SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
Commission File No. 0-27958
FLANDERS CORPORATION
-------------------------------------
(Exact name of registrant as specified in its charter)
North Carolina 13-3368271
-------------------------------- ------------------------
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization.)
2399 26th Avenue North, St. Petersburg, Florida 33734
----------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (727) 822-4411
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock: As of August 13, 2002, the issuer had 26,033,153 shares common
stock, par value $.001 per share, outstanding.
FLANDERS CORPORATION
FORM 10-Q
FOR QUARTER ENDED June 30, 2002
PART I - FINANCIAL INFORMATION Page
Item 1 -
Financial Statements
Consolidated Condensed Balance Sheets for June 30,
2002 (unaudited) and December 31, 2001 3
Consolidated Condensed Statements of Earnings (unaudited)
for the three and six months ended June 30, 2002 and 2001 4
Consolidated Condensed Statements of Stockholders' Equity
for the year ended December 31, 2001 and the six months
ended June 30, 2002 (unaudited) 5
Consolidated Condensed Statements of Cash Flows (unaudited)
for the three and six months ended June 30, 2002 and 2001 6
Notes to Consolidated Condensed Financial Statements 7
Item 2 -
Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 3 -
Quantitative and Qualitative Disclosures About Market Risk 16
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 18
Item 2 - Changes in Securities and Use of Proceeds 18
Item 3 - Defaults Upon Senior Securities 18
Item 4 - Submission of Matters to a Vote of Security Holders 18
Item 5 - Other Information 18
Item 6 - Exhibits and Reports on Form 8-K 18
SIGNATURES 19
Page 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, December 31,
ASSETS 2002 2001
------ ------------- -------------
(unaudited)
Current assets
Cash and cash equivalents $ 3,119,165 $ 3,877,785
Receivables:
Trade, less allowance for doubtful accounts:
6/30/2002 $1,827,984; 12/31/2001 $1,531,650 33,652,730 29,995,949
Other 593,230 483,941
Inventories (Note B) 33,468,763 31,391,365
Deferred taxes 1,994,964 1,994,964
Other current assets 4,358,120 4,633,848
------------- -------------
Total current assets 77,186,972 72,377,852
Related party receivables 482,650 549,350
Other assets 2,652,985 2,715,855
Intangible assets, less accumulated amortization of
$3,670,891 28,332,207 28,332,307
Property and equipment, less accumulated depreciation:
6/30/2002 $ 36,906,808; 12/31/2001 $33,515,344 74,678,285 76,279,734
------------- -------------
$183,333,099 $180,255,098
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities
Current maturities of long-term debt and capital
leases $ 32,124,454 $ 32,599,894
Accounts payable 18,075,342 15,726,086
Accrued expenses 9,367,392 9,449,073
------------- -------------
Total current liabilities 59,567,188 57,775,053
Long-term capital lease obligations, less current
maturities 3,047,458 3,173,502
Long-term debt, less current maturities 15,716,955 16,271,430
Long-term liabilities, other 1,280,983 1,089,983
Deferred taxes 4,989,362 5,065,762
Commitments and contingencies
Stockholders' equity
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 shares 26,033 26,033
Additional paid-in capital 90,331,524 90,331,524
Notes receivable (8,519,326) (8,325,978)
Accumulated other comprehensive loss (768,590) (653,990)
Retained earnings 17,661,512 15,501,779
------------- -------------
98,731,153 96,879,368
------------- -------------
$183,333,099 $180,255,098
============= =============
See Notes to Consolidated Condensed Financial Statements
Page 3
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net sales $ 44,767,256 $ 49,916,418 $ 87,221,447 $ 97,006,190
Cost of goods sold 33,266,881 39,794,877 66,540,268 75,507,327
------------ ------------ ------------ ------------
Gross profit 11,500,375 10,121,541 20,681,179 21,498,863
Operating expenses 7,576,158 8,684,879 14,559,285 18,199,412
------------ ------------ ------------ ------------
Operating income from continuing operations 3,924,217 1,436,662 6,121,894 3,299,451
Nonoperating expenses from continuing
operations, net (1,481,453) (424,179) (2,422,339) (671,775)
------------ ------------ ------------ ------------
Earnings from continuing operations before
income taxes 2,442,764 1,012,483 3,699,555 2,627,676
Provision for income taxes 981,531 465,993 1,539,822 1,201,070
------------ ------------ ------------ ------------
Earnings from continuing operations 1,461,233 546,490 2,159,733 1,426,606
------------ ------------ ------------ ------------
Loss from operations of discontinued subsidiary,
(including tax benefit of $68,062 and $136,696
for the three months and six months ended
June 30, 2001) - (90,950) - (212,353)
------------ ------------ ------------ ------------
Net earnings $ 1,461,233 $ 455,540 $ 2,159,733 $ 1,214,253
============ ============ ============ ============
Earnings per share from continuing operations
Basic $ 0.06 $ 0.02 $ 0.08 $ 0.05
============ ============ ============ ============
Diluted $ 0.06 $ 0.02 $ 0.08 $ 0.05
============ ============ ============ ============
Loss per share from discontinued operations
Basic $ - $ (0.00) $ - $ (0.01)
============ ============ ============ ============
Diluted $ - $ (0.00) $ - $ (0.01)
============ ============ ============ ============
Net earnings per share
Basic $ 0.06 $ 0.02 $ 0.08 $ 0.05
============ ============ ============ ============
Diluted $ 0.06 $ 0.02 $ 0.08 $ 0.05
============ ============ ============ ============
Weighted average common shares outstanding
Basic 26,033,153 26,033,153 26,033,153 26,039,011
============ ============ ============ ============
Diluted 26,033,153 26,033,153 26,035,077 26,039,011
============ ============ ============ ============
See Notes to Consolidated Condensed Financial Statements
Page 4
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
Accum-
Additional ulated Other
Common Paid-In Notes Compre- Retained
Stock Capital Receivable hensive Loss Earnings Total
-------- ------------- ------------- ------------ ------------- --------------
Balance, January 1, 2001 $ 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
Interest on notes receivable
secured by common shares
(unaudited) - - (193,348) - - (193,348)
Comprehensive income (loss)
Net earnings (unaudited) - - - - 2,159,733 2,159,733
Net loss on cash flow hedges
(unaudited) (114,600) (114,600)
--------------
Total comprehensive income
(unaudited) 1,269,785
-------- ------------- ------------- ------------ ------------- --------------
Balance, June 30, 2002 (unaudited) $ 26,033 $ 90,331,524 $ (8,519,326) $ (768,590) $ 17,661,512 $ 98,731,153
======== ============= ============= ============ ============= ==============
See Notes to Consolidated Condensed Financial Statements
Page 5
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by continuing operations $ 1,929,791 $ 409,972 $ 2,452,317 $ 2,355,527
Net cash used in discontinued operations - (90,950) - (212,353)
------------ ------------ ------------ ------------
Net cash provided by operating activities 1,929,791 319,022 2,452,317 2,143,174
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,225,620) (2,776,127) (2,106,568) (5,120,885)
Net proceeds from notes receivable 30,617 747,529 66,700 208,325
Net (increase) decrease in other assets 9,900 46,698 (15,110) 32,994
------------ ------------ ------------ ------------
Net cash used in investing activities of
continuing operations (1,185,103) (1,981,900) (2,054,978) (4,879,566)
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase and retirement of common stock - - - (585,881)
Net proceeds (payments) from revolving
credit agreement (209,127) (135,206) (492,813) 3,062,487
Principal payments on long-term borrowings (380,676) (263,577) (663,146) (620,035)
------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities (589,803) (398,783) (1,155,959) 1,856,571
------------ ------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents 154,885 (2,061,661) (758,620) (879,821)
CASH AND CASH EQUIVALENTS
Beginning of period 2,964,280 2,514,968 3,877,785 1,333,128
------------ ------------ ------------ ------------
End of period $ 3,119,165 $ 453,307 $ 3,119,165 $ 453,307
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes $ 83,193 $ - $ 83,193 $ -
============ ============ ============ ============
Interest $ 1,372,911 $ 880,504 $ 2,814,725 $ 1,613,300
============ ============ ============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
After tax impact of increase in interest
rate swap liability $ 203,397 $ - $ 114,600 $ -
============ ============ ============ ============
See Notes to Consolidated Condensed Financial Statements
Page 6
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note A. Nature of Business and Interim Financial Statements
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 users
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 the Company's wholly owned
foreign subsidiary total less than 5% of net sales. Assets held outside the
United States are negligible.
Interim financial statements:
The interim consolidated condensed financial statements presented herein are
unaudited and have been prepared in accordance with the instructions to Form
10-Q and Article 10 of Regulation S-X. These statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in our annual report on Form 10-K for the year ended December 31, 2001.
In the opinion of management the interim statements include all adjustments
(consisting only of normal recurring adjustments) necessary to summarize fairly
our financial position, results of operations, and cash flows. The results of
operations and cash flows for the three and six months ended June 30, 2002 may
not be indicative of the results that may be expected for the year ending
December 31, 2002.
Goodwill:
As of January 1, 2002, the Company adopted Statement of Financial Accounting
Standard No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 142
changes the accounting for goodwill from an amortization method to an
impairment-only approach. Thus, effective January 1, 2002, the Company has
ceased amortization of goodwill, including goodwill recorded in past business
combinations. The Company does not have any intangible assets with indefinite
lives other than goodwill.
In connection with the transitional goodwill impairment evaluation, SFAS 142
required the Company to perform an assessment of whether there was an indication
that goodwill was impaired as of January 1, 2002. To accomplish this the Company
was required to identify its reporting units and determine the carrying value of
each reporting unit by assigning the assets and liabilities, including the
existing goodwill and intangible assets, to those reporting units as of the date
of adoption. The Company, as of June 30, 2002, determined the fair value of each
reporting unit and compared it to the reporting unit's carrying amount. If a
reporting unit's carrying amount exceeds its fair value, then the reporting
unit's goodwill may be impaired and the Company must perform the second step of
the transitional impairment test. As of June 30, 2002, the Company determined
that the fair value of each reporting unit with goodwill exceeded the carrying
amount, and hence there was no impairment.
Page 7
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note A. Nature of Business and Interim Financial Statements - continued
The following table reconciles the Company's net earnings for the six months
ended June 30, 2002 and 2001 adjusted to exclude goodwill amortization pursuant
to SFAS 142 to amounts previously reported:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net earnings
Reported net earnings $ 1,461,233 $ 455,540 $ 2,159,733 $ 1,214,253
Add back: Goodwill amortization - 215,248 - 430,495
------------ ------------ ------------ ------------
Adjusted net earnings $ 1,461,233 $ 670,788 $ 2,159,733 $ 1,644,748
============ ============ ============ ============
Earnings per share - basic
Reported net earnings $ 0.06 $ 0.02 $ 0.08 $ 0.05
Goodwill amortization - 0.01 - 0.01
------------ ------------ ------------ ------------
Adjusted net earnings $ 0.06 $ 0.03 $ 0.08 $ 0.06
============ ============ ============ ============
Earnings per share - diluted
Reported net earnings $ 0.06 $ 0.02 $ 0.08 $ 0.05
Goodwill amortization - 0.01 - 0.01
------------ ------------ ------------ ------------
Adjusted net earnings $ 0.06 $ 0.03 $ 0.08 $ 0.06
============ ============ ============ ============
Other comprehensive income (loss):
Other comprehensive income (loss) is defined as the change in equity during a
period, from transactions and other events not included in net earnings,
excluding changes resulting from investments by owners (e.g., supplement stock
offerings) and distributions to owners (e.g., dividends).
As of June 30, 2002, accumulated comprehensive income (loss) consisted of the
following:
Balance at December 31, 2001 $ (653,990)
Net change during the period related
to cash flow hedges (114,600)
------------
Balance at June 30, 2002 $ (768,590)
============
Accounts receivable:
The majority of the Company's accounts receivable are due from large retail,
wholesale, construction and other companies. Credit is extended based on
evaluation of the customers' financial condition. Accounts receivable terms are
within normal time frames for the respective industries. The Company maintains
allowances for doubtful accounts for estimated losses, which are reviewed
regularly by management. The estimated losses are based on the aging of accounts
receivable balances and historical write-off experience, net of recoveries. If
the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
Page 8
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note A. Nature of Business and Interim Financial Statements - continued
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. These interest rate
swap agreements are accounted for as a cash flow hedge in accordance with SFAS
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." The tax effected
fair market value of the interest rate swap of $768,590 at June 30, 2002 is
included in other comprehensive loss. The interest rate swap contracts expire in
2013 and 2015.
Note B. Inventories
Our inventories consist of the following at June 30, 2002 and December 31, 2001:
6/30/2002 12/31/2001
------------ ------------
Finished goods $ 16,661,523 $ 14,530,664
Work in progress 3,986,286 3,287,288
Raw materials 13,540,785 14,723,048
------------ ------------
34,188,594 32,541,000
Less allowances 719,831 1,149,635
------------ ------------
$ 33,468,763 $ 31,391,365
============ ============
Note C. Stock Options and Warrants
The following table summarizes the activity related to all Company stock options
and warrants for the six months ended June 30, 2002 and the year ended December
31, 2001:
Weighted Average
Exercise Price Exercise Price
per Share per Share
Stock ----------------------------- -----------------
Warrants Options Warrants Options Warrants Options
-------------------- ----------------------------- -----------------
Outstanding at January 1, 2001 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
Granted - 230,000 - 1.44 - 2.36 - 1.63
Exercised - - - - - -
Canceled or expired (140,000) (379,300) - 1.74 - 8.50 14.73 3.89
--------------------
Outstanding at June 30, 2002 400,000 4,549,000 $ 8.40 $ 1.44 - 7.50 $ 8.40 $ 4.80
====================
Exercisable at June 30, 2002 400,000 4,369,000 $ 8.40 $ 1.88 - 7.50 $ 8.40 $ 4.83
====================
The warrants and options expire at various dates ranging from June 2003 through
December 2008.
Page 9
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note D. Litigation
The Company is involved in a dispute with a former workers' compensation
administrator and stop-loss insurer for some of the Company's subsidiaries. The
administrator has alleged that they are owed claims reimbursement and
administrative fees. The Company has counter-sued, claiming that the
administrator was negligent in its duties as administrator of our claims, that
it made payments on the Company's behalf which were specifically disallowed,
that they refused to follow instructions given to them by the Company, 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, the Company is requesting reimbursement for excessive administrative
fees paid but not allowed under the terms of the policy. 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
adverse effect on the 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 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.
Page 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussions should be read in conjunction with our Consolidated
Condensed Financial Statements and the notes thereto presented in "Item 1 -
Financial Statements," our audited financial statements, and the related
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in our report on Form 10-K for the year ended December 31,
2001. 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 those
discussed below under "Factors That May Affect Future Results" could cause
actual results to differ materially from those contained in the forward-looking
statements below.
Overview
Flanders is a full-range air filtration product company engaged in designing,
manufacturing and marketing high performance, mid-range and standard-grade air
filtration products and 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 and produce glass-based media for many of our
air filtration products.
Critical Accounting Policies
The following discussion and analysis is based upon our consolidated condensed
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 during the
periods reported, and assets and liabilities at the relevant balance sheet
dates. Note A of the Notes to Consolidated Financial Statements in our Annual
Report on Form 10-K for the year ended December 31, 2001 describes the
significant accounting policies used in preparation of the Consolidated
Condensed Financial Statements. 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 reflect 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 payments due to us.
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 one or more 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, if there are changes in customer buying patterns, or if new
technology or products are developed that compete with our existing inventory,
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, which could require a writedown of the carrying value of
these assets, which would adversely affect operating results.
Page 11
Results of Operations for Three Months Ended June 30, 2002
Compared to June 30, 2001
The following table summarizes our results of operations as a percentage of net
sales for the three months ended June 30, 2002 and 2001.
Three Months Ended
June 30,
-----------------------------------------
2002 2001
------------------- -------------------
$ (000's omitted)
Net sales $ 44,767 100.0% $ 49,916 100.0%
Gross profit 11,500 25.7 10,122 20.3
Operating expenses 7,576 16.9 8,685 17.4
Operating income from continuing operations 3,924 8.8 1,437 2.9
Provision for income taxes 982 2.2 466 0.9
Earnings from continuing operations 1,461 3.3 546 1.1
Loss from discontinued operations - - (91) (0.2)
Net earnings 1,461 3.3 456 0.9
Net sales: Net sales for the second quarter of 2002 decreased by $5,149,000, or
10.3%, to $44,767,000 from $49,916,000 for the second quarter of 2001. This
decrease in net sales was due to the continuation of an unexpectedly soft market
that began in the fourth quarter of 2001, primarily related to our West Coast
operations, where sales were down dramatically.
Gross Profit: Gross profit for the second quarter of 2002 increased by
$1,378,000, or 13.6%, to $11,500,000, which represented 25.7% of net sales, from
$10,122,000, which represented 20.3% of net sales, for the second quarter of
2001. The increase in gross profit percentage was principally attributable to
price increases, the elimination of unprofitable accounts, and increases in
operating efficiency in manufacturing operations, including labor force
reductions.
Operating expenses: Operating expenses for the second quarter of 2002 decreased
by $1,109,000, or 12.8%, to $7,576,000, representing 16.9% of net sales, from
$8,685,000, representing 17.4% of net sales, for the second quarter of 2001. The
decrease in operating expenses was caused by a decrease in sales-related
expenses associated with decreased revenues, a decrease of approximately
$215,000 of amortization of goodwill expenses caused by the Company's adoption
of SFAS 142 effective January 1, 2002, and reductions in administrative staffing
and other cost containment efforts.
Provision for income taxes: Our income tax provision for the second quarter of
2002 and 2001 consisted of a blended state and federal tax rate, excluding
nondeductible expenses such as amortization of goodwill of approximately
$215,000 during the second quarter of 2001, of approximately 40% of earnings
from continuing operations before income taxes.
Page 12
Results of Operations for Six Months Ended June 30, 2002
Compared to June 30, 2001
The following table summarizes our results of operations as a percentage of net
sales for the six months ended June 30, 2002 and 2001.
Six Months Ended
June 30,
-----------------------------------------
2002 2001
------------------- -------------------
$ (000's omitted)
Net sales $ 87,221 100.0% $ 97,006 100.0%
Gross profit 20,681 23.7 21,499 22.2
Operating expenses 14,559 16.7 18,199 18.8
Operating income from continuing operations 6,122 7.0 3,299 3.4
Provision for income taxes 1,540 1.8 1,201 1.2
Earnings from continuing operations 2,160 2.5 1,427 1.5
Loss from discontinued operations - - (212) (0.2)
Net earnings 2,160 2.5 1,214 1.3
Net sales: Net sales for the first half of 2002 decreased by $9,785,000, or
10.1%, to $87,221,000 from $97,006,000 for the first half of 2001. This decrease
in net sales was due to the continuation of an unexpectedly soft market that
began in the fourth quarter of 2001.
Gross Profit: Gross profit for the first half of 2002 decreased by $818,000, or
3.8%, to $20,681,000, which represented 23.7% of net sales, from $21,499,000,
which represented 22.2% of net sales, for the first half of 2001. The increase
in gross profit percentage was principally attributable to price increases, the
elimination of unprofitable accounts, and increases in operating efficiency in
manufacturing operations, including labor force reductions.
Operating expenses: Operating expenses for the first half of 2002 decreased by
$3,640,000, or 20.0%, to $14,559,000, representing 16.7% of net sales, from
$18,199,000, representing 18.8% of net sales, for the first half of 2001. The
decrease in operating expenses was caused by a decrease in sales-related
expenses associated with decreased revenues, a decrease of approximately
$430,000 of amortization of goodwill expenses caused by the Company's adoption
of SFAS 142 effective January 1, 2002, and reductions in administrative staffing
and other cost containment efforts.
Provision for income taxes: Our income tax provision for the first half of 2002
and 2001 consisted of a blended state and federal tax rate, excluding
nondeductible expenses such as amortization of goodwill of approximately
$430,000 during the first half of 2001, of approximately 40% of earnings from
continuing operations before income taxes.
Liquidity and Capital Resources
Our working capital was approximately $17,620,000 at June 30, 2002, compared to
approximately $14,603,000 at December 31, 2001. This includes cash and cash
equivalents of $3,119,000, at June 30, 2002 and $3,878,000 at December 31, 2001.
Our trade receivables increased $3,657,000, or 12.2%, to $33,653,000 at June 30,
2002, from $29,996,000 at December 31, 2001. Days sales outstanding, the ratio
of receivables to average daily sales during the prior three months was 68 days
at June 30, 2002 and 64 days at December 31, 2001. These ratios for days sales
outstanding typically vary between 60 and 70 days, depending on timing
differences in shipments and payments received.
Our continuing operations generated $1,930,000 and $319,000 of cash during the
second quarters of 2002 and 2001,
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respectively. Historically, our business is seasonal, with our second and third
quarters having higher sales than our first and fourth quarters. We attempt to
moderate swings in labor requirements and product shortages due to this seasonal
variance by increasing inventories in the first quarter and first part of the
second quarter. Larger inventories reduce the likelihood of stock shortages
during our busy season and help smooth out our labor requirements. In general,
we expect operations to consume cash, or generate substantially less cash than
earnings before taxes, depreciation and amortization, during our first and
second quarters because of increases in inventory and trade accounts receivable.
Our financing activities used $590,000 of cash during the second quarter of
2002, primarily consisting of payments on debt. Our investing activities
consumed $1,185,000 of cash during the second quarter of 2002, primarily used to
purchase property and equipment.
We currently have a $30 million working capital credit facility from two banks,
which expires August 30, 2002. As of June 30, 2002, we had used approximately
$29.3 million of the $30 million working capital facility. The working capital
credit facility bears interest at LIBOR, which was 2.25% at June 30, 2002, 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 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 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.
Future operations and planned expansion may require substantial capital
investment for the manufacture of filtration products. Although we have been
able to arrange debt facilities or equity financing needed to date, there can be
no assurance that sufficient debt financing or equity will continue to be
available in the future, or that it will be available on acceptable terms.
Failure to obtain sufficient capital could materially adversely impact our
growth strategy.
In 1998, the Board of Directors authorized the repurchase of up to two million
shares of 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 August 16, 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 interest in these products, but we do not know 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 of these types of facilities against airborne
bioweapons could have a significant impact on our business.
We are currently introducing new products for the retail marketplace, primarily
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 to $15 per
month). These are new products which are substantially different in features,
appearance and performance from competing products. 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
Page 14
of these units in significant quantities will require additional financial
resources, either through equity or debt financing, to meet working capital
requirements for production and sale of these products.
Sales of air filtration products for semiconductor facilities, historically a
major market, are expected to be slow through the rest of 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.
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.
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:
* the shortage of reliable market data regarding the air filtration
market,
* changes in external competitive market factors or in our internal
budgeting process which might impact trends in our results of
operations,
* anticipated working capital or other cash requirements,
* changes in our business strategy or an inability to execute our
strategy due to unanticipated changes in the market,
* product obsolescence due to the development of new technologies, and
* 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-Q 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
Due to acquisitions and expansions, our net sales increased by approximately
400% from 1995 through 2001, (a compound annual growth rate of 25%). We have not
continued to expand at this rate during 2002. Future growth could place a strain
on our management and financial capabilities. Our ability to compete effectively
and manage future growth depends on our ability to:
* recruit, train and manage our work force, particularly in the areas of
corporate management, accounting, research and development and
operations,
* manage production and inventory levels to meet product demand,
* manage and improve production quality,
* expand both the range of customers and the geographic scope of our
customer base, and
* improve financial and management controls, reporting systems and
procedures.
Page 15
Any failure to manage growth effectively could have a material adverse effect on
our business, financial condition and results of operations.
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 are introducing new products which, if successfully
mass-marketed, 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, mass manufacturing difficulties with new
products, 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.
Our Plan to Centralize Overhead Functions May Not Produce the Anticipated
Benefits to Our Operating Results
We are currently implementing plans to centralize and eliminate duplication of
efforts between our subsidiaries in the following areas:
* purchasing,
* production planning,
* shipping coordination,
* marketing,
* accounting,
* personnel management,
* risk management, and
* 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.
The preceding discussion should be read in conjunction with our annual report on
Form 10-K, which also includes additional "Factors That May Affect Future
Results" which are still applicable during the current period. 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 3. 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 changes 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.
The fair value of the Company's total long-term debt, including capital leases,
at June 30, 2002 was approximately $50,889,000. 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 June 30, 2002. 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
Page 16
between 5.14% and a tax exempt interest rate as determined by a remarketing
agent. These agreements are accounted for as a cash flow hedge in accordance
with SFAS 133 and SFAS 138. Gains or losses related to ineffectiveness of the
cash flow hedge are included in net income during the appropriate period related
to hedge ineffectiveness. The tax effected fair market value of the interest
rate swap of $769,000 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.
Page 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
We are involved in a dispute with a former 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 owed claims reimbursement and administrative fees. 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 are requesting reimbursement of excessive
administrative fees paid but not allowed under the terms of the policy.
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 adverse effect on the operating results
or cash flows in any one future accounting period.
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 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.
Item 2. Changes in Securities and the Use of Proceeds - None.
Item 3. Defaults Upon Senior Securities - None.
Item 4. Submission of Matters to a Vote of Security Holders - None.
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
99.1 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of The Sarbanes-Oxley Act
of 2002.
(b) Reports on Form 8-K - None
Page 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated this 16th day of August, 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
Chief Operating Officer, Vice President/
Chief Financial Officer, Principal
Accounting Officer and Director
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