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 March 31, 2001
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 May 14, 2001.
26,025,633 shares common stock, par value $.001 per share
(Title of Class)
FLANDERS CORPORATION
FORM 10-Q
FOR QUARTER ENDED MARCH 31, 2001
PART I - FINANCIAL INFORMATION Page
Item 1 -
Financial Statements
Consolidated Condensed Balance Sheets for March 31,
2001 (unaudited) and December 31, 2000................................3
Consolidated Condensed Statements of Earnings (unaudited)
for the three months ended March 31, 2001 and 2000....................4
Consolidated Condensed Statements of Stockholders'
Equity for the three months ended March 31, 2001 (unaudited)
and the year ended December 31, 2000..................................5
Consolidated Condensed Statements of Cash Flows (unaudited)
for the three months ended March 31, 2001 and 2000....................6
Notes to Consolidated Condensed Financial Statements....................7
Item 2 -
Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................10
Item 3 -
Quantitative and Qualitative Disclosures About Market Risk...............15
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings...............................................16
Item 2 - Changes in Securities and Use of Proceeds.......................16
Item 3 - Defaults Upon Senior Securities.................................16
Item 4 - Submission of Matters to a Vote of Security Holders.............16
Item 5 - Other Information...............................................16
Item 6 - Exhibits and Reports on Form 8-K................................16
SIGNATURES...................................................................19
Page 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, December 31,
ASSETS 2001 2000
------ ------------- -------------
(unaudited)
Current assets
Cash and cash equivalents $ 2,514,968 $ 1,333,128
Receivables:
Trade, net of allowance for doubtful accounts of
$1,854,977 at 3/31/2001 and $1,777,973 at 12/31/2000 32,055,240 33,481,302
Other 513,490 514,202
Inventories (Note B) 32,080,892 28,299,766
Deferred taxes 3,020,545 3,020,545
Other current assets 6,942,699 6,094,903
------------- -------------
Total current assets 77,127,834 72,743,846
Related party receivables 1,224,801 385,696
Other assets 2,669,637 2,985,180
Intangible assets, net of accumulated amortization of
$3,027,305 at 3/31/2001 and $2,812,300 at 12/31/2000 28,973,200 29,185,805
Property and equipment, net of accumulated depreciation of
$28,347,514 at 3/31/2001 and $26,451,929 at 12/31/2000 75,370,369 74,921,196
------------- -------------
$185,365,841 $180,221,723
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 35,751,296 $ 32,832,253
Accounts payable 22,026,424 20,267,236
Accrued expenses and other current liabilities 6,495,789 6,000,140
------------- -------------
Total current liabilities 64,273,509 59,099,629
Long-term capital lease obligation 3,350,476 3,403,664
Long-term debt, less current maturities 13,109,599 13,134,219
Deferred income taxes 6,432,927 6,432,927
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: 26,025,633
shares at 3/31/2001; 26,379,633 at 12/31/2000 26,026 26,380
Additional paid-in capital 90,312,731 90,898,258
Notes receivable (8,015,994) (7,891,208)
Retained earnings 15,876,567 15,117,854
Total stockholders' equity 98,199,330 98,151,284
------------- -------------
$185,365,841 $180,221,723
============= =============
See Notes to Consolidated Condensed Financial Statements
Page 3
FLANDERS CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
Three Months Ended
March 31,
----------------------------
2001 2000
------------ ------------
Net sales $47,089,772 $44,099,274
Cost of goods sold 35,712,450 31,349,813
------------ ------------
Gross profit 11,377,322 12,749,461
Operating expenses 9,514,533 9,301,775
------------ ------------
Operating income from continuing operations 1,862,789 3,447,686
Nonoperating expenses from continuing
operations, net (247,596) (129,311)
------------ ------------
Earnings from continuing operations before
income taxes 1,615,193 3,318,375
Provision for income taxes 735,077 1,417,350
------------ ------------
Earnings from continuing operations 880,116 1,901,025
Loss from operations of discontinued operations,
net of tax benefit of $80,935 and $220,170 for
the three months ended March 31, 2001 and 2000,
respectively (121,403) (352,195)
------------ ------------
Net earnings $ 758,713 $ 1,548,830
============ ============
Earnings per share from continuing operations
Basic $ 0.03 $ 0.08
============ ============
Diluted $ 0.03 $ 0.07
============ ============
Loss per share from discontinued operations
Basic $ (0.00) $ (0.01)
============ ============
Diluted $ (0.00) $ (0.01)
============ ============
Net earnings per share
Basic $ 0.03 $ 0.06
============ ============
Diluted $ 0.03 $ 0.06
============ ============
Weighted average common and common
equivalent shares outstanding:
Basic 26,037,433 25,278,583
============ ============
Diluted 26,037,433 26,607,945
============ ============
See Notes to Consolidated Condensed Financial Statements
Page 4
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional
Common Paid-In Notes Retained
Stock Capital Receivable Earnings
-------- ------------ ------------ -----------
Balance, January 1, 2000 $25,436 $91,798,188 $(6,323,308) $22,317,067
Issuance of 2,300,000 shares of common stock
upon exercise of options 2,300 2,297,700 (1,150,000) -
Issuance of notes receivable - - (357,304) -
Interest on notes receivable secured by common
shares - - (60,596) -
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) - -
Net loss - - - (7,199,213)
-------- ------------ ------------ -----------
Balance, December 31, 2000 26,380 90,898,258 (7,891,208) 15,117,854
Interest on notes receivable secured by common
shares, unaudited - - (124,786) -
Purchase and retirement of 354,000 shares of
common stock, unaudited (354) (585,527) - -
Net earnings, unaudited - - - 758,713
-------- ------------ ------------ -----------
Balance, March 31, 2001, unaudited $26,026 $90,312,731 $(8,015,994) $15,876,567
======== ============ ============ ===========
See Notes to Consolidated Condensed Financial Statements
Page 5
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
----------------------------
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by continuing operations $ 1,945,555 $ 1,994,272
Net cash used by discontinued operations (121,403) (572,365)
------------ ------------
Net cash provided by operating activities 1,824,152 1,421,907
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (2,344,758) (3,166,143)
Net advances on notes receivable (539,204) (94,493)
Net increase in other assets (13,704) (195,290)
------------ ------------
Net cash used in investing activities of
continuing operations (2,897,666) (3,455,926)
Net cash used in investing activities of
discontinued operations - (43,085)
------------ ------------
Net cash used in investing activities (2,897,666) (3,499,011)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of bonds - 3,897,694
Purchase and retirement of common stock (585,881) -
Net proceeds from revolving credit agreement 3,197,693 1,958,299
Net principal payments on long-term borrowings (356,458) (362,873)
------------ ------------
Net cash provided by financing activities
of continuing operations 2,255,354 5,493,120
Net cash used in financing activities
of discontinued operations - (31,043)
------------ ------------
Net cash provided provided by financing
activities 2,255,354 5,462,077
------------ ------------
Net increase in cash and cash equivalents 1,181,840 3,384,973
CASH AND CASH EQUIVALENTS
Beginning of period 1,333,128 824,220
------------ ------------
End of period $ 2,514,968 $ 4,209,193
============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes $ - $ 421,654
============ ============
Interest $ 732,796 $ 428,610
============ ============
See Notes to Consolidated Condensed Financial Statements
Page 6
Note A. Nature of Business and Interim Financial Statements
Nature of business:
We design, manufacture and sell air filters and related products. Our business
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
viruses. We also design and manufacture much of our production equipment to
automate processes to decrease labor costs associated with our standard
products. We also produce glass-based air filter media for many of our products.
The vast majority of our sales 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.
We have only one segment, filtration products. We sell some products for end
users outside of the United States through domestic specialty cleanroom
contractors. These sales are accounted for as domestic sales. We also sell
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 our 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, 2000.
The accompanying financial statements have not been examined by independent
accountants in accordance with auditing standards generally accepted in the
United States of America, but in the opinion of management such financial
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 months ended March 31, 2001 may not be indicative of the results that may
be expected for the year ending December 31, 2001.
Earnings per common share:
We have adopted FASB Statement No. 128 which requires the presentation of
earnings per share by all entities that have outstanding common stock or
potential common stock, such as options, warrants and convertible securities,
that trade in a public market. Those entities that have only common stock
outstanding are required to present basic earnings per-share amounts. Basic
per-share amounts are computed by dividing net earnings (the numerator) by the
weighted-average number of common shares outstanding (the denominator). All
other entities are required to present basic and diluted per-share amounts.
Diluted per-share amounts assume the conversion, exercise or issuance of all
potential common stock instruments unless the effect is to reduce the loss or
increase the income per common share from continuing operations.
Note B. Inventories
Our inventories consist of the following at March 31, 2001 and December 31,
2000:
3/31/2001 12/31/2000
------------ ------------
Finished goods $17,168,237 $12,423,309
Work in progress 2,682,038 2,440,136
Raw materials 13,616,327 14,822,031
------------ ------------
33,466,602 29,685,476
Less allowances 1,385,710 1,385,710
------------ ------------
$32,080,892 $28,299,766
============ ============
Page 7
Note C. Stock Options and Warrants
The following table summarizes the activity related to our stock options and
warrants for the three months ended March 31, 2001 and the year ended December
31, 2000:
Weighted Average
Exercise Price Exercise Price
per Share per Share
Stock ----------------------------- -----------------
Warrants Options Warrants Options Warrants Options
-------------------- ----------------------------- -----------------
Outstanding at January 1, 2000 612,239 7,005,700 $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) - 5.54 - 8.16 - 6.07 -
--------------------
Outstanding at December 31, 2000 540,000 4,718,200 8.40 - 14.73 2.50 - 9.50 10.04 4.96
Granted - - - - -
Exercised - - - - - -
Canceled or expired - (66,400) - 2.50 - 2.50
--------------------
Outstanding at March 31, 2001 540,000 4,651,800 $8.40 - 14.73 $2.50 - 9.50 $10.04 $ 4.99
====================
Exercisable at March 31, 2001 540,000 4,639,300 $8.40 - 14.73 $2.50 - 9.50 $10.04 $ 4.99
====================
The options and warrants expire at various dates ranging from June 2001 through
December 2008.
Note D. Disclosures About Debt Agreements
On February 9, 2000, we completed the extension of our $45,000,000 revolving
credit facility with a bank. The credit facility consists of a $30,000,000
working capital facility and a $15,000,000 line of credit to support issuances
of letters of credit. Outstanding balances on the working capital facility bear
interest, at the option of the Company, at either (a) the "prime" rate of
interest publicly announced by the bank, which was 8.5% at March 31, 2001, or
(b) the "LIBOR" rate as reported by the Wall Street Journal, which was 5.478% at
March 31, 2001, plus an amount equal to 1.00% to 1.95%, depending on the ratio
of total liabilities of the Company to its tangible net worth. As of March 31,
2001, the Company had used $29,205,000 of the working capital facility and had
issued $9,400,000 of letters of credit against the line of credit, leaving
approximately $795,000 available for future borrowings and $5.6 million
available for future letters of credit. Unless this credit facility is renewed,
it will expire in June 2002.
In connection with our lines of credit agreements and a note payable to a
regional development authority and bank, we agreed to certain restrictive
covenants which include, among other things, not paying dividends and
maintenance of certain financial ratios at all times including a minimum current
ratio, minimum tangible net worth, a maximum ratio of total liabilities to
tangible net worth and a minimum fixed charge coverage ratio. At times during
2000 and 2001, including at December 31, 2000 and March 31, 2001, we were in
violation of certain of these financial loan covenants. We are currently
negotiating with our banks to receive a waiver for these violations. As a result
of these violations, the outstanding balance of $29,205,000 on our $30 million
working capital facility and $5.5 million due to a regional development
authority have been classified as short-term debt.
Page 8
Note E. 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 insurance premiums, 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 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.
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 any one future
accounting period.
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.
Note E. Related Party Transactions
On January 2, 2001, the Company purchased and leased back $797,000 in
manufacturing equipment from a vendor of raw materials 50% owned by two officers
and directors. The Company 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.
Page 9
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." 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.
On March 21, 2000, we announced that we had engaged the investment banking firm
PaineWebber Incorporated to help us explore strategic alternatives, including
the possible sale of the Company.
Overview
Flanders is a full-range air filtration product company engaged in designing,
manufacturing and marketing high performance, mid-range and standard-grade air
filtration products and certain related products and services. 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 also produce glass-based
media for many of our air filtration products. Historical results of operations
do not reflect any future operating efficiencies and improvements from
integrating and consolidating the acquired businesses into our operations. As a
result, historical results of operations for the periods presented should be
evaluated specifically against these objectives. There can be no guarantee that
we will be able to achieve these objectives and gains in efficiency.
Results of Operations for Three Months Ended March 31, 2001 Compared to March
31, 2000
The following table summarizes our results of operations as a percentage of net
sales for the three months ended March 31, 2001 and 2000.
Three Months Ended
September 30,
-----------------------------------------
2000 1999
------------------- -------------------
(000's omitted)
Net sales $ 47,090 100.0% $ 44,099 100.0%
Gross profit 11,377 24.2 12,749 28.9
Operating expenses 9,515 20.2 9,302 21.1
Operating income from continuing operations 1,863 4.0 3,448 7.8
Provision for income taxes 735 1.6 1,417 3.2
Earnings from continuing operations 880 1.9 1,901 4.3
Loss from discontinued operations (121) (0.3) (352) (0.8)
Net earnings 759 1.6 1,549 3.5
Net sales: Net sales for the first quarter of 2001 increased by $2,991,000, or
6.8%, to $47,090,000 from $44,099,000 for the first quarter of 2000. This
increase represents maintenance of our core business, and was also impacted by
the comparison with an unusually seasonally strong first quarter of 2000.
Gross Profit: Gross profit for the first quarter of 2001 decreased by
$1,372,000, or 10.8%, to $11,377,000, which represented 24.2% of net sales, from
$12,749,000, which represented 28.9% of net sales, for the first quarter of
2000. The decrease in gross profit was principally attributable to:
Page 10
* Expanded facilities in Tijuana, which were brought partially online during
the quarter, 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. Results for the first quarter of 2001 do not include any
benefit from the associated reductions in force, which were completed in
March and April 2001.
* Increased inbound freight costs for raw materials associated with fuel
price increases and fuel surcharges.
Operating expenses: Operating expenses for the first quarter of 2001 increased
by $213,000, or 2.3%, to $9,515,000, representing 20.2% of net sales, from
$9,302,000, representing 21.1% of net sales, for the first quarter of 2000. The
increase in operating expenses was caused by an increase in sales commissions
and related sales expenses of approximately $250,000 commensurate with the
increase in sales, balanced by our ongoing programs to reduce overhead by
eliminating redundant personnel and functions at our subsidiaries.
Loss from discontinued operations: In December 1999, we adopted a formal plan to
close Airseal West, a wholly-owned subsidiary, and sell its various assets and
product lines to unrelated third parties. Closure of all production associated
with the discontinued assets was completed during this quarter. The assets to be
sold consist primarily of inventories, designs and other intellectual
properties. Operating losses from Airseal West were approximately $121,000 and
$352,000, net of income tax benefit, for the first quarter of 2001 and 2000,
respectively.
Provision for income taxes: Our income tax provision for the first quarter of
2001 and 2000 consisted of a blended state and federal tax rate, excluding the
effect of nondeductible expenses consisting primarily of amortization of
goodwill of approximately $900,000 per year, of approximately 40%.
Liquidity and Capital Resources
Our working capital was $12,854,000 at March 31, 2001, compared to $13,644,000
at December 31, 2000. This includes cash and cash equivalents of $2,515,000, at
March 31, 2001 and $1,333,000 at December 31, 2000.
Our trade receivables decreased $1,426,000, or 4.3%, to $32,055,000 at March 31,
2001, from $33,481,000 at December 31, 2000. Days sales outstanding, the ratio
of receivables to average daily sales during the prior three months was 61 days
at March 31, 2001, compared to 62 days at December 31, 2000. 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 $1,946,000 and $1,994,000 of cash during the
first quarter of 2001 and 2000, 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. We anticipate that current excess inventory will be sold
during our busy season and will return to historical norms by the end of the
third quarter of 2001. 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 from
continuing operations generated $2,255,000 of cash during the first quarter of
2001, primarily consisting of the issuance of debt. Our investing activities
from continuing operations consumed $2,898,000 of cash during the first quarter
of 2001, primarily used to purchase property and equipment.
On February 9, 2000, we completed the extension of our $45,000,000 revolving
credit facility with a bank. The credit facility consists of a $30,000,000
working capital facility and a $15,000,000 line of credit to support issuances
of letters of credit. Outstanding balances on the working capital facility bear
interest, at the option of the Company, at either (a) the "prime" rate of
interest publicly announced by the bank, which was 8.5% at March 31,
Page 11
2001, or (b) the "LIBOR" rate as reported by the Wall Street Journal, which was
5.478% at March 31, 2001, plus an amount equal to 1.00% to 1.95%, depending on
the ratio of total liabilities of the Company to its tangible net worth. As of
March 31, 2001, the Company had used $29,205,000 of the working capital facility
and had issued $9,400,000 of letters of credit against the line of credit,
leaving approximately $795,000 available for future borrowings and $5.6 million
available for future letters of credit. Unless this credit facility is renewed,
it will expire in June 2002.
In connection with our lines of credit agreements and a note payable to a
regional development authority and bank, the Company has agreed to certain
restrictive covenants which include, among other things, not paying dividends
and maintenance of certain financial ratios at all times including a minimum
current ratio, minimum tangible net worth, a maximum ratio of total liabilities
to tangible net worth and a minimum fixed charge coverage ratio. At times during
2000 and 2001, including at December 31, 2000 and March 31, 2001, we were in
violation of certain of these financial loan covenants. We are currently
negotiating with our banks to receive a waiver for these violations. As a result
of these violations, the outstanding balance of $29,205,000 on our $30 million
working capital facility and $5.5 million due to a regional development
authority have been classified as short-term debt.
Continuing expansion may require substantial capital investment for the
manufacture of filtration products. Although we have been able to arrange debt
facilities or equity financing to date, there can be no assurance that
sufficient debt financing or equity will continue to be available in the future,
or that it will be available on acceptable terms. Failure to obtain sufficient
capital could materially adversely impact our growth strategy.
In 1998, the Board of Directors authorized the repurchase of up to two million
shares of 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. As of April 12, 2001,
approximately 575,000 shares had been repurchased under this authorization.
These shares may be acquired in the open market or through negotiated
transactions. These repurchases may be made from time to time, depending on
market conditions, share price and other factors. These repurchases are to be
used primarily to satisfy our obligations under stock option and purchase plans
or any other authorized incentive plans, or for issuance pursuant to future
equity financing.
Outlook
During the first quarter of 2001, we instituted force reductions to eliminate
approximately 250 redundant positions and regain efficiency at several of our
manufacturing plants, and anticipate an additional reduction of approximately
100 redundant positions, primarily due to our reorganization of the west coast.
This force reduction is expected to save approximately $8 million annually,
beginning in the second quarter of 2001. In addition, all operating facilities
and departments, including corporate headquarters, will be required to reduce
wages by ten percent beyond the above-described reductions in force, either
through additional reductions in force or through salary and wage reductions.
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
financing, to finance working capital requirements for production and sale of
these products.
We believe there is currently a gradually increasing public awareness of the
issues surrounding indoor air quality and that this trend will continue for the
next several years. We also believe there is an increase in public concern
regarding the effects of indoor air quality on employee productivity, as well as
an increase in interest by standards-making bodies in creating specifications
and techniques for detecting, defining and solving indoor air quality problems.
Page 12
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.
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:
* 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 Negotiate Appropriate Loan Covenant Waivers or Obtain Alternate
Financing on Beneficial Terms Could Negatively Impact Our Business and
Shareholders
As of March 31, 2001, we were in violation of certain loan covenants on our $30
million operating capital line and a note payable to a regional development
authority which have not been waived. If our current and ongoing attempts to
obtain waivers from our banks 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 significantly adverse
impact on our business and operations or lead to significant dilution to our
existing shareholders.
Page 13
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 405% from 1995 through
2000, (a compound annual growth rate of 32%). We may not continue to expand at
this rate. 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.
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 2001 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, 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.
Page 14
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 change in market rates and prices, such as foreign currency
exchange and interest rates. For us, these exposures are primarily related to
the sale of product to foreign customers and changes in interest rates.
The fair value of our total debt at March 31, 2001 was approximately
$52,211,000. We have entered into an interest rate swap agreement related to
$8,500,000 of this amount, related to two outstanding Industrial Revenue Bonds.
These swap agreements are hedges which have the effect of fixing the interest
rate of these two IRB's at 5.14% per annum. Market risk for the remaining
$43,711,000 was estimated as the potential decrease (increase) in future
earnings and cash flows resulting from a hypothetical 10% increase (decrease) in
our estimated weighted average borrowing rate at March 31, 2001. Although most
of the interest on our debt is indexed to a market rate, there would be no
material effect on the future earnings or cash flows related to our total debt
for such a hypothetical change.
Our financial position is not materially affected by fluctuations in currencies
against the U.S. dollar, since assets held outside the United States are
negligible. Our sensitivity analysis of the effects of changes in foreign
currency exchange rates does not factor in a potential change in sales levels of
local currency prices, as the preponderance of our foreign sales occur over
short periods of time or are demarcated in U.S. dollars.
We do not have any derivatives or other financial instruments for trading or
speculative purposes.
Page 15
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
insurance premiums, 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. 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
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.
Page 16
10.1 Indemnification Agreement between Flanders Corporation, Steven K. Clark,
Robert Amerson and Thomas Allan, filed with the Form 10-K dated December
31, 1995, and incorporated herein by reference.
10.2 Stock Purchase Agreement between Flanders Corporation and the
Shareholders of Eco-Air Products, Inc. dated May 7, 1998, filed with the
Form 8-K dated June 30, 1998, and incorporated herein by reference.
10.3 Amendment dated May 20, 1998 to Stock Purchase Agreement by and between
the Registrant and the Shareholders of Eco-Air Products, Inc. dated May
7, 1998, filed with the Form 8-K dated June 30, 1998, and incorporated
herein by reference.
10.4 Promissory Note from Precisionaire, Inc. to SunTrust Bank, Tampa Bay, in
the amount of $2,134,524 dated August 28, 1997, filed with the Form S-1
dated September 15, 1997 (Reg No. 333-33635), and incorporated herein by
reference.
10.5 Assumption Agreement between POF Realty, Precisionaire, Inc., Polk County
Industrial Development Authority and SunTrust Bank, dated August 1, 1997,
filed with the Form S-1 dated September 15, 1997 (Reg No. 333-33635),
and incorporated herein by reference.
10.6 Mortgage Deed and Security Agreement between Precisionaire, Inc. and Sun
Trust Bank, Tampa Bay dated August 28, 1997, filed with the Form S-1
dated September 15, 1997 (Reg No. 333-33635), and incorporated herein by
reference.
10.7 Credit Agreement between Flanders Corporation, SunTrust Bank, Tampa Bay
and Zions First National Bank, dated November 10, 1997, filed with the
Form 10-K dated December 31, 1997, and incorporated herein by reference.
10.8 Loan Agreement between Will-Kankakee Regional Development Authority and
Flanders Corporation dated December 15, 1997, filed with the Form 10-K
dated December 31, 1997, and incorporated herein by reference.
10.9 Letter of Credit Agreement between Flanders Corporation and SunTrust
Bank, Tampa Bay, dated April 1, 1998, filed with the Form 10-Q dated
March 31, 1998, and incorporated herein by reference.
10.10 Credit Agreement between Flanders Corporation, SunTrust Equitable
Securities Corporation and SunTrust Bank, dated February 9, 2000, filed
with the Form 10-K dated December 31, 1999, and incorporated herein by
reference.
10.11 Loan Agreement between Flanders Corporation and the Johnston County
Industrial Facilities and Pollution Control Financing Authority, dated
April 1, 1998, filed with the Form 10-Q dated March 31, 1998, and
incorporated herein by reference.
10.12 Loan Agreement between Flanders Corporation and the Johnston County
Industrial Facilities and Pollution Control Financing Authority, dated
March 1, 2000, filed with the Form 10-K dated December 31, 1999, and
incorporated herein by reference.
10.13 Flanders Corporation 1996 Director Option Plan, filed with the Form 10-
K dated December 31, 1995, and incorporated herein by reference.
10.14 Employment Agreement between Elite Acquisitions, Inc., Flanders Filters,
Inc., and Steven K. Clark, filed with the Form 10-K dated December 31,
1995, and incorporated herein by reference.
10.15 Amendment to Employment Agreement between Elite Acquisitions, Inc.,
Flanders Filters, Inc., and Steven K. Clark, filed with the Form S-1
dated October 21, 1996 (Reg. No. 333-14655), and incorporated herein
by reference.
10.16 Amendment to Employment Agreement between Elite Acquisitions, Inc.,
Flanders Filters, Inc., and Steven K. Clark, filed with the Form 10-K
dated December 31, 1997, and incorporated herein by reference.
Page 17
10.17 Amendment to Employment Agreement between Elite Acquisitions, Inc.,
Flanders Filters, Inc., and Steven K. Clark, filed with Form 10-K dated
December 31, 1999, and incorporated herein by reference.
10.18 Employment Agreement between Elite Acquisitions, Inc., Flanders Filters,
Inc. and Robert R. Amerson, filed with the Form 10-K dated December 31,
1995, and incorporated herein by reference.
10.19 Amendment to Employment Agreement between Elite Acquisitions, Inc.,
Flanders Filters, Inc., and Robert R. Amerson, filed with the Form S-1
dated October 21, 1996 (Reg. No. 333-14655), and incorporated herein by
reference.
10.20 Amendment to Employment Agreement between Elite Acquisitions, Inc.,
Flanders Filters, Inc., and Robert R. Amerson, filed with the Form 10-K
dated December 31, 1997, and incorporated herein by reference.
10.21 Amendment to Employment Agreement between Elite Acquisitions, Inc.,
Flanders Filters, Inc., and Robert R. Amerson, filed with Form 10-K dated
December 31, 1999, and incorporated herein by reference.
10.22 Stock Option Agreement between Flanders Corporation and Robert R. Amerson
dated February 22, 1996, filed with the Form S-8 dated July 21, 1997, and
incorporated herein by reference.
10.23 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.
10.24 Stock Option Agreement between Flanders Corporation and Robert R. Amerson
dated June 3, 1996, filed with the Form S-8 dated July 21, 1997, and
incorporated herein by reference.
10.25 Stock Option Agreement between Flanders Corporation and Steven K. Clark
dated February 22, 1996, filed with the Form S-8 dated July 21, 1997, and
incorporated herein by reference.
10.26 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.
10.27 Stock Option Agreement between Flanders Corporation and Steven K. Clark
dated June 3, 1996, filed with the Form S-8 dated July 21, 1997, and
incorporated herein by reference.
10.28 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.
10.29 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.
(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 14th day of May, 2001.
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
Page 19