that this strategy will be successful.
Our Market Share May Not Continue to Increase if we are Unable to Acquire
Additional Synergistic Businesses
In the past several years we have significantly increased our market share by
acquiring synergistic businesses. Although we intend to continue to increase our
market share in this manner, we have no assurance that future acquisition
opportunities will be available. Additionally, in the future we may not have
access to the substantial debt or equity financing to finance potential
acquisitions. Moreover, these types of transactions may result in potentially
dilutive issuances of equity securities, the incurrence of additional debt and
other acquisition-related expenses, all of which could adversely affect our
profitability or cash flows. Our strategy of growth through acquisition also
exposes us to the potential risks inherent in assessing the value, strengths,
weaknesses, and potential profitability of acquisition candidates and in
integrating the operations of acquired companies. We do not currently have any
binding agreements with respect to future acquisitions.
Our Business May Suffer if Our Strategy to Increase the Size and Customer Base
of the Air Filtration Market is Unsuccessful
We are developing new products as part of our strategy to increase the size and
customer base of the air filtration market. We have no assurance that this
strategy will be successful. We have no guarantee that any new products we
develop will gain acceptance in the marketplace, or that these products will be
successful. Additionally, we have no assurance we will be able to recoup the
expenditures associated with the development of these products. To succeed in
this area we must:
o increase public awareness of the issues surrounding indoor air quality,
o adequately address the unknown requirements of the potential customer base,
o develop new products that are competitive in terms of price, performance
and quality, and
22
o avoid significant increases in current expenditure levels in development,
marketing and consumer education.
We May Experience Critical Equipment Failure Which Could Have a Material Adverse
Effect on Our Business
If we experience extended periods of downtime due to the malfunction or failure
of our automated production equipment, our business, financial condition and
operations may suffer. We design and manufacture much of the automated
production equipment used in our facilities. We also use other technologically
advanced equipment for which manufacturers may have limited production
capability or service experience. If we are unable to quickly repair our
equipment or quickly obtain new equipment or parts from outside manufacturers,
we could experience extended periods of downtime in the event of malfunction or
equipment failure.
If Automation of Our Production Lines Fails to Produce the Projected Results,
Our Business Will Suffer
We have only recently substantially completed a program to increase our gross
margins by automating portions of our production lines. Although the designs
have been extensively tested in the field, we have no assurance that the new
equipment will produce the expected beneficial results on our gross margins.
Additionally, we are not certain that any increases in efficiencies will not be
offset in the marketplace by competitors making similar improvements to their
facilities.
Our Plan to Centralize Overhead Functions May Not Produce the Anticipated
Benefits to Our Operating Results
We are currently completing the implementation of plans to centralize and
eliminate duplication of efforts between our subsidiaries in the following
areas:
o purchasing,
o production planning,
o shipping coordination,
o marketing,
o accounting,
o personnel management,
o risk management, and
o benefit plan administration.
We have no assurance that cutting overhead in this fashion will have the
anticipated benefits to our operating results. Additionally, we have no
assurance that these reorganizations will not significantly disrupt the
operations of the affected subsidiaries.
Our Success Depends on Our Ability to Retain and Attract Key Personnel
Our success and future operating results depend in part upon our ability to
retain our executives and key personnel, many of whom would be difficult to
replace. Our success also depends on our ability to attract highly qualified
engineering, manufacturing, technical, sales and support personnel for our
operations. Competition for such personnel, particularly qualified engineers, is
intense, and there can be no assurance that we will be successful in attracting
or retaining such personnel. Our failure to attract or retain such persons could
have a material adverse effect on our business, financial condition and results
of operations.
Our Current Distribution Channels May be Unavailable if Our Manufacturers'
Representatives Decide to Work Primarily With One of Our Competitors
We provide our manufacturers' representatives with the ability to offer a full
product line of air filtration products to existing and new customers. Some of
our competitors offer similar arrangements. We do not have exclusive
relationships with most of our representatives. Consequently, if our
representatives decide to work primarily with one of our competitors, our
current distribution channels, and hence, our sales, could be significantly
reduced.
Management Controls a Significant Percentage of Our Stock
As of April 12, 2002, our directors and executive officers beneficially held
approximately 43.8% of our outstanding common stock. As a result, such
shareholders effectively control or significantly influence all matters
requiring shareholder approval. These matters include the election of directors
and approval of significant corporate
23
transactions. Such concentration of ownership may also have the effect of
delaying or preventing a change in control.
We May be Required to Issue Stock in the Future That Will Dilute the Value of
Our Existing Stock
If we issue the following securities, such securities may dilute the value of
the securities that our existing stockholders now hold.
We have granted warrants to purchase a total of 540,000 of our shares of common
stock to various parties with exercise prices ranging from $5.54 to $14.73 per
share. All of the warrants are currently exercisable. As a result, if the
warrant holders exercise these warrants, the interests of current shareholders
may be diluted.
We have granted options to purchase a total of 4,688,300 shares of common stock
to various parties with exercise prices ranging from $1.88 to $8.50 per share.
The majority of these options are currently exercisable. Additionally, if the
option holders exercise their options, the interests of current shareholders may
be diluted..
Our Shareholders May Not Realize Certain Opportunities Because of Our Charter
Provisions and North Carolina Law
Our Articles of Incorporation and Bylaws contain provisions that are designed to
provide our board of directors with time to consider whether a hostile takeover
offer is in our best interest and the best interests of our shareholders. These
provisions may discourage potential acquisition proposals and could delay or
prevent a change of control in our business. Additionally, we are subject to the
Control Shares Acquisition Act of the State of North Carolina. This act provides
that any person who acquires "control shares" of a publicly held North Carolina
corporation will not have voting rights with respect to the acquired shares
unless a majority of the disinterested shareholders of the corporation vote to
grant such rights. This could deprive shareholders of opportunities to realize
takeover premiums for their shares or other advantages that large accumulations
of stock would typically provide.
Our Business Can be Significantly Affected by Environmental Laws
The constantly changing body of environmental laws and regulations may
significantly influence our business and products. These laws and regulations
require that various environmental standards be met and impose liability for the
failure to comply with such standards. While we endeavor at each of our
facilities to assure compliance with environmental laws and regulations, and are
currently not aware of any ongoing issues of this nature, we cannot be certain
that our operations or activities, or historical operations by others at our
locations, will not result in civil or criminal enforcement actions or private
actions that could have a materially adverse effect on our business. We have, in
the past, and may, in the future, purchase or lease properties with unresolved
potential violations of federal or state environmental regulations. In these
transactions, we have been successful in obtaining sufficient indemnification
and mitigating the impact of the issues without recognizing significant expenses
associated with litigation and cleanup. However, purchasing or leasing these
properties requires us to weigh the cost of resolving these issues and the
likelihood of litigation against the potential economic and business benefits of
the transaction. If we fail to correctly identify, resolve and obtain
indemnification against these risks, they could have a material adverse impact
on our financial position.
Because of the foregoing factors, as well as other variables affecting our
operating results, past financial performance should not be considered a
reliable indicator of future performance, and investors should not use
historical trends to anticipate results or trends in future periods.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are 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 Flanders, these exposures are primarily related
to the sale of product to foreign customers and changes in interest rates. We do
not have any derivatives or other financial instruments for trading or
speculative purposes.
24
The fair value of the Company's total long-term debt, including capital leases,
at December 31, 2001 was approximately $51,729,000. 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, 2001. 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.
We have only a limited involvement with derivative financial instruments. We
have two interest rate swap agreements to hedge against the potential impact on
earnings from increases in market interest rates of two variable rate bonds.
Under the interest rate swap agreements, we receive or make payments on a
monthly basis, based on the differential between 5.14% and a tax exempt interest
rate as determined by a remarketing agent. This interest rate swap is accounted
for as a cash flow hedge in accordance with SFAS 133 and SFAS 138. Gains or
losses related to inefficiencies of the cash flow hedge were included in net
income during the period related to hedge ineffectiveness. The tax effected fair
market value of the interest rate swap of $653,990 is included in other
comprehensive income. The interest rate swap contracts expire in 2013 and 2015.
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. Risks due to changes in foreign currency exchange rates are
negligible, as the preponderance of our foreign sales occur over short periods
of time or are demarcated in U.S. dollars.
Item 8. Financial Statements and Supplementary Data
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 51 President, Chief Executive Officer and Director
James L. "Buddy" 59 Vice President Operations
Mercer
Steven K. Clark 49 Chief Operating Officer, Vice President Finance/
Chief Financial Officer and Director
Linda Palmatier 48 Vice President Retail Sales
Al Longton 36 Vice President Foremarket Sales and Engineering
David Aaronson 37 Vice President Filter Sales and Service
Peter Fredericks 44 Director
J. Russell Fleming 52 Director
Andrew Stallman 44 Director
Robert R. Amerson. Mr. Amerson has been President and Chief Executive Officer
since 1988. Mr. Amerson is also a Director, a position he has held since 1988.
He joined us in 1987 as Chief Financial Officer. Mr. Amerson has a Bachelor of
Science degree in Business Administration from Atlantic Christian College.
James L. "Buddy" Mercer. Mr. Mercer has been Vice President Operations for the
company since December 2001. He has direct responsibility for all plant
manufacturing operations. Prior to December 2001, beginning in 1998, he was a
general manager for Precisionaire, a subsidiary of the company. From 1967
through 1997, Mr. Mercer worked at Purolator Air Products, a competitor, working
in several positions, up through plant manager.
Steven K. Clark. Mr. Clark was named as Vice President Finance, Chief Financial
Officer and Director in December 1995 and Chief Operating Officer in November
1999. Mr. Clark acted as a consultant from November, 1995 through December,
1995. From July 1992 through October 1995, he was the Chief Financial Officer of
Daw Technologies, Inc., a specialty cleanroom contractor and 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.
Linda Palmatier. Ms. Palmatier has been Vice President of Retail Sales for the
Company since October 2000. From December 1998 to October 2000, Ms. Palmatier
was the Company's Director of Procurement. From December 1996 through December
1998, she worked as a designer/sales representative for Com-Net Software
26
Specialist and Signature Electronics. From August 1995 through December 1996,
she worked as Director of Merchandising for J. Bill Circuit, Inc., a contract
manufacturer of electronics. Ms. Palmatier holds a Bachelor of Science degree in
business statistics from Virginia Commonwealth University and a Master of
Science degree in humanities from the University of Richmond..
Al Longton. Mr. Longton has been Vice President Foremarket Sales and Engineering
since March 2001. He has direct responsibility for sales and customer
requirements for all foremarket products. From January 2000 through March 2001,
Mr. Longton was a Regional Sales Manager. From October 1998 through January
2000, Mr. Longton was Product Manager over gas-phase filtration products for the
Company. From September 1994 through October 1998, Mr. Longton was Engineering
Manager for Flanders Filters, Inc., a subsidiary of the Company. Mr. Longton has
a Bachelor of Science, cum laude, degree in mechanical engineering from
Northeastern University..
David Aaronson. Mr. Aaronson has been Vice President Filter Sales and Service
since December 2001. He has direct responsibility for overseeing sales of
filtration products to air filter sales and service accounts. From August 2001
to December 2001, Mr. Aaronson was regional sales manager for the Company. From
1989 through 2000, Mr. Aaronson was the general manager of the air filtration
division of Jorban-Riscoe Associates, Inc., a manufacturers' representative
firm. Mr. Aaronson is also a partner in Air Quality Equipment Company, a
manufacturers' representative firm specializing in air filtration and energy
savings solutions. Mr. Aaronson graduated from the University of Kansas with a
Bachelor of Arts in Business/Personnel Administration.
Peter Fredericks. Mr. Fredericks has been a director since April 2002. Mr.
Fredericks is a private equity investor, and has been involved in business
management, equity investment, and consulting since 1982. Mr. Fredericks'
experience includes working as a strategy consultant with the Boston Consulting
Group. Mr. Fredericks received his Bachelor of Arts degree in Economics with
distinction from Stanford University, his Masters in Business Administration
from Harvard University, where he was a Baker Scholar, and his Ph.D. from the
Vienna University of Economics and Business Administration.
J. Russell Fleming. Mr. Fleming was elected as a Director in December 1999. Mr.
Fleming is Owner/President of Cape Point Development Co., Inc., located in
Greenville, North Carolina, specializing in land development and
commercial/multi-family construction. Mr. Fleming is also Owner/President of New
East Management & Realty, Inc., also located in Greenville, NC, which manages
residential and commercial rental properties. Mr. Fleming attended East Carolina
University prior to obtaining his General Contractor and Real Estate Broker
licenses.
Andrew Stallman. Mr. Stallman was appointed as a director in November 2001 and
elected in December 2001. Mr. Stallman is a principal of Investment
Transactions, LLC, and is an independent investment advisor. Mr. Stallman has
also been a portfolio manager for Soros Fund Management and Steinhardt Partners.
Mr. Stallman has also been a research analyst for both Lehman Brothers Asset
Management and E.F. Hutton. Mr. Stallman has a Bachelor of Arts degree in
history, summa cum laude, from the State University of New York in New Paltz,
and a Masters in Business Administration and finance from Harvard University.
27
Item 11. Executive Compensation
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 $100,000 in 2001.
Annual Compensation Long-Term Compensation
------------------------------------- -----------------------------------
Awards Payouts
------------------------- --------
Securities
Other Restricted Underlying
Annual Stock Options/ LTIP
Compen- Award(s) SARs Payouts
Name and Principal Position Year Salary ($) Bonus ($) sation ($) ($) (#) ($)
------------------------------------------ ----------- ---------- ------------ ----------- ------------ --------
Robert R. Amerson 2001(1) $ 241,347 - $ 10,500 - 1,000,000 -
President and CEO 2000 250,000 - - - - -
1999 254,808 - - - 1,000,000(2) -
James L. "Buddy" Mercer 2001 110,952 - - - - -
Vice President Finance/CFO 2000 112,247 - - - - -
1999 110,952 - - - - -
Steven K. Clark 2001(1) 240,866 - 1,327 - 1,000,000 -
Vice President Finance/CFO/COO 2000 250,000 - - - - -
1999 250,000 - - - 1,000,000(2) -
(1) Mr. Amerson and Mr. Clark each had an annual salary of $250,000, plus a
possible bonus each year, under their respective Employment Agreements, as
amended. In the third quarter of 2001, these salaries were voluntarily
reduced by ten percent, to $225,000 per year. See "Employment Agreements."
(2) Messrs. Amerson and Clark each had options to purchase 1,000,000 shares at
$2.50 per share whose expiration date was extended, on December 22, 1999,
from February 22, 2001 to February 22, 2006.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
The following table sets forth the aggregate number and value of stock options
and SAR's exercised during the last year by the Company's Chief Executive
Officer and by each of the Company's other executive officers whose annual
salary, bonus and other compensation exceed $100,000.
Number of Securities
Shares Underlying Unexercised Value of Unexercised
Acquired Options/SARs at Fiscal In-the-Money Options/
On Value Year-End (#) SARs at Fiscal Year-End
Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
--------------------- ------------ ------------ ------------------------- -------------------------
Robert R. Amerson - $ - 2,000,000 / - - / -
Steven K. Clark - $ - 2,000,000 / - - / -
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 after being a Director for at least six months receive an automatic option
to purchase 50,000 shares of the Company's common stock.
28
EMPLOYMENT AGREEMENTS
Messrs. Amerson and Clark have employment agreements effective as of December
15, 1995 ("Employment Agreements"). The Employment Agreements, as amended,
provide for an annual base salary of $250,000 for both Mr. Amerson and Mr. Clark
and terminate in 2010. The Employment Agreements also provide that the executive
shall be entitled to the following termination payments: (i) 100% of his current
base salary if the employment is terminated as a result of his death or
disability; (ii) up to 200% of his current base salary if the employment is
terminated by the Company for any reason other than death, disability or for
cause, or (iii) up to 250% of the executive's gross income during the year
preceding his termination if the Employment Agreement is terminated by the
executive for good reason or by the Company for any reason other than death,
disability or cause and the termination occurs within two years after a change
of control of the Company has occurred.
Both Mr. Amerson and Mr. Clark have agreed to voluntarily participate in our 10%
salary reduction and incentive program, and their salaries have been reduced to
$225,000 per year.
OTHER INFORMATION REGARDING THE BOARD OF DIRECTORS
Board Meetings and Committees
During 2001, the Board of Directors met three times and also executed various
resolutions and written actions in lieu of meetings. All directors were in
attendance at each of these meetings. The Board of Directors has an Audit
Committee and a Compensation Committee. The Audit Committee reviews the results
and scope of the audit and other services provided by the Company's independent
auditors, reviews and evaluates the Company's internal audit and control
functions, and monitors transactions between the Company and its employees,
officers and directors. The Compensation Committee administers the Company's
equity incentive plans and designates compensation levels for officers and
directors of the Company. The Audit Committee met four times during 2001. The
Compensation Committee met two times during 2001.
Currently, the Audit Committee consists of Messrs. Stallman, Fredericks, and
Fleming, with Mr. Stallman serving as chair. The Compensation Committee consists
of Messrs. Fleming, Fredericks and Amerson, with Mr. Fleming serving as chair.
Long-Term Incentive Plan
During 1996, the Company adopted the Long Term Incentive Plan to assist the
Company in securing and retaining key employees and consultants. The LTI Plan
authorizes grants of incentive stock options, nonqualified stock options, stock
appreciation rights ("SARs"), restricted stock performance shares and dividend
equivalents to officers and key employees of the Company and outside consultants
to the Company. There are 1,986,800 shares of Common Stock reserved for award
under the LTI Plan. During 2001, 2000 and 1999, the Company awarded options to
purchase 50,000, 12,500 and 52,850 shares of Common Stock under the LTI Plan,
respectively.
The Plan is administered by the Compensation Committee. The Compensation
Committee determines the total number and type of awards granted in any year,
the number and selection of employees or consultants to receive awards, the
number and type of awards granted to each grantee and the other terms and
provisions of the awards, subject to the limitations set forth in the LTI Plan.
Stock Option Grants. The Compensation Committee has the authority to select
individuals who are to receive options under the LTI Plan and to specify the
terms and conditions of each option so granted (incentive or nonqualified), the
exercise price (which must be at least equal to the fair market value of the
common stock on the date of grant with respect to incentive stock options), the
vesting provisions and the option term. Unless otherwise provided by the
Compensation Committee, any option granted under the LTI Plan expires the
earlier of five years from the date of grant or, three months after the
optionee's termination of service with the Company if the termination of
employment is attributable to (i) disability, (ii) retirement, or (iii) any
other reason, or 15 months after the optionee's death. As of April 12, 2002,
there are 423,300 options outstanding under the LTI Plan.
Stock Appreciation Rights. The Compensation Committee may grant SARs separately
or in tandem with a stock option award. A SAR is an incentive award that permits
the holder to receive (per share covered thereby) an equal amount by
29
which the fair market value of a share of common stock on the date of exercise
exceeds the fair market value of such share on the date the SAR was granted.
Under the LTI Plan, the Company may pay such amount in cash, in common stock or
a combination of both. Unless otherwise provided by the Compensation Committee
at the time of grant, the provisions of the LTI Plan relating to the termination
of employment of a holder of a stock option will apply equally, to the extent
applicable, to the holder of a SAR. A SAR granted in tandem with a related
option will generally have the same terms and provisions as the related option
with respect to exercisability. A SAR granted separately will have such terms as
the Compensation Committee may determine, subject to the provisions of the LTI
Plan. As of April 12, 2002, no SARs are outstanding under the LTI Plan.
Performance Shares. The Compensation Committee is authorized under the LTI Plan
to grant performance shares to selected employees. Performance shares are rights
granted to employees to receive cash, stock, or other property, the payment of
which is contingent upon achieving certain performance goals established by the
Compensation Committee. As of April 12, 2002, no performance shares are
outstanding under the LTI Plan.
Restricted Stock Awards. The Compensation Committee is authorized under the LTI
Plan to issue shares of restricted common stock to eligible participants on such
terms and conditions and subject to such restrictions, if any, outstanding under
the LTI Plan. As of April 12, 2002, no restricted shares have been awarded under
the LTI Plan.
Dividend Equivalents. The Compensation Committee may also grant dividend
equivalent rights to participants subject to such terms and conditions as may be
selected by the Compensation Committee. Dividend equivalent rights entitle the
holder to receive payments equal to dividends with respect to all or a portion
of the number of shares of stock subject to an option award or SARs, as
determined by the Committee. As of April 12, 2002, no dividend equivalents are
outstanding under the LTI Plan.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth all individuals known by the Company to
beneficially own 5% or more of the Company's common stock, and all officers and
directors of the registrant, with the amount and percentage of stock
beneficially owned, as of April 12, 2002. 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 Stock(1)
------------------- ---------------------- ---------------------
Robert R. Amerson(2) 7,874,370 28.09%
531 Flanders Filters Road
Washington, NC 27889
James L. "Buddy" Mercer(3) - *
2399 26th Avenue North
St. Petersburg, FL 33713
Steven K. Clark(2) 5,155,183 18.39%
Linda Palmatier - *
Al Longton(4) 10,000 *
Peter Fredericks(5) 52,300 *
J. Russell Fleming(6) 75,000 *
Andrew Stallman(5) 64,500 *
30
Percentage of
Name and Address Shares of Common Stock Outstanding Shares of
of Beneficial Owner Beneficially Owned Common Stock(1)
------------------- ---------------------- ---------------------
Thomas T. Allan 1,590,232 6.03%
3114 Barracks Road
Charlottesville, VA 22901
Franklin Resources, Inc. 1,361,743 5.23%
777 Marivers Island Blvd., 6th Fl.
San Mateo, CA 94404
Dimensional Fund Advisors, Inc. 2,111,300 8.11%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Becker Capital Management, Inc. 1,751,100 6.73%
1211 SW Fifth Avenue, Suite 2185
Portland, OR 97204
All Executive Officers and
Directors as a Group (8
persons)(2),(3),(4),(5),(6) 13,231,353 43.82%
* Represents less than 1% of the total issued and outstanding shares of
common stock.
1 Applicable percentage of ownership is based on 26,033,153 shares of common
stock outstanding as of April 12, 2002, together with all applicable options
for unissued securities for such shareholders exercisable within sixty days.
Shares of common stock subject to options exercisable within sixty days are
deemed outstanding for computing the percentage ownership of the person
holding such options, but are not deemed outstanding for computing the
percentage of any other person.
2 Includes 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 5,000 shares which are subject to an option to purchase such
shares from the Company at $7.125 per share.
4 Includes 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.
5 Includes 50,000 shares which are subject to an option to purchase such
shares from the Company at $1.79 per share.
6 Includes 50,000 shares which are subject to an option to purchase such
shares from the Company at $2.50 per share and 5,000 shares which are
subject to an option to purchase such shares from the Company at $1.875 per
share.
Item 13. Certain Relationships and Related Transactions
At December 31, 2001, Steven K. Clark owed the Company $3,782,007 of principal
and $539,388 of accrued interest which he previously borrowed to settle claims,
to make certain payments under an indemnity agreement he entered into with the
Company, to exercise options and to purchase certain shares from Thomas T.
Allan, a former officer and director. This debt is evidenced by a note which
bears interest at LIBOR plus 1%, and is due in full on December 31, 2010, or on
demand by the Company.
At December 31, 2000, Robert R. Amerson owed the Company $1,967,449 of principal
and $322,486 of accrued interest, which he previously borrowed, the majority of
which was used to settle claims, to make certain payments under an indemnity
agreement he entered into with the Company, to purchase certain shares from
Thomas T. Allan,
31
a former officer and director of the Company, and for other unspecified reasons.
This debt is evidenced by a note which bears interest at LIBOR plus 1%, and is
due in full on December 31, 2010, or on demand by the Company.
The Company made payments totaling $1,104,641 and $316,391 in 2001 and 2000,
respectively, to Superior Die- Cutting, a vendor supplying raw materials to the
company. Superior Die-Cutting is partially owned by Robert R. Amerson and Steven
K. Clark (twenty-five percent each). The company made payments totaling $349,509
and $55,040 in 2001 and 2000, respectively, to Wal-Pat II, a real estate
partnership which leases property to the company. Wal-Pat II is owned by Robert
R. Amerson and Steven K. Clark (fifty percent each). At December 31, 2001, the
Company owed a total of $349,509 and $0, to Superior Die-Cutting and Wal-Pat II,
respectively.
32
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
The following constitutes a list of Financial Statements, Financial Statement
Schedules and Exhibits required to be used in this report.
(a)(1) Financial Statements: Financial Statements are included beginning
at page F-1 as follows:
Report of Independent Certified Public Accountants..............F-2
Consolidated Balance Sheets at December 31, 2001 and 2000.......F-3
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999................................F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2001, 2000 and 1999....................F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 2001, 2000 and 1999..........................F-6
Notes to Consolidated Financial Statements......................F-8
(a)(2) Financial Statement Schedules
Report of Independent Certified Public Accountants
on Schedule....................................................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 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.
10.2 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.
10.3 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.
10.4 Credit Agreement between Flanders Corporation, SunTrust Equitable
Securities Corporation and SunTrust Bank, dated February 9, 2000,
filed with the Form 10-K dated December 31, 1999, and incorporated
herein by reference.
33
10.5 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.
10.6 Loan Agreement between Flanders Corporation and the Johnston County
Industrial Facilities and Pollution Control Financing Authority,
dated March 1, 2000, filed with the Form 10-K dated December 31,
1999, and incorporated herein by reference.
10.7 Flanders Corporation 1996 Director Option Plan, filed with the Form
10-K dated December 31, 1995, and incorporated herein by reference.
10.8 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.
10.9 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.
10.10 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.
10.11 Amendment to Employment Agreement between Elite Acquisitions, Inc.,
Flanders Filters, Inc., and Steven K. Clark, filed with the Form
10-K dated December 31, 1999, and incorporated herein by reference.
10.12 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.
10.13 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.
10.14 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.
10.15 Amendment to Employment Agreement between Elite Acquisitions, Inc.,
Flanders Filters, Inc., and Robert R. Amerson, filed with the Form
10-K dated December 31, 1999, and incorporated herein by reference.
10.16 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.
10.17 Amendment to Stock Option Agreement between Flanders Corporation
and Robert R. Amerson dated December 22, 1999, filed with the Form
10-K dated December 31, 1999, and incorporated herein by reference.
10.18 Stock Option Agreement between Flanders Corporation and Robert R.
Amerson dated November 7, 2001, filed herewith.
10.19 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.
10.20 Amendment to Stock Option Agreement between Flanders Corporation
and Steven K. Clark dated December 22, 1999, filed with the Form
10-K dated December 31, 1999, and incorporated herein by reference.
10.21 Stock Option Agreement between Flanders Corporation and Steven K.
Clark dated November 7, 2001, filed herewith.
10.22 Note Agreement between Steven K. Clark and Flanders Corporation,
dated April 24, 1999, filed with the Form 10-K dated December 31,
1999, and incorporated herein by reference.
10.23 Note Agreement between Robert R. Amerson and Flanders Corporation,
dated April 24, 1999, filed with the Form 10-K dated December 31,
1999, and incorporated herein by reference.
34
21 Subsidiaries of the Registrant.
23.1 Consent of Grant Thornton LLP for incorporation by reference of
their report into Form S-8 filed on July 21, 1997, filed herewith.
24 Power of Attorney (included on Signature page of this report).
(b) Reports on Form 8-K.
None.
(c) Financial Statement Schedules: See (a)(2) above.
35
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 17th day of April, 2002.
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 April 17, 2002
----------------------- President, Chief Executive Officer ----------------
Robert R. Amerson and Director
/s/ Steven K. Clark April 17, 2002
----------------------- Chief Operating Officer, Vice ----------------
Steven K. Clark President Finance/Chief Financial
Officer, Principal Accounting
Officer and Director
/s/ Peter Fredericks April 17, 2002
----------------------- ----------------
Peter Fredericks Director
/s/ J. Russell Fleming April 17, 2002
----------------------- ----------------
J. Russell Fleming Director
/s/ Andrew Stallman April 17, 2002
----------------------- ----------------
Andrew Stallman Director
35
FLANDERS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2001, 2000 and 1999
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Flanders Corporation
We have audited the accompanying consolidated balance sheets of Flanders
Corporation and Subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Flanders
Corporation and Subsidiaries as of December 31, 2001 and 2000, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Grant Thornton LLP
Salt Lake City, Utah
March 15, 2002, except for the last paragraph of Note H,
as to which the date is April 4, 2002
F-2
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 2001 2000
-------------- --------------
Current assets
Cash and cash equivalents $ 3,877,785 $ 1,333,128
Receivables:
Trade, less allowance for doubtful
accounts: 2001 $1,531,650;
2000 $1,777,973 29,995,949 33,481,302
Other 483,941 514,202
Inventories (Note B) 31,391,365 28,299,766
Deferred taxes (Note J) 1,994,964 3,020,545
Other current assets 4,633,848 6,094,903
-------------- --------------
Total current assets 72,377,852 72,743,846
Related party receivables (Note M) 549,350 385,696
Other assets (Note E) 2,715,855 2,985,180
Intangible assets, net (Note F) 28,332,307 29,185,805
Property and equipment, net (Notes G, H
and I) 76,279,734 74,921,196
-------------- --------------
$ 180,255,098 $ 180,221,723
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt and
capital lease obligations (Notes H and I) $ 32,599,894 $ 32,832,253
Accounts payable 15,726,086 20,267,236
Accrued expenses 9,449,073 6,000,140
-------------- --------------
Total current liabilities 57,775,053 59,099,629
Long-term capital lease obligations, less
current maturities (Note I) 3,173,502 3,403,664
Long-term debt, less current maturities
(Note H) 16,271,430 13,134,219
Long-term liabilities, other 1,089,983 -
Deferred taxes (Note J) 5,065,762 6,432,927
Commitments and contingencies (Notes H, I, K
and L)
Stockholders' equity (Notes L, M and N)
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:
26,033,153 in 2001; 26,379,633 in 2000 26,033 26,380
Additional paid-in capital 90,331,524 90,898,258
Notes receivable (Note M) (8,325,978) (7,891,208)
Accumulated other comprehensive loss
(Note H) (653,990) -
Retained earnings 15,501,779 15,117,854
-------------- --------------
96,879,368 98,151,284
-------------- --------------
$ 180,255,098 $ 180,221,723
============== ==============
The accompanying notes are an integral part of these financial statements.
F-3
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
2001 2000 1999
-------------- -------------- --------------
Net sales $ 189,077,482 $ 194,071,897 $ 171,392,281
Cost of goods sold (Notes K, L and M) 149,294,903 157,154,700 127,417,753
-------------- -------------- --------------
Gross profit 39,782,579 36,917,197 43,974,528
Operating expenses (Notes K, L and M) 36,311,426 40,733,468 33,802,204
-------------- -------------- --------------
Operating income (loss) from
continuing operations 3,471,153 (3,816,271) 10,172,324
-------------- -------------- --------------
Nonoperating income (expense) from continuing
operations:
Other income (expense), net (Note K) 1,928,661 (329,530) 1,258,440
Interest expense (3,911,179) (2,794,027) (1,257,157)
-------------- -------------- --------------
(1,982,518) (3,123,557) 1,283
-------------- -------------- --------------
Earnings (loss) from continuing
operations before income taxes 1,488,635 (6,939,828) 10,173,607
Provision (benefit) for income taxes (Note J) 929,510 (2,442,846) 4,670,682
-------------- -------------- --------------
Earnings (loss) from continuing
operations 559,125 (4,496,982) 5,502,925
Discontinued operations (Note D)
Loss from operations of discontinued
subsidiary (including tax benefit of
$115,132 in 2001;$1,111,800 in 2000;
$1,134,799 in 1999) (175,200) (1,819,688) (1,792,417)
Loss on disposal of subsidiary (including
tax benefit of $539,200 in 2000 and
$565,604 in 1999) - (882,543) (893,374)
-------------- -------------- --------------
Loss from discontinued operations (175,200) (2,702,231) (2,685,791)
-------------- -------------- --------------
Net earnings (loss) $ 383,925 $ (7,199,213) $ 2,817,134
============== ============== ==============
Earnings (loss) per share from continuing
operations (Note O)
Basic $ 0.02 $ (0.18) $ 0.22
============== ============== ==============
Diluted $ 0.02 $ (0.18) $ 0.21
============== ============== ==============
Loss per share from discontinued operations
Basic $ (0.01) $ (0.11) $ (0.11)
============== ============== ==============
Diluted $ (0.01) $ (0.11) $ (0.10)
============== ============== ==============
Net earnings (loss) per share
Basic $ 0.01 $ (0.28) $ 0.11
============== ============== ==============
Diluted $ 0.01 $ (0.28) $ 0.11
============== ============== ==============
Weighted average common shares outstanding (Note O)
Basic 26,036,082 25,297,520 25,344,433
============== ============== ==============
Diluted 26,037,633 25,297,520 26,525,429
============== ============== ==============
The accompanying notes are an integral part of these financial statements.
F-4
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2001, 2000 and 1999
Accum-
Additional ulated Other
Common Paid-In Notes Compre- Retained
Stock Capital Receivable hensive Loss Earnings Total
-------- ------------- ------------- ------------ ------------- --------------
Balance, January 1, 1999 $ 25,624 $ 91,837,257 $ (1,760,000) $ - $ 19,499,933 $ 109,602,814
Issuance of 94,544 shares of
common stock related to
acquisitions 95 (95) - - - -
Interest on notes receivable
secured by common shares - - (254,094) - - (254,094)
Reclassification of receivables
to shareholders - - (4,309,214) - - (4,309,214)
Issuance and release from escrow
of 245,899 shares of common
stock related to certain
acquisitions - 988,028 - - - 988,028
Purchase and retirement of 283,300
shares of common stock (283) (1,027,002) - - - (1,027,285)
Net earnings - - - - 2,817,134 2,817,134
-------- ------------- ------------- ------------ ------------- --------------
Balance, December 31, 1999 25,436 91,798,188 (6,323,308) - 22,317,067 107,817,383
Issuance of 2,300,000 shares of
common stock upon exercise of
options 2,300 2,297,700 (1,150,000) - - 1,150,000
Interest on notes receivable
secured by common shares - - (417,900) - - (417,900)
Cancellation of 150,000 shares
related to unmet contingent
conditions of acquisitions (150) 150 - - - -
Purchase and retirement of
1,206,000 shares of common stock (1,206) (3,197,780) - - - (3,198,986)
Net loss - - - - (7,199,213) (7,199,213)
-------- ------------- ------------- ------------ ------------- --------------
Balance, December 31, 2000 26,380 90,898,258 (7,891,208) - 15,117,854 98,151,284
Interest on notes receivable
secured by common shares - - (434,770) - - (434,770)
Purchase and retirement of 354,000
shares of common stock (354) (585,527) - - - (585,881)
Issuance of 7,520 shares of common
stock upon exercise of options 7 18,793 - - - 18,800
Comprehensive income (loss)
Net earnings - - - - 383,925 383,925
Transition adjustment - - - (579,273) - (579,273)
Net loss on cash flow hedges - - - (74,717) - (74,717)
--------------
Total comprehensive loss - - - (270,065)
-------- ------------- ------------- ------------ ------------- --------------
Balance, December 31, 2001 $ 26,033 $ 90,331,524 $ (8,325,978) $ (653,990) $ 15,501,779 $ 96,879,368
======== ============= ============= ============ ============= ==============
The accompanying notes are an integral part of these financial statements.
F-5
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2001 2000 1999
-------------- -------------- --------------
Increase (decrease) in cash and cash equivalents
CASH FLOWS FROM OPERATING ACTIVITIES
Earnings (loss) from continuing operations $ 559,125 $ (4,496,982) $ 5,502,925
Adjustments to reconcile earnings (loss) from
continuing operations to net cash provided by
(used in) operating activities:
Depreciation and amortization 8,050,603 8,535,653 6,122,134
Provision (credit) for doubtful accounts 397,575 1,489,129 39,620
Allowance for obsolete inventory (236,074) 1,197,710 93,586
(Gain) loss on sale of property and
equipment - - 127,703
Deferred income taxes 94,409 (578,791) (308,627)
Interest income on notes receivable (434,770) (60,596) (254,094)
Change in working capital components, net of
effects from acquisitions:
Receivables 3,087,777 (5,947,205) (3,711,074)
Inventories (2,855,524) (3,422,092) (1,480,901)
Other current assets (116,916) 200,398 (365,743)
Accounts payable (4,541,150) 4,281,921 173,435
Accrued expenses 3,448,931 2,035,571 (350,953)
Income taxes (net) 1,608,232 (3,777,814) (298,458)
-------------- -------------- --------------
Net cash provided by (used in) operating
activities of continuing operations 9,062,218 (543,098) 5,289,553
Net cash used in operating activities of
discontinued operations (175,200) (339,116) (1,153,100)
-------------- -------------- --------------
Net cash provided by (used in)
operating activities 8,887,018 (882,214) 4,136,453
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash acquired - - (1,786,692)
Purchase of property and equipment (8,106,531) (8,839,263) (9,301,802)
Proceeds from sale of property and equipment - - 39,000
Disbursements on notes receivables 217,995 (634,067) (960,709)
Decrease (increase) in other assets (227,213) (185,820) 799,956
-------------- -------------- --------------
Net cash used in investing activities of
continuing operations (8,115,749) (9,659,150) (11,210,247)
Net cash used in investing activities of
discontinued operations - (77,155) (424,769)
-------------- -------------- --------------
Net cash used in investing activities (8,115,749) (9,736,305) (11,635,016)
-------------- -------------- --------------
- Continued -
The accompanying notes are an integral part of these financial statements.
F-6
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
Year Ended December 31,
2001 2000 1999
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds (payments) from revolving credit
agreement 3,620,866 14,637,367 (1,630,250)
Proceeds from long-term borrowings - 3,901,989 -
Principal payments on long-term borrowings (1,261,597) (5,274,805) (2,604,392)
Purchase and retirement of common stock (585,881) (3,198,986) (1,027,285)
Proceeds from exercise of options and warrants - 1,150,000 -
-------------- -------------- --------------
Net cash provided by (used in) financing
activities of continuing operations 1,773,388 11,215,565 (5,261,927)
Net cash used in financing activities of
discontinued operations - (88,138) (87,975)
-------------- -------------- --------------
Net cash provided by (used in) financing
activities 1,773,388 11,127,427 (5,349,902)
-------------- -------------- --------------
Net increase (decrease) in cash and cash
equivalents 2,544,657 508,908 (12,848,465)
CASH AND CASH EQUIVALENTS
Beginning of year 1,333,128 824,220 13,672,685
-------------- -------------- --------------
End of year $ 3,877,785 $ 1,333,128 $ 824,220
============== ============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid, net of $135,370, $246,207 and
$395,074 interest capitalized to property and
equipment for 2001, 2000 and 1999,
respectively:
Continuing operations $ 3,836,240 $ 2,440,251 $ 1,365,866
============== ============== ==============
Discontinued operations $ - $ 13,368 $ 20,492
============== ============== ==============
Income taxes paid $ 181,780 $ 421,654 $ 3,257,773
============== ============== ==============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Valuation and release from escrow of 245,899
shares of common stock related to
acquisitions for 1999. $ - $ - $ 970,528
============== ============== ==============
Issuance of 7,520 and 1,150,000 shares of
common stock upon exercise of options in
exchange for notes receivable in 2001 and 2000 $ 18,800 $ 1,150,000 $ -
============== ============== ==============
Capital lease obligation incurred for property
and equipment $ 315,421 $ 3,700,000 $ -
============== ============== ==============
Exchange of assets for minority interest $ - $ - $ 866,139
============== ============== ==============
ACQUISITION OF COMPANIES (Note B)
Working capital acquired, net of cash and cash
equivalents received $ - $ - $ 592,288
Fair value of other assets acquired, principally
property and equipment - - 698,647
Goodwill - - 647,369
Long-term debt assumed - - (151,612)
-------------- -------------- --------------
$ - $ - $ 1,786,692
============== ============== ==============
The accompanying notes are an integral part of these financial statements.
F-7
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A. Nature of Business and Summary of Significant Accounting Policies
The nature of the business and a summary of the significant accounting policies
consistently applied in the preparation of the accompanying consolidated
financial statements follows.
1. Nature of business
The Company designs, manufactures and sells air filters and related products. It
is focused on providing complete environmental control systems for end uses
ranging from controlling contaminants in residences and commercial office
buildings through specialized manufacturing environments for semiconductors and
pharmaceuticals. The Company also designs and manufactures much of its own
production equipment to automate processes to decrease labor costs associated
with its standard products. The Company also produces glass-based air filter
media for many of its products. The vast majority of the Company's current
revenues come from the sale of after-market replacement filters, since air
filters are typically placed in equipment designed to last much longer than the
filters.
The Company sells some products for end users outside of the United States
through domestic specialty cleanroom contractors. These sales are accounted for
as domestic sales. The Company also sells products through foreign distributors,
primarily in Europe, and a wholly owned subsidiary, which sells to customers in
the Far East. Sales through foreign distributors and its wholly owned foreign
subsidiary total less than 5% of net sales. Assets held outside the United
States are negligible.
2. Principles of consolidation
The consolidated financial statements include the accounts and operations
of the Company and its subsidiaries, all of which are wholly owned except
for Superior Die Cut, of which 50% is owned by two officers and
directors and 50% is owned by other shareholders unrelated to the Company
or any of its officers and directors.
3. Significant customers
Net sales for the years ended December 31, 2001, 2000 and 1999 included sales to
the following major customers, together with the receivables due from those
customers:
Trade Receivable Balance
Amount of Net Sales As of December 31,
------------------------------------------ ---------------------------
2001 2000 1999 2001 2000
------------ ------------ ------------ ------------ ------------
Customer A $ 15,498,460 $ 16,527,125 $ 16,441,644 $ 1,084,449 $ 1,677,274
Customer B 29,618,268 24,772,898 21,148,340 4,781,894 3,256,765
4. Use of estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
F-8
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A. Nature of Business and Summary of Significant Accounting Policies
- Continued
5. 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 when purchased to be cash equivalents.
6. Fair value of financial instruments
The carrying amount of cash equivalents, trade receivables and trade payables
approximates fair value at December 31, 2001 and 2000 because of the short
maturity of those instruments. Based on the borrowing rates currently available
to the Company for bank loans with similar maturities and similar collateral
requirements, the fair value of notes payable and long-term debt approximates
the carrying amounts at December 31, 2001 and 2000.
7. Inventories
Inventories are valued at lower of cost (first-in, first-out method) or market.
8. Comprehensive income
FAS 130, "Reporting Comprehensive Income," requires disclosure of comprehensive
income in addition to the existing income statement. Other comprehensive income
(loss) is defined as the change in equity during a period, from transactions and
other events, excluding changes resulting from investments by owners (e.g.,
supplemental stock offerings) and distributions to owners (e.g., dividends).
9. Derivative financial instruments
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (SFAS 133) as amended by SFAS 138, "Accounting for
Certain Derivative Instruments and Hedging Activities -- an Amendment to
FASB Statement No. 133." SFAS 133 and SFAS 138 established new accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. All derivatives, whether designated in hedging relationships
or not, are required to be recorded on the balance sheet at fair value. If
the derivative is a cash flow hedge, the effective portions of changes in
the fair value of the derivative are recorded in other comprehensive
income and are recognized in the income statement when the hedged item
affects earnings. Ineffective portions of changes in the fair value of
cash flow hedges are recognized in earnings. The cumulative effect of the
adoption of SFAS 133 and SFAS 138, as of January 1, 2001 resulted in a
$579,273 decrease in other comprehensive income, a $386,182 decrease in
deferred tax liability and an increase in long-term liabilities - other of
$965,455, and had no impact on net earnings.
F-9
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A. Nature of Business and Summary of Significant Accounting Policies
- Continued
9. Derivative financial instruments - Continued
The Company has only limited involvement with derivative financial instruments.
The Company has two interest rate swap agreements to hedge against the potential
impact on earnings from increases in market interest rates of two variable rate
bonds. Under the interest rate swap agreements, the Company receives or makes
payments on a monthly basis, based on the differential between 5.14% and a tax
exempt interest rate as determined by a remarketing agent. This interest rate
swap is accounted for as a cash flow hedge in accordance with SFAS 133 and SFAS
138. The tax effected fair market value of the interest rate swap of $653,990 at
December 31, 2001 is included in other comprehensive loss. The interest rate
swap contracts expire in 2013 and 2015.
The following is a rollforward of the components of other comprehensive loss
for the year ended December 31, 2001:
Transition adjustment from adoption of SFAS 133 $ 579,273
Net change associated with hedge transactions 74,717
---------
Ending balance deferred in other comprehensive loss $ 653,990
=========
10. 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, 2001.
11. Trademarks and trade names
Trademarks and trade names are being amortized on a straight line basis over 17
years. At each balance sheet date, the Company evaluates the value of trademarks
and tradenames for impairment by comparing expectations of non-discounted future
cash flows excluding interest costs with the carrying value of trademarks and
tradenames for each trademark or tradename having a material unamortized
balance. Based upon its most recent analysis, the Company believes that no
impairment of trademarks and tradenames exists at December 31, 2001.
12. Property and equipment
Property and equipment are stated at cost. Depreciation is computed by the
straight-line method over estimated useful lives. Amortization of equipment and
property held under 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. In the fourth quarter of 2001, the Company changed its
estimate of remaining useful life of certain machinery and equipment from ten to
fifteen years. The Company made these changes to better reflect the estimated
periods during which such assets will remain in service. The net effect during
the fourth quarter was to decrease depreciation expenses by approximately
$224,256. Based upon its most recent analysis, the Company believes that no
impairment of property and equipment exists at December 31, 2001.
F-10
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A. Nature of Business and Summary of Significant Accounting Policies
- Continued
13. Revenue recognition
Sales are recognized when shipments are made to customers. Rebates, allowances
for damaged goods and other advertising and marketing program rebates are
accrued pursuant to contractual provisions.
14. Income taxes
Deferred taxes are provided on the 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.
15. Earnings (loss) per share
Basic EPS is calculated by dividing earnings (loss) available to common
shareholders by the weighted average number of common shares outstanding during
each period. Diluted EPS is similarly calculated, except that the denominator
includes common shares that may be issued subject to existing rights with
dilutive potential, except when their inclusion would be antidilutive.
16. Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options as provided for under FASB
Statement 123, "Accounting for Stock-Based Compensation" (SFAS 123).
17. Outbound shipping expenses
Outbound shipping expenses are included in "operating expenses," not in "cost of
goods sold."
18. Advertising
The costs of advertising are expensed as incurred.
19. Warranty
The costs of warranties on the Company's products have not been historically
significant and are expensed as incurred.
20. Self-Insurance
The Company is self-insured for certain losses relating to workers' compensation
claims and medical benefits. The Company has purchased stop-loss coverage in
order to limit the exposure to any significant levels of workers' compensation
and medical benefits liability claims.
Self-insured losses are accrued based upon the Company's estimate of the
aggregate liability for uninsured claims incurred using the Company's historical
experience.
F-11
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A. Nature of Business and Summary of Significant Accounting Policies
- Continued
21. Reclassifications
Certain account balances for 2000 and 1999 have been reclassified with no effect
on net earnings or retained earnings to be consistent with the classification
adopted for the year ended December 31, 2001.
22. Impact of Recently Issued Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets"
(SFAS 142). Under SFAS 142, goodwill and intangible assets with indefinite lives
are no longer amortized but are reviewed annually (or more frequently if
impairment indicators arise) for impairment. Separable intangible assets that
are not deemed to have indefinite lives will continue to be amortized over their
useful lives (but with no maximum life). The amortization provisions of SFAS 142
apply to goodwill and intangible assets acquired after June 30, 2001. With
respect to goodwill and intangible assets acquired prior to July 1, 2001, the
Company is required to adopt SFAS 142 effective January 1, 2002. The adoption of
this new accounting pronouncement has not been fully evaluated, but is expected
to have an impact on the Company's financial statements and results of
operations, as goodwill with a net carrying amount of $27,612,236 as of December
31, 2001 will no longer be amortized.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations," (SFAS 143) which is effective for fiscal years beginning after
June 15, 2002. Management does not expect the adoption of SFAS 143 to have a
material impact on the Company's financial statements and results of operations.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS 144). The Company is required to adopt SFAS
144 no later than its first fiscal year beginning after December 15, 2001.
Management does not expect the adoption of SFAS 144 to have a material impact on
the Company's financial statements or results of operations.
Note B. Mergers and Acquisitons
Effective April 1, 1999 the Company purchased the Tidewater group of companies,
consisting of Tidewater Air Filter Fabrication Company, Inc., Newport
Manufacturing, Inc., and Bio-Tec Inc., for a total cost of approximately
$1,787,000, net of cash received, in a transaction recorded as a purchase.
Goodwill of approximately $647,000 was recorded in this transaction. Tidewater
is an air filter distributor and service organization. Prior to the acquisition,
Tidewater was an exclusive distributor of a competitor's products. The Company's
financial statements include the operating results of the Tidewater group of
companies from April 1, 1999.
Pro forma results of operations of the Company as though Tidewater had been
acquired as of January 1, 1999, are not presented because the pro forma would
not be materially different than those presented.
F-12
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note C. Inventories
Inventories consist of the following at December 31:
2001 2000
-------------- --------------
Finished goods $ 14,530,664 $ 12,423,309
Work in progress 3,287,288 2,440,136
Raw materials 14,723,048 14,822,031
-------------- --------------
32,541,000 29,685,476
Less allowances 1,149,635 1,385,710
-------------- --------------
$ 31,391,365 $ 28,299,766
============== ==============
Note D. Discontinued Operations
During 1997, the Company established a new subsidiary, Airseal West, Inc., to
serve as a manufacturer of industrial air handlers, custom housings, and related
products for the western U.S. The market opportunities envisioned by this
venture failed to materialize, and Airseal West focused its primary efforts on
perceived opportunities in businesses and products unrelated to air filtration,
including sporting goods, vending equipment and other general manufacturing.
In December 1999, the Company adopted a formal plan to close Airseal West, a
wholly owned subsidiary, and sell its various assets and product lines to
unrelated third parties. The closure was completed in the first quarter of 2001.
During the year ended December 31, 2000, approximately $3 million of fixed
assets and inventory were transferred to other subsidiaries, with other assets
remaining held for sale. The closure was completed in the first quarter of 2001,
although various assets, consisting primarily of non-filtration inventories,
manufacturing equipment, designs and intellectual properties, were not sold
until later in the year.
Operating results of Airseal West, including net sales of Airseal West,
are shown separately in the accompanying statement of operations and are
combined into the heading, "Loss from operations of discontinued
subsidiary." Net sales of Airseal West for 2001, 2000 and 1999 were
approximately $68,000, $1,710,000 and $2,354,000, respectively.
Net assets of Airseal West consist of the following at December 31:
2001 2000
-------------- --------------
Accounts receivable $ - $ 374,952
Accounts payable - (228,241)
Accrued liabilities - (69,295)
Long-term debt - (77,416)
-------------- --------------
$ - $ -
============== ==============
F-13
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note E. Other Assets
Other assets consist of the following at December 31:
2001 2000
-------------- --------------
Real estate held for sale $ 56,000 $ 56,000
Notes receivable 892,571 1,255,420
Deposits 503,340 490,267
Deferred expenses, net of accumulated
amortization of $399,976 in 2001 and
$338,010 in 2000 1,209,903 1,071,807
All other 54,041 111,686
-------------- --------------
$ 2,715,855 $ 2,985,180
============== ==============
Note F. Intangible Assets
Intangible assets consist of the following at December 31:
2001 2000
-------------- --------------
Goodwill, net of accumulated amortization of
$3,353,778 in 2001 and $2,555,832 in 2000 $ 27,612,236 $ 28,405,089
Trademarks and trade names, net of
accumulated amortization of $317,113 in
2001 and $256,468 in 2000 720,071 780,716
-------------- --------------
$ 28,332,307 $ 29,185,805
============== ==============
Note G. Property and Equipment
Property and equipment and estimated useful lives consist of the following at
December 31:
Estimated
2001 2000 Useful Lives
-------------- -------------- --------------
Land $ 3,822,609 $ 3,772,114 -
Buildings 38,277,128 37,650,718 15-40 years
Machinery and equipment 54,624,251 48,268,362 10-15 years
Office equipment 8,669,770 7,553,043 5 years
Vehicles 1,486,189 1,351,045 5 years
Construction in progress 2,915,131 2,777,843 -
-------------- --------------
109,795,078 101,373,125
Less accumulated depreciation 33,515,344 26,451,929
-------------- --------------
$ 76,279,734 $ 74,921,196
============== ==============
Total depreciation expense charged to operations totaled $7,063,416, $7,612,348
and $5,544,018 for 2001, 2000 and 1999, respectively.
F-14
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note H. Pledged Assets and Debt
A summary of the Company's debt, and collateral pledged thereon, consists of the
following at December 31:
2001 2000
-------------- --------------
Long-term debt:
Lower of prime or LIBOR plus defined percentage
line of credit agreements (4.41% at December
31, 2001) $ 29,627,983 $ 26,007,117
Prime plus 0.25 percent (5% at December 31,
2001) 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 building. 1,060,809 1,283,156
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. 361,735 483,622
Various notes payable to a bank with interest at
prime plus .25 percent with a floor of 7% (7%
at December 31, 2001) due in monthly
installments of $12,038, including interest,
expiring at various times through April 2004,
collateralized by a deed of trust on real
property. 975,748 1,045,297
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. 5,320,000 5,505,000
Note payable to a bank with interest at prime
plus 0.25 percent, with rate adjusted annually
(7.25% at December 31, 2001), 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 property. 790,714 808,905
Industrial revenue bond with a variable tax
exempt interest rate as determined by a
remarketing agent, with rate effectively fixed
at 5.14% by an interest-rate swap,
collateralized by a $4,000,000 letter of
credit which expires April 1, 2015. 3,970,573 3,901,989
Note payable to an industrial development
authority, with an interest rate of 83 percent
of prime rate or a floor of 5.5%, whichever is
higher (5.5% at December 31, 2001), due in
monthly installments of $11,333 plus interest
through January 2005, collateralized by a deed
of trust on real property. 430,810 566,800
Industrial revenue bond with a variable tax
exempt interest rate as determined by a
remarketing agent, with rate effectively fixed
at 5.14% by an interest-rate swap,
collateralized by a $4,500,000 letter of
credit which expires April 1, 2013. 4,500,000 4,500,000
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. 1,209,564 1,440,804
F-15
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note H. Pledged Assets and Debt - Continued
2001 2000
-------------- --------------
Various other contracts payable 392,887 226,782
-------------- --------------
48,640,823 45,769,472
Less current maturities 32,369,393 32,635,253
-------------- --------------
$ 16,271,430 $ 13,134,219
============== ==============
Aggregate maturities required on long-term debt as of December 31, 2001 are due
in future years as follows:
Year Ending December 31,
------------------------
2002 $ 32,369,393
2003 852,654
2004 957,616
2005 548,479
2006 338,098
Later years 13,574,583
------------
$ 48,640,823
============
The line of credit agreements have amounts outstanding on revolving credit
facilities with banks which provide lines of credit up to a maximum principal
amount of $30,000,000 at December 31, 2001 and 2000. The lines of credit bear
interest rates at LIBOR, which was 2.45% at December 31, 2001, plus 3.5%. The
line of credit is collateralized by the pledge of all common stock of the
subsidiaries owned by the Company and other assets of the Company. In connection
with the lines 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, not repurchasing its
stock, 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. At
times during 2001 and 2000, including at December 31, 2001, the Company was in
violation of certain of these financial loan covenants.
Subsequent to December 31, 2001, the Company signed an agreement to amend and
extend the current credit agreement which modifies required financial ratios,
other loan covenants, and waives prior loan covenant violations. The agreement
to amend and extend the line of credit agreement calls for the line of credit
agreement to expire August 30, 2002, and is subject to finalization of
documentation acceptable to both the banks and the Company.
F-16
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note I. Leases
The Company leases certain facilities and equipment under long-term
non-cancellable operating leases, which may be renewed in the ordinary course of
business, including a building lease with a related party (Note M). The Company
leases certain manufacturing and warehousing space under a capital lease with an
original term of ten years with two consecutive ten-year renewal options. Leased
capital assets are included in property and equipment as follows at December 31:
2001 2000
-------------- --------------
Buildings $ 3,700,000 $ 3,700,000
Accumulated depreciation (185,000) (61,667)
-------------- --------------
$ 3,515,000 $ 3,638,333
============== ==============
Future minimum payments, by year and in aggregate, under capital leases and
operating leases consist of the following at December 31, 2001:
Year Ending December 31, Capital leases Operating leases
------------------------ -------------- ----------------
2002 $ 521,272 $ 2,163,086
2003 536,910 1,773,078
2004 553,018 1,672,145
2005 569,608 1,430,617
2006 586,697 1,248,565
Later years 2,138,231 7,477,317
-------------- ----------------
Total minimum lease payments 4,905,736 $ 15,764,808
Less amount representing interest 1,501,733 ================
--------------
Present value of net minimum payments 3,404,003
Current portion 230,501
--------------
Long-term portion $ 3,173,502
==============
Total rent expense charged to operations was approximately $3,434,532,
$2,900,000 and $2,900,000 for 2001, 2000 and 1999, respectively.
F-17
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note J. Income Taxes
The Company's provision (benefit) for income taxes is as follows for the years
ended December 31:
2001 2000 1999
-------------- -------------- --------------
Current:
Federal $ 499,474 $ (2,784,617) $ 2,485,920
State 145,290 (775,119) 792,986
Foreign 75,205 44,681 -
-------------- -------------- --------------
719,969 (3,515,055) 3,278,906
-------------- -------------- --------------
Deferred:
Federal 73,135 (501,298) (250,675)
State 21,274 (77,493) (57,952)
-------------- -------------- --------------
94,409 (578,791) (308,627)
-------------- -------------- --------------
Total 814,378 (4,093,846) 2,970,279
Allocated to discontinued operations (115,132) (1,651,000) (1,700,403)
-------------- -------------- --------------
Total provision (benefit) from continuing operations $ 929,510 $ (2,442,846) $ 4,670,682
============== ============== ==============
The income tax provision for continuing operations differs from the amount of
income tax determined by applying the U.S. federal income tax rate of 34% to
pretax income due to the following for years ended December 31:
2001 2000 1999
-------------- -------------- --------------
Computed "expected" tax expense (benefit) $ 407,423 $ (3,839,640) $ 1,967,719
Increase (decrease) in income taxes resulting from:
Nondeductible expenses 298,146 337,608 377,919
Nontaxable income - - (1,061)
State income taxes net of federal tax benefit 88,025 (591,814) 427,769
Change in valuation allowance - - (2,094)
Foreign taxes 20,784 - -
Other - - 200,000
-------------- -------------- --------------
$ 814,378 $ (4,093,846) $ 2,970,252
============== ============== ==============
F-18
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note J. Income Taxes - Continued
Net deferred tax assets and (liabilities) consist of the following
components as of December 31:
2001 2000
-------------- --------------
Accounts receivable allowance $ 583,277 $ 638,728
State net operating loss carryforward 711,478 -
Interest rate swap 435,993 -
Inventory 993,249 1,451,632
Accrued expenses 361,967 843,582
Prepaid expenses 37,011 68,270
Contributions carryover 19,460 18,333
Property and equipment (6,213,233) (6,432,927)
-------------- --------------
$ (3,070,798) $ (3,412,382)
============== ==============
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 as:
2001 2000
-------------- --------------
Current assets $ 1,994,964 $ 3,020,545
Noncurrent liabilities (5,065,762) (6,432,927)
-------------- --------------
$ (3,070,798) $ (3,412,382)
============== ==============
F-19
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note K. Commitments and Contingencies
1. Employment Agreements:
The President and Chief Executive Officer, and the Chief Operating Officer/Vice
President Finance/Chief Financial Officer, both have employment agreements which
expire in December 2010. The employment agreements provide for an annual salary
of $250,000 for each officer. In addition to a base salary and bonuses which may
be paid at the discretion of the Board of Directors, the agreements provide for
a termination payment of the minimum amount due under the employment contract if
the officer had served his full term, in the event the officer's employment is
terminated under various circumstances.
2. Litigation:
During 2000, the Company settled its lawsuit with a customer regarding a
purchase of allegedly defective filters. As part of the settlement, the Company
agreed to pay the customer $1.5 million, accept the return of the filters as
payment for its account receivable, and supply the customer with filters at
reduced prices for future work. The Company has sued the supplier of the
urethane sealant used in the allegedly defective filters for supplying a sealant
which did not meet specifications for the project. The amount and probability of
any settlement or award is unknown at this time.
The Company is involved in a dispute with Liberty Mutual, a former
workers' compensation administrator and stop-loss insurer for some of the
Company's subsidiaries. The administrator has alleged that they are
entitled to be reimbursed for certain costs incurred in administering
various insurance claims. The Company has counter-sued, claiming that the
administrator was negligent in its duties as administrator of our claims,
that it made payments on our behalf which were specifically disallowed,
that they refused to follow instructions given to them by us, that they
failed to meet minimal acceptable standards for administering claims, and
that such failures constituted a material dereliction of their
responsibilities as administrator, as well as other claims related to
malfeasance and negligence. In addition, Liberty Mutual charged certain
administrative fees over and above the actual costs incurred which the
Company is contesting. The amount and probability of any payment or
settlement is unknown at this time. Among the issues being considered is
the matter of currently unresolved workers' compensation claims whose
estimate of potential loss may change as a result of this litigation.
While management believes it has reserved an adequate amount for
settlement of these claims, there is no guarantee that the Company's
actual liability will not exceed its current estimate. Accordingly, these
matters, if resolved in a manner different from management's estimate,
could have a material effect on operating results or cash flows in the
future.
From time to time, the Company is a party as plaintiff or defendant to various
legal proceedings related to our normal business operations. In the opinion of
management, although the outcome of any legal proceeding cannot be predicted
with certainty, the ultimate liability of the Company in connection with its
legal proceedings will not have a material adverse effect on the Company's
financial position, but could be material to the results of operations in any
one future accounting period. Defense costs are expensed as incurred.
Note L. Employee Benefit Plans
The Company has a defined contribution 401(k) salary reduction plan intended to
qualify under section 401(a) of the Internal Revenue Code of 1986 ("Salary
Savings Plan"). The Salary Savings Plan allows 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 $118,000,
$230,000 and $195,000 to the Salary Savings Plan for the years ended December
31, 2001, 2000 and 1999, respectively.
The Company's employee benefit program also includes health, accident, dental,
life insurance and disability benefits. Substantially all the Company's
subsidiaries have elected to self-insure the health and accident insurance at an
individual maximum ranging from $30,000 to $90,000 per employee per claim year.
A stop loss policy is maintained for subsidiaries that are self-insured, which
covers 100 percent of liability over the self- insured amounts. The employer's
portion of claims charged to operations totaled approximately $3,017,868,
$2,045,000 and $1,100,000 for 2001, 2000 and 1999, respectively.
F-20
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note L. Employee Benefit Plans - Continued
During 1996, the Company adopted the Long Term Incentive Plan ("LTI Plan") to
assist the Company in securing and retaining key employees and consultants. The
LTI Plan authorizes grants of incentive stock options, nonqualified stock
options, stock appreciation rights ("SARs"), restricted stock performance shares
and dividend equivalents to officers and key employees of the Company and
outside consultants to the Company. There are 1,986,800 shares of Common Stock
reserved for award under the LTI Plan. During 2001, 2000 and 1999, the Company
awarded options to purchase 40,000, 12,500 and 52,850 shares of Common Stock
under the LTI Plan, respectively (Note N).
During 1996, the Company also adopted the 1996 Director Option Plan which
provides for the grant of stock options to outside directors of the Company who
were elected or appointed after February 1, 1996, and who were not existing
directors on the effective date of the plan. Each such outside director who is
serving as a director on January 1 of each calendar year will automatically be
granted an option to acquire up to 5,000 shares of Common Stock on such date,
assuming such outside director had been serving for at least six months prior to
the date of grant. The Company has reserved 500,000 shares of its Common Stock
for issuance under the 1996 Director Option Plan which expires in 2006. During
2001, 2000 and 1999, the Company awarded options to purchase 60,000, 0 and
105,000 shares, respectively, of Common Stock under the 1996 Director Option
Plan (Note N).
Note M. Related Party Transactions and Balances
At December 31, 2001 and 2000, the Company had notes receivable secured by
common stock classified as contra-equity of $8,325,978 and $7,891,208,
respectively, due from various directors, officers, shareholders and employees,
with interest thereon varying between 3.45% and 8.75%, maturing at various dates
to December 2010 and callable on demand by the Company.
During November 2000, the Company entered into a five-year operating lease
whereby the Company is leasing 138,000 square feet of a building 50% owned by
two officers and directors of the Company for $27,520 per month. The Company
believes this lease is at prevailing market rates.
On January 2, 2001, the Company purchased and leased back $797,000 in
manufacturing equipment from Superior Die Cut, a vendor of raw materials owned
by two officers and directors. The Company has also loaned this supplier
$500,000, secured by a building and used to pay off an existing mortgage, and
$400,000 to repay a credit line secured by inventory, receivables and other
current assets. Due to the significance of the loans and advances the Company
has made to Superior Die Cut, and its ability to exercise control over this
company, the Company has consolidated the accounts and operations of this
entity. The Company made payments of $261,352 and $233,831 in 2001 and 2000,
respectively, to this supplier. At December 31, 2001 and 2000, the Company owed
a total of $86,614 and $76,991, respectively, to this vendor.
F-21
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note N. Stock Options and Warrants
During 2001, the Company granted options to purchase: 50,000 shares of common
stock under its LTI Plan at an exercise price of $2.50 per share; 60,000 shares
of common stock under its 1996 Director Option Plan at a weighted average
exercise price of $2.02 per share; and other options to purchase 2,000,000
shares of common stock to officers and directors at an exercise price of $7.50
per share. All options granted during 2001 were non-qualified fixed price
options.
The following table summarizes the activity related to all Company stock options
and warrants for 2001, 2000 and 1999:
Weighted Average
Shares Exercise Price Exercise Price
--------------------------- per Share per Share
Stock ----------------------------------------------------------
Warrants Options Warrants Options Warrants Options
-------------------------------------------------------------------------------------
Outstanding at January 1, 1999 637,239 6,930,370 $5.54 - 14.73 $1.00 - 9.50 $ 9.57 $ 3.70
Granted - 157,850 - 2.50 - 4.75 - 2.97
Exercised - - - - - -
Canceled or expired (25,000) (75,000) 9.63 2.50 - 9.50 9.63 5.29
------------- ------------
Outstanding at December 31, 1999 612,239 7,013,220 5.54 - 14.73 1.00 - 9.50 9.57 3.66
Granted - 12,500 - 2.50 - 2.63 - 2.53
Exercised - (2,300,000) - 1.00 - 1.00
Canceled or expired (72,239) - 5.34 - 8.16 - 6.07 -
------------- ------------
Outstanding at December 31, 2000 540,000 4,725,720 8.40 - 14.73 2.50 - 9.50 10.04 3.66
Granted - 2,110,000 - 1.88 - 7.50 - 7.25
Exercised - (7,520) - 2.50 - 2.50
Canceled or expired - (2,129,900) - 2.50 - 9.50 - 7.37
------------- ------------
Outstanding at December 31, 2001 540,000 4,698,300 8.40 - 14.73 1.88 - 8.50 10.04 4.89
============= ============
Exercisable at December 31, 2001 540,000 4,648,300 8.40 - 14.73 1.88 - 8.50 10.04 4.91
============= ============
Exercisable at December 31, 2000 540,000 4,725,720 8.40 - 14.73 1.00 - 9.50 10.04 3.68
============= ============
Exercisable at December 31, 1999 612,239 6,753,520 5.54 - 14.73 1.00 - 9.50 9.57 3.69
============= ============
The warrants and options expire at various dates ranging from June 2002 to
December 2008. A further summary of information related to options outstanding
at December 31, 2001 is as follows:
Weighted Average Weighted Average
Range of Exercise Number Remaining Contractual Exercise Price
Prices Outstanding / Exercisable Life (Years) Outstanding / Exercisable
---------------------- -------------------------- ------------------------- ----------------------------
$1.88 to 2.63 2,242,500 / 2,192,500 4.09 $2.49 / 2.49
3.00 to 4.75 213,200 / 213,200 4.37 4.13 / 4.13
5.38 to 8.50 2,242,600 / 2,242,600 4.44 7.36 / 7.36
F-22
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note N. Stock Options and Warrants - Continued
As permitted under accounting principles generally accepted in the United States
of America, grants to employees under the LTI Plan and other grants to employees
of options are accounted for following APB Opinion No. 25 and related
Interpretations. Accordingly, no compensation cost has been recognized for
grants to employees under the LTI Plan, since all options granted had an
exercise price at or above the quoted 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 , reported net earnings (loss) and earnings (loss) per common
share would have been changed to the pro forma amounts shown below for the years
ended December 31:
2001 2000 1999
-------------- -------------- --------------
Net earnings (loss):
As reported $ 383,925 $ (7,199,213) $ 2,817,134
Pro forma $ (1,418,013) $ (7,199,213) $ 1,136,155
Basic earnings (loss) per share:
As reported $ 0.01 $ (0.28) $ 0.11
Pro forma $ (0.05) $ (0.28) $ 0.04
Diluted earnings (loss) per share:
As reported $ 0.01 $ (0.28) $ 0.11
Pro forma $ (0.05) $ (0.28) $ 0.04
Weighted average fair value per option of options
granted during the year $ 1.42 $ 2.17 $ 1.53
In determining the pro forma amounts above, the value of each grant is estimated
at the grant date using the Black-Scholes option model with the following
weighted average assumptions for options granted in 2001, 2000 and 1999:
Dividend rate of 0%; risk-free interest rate of 4.00%, 6.00% and 5.66%,
respectively; expected lives of 5 years; and expected price volatility of 88%,
125% and 67%, respectively.
F-23
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note O. Earnings (Loss) per Share
The following data show the shares used in computing earnings (loss) per
common share including dilutive potential common stock:
2001 2000 1999
-------------- -------------- --------------
Common shares outstanding at beginning of year 26,379,633 25,435,583 25,624,339
Net weighted average common shares issued and
canceled during year (343,551) (138,063) (279,906)
-------------- -------------- --------------
Weighted average number of common shares used
in basic EPS 26,036,082 25,297,520 25,344,433
Dilutive effect of stock options and warrants 1,551 - 1,159,996
Dilutive effect of contingent shares - - 21,000
-------------- -------------- --------------
Weighted average number of common shares and
dilutive potential shares used in diluted EPS 26,037,633 25,297,520 26,525,429
============== ============== ==============
As of December 31, 2001, 5,086,250 options and warrants described in Note
N were excluded from the computation of diluted EPS because the market
price of the underlying stock was less than the exercise price. As of
December 31, 2000 all options and warrants described in Note N were
excluded from the computation of diluted EPS because 2000 was a loss year
and inclusion of options and warrants would have been anti-dilutive. As of
December 31, 1999 3,953,050 options and warrants described in Note N were
excluded from the computation of diluted EPS because the market price of
the underlying stock was less than the exercise price.
F-24
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note P. Quarterly Financial Data (Unaudited)
Quarters Ended
----------------------------------------------------------
March 31, June 30, September 30, December 31,
2001 2001 2001 2001
------------- ------------- ------------- -------------
Net sales $ 47,089,772 $ 49,916,418 $ 49,862,475 $ 42,208,817
Gross profit 11,377,322 10,121,541 10,887,907 7,395,809
Operating income (loss) from
continuing operations 1,862,789 1,436,662 2,099,317 (1,927,615)
Earnings (loss) from continuing
operations $ 880,116 $ 546,490 $ 746,187 $ (1,613,668)
============= ============= ============= =============
Earnings (loss) from continuing
operations per share:
Basic $ 0.03 $ 0.02 $ 0.03 $ (0.07)
Diluted 0.03 0.02 0.03 (0.07)
Common stock prices:
High $ 2.72 $ 2.45 $ 2.15 $ 3.69
Low 1.56 1.61 1.16 1.30
March 31, June 30, September 30, December 31,
2000 2000 2000 2000
------------- ------------- ------------- -------------
Net sales $ 44,099,274 $ 50,033,661 $ 50,422,300 $ 49,516,662
Gross profit 12,749,461 11,335,321 7,021,910 5,810,505
Operating income (loss) from
continuing operations 3,447,686 2,072,017 (2,491,726) (6,844,248)
Earnings (loss) from continuing
operations $ 1,901,025 $ 959,349 $ (1,845,452) $ (5,511,904)
============= ============= ============= =============
Earnings (loss) from continuing
operations per share:
Basic $ 0.08 $ 0.04 $ (0.07) $ (0.22)
Diluted 0.08 0.04 (0.07) (0.22)
Common stock prices:
High $ 4 1/8 $ 4 1/8 $ 3 11/16 $ 2 19/32
Low 2 9/16 1 5/16 1 5/8 1 3/8
F-25
FLANDERS CORPORATION
FINANCIAL STATEMENT SCHEDULE
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON SCHEDULE
Board of Directors and Stockholders
Flanders Corporation
In connection with our audit of the consolidated financial statements of
Flanders Corporation and Subsidiaries referred to in our report dated
March 15, 2002, except for the last paragraph of Note H, as to which the
date is April 4, 2002, which is included in the annual report and Form
10-K, we have also audited Schedule II for each of the three years in the
period ended December 31, 2001. In our opinion, this schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth
therein.
/s/ Grant Thornton LLP
Salt Lake City, Utah
March 15, 2002
F-27
FLANDERS CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2001, 2000 and 1999
Additions
------------
Balance at Charged to Balance
Beginning Cost and at End
of Period Expense Deductions of Period
------------ ------------ ------------ ------------
For the year ended December 31, 2001
Allowance for doubtful accounts $ 1,777,973 $ 397,575 $ (643,898)(1) $ 1,531,650
Allowance for inventory value 1,385,710 - (236,075)(2) 1,149,635
------------ ------------ ------------ ------------
Total $ 3,163,683 $ 397,575 $ (879,973) $ 2,681,285
============ ============ ============ ============
For the year ended December 31, 2000
Allowance for doubtful accounts $ 487,321 $ 1,489,129 $ (198,477)(1) $ 1,777,973
Allowance for inventory value 188,000 1,197,710 - 1,385,710
------------ ------------ ------------ ------------
Total $ 675,321 $ 2,686,839 $ (198,477) $ 3,163,683
============ ============ ============ ============
For the year ended December 31, 1999
Allowance for doubtful accounts $ 551,725 $ 39,620 $ (104,024)(1) $ 487,321
Allowance for inventory value 94,414 93,586 - 188,000
Valuation allowance for deferred tax assets 2,094 - (2,094)(3) -
------------ ------------ ------------ ------------
Total $ 648,233 $ 133,206 $ (106,118) $ 675,321
============ ============ ============ ============
(1) Uncollected receivables written-off, net of recoveries.
(2) Reduction in allowance, offset to inventory.
(3) Reduction in allowance.
F-28