As filed with the Securities and Exchange Commission on October 21, 1996
Registration No. 33-8228-NY
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
___________
Form S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
___________
FLANDERS CORPORATION
previously known as
Elite Acquisitions, Inc.
(Exact name of registrant as specified in charter)
NORTH CAROLINA 3564 13-3368271
- ------------------------ ----------------- ----------------------
(State of Incorporation) (primary standard (I.R.S. Employer
industrial code) Identification Number)
531 Flanders Filters Road
Washington, North Carolina 27889
(919) 946-8081
(Address, including zip code, and telephone number,
including area code, registrant's principal offices)
Steven K. Clark
Flanders Corporation
531 Flanders Filters Road
Washington, North Carolina 27889
(919) 946-8081
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
copy to:
William C. Gibbs Lawrence B. Fisher, Esq.
Snell & Wilmer L.L.P. Orrick, Herrington & Sutcliffe LLP
111 East Broadway, Suite 900 666 5th Avenue
Salt Lake City, Utah 84111 New York, New York 10103
(801) 237-1900 (212) 506-5000
___________
Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 426(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
___________
<TABLE>
CALCULATION OF REGISTRATION FEE
<CAPTION>
Title of each class of Proposed maximum offering Proposed maximum Amount of
securities to be registered Amount to be registered <F1> price per unit <F2> aggregate offering price registration fee
<S> <C> <C> <S> <S>
__________ __________ __________ __________ __________
Common Stock 3,173,889 $10.13 $32,151,495.57 $9,742.88
<FN>
<F1>
Includes 240,000 shares that the Underwriters have the option to purchase to
cover over-allotments, if any. Includes 1,333,889 shares being registered for
resale on behalf of certain selling shareholders; the Company will not receive
any proceeds from the sale of such shares.
<F2>
Computed in accordance with Rule 457(c) of the Securities Act of 1933 on the
basis of the average of the high and low bid prices of the Common Stock on
October 17, 1996.
</FN>
</TABLE>
<PAGE>
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
2
<PAGE>
FLANDERS CORPORATION
<TABLE>
CROSS-REFERENCE SHEET
(Pursuant to Item 501(b) of Regulation S-K)
<CAPTION>
Registration Statement Item and Heading Location in Prospectus
<S> <S>
1. Forepart of the Registration Statement
and Outside Front Cover Page
of Prospectus............................. Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus....................... Inside Front and Outside Back
Cover Pages; Available Information
3. Summary Information, Risk Factors
and Ratio of Earnings to
Fixed Charges............................. Prospectus Summary; Risk Factors; Selected
Consolidated Financial Data
4. Use of Proceeds........................... Use of Proceeds
5. Determination of Offering Price........... The Offering; Underwriting
6. Dilution.................................. Dilution
7. Selling Security Holders.................. Cover Page; Selling Securities Holders
8. Plan of Distribution...................... Underwriting; Plan of Distribution
9. Description of Capital Stock
to be Registered.......................... Description of Capital Stock
10. Interests of Named Experts
and Counsel............................... Experts
11. Information with Respect to
the Registrant............................ Outside Front Cover; Prospectus Summary; Risk
Factors; Pro-Forma Consolidated Financial
Statements; Selected Consolidated Financial Data;
Management's Discussions and Analysis of Financial
Condition and Results of Operations; The Company;
Business; Management; Principal Stockholders;
Certain Relationships and Related Transactions;
Description of Capital Stock; Underwriting;
Consolidated Financial Statements
12. Disclosure of Commission Position
on Indemnification for
Securities Act Liabilities................ Item 17, Undertakings
</TABLE>
3
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration.
SUBJECT TO COMPLETION, DATED OCTOBER 21, 1996
PROSPECTUS
FLANDERS CORPORATION
1,600,000 SHARES OF COMMON STOCK
_____________________
Flanders Corporation (the "Company") hereby offers 1,600,000 shares of
common stock, par value $.001 per share (the "Shares"). An additional
1,333,889 shares are being registered for resale on behalf of certain selling
shareholders of the Company (the "Selling Shareholders"). Such shares may be
offered for sale by or on behalf of the Selling Shareholders from time to time
in or through transactions or distributions in the over-the-counter market, in
privately negotiated transactions, on any stock exchange or automated quotation
system on which the Company's common stock may be listed in the future or
otherwise at prices prevailing in such market or exchange or as may be
negotiated at the time of sale. See "Underwriting" and "Selling Shareholders."
The Company will not receive any of the proceeds from the sale of shares by the
Selling Shareholders when, and if such shares are offered for sale. The
Company's Common Stock is quoted on the Nasdaq Small-Cap Market system under
the symbol "FLDR." On October 17, 1996, the last reported sale price of the
Common Stock was $10.25 per share. The Company has made application to have
its Common Stock listed on the Nasdaq National Market immediately prior to this
Offering. See "Price Range of Common Stock."
_____________________
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS"
LOCATED ON PAGE 7, AND "DILUTION."
_____________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATES SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===============================================================================
Underwriting
Price to Public Discounts <F1> Proceeds to Company <F2>
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- -------------------------------------------------------------------------------
Total <F3> $ $ $
===============================================================================
<FN>
<F1>
Does not include additional compensation payable to Gilford Securities
Incorporated, the Representative of the several Underwriters (the
"Representative") in the form of a non-accountable expense allowance. In
addition, see "Underwriting" for information concerning indemnification and
contribution arrangements with the Underwriters and other compensation payable
to the Representative.
<F2>
Before deducting estimated expenses of $820,000 payable by the Company,
including the Underwriter's non-accountable expense allowance.
<F3>
The Company has granted to the Underwriters an option (the "Over-
Allotment Option"), exercisable for a period of 45 days after the date of this
Prospectus, to purchase up to 240,000 additional shares of Common Stock upon
the same terms and conditions set forth above, solely to cover over-allotments,
if any. If the Over-Allotment Option is exercised in full, the total Price to
Public, Underwriting Discounts and Proceeds to Company will be increased to
$_________, $_________ and $__________, respectively, See "Underwriting."
</FN>
</TABLE>
_____________________
The Common Stock is being offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters, and
subject to approval of certain legal matters by their counsel and subject to
certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify the offering and to reject any order in whole or in part. It
is expected that delivery of the Shares offered hereby will be made against
payment, at the offices of Gilford Securities Incorporated, New York, New York,
on or about __________, 1996.
Gilford Securities Incorporated
The date of this Prospectus is __________, 1996.
<PAGE>
[ARTWORK]
After completion of this offering, the Company intends to furnish each year
to its stockholders an annual report containing financial statements audited by
its certified public accountants. The Company may, from time to time, also
furnish to its stockholders interim reports, as determined by management.
_________________
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
_________________
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus. This Prospectus includes
forward-looking statements that are subject to risks and uncertainties and
actual results may differ materially. Prospective investors should carefully
consider the factors set forth under the caption "Risk Factors." Except where
the context requires otherwise, Flanders Corporation, its predecessor, Elite
Acquisitions, Inc., ("Elite"), together with its consolidated subsidiaries,
including Flanders Filters, Inc. ("FFI"), AirSeal Filter Housings, Inc.
("AirSeal"), Charcoal Service Corporation ("CSC") and Precisionaire, Inc.
("Precisionaire") are referred to as the "Company." Except as otherwise
specified, information in this Prospectus (i) assumes no exercise of the
Underwriters' over-allotment option and (ii) does not give effect to the
exercise of the Representative's Warrants.
THE COMPANY
The Company designs, manufactures and markets a full range of air
filtration products ranging from high performance laminar flow High Efficiency
Particulate Air ("HEPA") filters and charcoal filters for semiconductor
manufacturing facilities, to residential furnace filters. The Company's air
filtration products are utilized by many industries, including those associated
with commercial and residential heating, ventilation and air conditioning
systems (commonly known as "HVAC" systems), semiconductor manufacturing, ultra-
pure materials, biotechnology, pharmaceuticals, synthetics, nuclear power and
nuclear materials processing. The Company's customers include AT&T, Motorola,
Merck, Kodak, Westinghouse, Walmart, IBM, and several large computer chip
manufacturers.
Although, the Company historically has specialized in HEPA and medium
efficiency filters and equipment, the Company implemented a strategy of growth
by acquisition in December 1995. In 1996, the Company expanded its product
line through the purchase of three other companies: CSC, which specializes in
charcoal filtration systems for the removal of gaseous contaminants, AirSeal,
which specializes in filter housings and customized industrial HVAC equipment
and Precisionaire which specializes in the manufacture and sale of filter
products ranging from mid-range ASHRAE grade filters through residential
furnace filters. The acquisitions of AirSeal, CSC and Precisionaire are
sometimes collectively referred to herein as the "Acquisitions."
Frost & Sullivan, a leading industry analyst, estimates that the total
domestic industrial air filtration market exceeded $1.15 billion in 1995 and
will reach $1.2 billion in 1996. The forces driving the air filtration market
have evolved over the past decade from concerns related to the preservation of
machinery and equipment to present day requirements for air quality and
production efficiency. Because of these requirements, air filtration products
are essential to many industries, including those associated with semiconductor
manufacturing, commercial and residential HVAC systems, ultra-pure materials
manufacturing, biotechnology, pharmaceuticals, synthetics, nuclear power and
nuclear materials processing. Increasingly, companies are devoting resources
to air filtration products to enhance corporate efficiency and productivity.
Management believes the domestic market for retail and wholesale off-the-
shelf air filters and related products will exceed $500 million in 1996.
Management believes the world market for its products currently is more than
five times the total domestic market, and that as public awareness of the
benefits of living and working in clean environments become more generally
known and mandated by governments, this market will increase dramatically. The
world air filtration market is extremely fragmented, with over 100 companies
ranging in size from large companies with over $300 million in revenues per
year, to privately held niche manufacturing firms on which no revenue data is
available.
The Company's growth strategy is to: (i) increase the Company's market
share by selling a full line of products to the Company's current customers;
(ii) introduce new products based on applying existing high-technology concepts
to commercial and residential products; and (iii) increase operating
efficiencies.
3
<PAGE>
<TABLE>
THE OFFERING
<CAPTION>
<S> <C>
Common Stock Offered by the Company 1,600,000 shares
Common Stock Registered on behalf of
the Selling Shareholders 1,333,889 shares
Common Stock Outstanding after the
Offering 17,538,348 shares <F1>
Common Stock Outstanding before the
Offering 15,938,348 shares
Use of Proceeds Repayment of debt. See "Use of
Proceeds." The Company will not receive
any proceeds from the sale of shares by
the Selling Shareholders, when, as and
if such shares are offered for sale.
Risk Factors Prospective purchasers of the Shares
should carefully consider the matters
set forth herein under "Risk Factors."
Nasdaq Symbol FLDR
<FN>
<F3>
The foregoing excludes (i) 7,576,520 shares of Common Stock issuable upon
exercise of outstanding stock options, (ii) 2,500,000 shares of Common Stock
reserved for future issuance under the Company's Long Term Incentive Plan and
Director Option Plan, (iii)) 1,077,778 shares of Common Stock reserved for
issuance upon conversion of certain convertible promissory notes and
convertible debentures, and (iv) 62,712 shares of Common Stock issuable upon
exercise of outstanding Warrants. The exercise of any of the above described
options or warrants may result in additional dilution. See "Management --
Long-Term Incentive Plan," "Management -- Director Option Plan," "Description
of Capital Stock" and "Underwriting and Plan of Distribution."
</FN>
</TABLE>
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
The following summary consolidated financial data for each of the fiscal
years below, has been derived from the audited financial statements of the
Company for the periods indicated. See "Selected Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Financial Statements." Interim period financial information
has not been audited. All financial information has been adjusted to reflect
the reverse acquisition of FFI. Under a reverse acquisition, FFI is treated
for accounting purposes as having acquired the Company and the historical
financial statements of FFI become the historical financial statements of the
Company. See "Business--Acquisition History." For a more detailed summary of
selected financial data for the six month periods ended June 30, 1996 and 1995,
and the past five fiscal years, see "Selected Consolidated Financial Data."
<TABLE>
Selected Historical Operations Data
For the six months ended June 30, 1996 and 1995 and the years ended December
31, 1995, December 30, 1994, December 31, 1993, December 31, 1992 and December
27, 1991
<CAPTION>
6/30/95 6/30/96
1991 1992 1993 1994 1995 (unaudited) (unaudited)
---- ---- ---- ---- ---- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 18,257 $ 20,757 $ 20,569 $ 26,072 $ 38,494 $ 18,930 $ 26,241
Cost of goods sold 12,577 14,682 14,065 18,845 28,953 13,961 19,773
Gross profit 5,680 6,075 6,504 7,227 9,541 4,969 6,468
Operating expenses 4,946 5,411 6,695 7,239 7,263 3,552 4,548
Operating income 911 915 356 622 2,419 1,417 1,919
Earnings before income taxes 572 451 25 171 1,830 1,030 2,166
Income taxes 238 207 15 176 684 391 818
Cumulative effect of accounting
changes - - 307 - - - -
Extraordinary items 238 89 - - - - -
---------- ---------- ---------- ---------- ---------- ----------- ----------
Net earnings (loss) $ 572 $ 333 $ 317 $ (5) $ 1,146 $ 639 $ 1,348
========== ========== ========== ========== ========== =========== ==========
Earnings (loss per common and
common equivalent share $ 0.06 $ 0.03 $ 0.03 $ - $ 0.12 $ 0.07 $ 0.09
========== ========== ========== ========== ========== =========== ==========
Weighted average common and
common equivalent shares
outstanding 9,654 9,654 9,654 9,693 9,832 9,693 15,252
========== ========== ========== ========== ========== =========== ==========
</TABLE>
5
<PAGE>
<TABLE>
Selected Historical Balance Sheet Data (000's omitted)
as of June 30, 1996, December 31, 1995, December 30, 1994, December 31, 1993,
December 31, 1992 and December 27, 1991
<CAPTION>
6/30/96
1991 1992 1993 1994 1995 (unaudited)
---- ---- ---- ---- ---- -----------
<S> <C> <C> <C> <C> <C> <C>
Working Capital $ 1,187 $ 788 $ 675 $ 349 $ 4,030 $ 9,462
Total Assets 10,259 11,026 12,213 14,414 18,529 30,032
Total Long-Term Debt<F1> 2,657 2,258 1,803 1,892 1,761 1,724
Total Shareholders Equity 3,264 3,612 3,967 3,953 8,208 18,131
<FN>
<F1>
Total Long-Term debt, including current portion.
</FN>
</TABLE>
<TABLE>
Unaudited Pro-Forma Data (000's omitted, except per share data)
for the year ended December 31, 1995 and for the six months ended June 30, 1996
<CAPTION>
December 31, June 30,
1995 1996
------------ ------------
<S> <C> <C>
Statement of Operations Data:
Net sales $ 107,984 $ 61,375
Cost of goods sold 81,045 47,143
Gross profit 26,939 14,232
Operating Income 6,642 3,356
Net earnings (loss) 2,618 1,819
Earnings per share-primary $ 0.20 $ 0.11
Balance Sheet Data (at end of period):
Working capital $ 17,757 $ 22,792
Total assets 73,175 82,453
Total long term debt, less
current maturities 21,475 24,506
Total stockholder's equity $ 33,403 $ 35,538
</TABLE>
The summary Pro-Forma Data presented here was derived from, and should be
read in conjunction with, the Unaudited Pro-Forma Financial Data included
elsewhere in this Prospectus. The Unaudited Pro-Forma Statement of Operations
Data give effect to the Acquisitions as if the Acquisitions had occurred on
January 1, 1995 and the Unaudited Pro-Forma Balance Sheet Data give effect to
the Acquisitions as if the same had occurred on December 31, 1995. See
"Selected Consolidated Financial Data."
6
<PAGE>
RISK FACTORS
Investment in the Shares offered hereby involves a high degree of risk
including, but not limited to, the risk factors described below. Prospective
investors should carefully consider, among other things, the following factors
concerning the business of the Company and the Offering, and should consult
independent advisors as to the technical, tax, business and legal
considerations regarding an investment in the Shares.
Need for Additional Financing for Future Acquisitions
The Company believes that the revenues from current operations along with
the proceeds from this Offering will provide the Company with sufficient
capital to fund continuing operations for the foreseeable future. However, to
continue its growth through acquisition, substantial additional debt or equity
financing may be needed. There can be no assurance that the Company will be
able to obtain additional debt or equity capital to meet its future
requirements on satisfactory terms, if at all. Failure to obtain sufficient
capital could materially adversely affect the Company's acquisition strategy.
See "Management's Discussion and Analysis of Financial Condition" and "Results
of Operations-Liquidity and Capital Resources."
Integration of Acquired Companies
FFI, CSC, AirSeal and Precisionaire have been separate companies and were
managed separately prior to their acquisition by the Company. Consequently,
these companies have operated under different management philosophies,
management teams and marketing strategies. Integration of these companies may
significantly strain the Company's management, financial and other resources.
There can be no assurance that the Company's systems, procedures and controls
will be adequate to accommodate integration of these companies. Failure to
successfully integrate these companies could materially adversely affect the
Company's business and results of operation. Additionally, an essential
component of the Company's acquisition strategy is improving the operating
efficiency, output and capacity of each acquired company and the facilities
they operate. This process may include the repair or replacement of outdated
and inefficient equipment in order to improve operations and output. There can
be no assurance that the Company can improve the efficiency of the acquired
companies in a cost effective manner. Failure to do so, could materially
adversely affect the Company's business and results of operations.
Need for Technical Employees
The Company's future operating results depend in part upon its ability to
retain and attract qualified engineering, manufacturing, technical, sales and
support personnel for its operations. Competition for such personnel is
intense, and there can be no assurance that the Company will be successful in
attracting or retaining such personnel. The failure to attract or retain such
persons could materially adversely affect the Company's business and results of
operations. The Company's expansion may also significantly strain the
Company's management, financial and other resources. There can be no assurance
that the Company's systems, procedures and controls will be adequate to support
the Company's operations. See "Management."
Management of Growth
The Company's revenues increased by approximately 26% from 1993 to 1994,
and by approximately 47% from 1994 to 1995. With the Acquisitions, the
Company's monthly revenues in 1996 have more than doubled compared to monthly
revenues in 1995. There can be no assurance that the Company will continue to
expand at this rate, or at all. If the Company does continue to grow, the
additional growth will place burdens on management to manage such growth while
maintaining the Company's profitability. Additional growth may require the
Company to recruit and train additional management personnel in the areas of
corporate management, sales, accounting, marketing, research and development
and operations. There can be no assurance that the Company will be able to do
so.
7
<PAGE>
Technological Change; Importance of Timely Product Introduction
The high-performance filtration industry is subject to technological change
and new product introductions and enhancements. Through September 30, 1996,
approximately 24% of the Company's revenues on a pro-forma basis resulted from
sales of high-performance filtration products. The Company's ability to remain
competitive in this market will depend in part upon its ability to anticipate
such technological changes, develop new and enhanced filtration systems and
introduce these systems at competitive prices in a timely and cost-efficient
manner. There can be no assurance that the Company will successfully
anticipate future technological changes or that technologies or systems
developed by others will not render the Company's technology obsolete. In
addition, new product introductions or enhancements by the Company's
competitors could cause a decline in sales or loss of market acceptance of the
Company's existing products. Increased competitive pressure could also lead to
intensified price-based competition resulting in lower prices and profit
margins, which could materially adversely affect the Company's business and
results of operations. See "Business."
Acquiring and Maintaining Equipment
The Company uses technologically advanced equipment, for which
manufacturers may have limited production capability or service experience,
which could result in delays in the acquisition and installation of such
equipment or extended periods of down-time in the event of malfunction or
equipment failure. Any such extended period of down-time for any critical
equipment could have a material adverse impact on the Company, its financial
condition and operations.
Fluctuation of Quarterly Operating Results
Historically, the Company's business has been seasonal, with a substantial
percentage of its sales occurring during the first quarter and fourth quarter
of each year. The recent Acquisitions by the Company appear to be counter
cyclical, with a greater percentage of their sales occurring in the summer
months. The Company believes period-to-period comparisons of its quarterly
financial results are not necessarily meaningful and should not be relied upon
as an indication of future performance. See "Management's Discussion and
Analysis of Financial Condition" and "Results of Operations."
Potential Environmental Risks
The Company's business and products may be significantly influenced by the
constantly changing body of environmental laws and regulations, which require
that certain environmental standards be met and impose liability for the
failure to comply with such standards. While the Company endeavors at each of
its facilities to assure compliance with environmental laws and regulations,
there can be no assurance that the Company's operations or activities, or
historical operations by others at the Company's locations, will not result in
civil or criminal enforcement actions or private actions that could have a
materially adverse effect on the Company.
Product Liability
The Company is subject to possible liability for damages arising from (a)
filter failure; and (b) failure of a new product to perform as specified. Any
such liability could damage the Company's reputation and/or have a material
adverse effect on the Company's business and/or financial condition. The
Company also plans to develop new products as part of its strategy to increase
the size and customer base of the air filtration market. There can be no
assurance that the Company will be successful in developing the new products or
that any product developed will be commercially viable. See "Business - -
Strategies."
Acquisition Strategy
The Company's acquisition strategy exposes the Company to the potential
risks inherent in assessing the value, strengths, weaknesses, contingent or
other liabilities and potential profitability of acquisition candidates and in
integrating the operations of acquired companies. Although the Company
generally has been successful in pursuing these acquisitions, there can be no
assurance that acquisition opportunities will continue to be available, that
the Company will have access to the capital required to finance potential
acquisitions, that the Company will continue to acquire businesses or that any
business acquired will be integrated successfully or prove profitable. The
Company has no current plans regarding any material acquisitions.
8
<PAGE>
Competition
The Company currently faces significant competition in its business
activities, and this competition may increase as new competitors enter the
market. Several of these competitors may have longer operating histories and
greater financial, marketing and other resources than the Company. There can
be no assurance that the Company will be able to compete successfully with
existing or new entrant companies. See "Business -- Competition."
Dependence on Key Personnel
The Company's financial performance will depend in significant part upon
the continued contributions of its officers and key personnel, many of whom
would be difficult to replace. The Company has entered into employment
agreements with each of Robert Amerson, its President, Steven K. Clark, its
Vice President and Chief Financial Officer and Gustavo Hernandez, its Vice-
President of Operations. The loss of any key person could have a material
adverse effect on the business, financial condition and results of operations
of the Company. The Company maintains $2,000,000 worth of "key man" life
insurance on Robert Amerson and Steven Clark. See "Management."
Control by Management
Immediately following the completion of the Offering, the Directors and
executive officers of the Company will continue to own approximately 44% of the
outstanding Common Stock of the Company. Such shareholders may effectively
control the business and affairs of the Company. Furthermore, Robert Amerson
and Steven Clark have options to purchase 80% of the shares of Common Stock of
the Company owned by A. Russell Allan, III and Thomas T. Allan (representing
approximately 43% of the Company's outstanding shares). Additionally,
management currently owns options, which if exercised, will result in
management owning approximately 67.25% of the outstanding Common Stock of the
Company. See "Principal Shareholders."
No Dividends
The Company has not declared or paid, and does not plan to declare or pay,
any cash or other dividends in the foreseeable future. It is anticipated that
any earnings will be retained to finance the Company's operations and growth.
See "Dividend Policy."
Volatility of Stock Price
The Company has only recently listed its common stock on the Nasdaq Small-
Cap Market. The market price of the Company's common stock is therefore
expected to be volatile for the foreseeable future. The Company believes
factors such as quarterly fluctuations in results of operations, announcements
of new orders by the Company and changes in either earnings estimates of the
Company or investment recommendations by stock market analysts may cause the
market price of the Company's stock to fluctuate, perhaps substantially. In
addition, in recent years the stock market in general, has experienced extreme
price fluctuations, and such extreme price fluctuations may continue. These
broad market and industry fluctuations may adversely affect the market price of
the Company's Common Stock.
Possible Issuance of Additional Shares; Exercise of Options
The exercise price of the Company's outstanding options may be less than
the market price of the Company's Common Stock at the time such options are
exercised. Accordingly, for the life of such options, the holders are given
the opportunity to profit from a rise in the market price of such underlying
stock without assuming the risk of ownership. So long as such options remain
unexercised, the terms under which the Company could obtain additional equity
financing may be adversely affected. Moreover, the holders of such options may
be expected to exercise them at a time when the Company could in all likelihood
be able to obtain any needed capital by a new offering of its securities on
terms more favorable than those provided by such options. If the options are
exercised, the interests of the Company's shareholders may be diluted
proportionately.
The Board of Directors has the power to issue Common Stock and/or Preferred
Stock without shareholder approval, up to the number of authorized shares set
forth in the Company's Articles of Incorporation. In addition, the Company has
granted options to employees, officers and directors of the Company
representing 6,676,520 shares in the aggregate, of which 2,500,000 were
exercisable as of June 30, 1996. See "Management." The Company has also
issued options and warrants to purchase
9
<PAGE>
962,712 shares in aggregate to various underwriters, finders and consultants.
The issuance of additional shares by the Company in the future may result in a
reduction of the book value or market price, if any, of the then outstanding
Common Stock. Issuance of additional shares of Common Stock may reduce the
proportionate ownership and voting power of existing shareholders.
Dilution
The assumed public offering price for the Shares offered hereby is
substantially higher than the book value per share of the Shares. As a result,
purchasers of the Shares are likely to incur immediate and substantial dilution
of $7.77 per share or 77.7%. See "Dilution."
Shares Eligible for Future Sale
Upon completion of this offering, the Company will have 17,538,348 shares
of Common Stock outstanding (assuming no exercise of the Underwriters' over-
allotment option). Of these shares, 3,267,668 shares (including the 2,933,889
shares sold in this offering) will be freely tradable without restriction under
the Securities Act.
As of October 17, 1996, there were stock options and warrants outstanding
to purchase an aggregate of 7,639,232 shares of Common Stock, 5,582,232 of
which are currently exercisable. In addition, the Company has agreed to sell
to the Representative or its designees, for nominal consideration, the
Representative's Warrant to purchase up to 160,000 shares of Common Stock at an
exercise price equal to 120% of the public offering price set forth herein.
Holders of the Company's Series A Convertible Debentures can convert such
debentures into an aggregate of 277,778 shares of Common Stock at a conversion
rate of $9.00 per share. Additionally, the Holders of the Company's 10%
convertible notes can convert such notes into Common Stock at the lesser of 82%
of the average bid and ask price for the immediately preceding seven (7)
trading days or $9.00. As of October 17, 1996, such holders would receive
approximately 490,000 shares of Common Stock.
Holders of approximately 4,567,484 shares of Common Stock, 1,333,889 of
which are being registered herein, and holders of approximately 7,639,232
options or warrants to purchase Common Stock, or their transferees, are
entitled to certain rights with respect to the registration of such shares
under the Securities Act. Under the terms of an agreement between the Company
and such holders, if the Company proposes to register any of its securities
under the Securities Act, either for its own account or the account of other
security holders exercising registration rights, the holders are entitled to
notice of such registration and are entitled to include shares of such Common
Stock therein; the registration rights provide, however, among other
conditions, that the underwriters of any offering have the right to limit the
number of such shares included in such registration. In addition, the
shareholders benefiting from these rights may require the Company, on not more
than one occasion, to file a registration statement under the Securities Act
with respect to such shares, on form S-3, if such form is available to the
Company, subject to certain conditions and limitations.
The Company makes no prediction as to the effect, if any, that future sales
of shares or the availability of shares for future sale will have on the
prevailing market price of the Common Stock. Sales of substantial amounts of
the Company's Common Stock in the public market or the perception that such
sales could occur could have an adverse affect on the prevailing market price
of the Common Stock.
Dependence on Manufacturers Representatives
The majority of the Company's sales are to manufacturer's representatives
and regional filtration distributors who offer their customers a complete line
of air filtration products. Many of the Company's representatives and
distributors have indicated a willingness to offer the Company's products
exclusively now that the Company offers a full range of products.
Nevertheless, these representatives and distributors may decide to work
exclusively with some other company for various reasons, thus, the current
distribution channels would be unavailable. A lack of adequate distribution
channels would adversely affect the Company's financial condition and
operations. See "Business -- Strategies."
10
<PAGE>
Forward Looking Statements and Associated Risks
This Prospectus contains certain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995, including,
among others (i) results of operations (including expected changes in the
Company's gross margin and general, administrative and selling expenses); (ii)
the Company's business strategy for expanding its market share of the air
filtration industry; (iii) the Company's strategy to increase the size and
customer base of the air filtration market; and (iv) the Company's ability to
distinguish itself from its current and future competitors.
These forward-looking statements are based largely on the Company's current
expectations and are subject to a number of risks and uncertainties. Actual
results could differ materially from these forward-looking statements. In
addition to the other risks described elsewhere in this "Risk Factors"
discussion, important factors to consider in evaluating such forward-looking
statements include (i) the shortage of reliable market data regarding the
filtration market; (ii) changes in external competitive market factors or in
the Company's internal budgeting process which might impact trends in the
Company's results of operations; (iii) anticipated working capital or other
cash requirements; (iv) changes in the Company's business strategy or an
inability to execute its strategy due to unanticipated changes in the market;
and (v) various competitive factors that may prevent the Company from competing
successfully in the marketplace. In light of these risks and uncertainties,
many of which are described in greater detail elsewhere in this "Risk Factors"
discussion, there can be no assurance that the events contemplated by the
forward-looking statements contained in this Prospectus will in fact occur.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,600,000 shares of
Common Stock offered hereby, at an assumed public offering price of $10 per
share, are estimated to be approximately $14.3 million (approximately $16.7
million if the Underwriters' over-allotment option is exercised in full) after
deducting underwriting discounts and commissions and estimated offering
expenses. The Company will not receive any proceeds from the sale, if any, of
shares of Common Stock by the Selling Shareholders. See "Selling
Shareholders."
The Company intends to use all of the net proceeds of this offering to
repay principal and accrued interest on certain outstanding indebtedness to
NationsBank, comprised of a revolving line of credit and a term loan. As of
October 17, 1996, the outstanding principal amounts under the revolving line of
credit and the term loan were approximately $6.5 million and $21,000,000,
respectively. The revolving line of credit bears interest based at the
NationsBank prime rate plus 1.0% (9.25% per annum as of October 17, 1996) and
matures in September, 1998. The term loan bears interest at the NationsBank
prime rate plus 1.5% (9.75% per annum as of October 17, 1996) and matures in
September, 1998.
Pending their uses as set forth above, the net proceeds of this offering
will be invested in government securities or in short-term, investment-grade,
interest-bearing securities.
11
<PAGE>
DILUTION
As of June 30, 1996, the Company (on a pro-forma basis after giving effect
to the Acquisitions) had a pro-forma net tangible book value of $24,820,075 or
$1.56 per share of Common Stock. Pro-forma net tangible book value per share
of Common Stock represents the Company's pro-forma net worth as described above
less intangible assets, divided by the number of shares of Common Stock issued
and outstanding. After giving effect to the sale of the Shares to be sold by
the Company in the Offering (at an assumed price of $10.00 per share and the
application of the net proceeds therefrom), the Company's adjusted pro-forma
net tangible book value at June 30, 1996 would have been $39,120,075 or $2.23
per share. "Dilution" means the difference between the purchase price and the
net tangible book value per share after giving effect to the Offering. The
following table illustrates the dilution in pro-forma net tangible book value
per share of Common Stock to new investors:
Assumed Offering Price........................... $ 10.00
Adjusted pro-forma net tangible book
value before the Offering................ 1.56
Increase in net tangible book value
attributable to net proceeds
of the Offering.......................... 0.67
Adjusted pro-forma net tangible book
value after the offering..................... 2.23
Dilution to new investors........................ $ 7.77
The foregoing excludes (i) 7,576,520 shares of Common Stock issuable upon
exercise of outstanding stock options, (ii) 2,500,000 shares of Common Stock
reserved for future issuance under the Company's Long Term Incentive Plan and
Director Option Plan, (iii) 1,077,778 shares of Common Stock reserved for
issuance upon conversion of certain convertible promissory notes and
convertible debentures, and (iv) 62,712 shares of Common Stock issuable upon
exercise of outstanding Warrants. The exercise of any of the above described
options or warrants may result in additional dilution. See "Management --
Long-Term Incentive Plan," "Management -- Director Option Plan," "Description
of Capital Stock" and "Underwriting and Plan of Distribution."
The following table sets forth, at September 30, 1996, the differences in
the total consideration paid and the average price per share paid between the
existing stockholders and the new investors with respect to the shares of
Common Stock to be issued by the Company:
<TABLE>
<CAPTION>
Total Shares Total Consideration Average
------------- ------------------- Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders 15,938,348 90.9% $ 29,128,000 64.5% $ 1.83
New Investors 1,600,000 9.1% $ 16,000,000 35.5% $ 10.00
----------- ------- ------------- -------
Total 17,538,348 100.0% $ 45,128,000 100.0%
=========== ======= ============= =======
</TABLE>
If the Underwriter exercises its over-allotment option in full, the Shares
of Common Stock purchased by new investors would be 1,840,000; Percent of total
shares purchased by new investors would be 10.3%; Total consideration paid by
new investors would be 18,400,000; Percent of total consideration paid by new
investors would be 38.7%; and average price per share paid by new investors
would be $10.00.
12
<PAGE>
MARKET INFORMATION
The Company's Common Stock is listed on the Nasdaq under the symbol FLDR.
PRICE RANGE OF COMMON STOCK
The following table sets forth, for the periods indicated, the high and low
sale prices of the Common Stock as reported by the Nasdaq Small-Cap Market
System. Such quotations do not include retail mark-ups, mark-downs, or other
fees or commissions.
<TABLE>
<CAPTION>
High Low
Fiscal Year 1996
<S> <C> <C>
Fourth Quarter (through October 17, 1996)............ $ 10.38 $ 9.75
Third Quarter ended September 30, 1996............... 10.50 9.00
Second Quarter ended June 30, 1996................... 10.00 5.00
First Quarter ended March 31, 1996................... 2.50<F1> 5.00<F1>
<FN>
<F1>
The Company was initially listed on the Nasdaq Small-Cap Market System on
April 8, 1996. From February 27, 1996 through April 7, 1996, the Company was
listed on the OTC Bulletin Board. Prior to February 27, 1996, there was no
public market in the Company.
</FN>
</TABLE>
On October 17, 1996, the closing price for the stock was $10 3/8. The
Company has made application to have its Common Stock listed on the Nasdaq
National Market prior to this Offering. As of October 15, 1996 there were
approximately 394 holders of record of the Company's Common Stock; the Company
estimates there are in excess of 590 beneficial owners of the Company's Common
Stock.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain any earnings for use in its
business and therefore does not anticipate paying any cash dividends in the
foreseeable future. Any future determination to pay cash dividends will be
made by the Board of Directors in light of the Company's earnings, financial
position, capital requirements and such other factors as the Board of Directors
deems relevant.
13
<PAGE>
CAPITALIZATION
The following table sets forth (i) the historical consolidated
capitalization of the Company, (ii) the historical consolidated capitalization
of the Company as adjusted to give effect, as of June 30, 1996, to the
Acquisitions and (iii) the historical consolidated capitalization of the
Company as adjusted to give effect, as of June 30, 1996, to the Acquisitions
and the sale of 1,600,000 shares of Common Stock offered by the Company hereby
(after deduction of underwriting documents and commissions and estimated
offering expenses). The following table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the "Financial Statements" included elsewhere in this
Prospectus.
<TABLE>
As of June 30, 1996
(000's omitted)
<CAPTION>
Pro-Forma
Actual Pro-Forma<F1> As Adjusted
------ ------------- -----------
<S> <C> <C> <C>
Current portion of long-term obligations, including notes
payable <F1>............................................. $ 3,016 $ 4,298 $ 4,298
Long-term obligations, less current portion................ 1,465 24,506 10,206
Stockholders' equity:
Preferred stock, authorized 10,000 shares of $0.001
par value, 0 shares issued and outstanding............. - - -
Common Stock, authorized 50,000 shares of $0.001 par
value, 13,532,596 shares issued and outstanding
actual; 15,938,348 shares issued and outstanding
pro-forma <F1>, <F2>; 17,537,348 shares issued and
outstanding as adjusted<F2>............................ 14 16 18
Additional paid-in capital............................. 11,992 29,112 43,410
Retained earnings...................................... 6,126 6,126 6,126
Total stockholders' equity......................... 18,131 35,538 49,838
Total capitalization........................... $ 30,032 $ 64,342 $ 64,342
<FN>
<F1>
The pro-forma adjustments include 1,333,889 shares of common stock issued in a
recent private placement of the Company's common stock and $6,500,000 of
convertible debentures issued in a separate private placement..
<F2>
The foregoing excludes (i) 7,576,520 shares of Common Stock issuable upon
exercise of outstanding stock options, (ii) 2,500,000 shares of Common Stock
reserved for future issuance under the Company's Long Term Incentive Plan and
Director Option Plan, (iii) 1,077,778 shares of Common Stock reserved for
issuance upon conversion of certain convertible promissory notes and
convertible debentures, and (iv) 62,712 shares of Common Stock issuable upon
exercise of outstanding Warrants. The exercise of any of the above described
options or warrants may result in additional dilution. See "Management --
Long-Term Incentive Plan," "Management -- Director Option Plan," "Description
of Capital Stock" and "Underwriting and Plan of Distribution."
</FN>
</TABLE>
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following Selected Consolidated Financial Data is qualified by
reference to and should be read in conjunction with the consolidated financial
statements of the Company and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
included elsewhere in this Prospectus. The following selected consolidated
financial data of the Company for the fiscal years ended December 27, 1991,
December 31, 1992, December 31, 1993, December 30, 1994 and December 31, 1995
have been derived from the audited consolidated financial statements of the
Company which were audited by McGladrey & Pullen, LLP, independent auditors.
The selected consolidated financial data for the six months ended June 30, 1996
has been derived from the Company's unaudited Financial Statements, which, in
the opinion of management, reflect all adjustments which are of a normal
recurring nature necessary for a fair presentation of the results of operations
for such periods, and is presented on a pro-forma basis to give effect to the
Acquisitions. The results of the interim period are not necessarily indicative
of the results of a full year.
<TABLE>
Selected Historical Operations Data (000's omitted except per share data)
For the years ended December 27, 1991, December 31, 1992, December 31, 1993,
December 30, 1994 and December 31, 1995 and for the six months ended June 30,
1995 and 1996
<CAPTION>
6/30/95 6/30/96
1991 1992 1993 1994 1995 (unaudited) (unaudited)
---- ---- ---- ---- ---- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 18,257 $ 20,757 $ 20,569 $ 26,072 $ 38,494 $ 18,930 $ 26,241
Cost of goods sold 12,577 14,682 14,065 18,845 28,953 13,961 19,773
Gross profit 5,680 6,075 6,504 7,227 9,541 4,969 6,468
Operating expenses 4,946 5,411 6,695 7,239 7,263 3,552 4,548
Operating income 911 915 356 622 2,419 1,417 1,919
Earnings before income taxes 572 451 25 171 1,830 1,030 2,166
Income taxes 238 207 15 176 685 391 818
Cumulative effect of
accounting changes - - 307 - - - -
Extraordinary items 238 89 - - - - -
---------- ---------- ---------- ---------- ---------- ----------- ----------
Net earnings (loss) $ 572 $ 333 $ 317 $ (5) $ 1,146 $ 639 $ 1,348
========== ========== ========== ========== ========== =========== ==========
Earnings per common and
common equivalent share $ 0.06 $ 0.03 $ 0.03 $ - $ 0.12 $ 0.07 $ 0.09
========== ========== ========== ========== ========== =========== ==========
Weighted average common and
common equivalent shares
outstanding 9,654 9,654 9,654 9,693 9,832 9,693 15,252
========== ========== ========== ========== ========== =========== ==========
</TABLE>
<TABLE>
Selected Historical Balance Sheet Data (000's omitted)
as of December 27, 1991, December 31, 1992, December 31, 1993,
December 30, 1994, December 31, 1995 and June 30, 1996
<CAPTION>
6/30/96
1991 1992 1993 1994 1995 (unaudited)
---- ---- ---- ---- ---- -----------
<S> <C> <C> <C> <C> <C> <C>
Working Capital $ 1,187 $ 788 $ 675 $ 349 $ 4,030 $ 9,462
Total Assets 10,259 11,026 12,213 14,414 18,529 30,032
Total Long-Term Debt<F1> 2,657 2,258 1,803 1,892 1,761 1,724
Total Shareholders Equity 3,264 3,612 3,967 3,953 8,208 18,131
<FN>
<F1>
Total Long-Term debt, including current portion.
</FN>
</TABLE>
15
<PAGE>
UNAUDITED PRO-FORMA FINANCIAL INFORMATION
The Unaudited Pro-Forma Balance Sheet of Flanders as of December 31, 1995
and the Unaudited Pro-Forma Consolidated Statement of Operations for the year
ended December 31, 1995 (the "Unaudited Pro-Forma Consolidated Financial
Statements") are set forth below.
The Unaudited Pro-Forma Balance Sheet has been prepared assuming that the
Acquisitions occurred on December 31, 1995. The Unaudited Pro-Forma Statements
of Operations have been prepared assuming that the Acquisitions had occurred on
January 1, 1995.
The Unaudited Pro-Forma Financial Statements are presented for
informational purposes only and do not purport to represent what the Balance
Sheet would have been had the Acquisitions, in fact, occurred on December 31,
1995 or what the results of operations for the year ended December 31, 1995
would have been had the Acquisitions, in fact, occurred on January 1, 1995, or
to project the results of operations for any future period.
The Acquisitions have been accounted for as "purchases" for accounting and
reporting purposes.
<TABLE>
Pro-Forma Consolidated Balance Sheet
as of December 31, 1995 (000's omitted)
<CAPTION>
Flanders Private Purchase Combined
ASSETS Filters CSC Precisionaire AirSeal Offerings Adjustments Pro-Forma
- ------ --------- --------- ------------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents $ 2,974 $ 92 $ 744 $ 122 $ 25,194<F1> $(35,020)<F2> $ 11,932
17,826 <F3>
Receivables:
Trade 7,244 707 5,624 256 - - 13,831
Other 321 21 - - - - 342
Notes receivable, stockholders - 435 - - - - 435
Inventories 2,321 1,519 4,115 366 - - 8,321
Deferred income taxes 138 19 535 - - - 692
Income tax refund claim - 9 - - - - 9
Prepaid expenses 47 16 14 30 - - 107
--------- --------- ------------- --------- --------- ---------- ---------
Total current assets 13,045 2,818 11,032 774 25,194 (17,194) 35,669
--------- --------- ------------- --------- --------- ---------- ---------
Intangible Assets - - - - - 10,693 <F4> 10,693
Other Assets 183 - 916 28 - - 1,127
Property, Plant and Equipment 5,301 771 5,537 112 - 13,964 <F5> 25,685
--------- --------- ------------- --------- --------- ---------- ---------
$ 18,529 $ 3,589 $ 17,485 $ 914 $ 25,194 $ 7,463 $ 73,174
========= ========= ============= ========= ========= ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Notes payable $ 3,890 $ - $ - $ - $ - $ - $ 3,890
Current maturities of
long-term debt 454 - 1,284 15 - - 1,753
Accounts payable 3,984 588 4,550 197 - - 9,319
Accrued expenses 686 113 2,114 37 - - 2,950
--------- --------- ------------- --------- --------- ---------- ---------
Total current liabilities 9,014 701 7,948 249 - - 17,912
Long-Term Debt, less current
maturities 1,307 - 2,317 25 - 17,826 <F3> 21,475
Deferred income taxes - 74 310 - - - 384
Commitments - - - - - - -
--------- --------- ------------- --------- --------- ---------- ---------
Total liabilities 10,321 775 10,575 274 - 17,826 39,771
Stockholders' Equity
Capital stock 11 1 4 10 3<F1> (15)<F2> 15
Paid-in capital 3,419 - 276 (142) 25,191<F1> (134)<F2> 28,610
Retained earnings 4,778 2,813 6,630 771 - (10,215)<F2> 4,778
--------- --------- ------------- --------- --------- ---------- ---------
Total Stockholders' Equity 8,208 2,814 6,910 640 25,194 (10,364) 33,753
--------- --------- ------------- --------- --------- ---------- ---------
$ 18,529 $ 3,589 $ 17,485 $ 914 $ 25,194 $ 7,463 $ 73,174
========= ========= ============= ========= ========= ========== =========
16
<PAGE>
<FN>
<F1>
Includes $7,200,004 of net proceeds from investors in a Private Offering
who retain rescission rights if certain conditions are not met. See "Notes to
Financial Statements."
<F2>
To reflect cash paid for the Acquisitions.
<F3>
Proceeds from issuance of long-term debt.
<F4>
To reflect good will from the Acquisitions, as well as the write-up of
intangible assets owned by the acquired companies.
<F5>
To reflect write-up of leasehold improvements, furniture and equipment, as
well as the purchase of land and buildings in the Acquisition.
</FN>
</TABLE>
17
<PAGE>
<TABLE>
PRO-FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Year ended December 31, 1995
(Unaudited)
(000's omitted, except per share data)
<CAPTION>
Pro-Forma
Flanders CSC AirSeal Precisionaire Adjustments Pro-Forma
-------- --- ------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Sales $ 38,494 $ 5,077 $ 2,603 $ 61,810 $ - $ 107,984
Cost of goods sold 28,953 3,335 1,554 47,203 - 81,045
--------- --------- --------- ---------- ---------- ----------
Gross profit 9,541 1,742 1,049 14,607 - 26,939
Other operating revenue 141 - - - - 141
General and administrative
expenses 7,263 1,659 813 11,497 748 <F1> 20,438
(1,357)<F2>
(185)<F3>
--------- --------- --------- ---------- ---------- ----------
Operating income 2,419 83 236 3,110 794 6,642
Nonoperating income (expense):
Interest income - 29 - - - 29
Other income 44 67 3 132 - 246
Interest (expense) (633) (8) - (391) (1,384)<F4> (2,416)
--------- --------- --------- ---------- ---------- ----------
(589) 88 3 (259) (1,384) (2,141)
--------- --------- --------- ---------- ---------- ----------
Income before income
taxes 1,830 171 239 2,851 (590) 4,501
Income tax (benefit) 684 60 91 1,171 (224) 1,782
--------- --------- --------- ---------- ---------- ----------
Net income $ 1,146 $ 111 $ 148 $ 1,680 $ (366) $ 2,719
========= ========= ========= ========== ========== ==========
Earnings per weighted
average share $ 0.12 $ 0.21
========= ==========
Weighted average
common and common
equivalent shares
outstanding 9,832 3,371 13,203
========= ========== ==========
<FN>
<F1>
To reflect amortization of good will and additional depreciation due to
write-up to market value of plant and equipment from the Acquisitions.
<F2>
To reflect removal of non-recurring remuneration paid to previous owners
of the companies acquired in the Acquisitions who did not participate in
operations.
<F3>
To reflect removal of leases paid on buildings included in the
Acquisitions.
<F4>
To reflect increase in interest expense from financing required for the
Acquisitions, net proceeds of the private offerings.
</FN>
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Consolidated Financial Data," the Company's Consolidated Financial Statements
and the notes thereto and the Company's Pro-Forma Financial Statements and the
notes thereto, all included elsewhere herein. The information set forth in
this "Management's Discussion and Analysis of Financial Condition and Results
of Operations" includes forward-looking statements that involve risks and
uncertainties. Many factors could cause actual results to differ materially
from those contained in the forward-looking statements below. See "Risk
Factors -- Forward Looking Statements and Associated Risks."
Overview
The Company is a full-range air filtration product company engaged in
designing, manufacturing and marketing high performance air filtration products
and related products, services and equipment. During the last year, the Company
has experienced significant growth in its HEPA filter business and from the
acquisition of other air filtration businesses. As of May 31, 1996, the
Company acquired CSC, and on June 15, 1996, acquired Air Seal. As of September
24, 1996, the Company acquired Precisionaire. The results of operations for
the acquired businesses are included in the Company's financial statements only
from the applicable date of acquisition. As a result, the Company's historical
results of operations for the periods presented are not directly comparable.
The Company believes the Acquisitions will have a positive impact on its
future results of operations and accordingly believes that the Company's
historical results should be considered in conjunction with the pro-forma
financial statements and the notes thereto included elsewhere herein.
Additionally, neither the historical nor the pro-forma results of operations
fully reflect the operating efficiencies and improvements that are expected to
be achieved by integrating the acquired businesses into the Company's
operations.
Results of Operations
The following table summarizes the Company's results of operations as a
percentage of net sales for the fiscal years ended December 31, 1993, December
30, 1994 and December 31, 1995 and the six month periods ended June 30, 1995
and 1996.
<TABLE>
<CAPTION>
Six Months ended
Year ended December 31 June 30
(unaudited)
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit 31.6 27.7 24.8 26.3 24.7
Operating expenses 32.6 27.8 18.8 18.8 17.3
Operating income 1.7 2.4 6.3 7.5 7.3
Earnings before income taxes 0.1 0.7 4.8 5.4 8.3
Income taxes 0.07 0.7 1.8 2.1 3.1
Cumulative effect of
accounting change 1.5 - - - -
Net Earnings (loss) 1.5 (0.02) 3.0 3.4 5.1
</TABLE>
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
Net sales: Net sales for the six months ended June 30, 1996 increased 39%
to $26.2 million compared to $18.9 million for the six months ended June 30,
1995. The increase was due to the acquisition of Charcoal Service Corporation
("CSC") and Air Seal Filter Housings, Inc. ("Air Seal"), which accounted for
$1,638,000 of the increase in sales and the remainder of the increase was due
to increased overall demand for the Company's products.
Gross profit: Gross profits for the six months ended June 30, 1996
represented 25% of net sales, compared to 26% of net sales for the six months
ended June 30, 1995. The primary reason for the slight decrease in gross
profit
19
<PAGE>
margin was the consolidation of operations of Airpure, whose gross profit
represented 15% of its net sales. The remainder of the decrease in margins was
due to normal fluctuations in materials prices and product mix. The Acquisitions
had no material effect on the Company's gross profit as a percentage of sales.
The Company expects gross profit margins to range from 23% to 29%.
Operating expenses: Operating expenses increased to $4.5 million for the
six months ended June 30, 1996, compared to $3.6 million for the six months
ended June 30, 1995. Operating expenses decreased as a percentage of net
sales, to 17.3%, compared to 18.8% for the six months ended June 30, 1996 and
1995, respectively. This decrease was due to spreading of fixed operations
expenses to a larger sales volume. The Company expects operating expenses to
increase during the next twelve months but expects them to decrease on a pro-
forma basis, as savings from the consolidation of the Acquisitions are
realized, consisting of the removal of duplicated overhead and the dedication
of each facility to a given range of products, removing duplication of product
lines.
Income taxes: The effective income tax rate has remained constant at 38%
for the six months ended June 30, 1996 and 1995.
Net income: Net income increased to $1,348,000, or $0.09 per share, from
$639,000, or $0.07 per share, for the six months ended June 30, 1996 and 1995,
respectively.
Year Ended December 31, 1995 Compared to Year Ended December 30, 1994
Net sales for 1995 increased 47.6% to $38,494,000 compared to $26,072,000
in 1994. This increase was due primarily to increased overall demand for the
Company's products, several large contracts for end users building facilities
for semiconductor manufacturing, and approximately $6.0 million of increased
net sales from Airpure, a subsidiary established in 1994.
Gross profit for 1995 represented 24.8% of net sales, compared to 27.7% of
net sales in 1994. The primary reasons for the decrease in gross profit margin
percentage were: (i) the consolidation of operations of Airpure, whose products
had been priced at lower margins (an average of 18.8%) in order to achieve
entry into the mid-level ASHRAE products market, accounting for 1.1% of the
2.9% decrease in gross profit margin percentage; (ii) a temporary price
increase in an essential component of the filtration media because of resource
scarcity increased these costs to approximately $370,000 over budget for the
year. Other normal fluctuations in materials prices and product mix accounted
for the rest of the change in gross margin percentage. The Company expects,
with the Acquisitions, that its margins will increase slightly in 1996 to
between 25% and 28%. The Company is aiming to eventually reach 30% for its
gross margins. See "Business -- Strategies -- Increase Operating Efficiency."
Operating expenses during 1995 increased 0.3% to $7,263,000, representing
18.8% of net sales, compared to $7,239,000 in 1994, which represented 27.8% of
net sales. The Company is seeking to hold increases in operating expenses,
except for new plants and acquisitions, to less than 20% of the rate of
increase of revenues. Operating expenses included $375,000 and $150,000 in
1995 and 1994, respectively, of costs from settlement of lawsuits in December
1995 with two insurance companies, indemnified by certain officers and
shareholders of the Company. See "Business - Legal Proceedings." Because
these officers are deemed affiliates, this indemnification was deemed to be a
capital contribution to offset expenses incurred by the Company, rather than as
a decrease in expense, and was recorded as a debit to accrued liabilities and a
credit to paid-in capital. There was no effect upon the cash flows from
operations for recording this indemnification. If the settlement had been
indemnified by non-affiliates operating expenses during 1995 would have
declined 5.2%, to $6,888,000, or 17.9% of net sales, from $7,089,000, or 27.2%
of net sales, during 1994, income tax expense would have increased
approximately $146,000 and $58,000, respectively, and total stockholders'
equity would have decreased approximately $204,000 and $58,000, respectively.
Net earnings for 1995 were $1,146,000, or $0.12 per share, compared to a
net loss of $5,000, or $0.00 per share, for 1994. Net earnings were decreased
by $229,000 (after consideration of a tax benefit of $146,000) and $92,000
(after consideration of a tax benefit of $58,000) during 1995 and 1994,
respectively, by the indemnified lawsuit settlement. Without these indemnified
settlement expenses, net income would have been $1,375,000, or $0.14 per share,
for 1995, compared to $87,000, or $0.01 per share, for 1994.
20
<PAGE>
Year Ended December 30, 1994 Compared to Year Ended December 31, 1993
Net sales for 1994 increased 26.8% to $26,072,000 compared to $20,569,000
in 1993. This increase was due primarily to increased overall demand for the
Company's products, several large contracts for end users building facilities
for semiconductor manufacturing, and approximately $1.5 million of net sales
from Airpure, a newly established subsidiary.
Gross profit for 1994 represented 27.7% of net sales, compared to 31.6% of
net sales in 1993. The primary reason for the decrease in gross profit margin
percentage was the consolidation of start-up operations of Airpure, whose gross
profit represented 12.8% of net sales, and normal fluctuations in materials
prices and product mix.
Operating expenses for the Company increased 8%, to $7,239,000 in 1994,
compared to $6,695,000 in 1993. This 8% increase was primarily due to the
addition of Airpure's operations in 1994, and $150,000 accrued for the
resolution of the two lawsuits by insurance carriers against the Company. See
"Business - Legal Proceedings."
The Company experienced a net loss of $5,000 in 1994, compared to net
earnings of $317,000 in 1993. The loss in 1994 was the result of a larger than
normal income tax expense. The $317,000 of net earnings in 1993 would have
been net earnings of $10,000 except for a $307,000 one-time cumulative effect
of accounting change related to the Company changing its method of accounting
for income taxes.
Pro-Forma Combined Results of Operations
The Company's pro-forma combined operating results reflect the acquisitions
of Precisionaire, CSC and AirSeal as if each had occurred at the beginning of
each period presented. The pro-forma operating results for the six months
ended June 30, 1996 include the operating results of the Company,
Precisionaire, CSC and Air Seal for such period. Adjustments to the pro-forma
combined operating results include changes in depreciation and amortization to
reflect the new cost basis for assets acquired; changes to selling and
administrative expenses to remove non-recurring salaries and benefits to
stockholders not involved in operations; and changes in interest expense to
reflect debt incurred in financing the acquisitions. No adjustments have been
made to reflect synergies or operating efficiencies. The pro-forma operating
results are not necessarily indicative of the actual results which would have
been reported had the Company owned Precisionaire, CSC and AirSeal in the
periods presented.
The following table summarizes the Company's results of pro-forma
operations both in dollars and as a percentage of net sales for the fiscal
years ended December 31, 1993, 1994 and 1995 and the six month periods ended
June 30, 1995 and 1996.
21
<PAGE>
<TABLE>
SUMMARY COMBINED PRO-FORMA RESULTS OF OPERATIONS
(In thousands)
<CAPTION>
Year ended December 31 Six Months ended June 30
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 77,910 100.0% $ 87,210 100.0% $ 107,984 100.0% $ 51,186 100.0% $ 61,375 100.0%
Cost of sales 57,770 74.1 65,196 74.8 81,045 75.1 38,354 74.9 47,413 77.3
---------- ---------- ---------- ---------- ----------
Gross profit 20,140 25.9 22,014 25.2 26,939 24.9 12,832 25.1 14,232 23.2
Other operating revenue 547 0.7 634 0.7 141 0.1 - 0.0 - 0.0
Operating expenses 17,859 22.9 19,764 22.7 20,438 18.9 9,832 19.2 10,876 17.7
---------- ---------- ---------- ---------- ----------
Operating income 2,828 3.6 2,884 3.3 6,642 6.2 3,000 5.9 3,356 5.5
Earnings before
income taxes 1,244 1.6 1,082 1.2 4,501 4.2 1,830 3.6 2,837 4.6
Cumulative effect of
accounting change 307 0.4 - 0.0 - 0.0 - 0.0 - 0.0
---------- ---------- ---------- ---------- ----------
Net earnings (loss) $ 1,087 1.4 $ 528 0.6 $ 2,719 2.5 $ 1,260 2.5 $ 1,819 3.0
========== ========== ========== ========== ==========
</TABLE>
Pro-Forma Six Months Ended June 30, 1996 Compared to Pro-Forma Six Months Ended
June 30, 1995
Pro-forma net sales for the six months ended June 30, 1996 increased 20%,
to $61,375,000, compared to $51,186,000 for the six months ended June 30, 1995.
The increase was due primarily to each of the subsidiaries being relatively
successful in increasing its market share through enhanced marketing and
increased production. Frost & Sullivan's survey on the industry estimated that
the total industrial air filtration market grew between 4% and 5% year-to-year
during this period. The Company hopes to continue capturing market share in
the future. See "Business -- Strategies."
Pro-forma gross profits for the six months ended June 30, 1996 represented
23.2% of pro-forma net sales, compared to 25.1% of pro-forma net sales for the
six months ended June 30, 1995. The primary reason for the decrease in gross
profit margin was the increase in sales from Airpure and Airpure West. These
subsidiaries, whose primary focus is on mid-range ASHRAE filtration products,
had combined gross profit representing approximately 15% of net sales. The
Acquisitions had no material effect on the Company's pro-forma gross margins.
Pro-forma operating expenses increased to $10,876,000, compared to
$9,832,000 for the six months ended June 30, 1996 and 1995, respectively. Pro-
forma operating expenses declined as a percentage of pro-forma net sales, to
17.7% compared to 19.2% for the six months ended June 30, 1996 and 1995,
respectively. The Company expects that pro-forma operating expenses will not
change materially during the next two quarters, expecting the normal increases
in sales expenses associated with expected increases in revenues to compensate
for with savings from the consolidation of operations of the Acquisitions. See
"Business -- Strategies."
For the six months ended June 30, 1996 and 1995, the Company's pro-forma
provision for income taxes represented approximately 36% and 31%, respectively,
of earnings before income taxes.
Pro-Forma Year Ended December 31, 1995 Compared to Pro-Forma Year Ended
December 30, 1994
Pro-forma net sales for 1995 increased 24%, to $107,984,000 compared to
$87,210,000 in 1994. This increase was primarily due to the success of all of
the Company's subsidiaries in capturing additional market share and increasing
production. See "Business - Strategies."
Pro-forma gross profit for 1995 represented 24.9% of pro-forma net sales,
compared to 25.2% in 1994. The primary reason for the decrease in pro-forma
gross profit margin percentage was a decrease in gross profit margin percentage
of FFI and its Airpure subsidiary, to 24.8% for 1995, compared to 27.7% for
1994. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year Ended December 31, 1995 Compared to Year Ended
December 30, 1994."
22
<PAGE>
Pro-forma operating expenses during 1995 increased 3.4%, to $20,438,000
from $19,764,000 in 1994, and decreased as a percentage of sales to 18.9% in
1995, compared to 22.7% in 1994. The Company expects that pro-forma operating
expenses will not change materially during the next two quarters, expecting the
normal increases in sales expenses associated with expected increases in
revenues to compensate for with savings from the consolidation of operations of
the Acquisitions. See "Business -- Strategies."
Pro-forma net earnings for 1995 were $2,719,000 compared to $528,000 for
1994.
Pro-Forma Year Ended December 30, 1994 Compared to Pro-Forma Year Ended
December 31, 1993
Pro-forma sales for 1994 increased 12%, to $87,210,000 in 1994, compared to
$77,910,000 in 1993. This increase was primarily due to increased overall
demand for the Company's products.
Pro-forma gross profit for 1994 represented 25.2% of pro-forma net sales,
compared to 25.9% in 1993. The decrease in pro-forma gross profit percentage
was due to a decrease in margins for FFI, which was due to troubleshooting and
personnel training costs associated with the start of operations for Airpure in
1994.
Pro-forma operating expenses during 1994 increased 10.7%, to $19,764,000 in
1994, compared to $17,859,000 in 1993. This increase is primarily due to the
start up of the Airpure operations.
Pro-forma net earnings for 1994 were $528,000 compared to $1,087,000 for
1993, a decrease of 51%. The decrease in net earnings was the result of a
larger than normal income tax expense as well as one-time cumulative effect of
an accounting change related to the Company's changing its method of accounting
for income taxes.
Liquidity and Capital Resources
As the Company's business has grown, overall cash requirements for internal
growth and acquisitions have been met through a combination of bridge
financing, private placements of equity securities, and cash flow from
operations.
The Company's working capital was $9,462,000 at June 30, 1996, compared to
$4,030,000 at December 31, 1995 and $349,000 at December 30, 1994. This
includes cash and cash equivalents of $406,000, $2,974,000 and $157,000 at June
30, 1996, December 31, 1995 and December 30, 1994, respectively. Working
capital does not include the unused portion of the Company's revolving credit
lines or the proceeds from the Company's Private Offerings completed after the
end of the respective periods.
Trade receivables increased to $12,704,000 at June 30, 1996 from $7,244,000
at December 31, 1995. The increase in receivables is primarily attributable to
the increase in the volume of net sales. Other factors for the increase in
receivables include normal timing differences in shipments and payments
received.
Revenues for FFI tend to be higher during the first and fourth quarters
whereas revenues for Precisionaire tend to be higher during the second and third
quarters of the year. This and other factors may cause results of operations to
fluctuate materially quarter to quarter. One quarter's results may not be
indicative of the next quarter's or be indicative of the results that may be
expected for the year.
Effective September 24, 1996, the Company acquired all of the outstanding
capital stock of Precisionaire, pursuant to a stock purchase agreement dated
July 1, 1996. The purchase price was $27,315,000 plus 786,885 shares of the
Company's Common Stock, subject to a post-closing purchase price adjustment,
and was paid by delivery of both $27,315,000 in cash to the Precisionaire
sellers and 786,885 shares of Company Common Stock to an escrow agent to be
held in escrow and released to the Precisionaire sellers over a three year
period if certain performance objectives are met by Precisionaire. The
acquisition of Precisionaire by the Company has been accounted for by the
Company as a purchase. For accounting purposes this acquisition has been
accounted for as of September 30, 1996, the closest period end to the
transaction.
23
<PAGE>
To finance the acquisition of Precisionaire, the Company arranged with
NationsBank for a credit facility consisting of (i) a revolving credit facility
in the maximum principal amount of $25,000,000 and (ii) a term loan facility in
the maximum principal amount of $6,500,000. As of October 15, 1996, the
Company has used approximately $21,000,000 of the revolving credit facility and
$6,500,000 of the term loan facility. In September 1996, the Company raised
$12,005,000 from a private placement of 1,333,889 shares of stock at $9.00 per
share to accredited investors, $2,500,000 from a private placement of A Series
subordinated convertible debentures to certain unrelated investors, and
$4,000,000 from the sale of 10% Convertible Notes pursuant to Regulation S to
certain unrelated offshore investors (collectively called the "September
Offering"). Net proceeds to the Company after commissions and expenses from
the September Offering were $17,123,000. The shares sold in the September
Offering are the same shares being registered on behalf of the Selling
Shareholders.
On June 3, 1996, the Company completed a private placement offering of
1,537,315 shares of the Company's common stock at $5.00 per share to accredited
investors. The net proceeds to the Company after commissions and expenses from
the offering totaling $347,000 amounted to $7,340,000. A portion of the
proceeds of this private placement were used to acquire CSC.
Effective May 31, 1996, the Company completed the acquisition of all of the
outstanding capital stock of CSC, along with certain land and buildings
formerly owned by the shareholders of CSC, pursuant to a stock purchase
agreement. The purchase price for CSC was $4,435,690. In addition, 100,000
shares of the Company's common stock have been issued into escrow as a
valuation allowance pending the realized value of future cash flows. The
Company also capitalized $143,474 of offering expenses, consisting of legal
fees, professional fees and other miscellaneous offering-related expenses. The
acquisition by the Company of CSC has been accounted for by the Company as a
purchase.
Effective June 1, 1996, the Company acquired all of the outstanding capital
stock of AirSeal, along with certain land and buildings formerly owned by the
shareholders of AirSeal, pursuant to a stock purchase agreement. The purchase
price for AirSeal was $2,150,000. In addition, 150,000 shares of the
Company's common stock have been issued into escrow as a valuation allowance
pending the realized value of future cash flows. The Company also capitalized
$102,440 of offering expenses, consisting of legal fees, professional fees and
other miscellaneous offering-related expenses. The acquisition of AirSeal by
the Company has been accounted for by the Company as a purchase.
On January 24, 1996, the Company completed a private placement offering
under Regulation D of 500,000 shares of the Company's common stock to
accredited investors at $2.50 per share. The net proceeds to the Company after
commissions and expenses from the offering totaling $147,251 amounted to
$1,102,749. The proceeds were used for general working capital.
On December 29, 1995, the Company completed a private offering under
Regulation D of 1,100,000 shares of stock at $2.50 per share to accredited
investors. Net proceeds to the Company after commissions and expenses from the
offering were $2,430,601. The proceeds were used for general working capital.
Expansions of the business of the Company may require substantial
continuing capital investment. Although the Company has been able to arrange
equity financing or debt facilities to date, there can be no assurance that
sufficient debt financing or equity will continue to be available in the
future, nor that it will be available on terms acceptable to the Company.
Substantial additional debt or equity financing may be needed for the Company
to continue to grow through the acquisition of other businesses. Failure to
obtain sufficient capital could adversely affect the Company's acquisition
strategy. The Company expects that future financing will be in the form of
equity placements, however, no assurance can be given that the Company will be
able to obtain additional financing on reasonable terms, if at all.
The Company's business and operations have not been materially affected by
inflation during the periods for which financial information is presented.
24
<PAGE>
BUSINESS
The information set forth below includes "Forward-Looking Statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Many factors could cause actual results to differ materially from those
contained in the forward-looking statements below. See "Risk Factors --
Forward Looking Statements and Associated Risks."
Overview
The Company designs, manufactures and markets a full range of air
filtration products ranging from high performance laminar flow High Efficiency
Particulate Air ("HEPA") filters and charcoal filters for semiconductor plants,
to residential furnace filters. The Company's air filtration products are
utilized by many industries, including those associated with commercial and
residential air conditioning and heating systems, semiconductor manufacturing,
ultra-pure materials, biotechnology, pharmaceuticals, synthetics, nuclear power
and nuclear materials processing. The Company's major customers include AT&T,
Motorola, Merck, Kodak, Westinghouse, Home Depot, Walmart and several large
semiconductor and computer chip manufacturers.
Although, the Company historically has specialized in HEPA and medium
efficiency filters and equipment, the Company implemented a strategy of growth
by acquisition in December, 1995. In 1996, the Company expanded its product
line through the purchase of three other companies: CSC, which specializes in
charcoal filtration systems for the removal of gaseous contaminants, AirSeal,
which specializes in filter housings and customized industrial HVAC equipment
and Precisionaire which specializes in the manufacture and sale of filter
products ranging from mid-range ASHRAE grade filters through residential
furnace filters. The acquisitions of AirSeal, CSC and Precisionaire are
sometimes collectively referred to herein as the "Acquisitions."
Industry Background
Frost & Sullivan, a leading industry analyst, estimates that the total
domestic industrial air filtration market exceeded $1.15 billion in 1995 and
will reach $1.2 billion in 1996. The forces driving the air filtration market
have evolved over the past decade from concerns related to the preservation of
machinery and equipment to present day requirements for air quality and
production efficiency. Because of these requirements, air filtration products
are essential to many industries, including those associated with semiconductor
manufacturing, commercial and residential heating, ventilation and air
conditioning ("HVAC") systems, ultra-pure materials manufacturing,
biotechnology, pharmaceuticals, synthetics, nuclear power and nuclear materials
processing. Increasingly, companies are devoting resources to air filtration
products to enhance corporate efficiency and productivity.
Management believes the domestic market for retail and wholesale off-the-
shelf air filters and related products will exceed $500 million in 1996.
Management believes the world market for its products currently is more than
five times the total domestic market, and that as public awareness of the
benefits of living and working in clean environments become more generally
known and mandated by governments, this market will increase dramatically. The
world air filtration market is extremely fragmented, with over 100 companies
ranging in size from large companies like AAF International, with over $300
million in revenues per year, to privately held niche manufacturing firms on
which no revenue data is available.
Air filtration products have the following uses:
Industrial. Air filtration products are used in standard industrial
settings to provide cleaner work environments; for example, air filtration
systems are used by auto makers to remove "oil mist" contaminants from the
air in their plants, and industrial paint booth users utilize air
filtration to remove paint particulates from the air.
Semiconductor Manufacturing. Air filtration products are necessary to meet
the increasingly stringent manufacturing environment requirements of
semiconductor manufacturers. Laminar flow grade final filters are the most
critical component of a semiconductor manufacturers' cleanrooms. A typical
state-of-the-art semiconductor product line will have 75,000 square feet of
laminar flow grade filters, worth approximately $1.8 million.
25
<PAGE>
Pharmaceutical and Biotechnology. Air filtration products are necessary to
meet the pharmaceutical and biotechnology industry's increased emphasis on
preventing cross-contamination by isolating each process in a separate air
stream, speed of room recovery from contamination, and decreased emphasis
on actual particle counts. Currently, most pharmaceuticals are not
manufactured in cleanrooms, but recent regulation changes for the industry
which increase the standards for purity and production quality of
pharmaceuticals have led to increased demand for pharmaceutical cleanrooms.
Nuclear Power and Materials Processing. Filtration systems are necessary to
radioactive containment procedures for all nuclear facilities.
Commercial and Residential HVAC Systems. Replacement filters are an
essential requirement for the efficient operation of commercial and
residential HVAC systems.
Recent Trends
Recent trends in industry, as well as changes in laws and governmental
regulations, all lead to the increasing awareness of the benefits of the use of
air filtration products. Some of these trends and changes are:
Indoor Air Quality (IAQ) and Health. During the past ten years, the air
filtration industry has studied the effects of indoor air quality ("IAQ")
on employee productivity and solutions for solving IAQ problems. In
particular, surveys taken of semiconductor cleanroom production employees
report a decrease in the incidence and severity of symptoms associated with
common allergies, colds and other maladies, ostensibly related to the
workers' time spent in a working environment effectively free of dust,
pollen, smoke, bacteria and other common airborne contaminants.
Hazardous Working Environments. Several studies recognize an increasing
number of industrial processes as having significant impacts upon human
health. OSHA regulations, in particular, have made IAQ a consideration in a
wide variety of industries, ranging from those industries using spray-paint
booths to those using automobile assembly lines.
Sick Building Syndrome. Sick Building Syndrome ("SBS"), which is
characterized by lethargy, frequent headaches, eye irritation and fatigue,
has recently been shown to be a valid concern, and is a major design
consideration in new and renovated commercial and industrial buildings. The
identification of "sick" buildings, and the solutions to SBS, involve
complex issues which need to be examined on a case-by-case basis by
qualified engineers; solutions typically include improving the HVAC and
filtration systems of the "sick" buildings.
Hazardous Emission Regulation and Liability. Electrical utilities will
become subject to emissions regulations by the end of 1996 under the Clean
Air Act of 1990. In addition, several other new or revised regulations
regarding liability for claims made by employees or neighboring communities
have made many industries, in particular the chemical and semiconductor
industries, more aware of clean air regulations. As a result, these
industries have taken voluntary steps, including the utilization of air
filtration systems, to reduce emissions of potentially hazardous
substances.
Strategies
The Company's growth strategy is to: (i) increase the Company's market
share by selling a full line of products to the Company's current customers;
(ii) introduce new products based on applying existing high-technology concepts
to commercial and residential products; and (iii) increase operating
efficiencies.
Increase Market Share
Sell Full Range of Products to Existing Customers. Currently, the Company
sells its products through a direct sales force and manufacturers'
representatives. Historically, the manufacturer's representatives have
only sold certain of the Company's products. Those representatives can now
offer the Company's full range of air
26
<PAGE>
filtration products. Certain of the Company's representatives and
distributors have indicated a willingness to offer the Company's products
exclusively now that the Company offers a full range of products.
Establish Foreign Presence. The Company intends to manufacture and continue
to market its products in foreign markets. In April 1996, the Company
established a sales office, through a wholly owned subsidiary, in
Singapore. The Company intends to begin manufacturing ASHRAE-grade filters
in the region by the end of the second quarter of 1997, and has already
begun sales of the Company's products which are shipped from its domestic
manufacturing sites.
Strategic Acquisitions. The Company will continue to increase its market
share through strategic acquisitions of synergistic businesses. The Company
seeks to identify potential acquisition targets with (i) dominant positions
in local or regional markets, (ii) excess or underutilized capacity, (iii)
an ability to add new product lines to the Company's business, and (iv)
significant asset value to enable the Company to obtain debt financing or
non-dilutive equity financing for the acquisition. The Company is
continuously evaluating acquisition opportunities in light of the above
criteria. Once a potential target is identified, the Company commences an
in-depth due diligence evaluation of the target's operations, markets,
profitability and examines all potential liabilities including
environmental liabilities and any contingent liabilities. At the present
time, the Company has no specific plans or agreements with respect to
future acquisitions.
Expand Domestic Rep Network. The Company plans to expand its network of
domestic manufacturers' representatives by taking advantage of its
established contacts with specialty contractors and manufacturers'
representatives throughout the mid-West, Southwest and Eastern regions of
the United States. Using its contacts for high end products and its new
facility in Santa Rosa, California, the Company intends to expand into West
Coast markets for mid range and low end products.
Continued Emphasis on Quality and Performance. The Company's continued
emphasis on product quality has allowed it to grow in several
high-technology industries in recent years. See "Business--Products" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Expand Market with New Products
The Company intends to develop products for new markets by applying
existing technology developed for high-technology niche markets to new
applications. For each new application, the Company will first develop a line
of products to meet the needs of the specific application, and through trade
shows, technical publications, mass marketing, distributor education and other
appropriate methods, will create demand for the application in the new target
market.
Increase Operating Efficiency.
Eliminate Redundancy. The Company is planning to increase the focus of its
individual subsidiaries, so that each subsidiary only produces a single
category of product. The Company expects to reduce costs by eliminating
redundant part and lot tracking between its FFI and CSC facilities. Part
and lot tracking is currently required by the FDA and DOE for all
facilities manufacturing high-end containment environments. These
containment environments will now be produced exclusively at CSC's site in
Bath, North Carolina.
Centralize Overhead Functions. The Company plans to centralize and
eliminate duplication of efforts between the subsidiaries in the following
areas: Purchasing, marketing, accounting, personnel management, risk
management and policies and other benefit plan administration, production
planning and shipping coordination.
Cross-Apply Technology and Expertise. The Company plans to evaluate the
manufacturing technologies used by its various subsidiaries and to
cross-apply such technologies to create greater efficiencies in each
manufacturing line. The Company has already identified cost saving
procedures used by FFI which, when implemented, will enhance the efficiency
at Precisionaire.
27
<PAGE>
Marketing
The Company sells its products through manufacturer's representatives,
distributors and a direct sales force. Sales to the semiconductor,
biotechnology and general industrial markets are typically made through
manufacturer's representatives. The direct sales force sells primarily to
wholesale distributors, large retail chains, original equipment manufacturers,
end users and government organizations.
Each of the Company's subsidiaries has had a distinct group of non-
exclusive manufacturer's representatives; each representative typically
represents a group of end users with similar filtration needs, in a relatively
small geographical region. For example, FFI typically has at least one
"exclusive" representative in each major urban center in the U.S., whose
customers are the high-technology firms who use FFI's products, or the
specialty HVAC contractors who serve these end users. These representatives
will also typically sell mid-range ASHRAE filters, standard-grade filters and
related products and housings from other manufacturers to fill out their
product offerings.
The Company is currently focused on expanding its business with each of
these representatives to include all of the Company's products. The Company
believes it will be successful with the majority of its current representatives
for the following reasons:
Product Quality. The Company believes it manufacturers high performance air
filtration products. It currently offers filters of 99.999997% efficiency
on particles 0.1 microns or larger, the highest efficiency rating available
anywhere. It offers one of the few isolation environments approved by the
FDA for production of hazardous micro-organisms. Its standard grade
replacement filters meet or exceed all OEM specifications, and are
specifically recommended by some of the major HVAC equipment manufacturers.
Name Recognition. The Company believes that each of its product lines has
high name recognition in its target markets. The Company's representatives
have indicated that they believe their sales will be increased with
additional products associated with the Company.
Single Source Supplier. The Company provides a complete spectrum of air
filtration products. The ability to work with a single source for filters
will enable representatives to operate more efficiently, only needing to be
trained on one filtration system, maintain contacts with a single
organization and order from a central source.
Product Promotion and Innovation. The Company plans to introduce the public
to new applications it is developing for filtration products.
Representatives will be able to take advantage of the additional name
recognition and public knowledge associated with the marketing of the new
products, and see this as a competitive advantage to selling the Company's
products.
The Company is also seeking to consolidate its share of its direct
customers' business in the same fashion. For example, CSC has historically
sold high-end radiation containment filtration systems for radioactive
containment and exhaust purposes to U.S. Department of Energy nuclear
facilities. These facilities also use standard and industrial-grade filters
for air intake systems and control areas. The Company believes each of its
subsidiaries will be able to sell its direct customers additional products from
the other subsidiaries, for many of the same reasons given above: perception of
product quality, name recognition, and public knowledge of product innovations
and technical superiority.
Products
The Company's principal products are high-end, mid-range and standard-grade
air filtration products and related equipment and hardware. These principal
products are divided into product lines and each product line is marketed
separately through a combination of direct sales and a network of regional
distributors and specialized technical representatives and contractors
28
<PAGE>
"High-End" Products and Services.
The Company manufactures and sells "high-end" air filtration products for
use in applications requiring High Efficiency Particulate Air ("HEPA") filters,
or absolute control of other contaminants or toxic gases, typically with at
least 99.97% efficiency. Set forth below is a description of some of the
Company's high-end products.
HEPA Filters. The Company manufactures a full line of commercial-grade and
specialty HEPA filters, in a variety of styles, including bag filters,
fluid seal filters and clamp-down ceiling filters. These filters are used
to remove extremely small particles from air and other gases for a variety
of applications ranging from removing radioactive particles in the event of
a nuclear containment breach to removing oil mist from the air of
automobile plants to meet OSHA requirements, to removing cigarette smoke
from the air of smoking areas at airport terminals before it is mixed with
the general airport air.
Laminar Flow Grade Filters. The Company manufactures an extensive line of
high-performance air filters designed to meet the additional requirements
of cleanrooms. Efficiencies for various laminar flow filter types range
from 99.99% to 99.999997% for particle removal. The performance of these
product lines forms the basis for the Company's reputation among high-end
users. A key advantage of the Company's laminar flow filters is that the
Company is the only HEPA filter manufacturer to produce its own fiber-glass
based filter media. Besides allowing more immediate and effective product
quality control, the Company has developed unique processes which enable
them to manufacture "completely separatorless" filters, while competing
filters use aluminum, tape, glue or strings to separate adjacent pleats of
the media which obstruct air flow and contribute to off-gassing and
particle generation. Laminar flow grade filters are essential for the
production of semiconductors, pharmaceuticals and many other
high-technology products.
HEGA Products. High-Efficiency Gas Adsorbers ("HEGAs") collect gaseous
contaminants through "adsorption," or collecting contaminants in a
condensed form on a surface. HEGA filters are used to control or eliminate
gaseous contaminants, odors, bacteria and other micro-organisms, toxic
chemicals and specialized biological agents. HEGA products typically
contain one of several forms of activated charcoal, selected to match the
types of contaminant which need to be filtered for the particular
application. HEGA filters, in combination with ASHRAE-grade and HEPA
filters, are critical to many applications, including the production and
disposal of chemical and biological warfare agents, the removal of
radioactive gases from the exhaust of nuclear facilities and the removal of
volatile organic compounds generated by many industries ranging from
hospital operating rooms to sub-surface mining.
Containment Environments. The Company manufactures isolated containment
environments for a variety of applications which combine HEPA and HEGA
filtration with specialized housings and self-contained fan-filter units.
These systems are customized to meet the requirements of the end user, and
have been used in applications ranging from isolating contagion in critical
care wards to the production of designer micro-organisms. The Company
offers the only FDA approved containment environment for the production of
potentially hazardous micro-organisms. These containment environments are
potentially adaptable, especially in combination with gas-phare filtration
technologies, to many other industries, including the pharmaceutical and
semiconductors industries.
"Mid-Range" Filtration Products and Services.
The Company also manufactures and sells products intended for "mid-range"
applications. These filters are also known as ASHRAE filters, because they
fall under specifications and are categorized by efficiency ratings established
by the American Society of Heating, Refrigeration and Air-conditioning
Engineers. These applications are generally characterized by requiring
filtration of at least 20% efficiency. The Company's mid-range industrial
grade filters are used in many applications, including hospital and bio-medical
ventilation systems, photoproduct processes, food handling or processing
operations, toxic or carcinogenic containment, and as high-efficiency
prefilters for the HVAC units in cleanrooms.
The Company's mid-range industrial grade products include PUREFORM(r)
Separatorless Filters, Separator-Type filters with corrugated aluminum
separators, high-temperature HEPA filters, and 95% DOP high-efficiency filters,
in
29
<PAGE>
a variety of styles, including nipple-connected, square gasketed with gel-
seal and round with or without faceguards. Other major ASHRAE-rated products
include Precision Pak(tm) extended surface area "bag" type filters, Rigi-
Pleat(tm) deep-pleated filters, Multi-Fold(tm) Collapsible medium and high-
efficiency air filter cartridges, and Multi-Cap and Multi-Flo collapsible air
filter cartridges for replacement of competitors' filters.
"Standard-Grade" Products and Services.
The Company manufactures and sells standard-grade products for use in
conventional commercial and residential HVAC systems. These products are
typically sold off-the-shelf to HVAC distributors, retail outlets, industrial
wholesalers and specialty contractors. These filters are characterized by
their low cost, and typically have efficiency ratings below 30%, with average
arrestance ranging from 50% to 95%. The Company's product lines in this
category include a full range of filters and media for standard residential and
commercial furnace and air conditioning applications.
The Company's standard-grade filters are sold under more than 20 different
brand names, including Precisionaire Industrial Grade, Tri-Bond, E-Z Flow,
Dustgard, Kwik Kut, Smilie, Permaire, Kwik Kleen, Pre-Foam Kleen, Kwik Kleen
Synthetic, Pre-Pleat and Micro-Particle Pleated Home Air Filters.
Other Products and Services.
In addition to filters, the Company also sells related products, including
filter housings, lay-in grid cleanroom ceilings, fans and blowers, isolation
dampers, adhesives, caulk, filter media, and sealants. The Company also has a
limited number of service clients, where the Company will replace or recharge
media and perform related maintenance services.
Manufacturing
The Company designs and manufactures air filters, housings, containment
environments and related equipment. Its products are manufactured at seven
facilities in the U.S., which range in size from 40,000 square feet to over
200,000 square feet. CSC manufactures high-end containment environments,
housings, custom filter assemblies and other custom filtration products and
systems which require extensive custom design, production and lot tracking,
such as FDA-approved enclosures for the production and containment of
potentially dangerous biologically engineered microorganisms. Precisionaire
has three separate manufacturing facilities, which produce medium efficiency
and standard-grade filters in standard sizes, which are shipped in bulk to
retailers, distributors and other customers. FFI's facility in Washington, NC,
produces high-end HEPA products; Management believes that FFI's ability to
manufacture its own filter media provides it with a significant competitive
advantage, allowing more direct control over quality and composition than is
generally available with outside suppliers. The Company's Selma, N.C. and
Santa Rosa, Ca., facilities manufacture ASHRAE grade filters.
The Company's manufacturing operations are subject to periodic inspection
by regulatory authorities. Because of the nature of some of the Company's
products, these agencies include, in some cases, the Department of Energy, the
Food and Drug Administration and other agencies responsible for overseeing
sensitive technologies. One of the considerations in deciding which types of
products each facility will manufacture is the segregation of highly-regulated
products to a minimal number of facilities, to reduce the overhead associated
with regulatory monitoring and compliance.
Each of the Company's manufacturing facilities utilize testing and design
strategies appropriate to the products manufactured. These range from standard
statistical process quality controls for standard-grade residential replacement
filters to individual testing and certification with patented proprietary
particle scanning technologies for each laminar-grade HEPA filter. The Company
believes that its ability to comprehensively test and certify its filters
provides it with a competitive advantage.
30
<PAGE>
Competition
The air-filtration market is fragmented and highly competitive. There are
many companies which compete in the Company's market areas. The Company
believes that the principal competitive factors in the air-filtration business
include, product performance, price, product knowledge, reputation, customized
design, timely delivery and product maintenance. The Company believes it
competes favorably in all of these categories. The Company's competitors
include successful companies with resources, capital requirements, financial
strength, and market share which may be greater than the Company's. Major
competitors include AAF International, Calgon Carbon Corporation, Farr Company,
HEPA Corporation, Purolator Products Air Filtration Company, and Torit/Day.
Patents, Trademarks and Licenses
The Company currently holds eight patents relating to filtration
technology, including patents relating to HEPA filters and fabrication methods,
filter leak testing methods, and laminar flow cleanrooms. The Company has a
patent pending on its isolation workstation technology.
The Company has applied for federal trademark protection for the following
marks: Precisionaire(r), Dustgard(r), Preflex(tm), AP Armaflex(r), E-Z
flow(r), E-Z flow II(r), Smilie(r), Permaire(r), AIRVELOPE(tm), CHANNEL-
CEIL(r), CHANNEL-HOOD(tm), PUREFORM(tm), ECONOCELL(tm), PURESEAL(r), TECH-
SORB(tm), GAS-PAK(tm) and ULTRASORB(tm). Although management believes that
the patents and trademarks associated with the Company's various product lines
and subsidiaries are valuable to the Company, it does not consider any of them
to be essential to its business.
The Company currently licenses some of its manufacturing products to
specialty HVAC and ASHRAE original equipment manufacturers ("OEMs"), who
produce products under their own name and with their own identifying labels.
Acquisition History
In September 1996, the Company acquired all of the outstanding stock of
Precisionaire pursuant to a stock purchase agreement dated July 1, 1996. The
purchase price was $27,315,000, subject to a post-closing purchase price
adjustment, and up to 786,885 shares of Company Common Stock, if certain
performance criteria are met. The acquisition of Precisionaire by the Company
has been accounted for by the Company as a purchase. Precisionaire
manufactures and sells filter products for use in conventional, commercial and
residential HVAC systems. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources".
In June 1996, pursuant to a stock purchase agreement, the Company acquired
all of the outstanding stock of Air Seal, a mid-range custom filter housing
manufacturer based in Houston, Texas, as well as the land and building where
Air Seal's plant and offices are located. The Company gave consideration of
$2,150,000 and up to 150,000 shares of the Company's common stock if certain
performance criteria are met. The Company accounted for this acquisition as a
purchase.
In May 1996, pursuant to a stock purchase agreement, the Company acquired
all of the outstanding stock of CSC, a charcoal filter manufacturer based in
North Carolina specializing in activated charcoal filters and containment
environments, as well as the land and buildings where CSC's manufacturing plant
and offices are located. The acquisition was effective as of March 1, 1996.
The purchase price for CSC was $4,435,690, subject to a post-closing purchase
price adjustment, and was paid by delivery of $4,435,690 in cash. The
acquisition by the Company of CSC has been accounted for by the Company as a
purchase.
In January 1996, Elite entered into a reincorporation merger with Flanders,
a newly formed North Carolina corporation and wholly owned subsidiary. As a
part of the reincorporation merger, Elite changed its name to Flanders
Corporation and its domicile to North Carolina.
Elite, the predecessor of Flanders, was incorporated on July 2, 1986 in the
State of Nevada. In December 1995 Elite acquired FFI, a manufacturer of
precision high-performance filtration products, in a stock-for-stock exchange.
Prior to the acquisition of FFI, Elite was a "public shell" company with no
significant operations or assets. The
31
<PAGE>
acquisition of FFI was accounted for as a reverse acquisition, meaning that
for purposes of financial statements, the historical results of FFI become
the historical results of Elite.
Backlog
The Company had approximately $19,259,000 million in firm backlog, on a
pro-forma basis, at September 30, 1996, compared to $16,537,000 million at
December 31, 1995, and $14,564,000 million at December 30, 1994. Firm backlog
includes orders received and not begun and the unfinished and unbilled portion
of contracts in progress. Orders are typically not cancelable without penalty,
except for certain stable filter supply contracts to nuclear facilities
operated by the United States government. All backlog at September 30, 1996 is
expected to be shipped by the end of the first quarter of 1997.
Employees
The Company employed approximately 1,389 full-time employees on September
30, 1996: 1,234 in manufacturing, 37 in development and technical staff, 39 in
sales and marketing, and the remaining 79 in support staff and administration.
The Company's employees are not represented by a labor union. The Company
believes that its relationship with its employees is satisfactory.
Facilities
The following table lists the principal facilities owned or leased by the
Company.
<TABLE>
<CAPTION>
Approximate
Floor
Principal Facility Location Space Monthly Expense Lease/Type
<S> <S> <C> <C> <C>
Headquarters and Washington, North 220,000 square feet N/A N/A - owned
manufacturing facility Carolina
Manufacturing, Bath, North 44,282 square feet N/A N/A - owned
service and office Carolina
facility
Plant and office Selma, North 22,500 square feet $ 6,250.00 Monthly Lease
facility <F1> Carolina
Manufacturing Bartow, Florida 175,000 square feet $ 16,304.17 10 year, expires
plant <F2><F4> in 2006
Lakeland facility - Lakeland, Florida 30,000 square feet $ 5,962.50 3 year, expires
manufacturing plant February 15, 1997
Manufacturing Terrell, Texas 146,256 square feet $ 21,800.00 N/A -- purchasing
plant <F3>
Manufacturing Auburn, 91,000 square feet $ 16,304.17 10 year, expires in
plant <F2><F4> Pennsylvania 2006
Office Space <F4> St. Petersburg, 12,000 square feet $ 7,650.60 5 year, expires in
Florida 2001
Office Space Terrell, Texas 13,200 square feet $ 1,000.00 5 year, expires
April 1, 2000
32
<PAGE>
R&D; Cafeteria <F4> St. Petersburg, 6,000 square feet $ 1,464.38 5 year, expires in
Florida 2001
Warehouse South Holland, 33,226 square feet $ 8,307.00 4 year, expires on
Illinois March 31, 1998
Manufacturing plant Sonoma, 40,000 square feet $ 6,675.00 1 year, expires
California April 30, 1997
Manufacturing plant Stafford, Texas 8,000 square feet $ 1,600.00 1 year, expires
January 8, 1997
<FN>
<F1>
The Selma facility is leased from a related party pursuant to a month-to-
month lease. See "Certain Relationships and Related Transactions."
<F2>
Upon satisfaction of certain conditions, the landlord at this location has
the right to cause the Company to purchase such property and the Company has
the right to purchase this property for five (5) years thereafter.
<F3>
The Company is currently negotiating the assumption of the mortgage of the
property at this location.
<F4>
These facilities are leased from a related party pursuant to leases. See
"Certain Relationships and Related Transactions."
</FN>
</TABLE>
Research and Development
The Company's research and development is focused in the following areas:
Automated equipment design, to increase the efficiency and profitability of
production lines used for mass production of off-the-shelf filters;
Alternative filtration media types, including evaluation of new synthetic
media products, which might either increase efficiency or decrease media
costs;
Improved media production techniques, particularly at FFI's plant in
Washington, NC, where the Company produces its Dimple-Pleat media, and
other media for high-end HEPA products; during the past ten years, the
Company has increased the efficiency of its filters through advances in
media formulation and production techniques from 99.97% to 99.9999997%.
Application development, where new methods and products are developed from
existing technologies. See "Business Strategies -- Expand Market with New
Products."
Research and development costs for the six months ending June 30, 1996 and
the last three fiscal years are summarized below. Research and development
costs on a pro-forma basis were expended and included in general and
administration expenses during the period incurred.
Period Ending Amount
6/30/96 $ 450,000
12/31/95 $ 1,000,000
12/31/94 $ 650,000
12/31/93 $ 550,000
33
<PAGE>
Legal Proceedings
From time to time, the Company is a party to various legal proceedings
incidental to its business. Currently, the Company is not a party to any legal
proceeding material to the conduct of its business, operations or financial
condition.
MANAGEMENT
The Company's directors and executive officers are as follows:
Name Age Title
Thomas T. Allan 58 Chairman of the Board
Robert R. Amerson 46 President, Chief Executive Officer and Director
Gustavo Hernandez 61 Director, Vice President of Operations
Steven K. Clark 43 Vice President of Finance/Chief Financial
Officer and Director
William M. Claytor 54 Director
William H. Clark 53 Director
Thomas T. Allan. Mr. Allan currently serves as the Company's Chairman of
the board, a position he has held for over ten years, and he has served on the
Board of Directors for over twenty years. Mr. Allan first joined Flanders in
1964. He holds a Bachelor of Arts degree in Journalism from the University of
Pennsylvania.
Robert R. Amerson. Mr. Amerson has been President and a Director of
Flanders since 1988. He joined the Company in 1987 as Chief Financial Officer.
Mr. Amerson has a Bachelor of Science degree in Business Administration from
Atlantic Christian College.
Gustavo Hernandez. Mr. Hernandez has been President of Precisionaire since
1979, and became a Director and Vice-President of the Company contemporaneous
with the Company's acquisition of Precisionaire in September 1996. Mr. Hernandez
joined Precisionaire in 1969 as Vice President of Finance. Mr. Hernandez has a
Bachelor of Arts degree in Accounting from the University of Southern Florida.
Steven K. Clark. Mr. Clark was named a Director, Vice President and Chief
Financial Officer of the Company in December 1995. Mr. Clark acted as a
consultant to the Company from November 15, 1995 through December 15, 1995. From
July 1992 through October 1995, he was the Chief Financial Officer of Daw
Technologies, Inc., a specialty cleanroom contractor and customer of the
Company. Mr. Clark is a Certified Public Accountant and has Bachelor of Arts
degrees in Accounting and Political Science and a Master of Business
Administration degree, all from the University of Utah.
William M. Claytor. Mr. Claytor has been an outside Director of Flanders
for the last five years. He is a partner in the law firm of Baucom, Claytor,
Benton, Morgan, Wood & White, P.A., and has held such position since 1975. Mr.
Claytor graduated from Memphis State University School of Law in 1969 and from
the University of Missouri in 1963.
William H. Clark. Mr. Clark has been an outside Director of Flanders since
June, 1996. He is and has been since 1977, the President and Owner of Bill Clark
Construction Co., Inc., a construction company located in Greenville, North
Carolina specializing in residential development. He is currently a member of
the Business Advisory Council of the East Carolina University School of
Business. Mr. Clark has a BA degree and a Masters of Business Administration
degree, both from East Carolina University.
34
<PAGE>
Other Key Employees
In addition to the executive officers named above, the Company considers
the following to be key employees:
O. Weldon Scott, Jr.. Mr. Scott is President of FFI. Mr. Scott has been
with the Company since 1973. He has worked in many positions at all levels
of the Company, including Director of Filter Manufacturing, Service
Technician and Foreman of Testing.
Knox Oakley. Mr. Oakley has been the Vice President of Corporate Marketing
and Sales of FFI since June 1994. From 1989 through June 1994, Mr. Oakley
was Director of North American Sales for American Air Filter (now AAF
International). Mr. Oakley received his Bachelor of Science degree in
Biology from the Citadel.
Committees of the Board of Directors
The Board of Directors has an Audit Committee and a Compensation Committee.
The Audit Committee, which was established in December of 1995, reviews the
results and scope of the audit and other services provided by the Company's
independent auditors, reviews and evaluates the Company's internal audit and
control functions, and monitors transactions between the Company and its
employees, officers and directors. The Compensation Committee administers the
Company's equity incentive plans and designates compensation levels for
officers and directors of the Company.
The members of the Audit Committee are Mr. S. K. Clark, Mr. W.H. Clark and
Mr. Claytor. The members of the Compensation Committee are Messrs. Claytor and
Allan. Both Mr. Claytor and Mr. W.H. Clark are non-employee directors. Mr.
Allan is the Chairman of the Board; his compensation is fixed at $71,000 per
year, and he is not eligible for bonuses.
Employment Agreements
The Company has entered into employment agreements with Messrs. Amerson and
S. K. Clark effective as of December 15, 1995 ("Employment Agreements"). Mr.
Amerson's employment agreement currently provides for an annual base salary of
$250,000. Mr. Clark's employment agreement currently provides for an annual
base salary of $250,000. The Employment Agreements each have an initial five
(5) year term. The Employment Agreements also provide that the executive shall
be entitled to the following termination payments: (i) 100% of his current base
salary if the employment is terminated as a result of his death or disability,
(ii) up to 200% of his current base salary, if the employment is terminated by
the Company for any reason other than death, disability or for Cause (as
defined in his Employment Agreement), or (iii) up to 250% of the executive's
gross income during the year preceding his termination if the Employment
Agreement is terminated by the executive for Good Reason (as defined in the
Employment Agreement) or by the Company for any reason other than death,
disability or Cause and the termination occurs within two years after a Change
of Control (as defined in the Employment Agreement) of the Company has
occurred.
The Company has also entered into an employment agreement with Mr.
Hernandez effective September 23, 1996. This agreement currently provides for
a base salary of $250,000 and has an initial five (5) year term. The
employment agreement also provides that the executive shall be entitled to the
following termination payments: (i) 100% of his current base salary if the
employment is terminated as a result of his death or disability, and (ii) up to
200% of his current base salary, if the employment is terminated by the Company
for any reason other than death, Disability or for Cause (as defined in his
employment agreement).
Compensation of Directors
Directors who are Company employees receive no additional or special
remuneration for serving as directors. The Company's non-employee Directors
are paid $500 plus out-of-pocket expenses for each meeting of the Board of
Directors and receive options to purchase shares of Common Stock of the Company
pursuant to the Director Option Plan
35
<PAGE>
described below. In addition, in 1995, Mr. Claytor received an option to
purchase 50,000 shares of common stock and Mr. Allan received an option to
purchase 150,000 shares of common stock, both exercisable at $1 per share.
Director Option Plan
The 1996 Director Option Plan provides for the grant of stock options to
existing and future outside directors of the Company. Each outside director
who is serving as a director on January 1 of each calendar year, commencing
January 1, 1997, will automatically be granted an option to acquire up to 5,000
shares of common stock at an exercise price per share not less than the fair
market value per share of common stock on such date, assuming such outside
director had been serving for at least six months prior to the date of grant.
Payment of the exercise price for options granted under the Director Option
Plan may be made in cash, in shares of the Company's common stock, or in a
combination of cash and common stock. Options under the Director Option Plan
are fully exercisable upon six months of the anniversary of receipt. Options
granted under the Director Option Plan are not transferrable, except under
limited circumstances. If the outside director optionee ceases to be an
outside director other than by reason of death, disability or cause, all
unexercised options terminate three months thereafter.
The Company has reserved 500,000 shares of its common stock for issuance
under the Director Option Plan. The Director Option Plan terminates in 2006.
Long-Term Incentive Plan
In 1996, the Company adopted the Long Term Incentive Plan ("LTI Plan") to
assist the Company in securing and retaining key employees and consultants.
The LTI Plan authorizes grants of incentive stock options, nonqualified stock
options, stock appreciation rights ("SARs"), restricted stock performance
shares and dividend equivalents to officers and key employees of the Company
and outside consultants to the Company. There are 2,000,000 shares of Common
Stock reserved for award under the LTI Plan.
The Plan is administered by the Compensation Committee of the Board of
Directors. The Compensation Committee determines the total number and type of
award granted in any year, the number and selection of employees or consultants
to receive awards, the number and type of awards granted to each grantee and
the other terms and provisions of the awards, subject to the limitations set
forth in the LTI Plan.
Stock Option Grants. The Compensation Committee has the authority to select
individuals who are to receive options under the LTI Plan and to specify
the terms and conditions of each option so granted (incentive or
nonqualified), the exercise price (which must be at least equal to the fair
market value of the Common Stock on the date of grant with respect to
incentive stock options), the vesting provisions and the option term.
Unless otherwise provided by the Compensation Committee, any option granted
under the LTI Plan expires the earlier of 10 years from the date of grant
or, three months after the optionee's termination of service, other than
termination for cause, with the Company or three years after the optionee's
death or disability. As of October 7, 1996 the Company has granted options
to purchase 176,520 shares of Common Stock under the LTI Plan.
Stock Appreciation Rights. The Compensation Committee may grant SARs
separately or in tandem with a stock option award. A SAR is an incentive
award that permits the holder to receive (per share covered thereby) an
amount equal to the amount by which the fair market value of a share of
Common Stock on the date of exercise exceeds the fair market value of such
share on the date the SAR was granted (the "base price"). Under the LTI
Plan, the Company may pay such amount in cash, in Common Stock or a
combination of both. Unless otherwise provided by the Compensation
Committee at the time of grant, the provisions of the LTI Plan relating to
the termination of employment of a holder of a stock option will apply
equally, to the extent applicable, to the holder of a SAR. A SAR granted in
tandem with a related option will generally have the same terms and
provisions as the related option with respect to exercisability. A SAR
granted separately will have
36
<PAGE>
such terms as the Compensation Committee may determine, subject to the
provisions of the LTI Plan. As of June 30, 1996, no SARs have been granted
under the LTI Plan.
Restricted Stock Awards. The Compensation Committee is authorized under the
LTI Plan to issue shares of restricted Common Stock to eligible
participants on such terms and conditions and subject to such restrictions,
if any, as the Compensation Committee may determine. As of June 30, 1996,
no restricted stock awards have been granted under the LTI Plan.
Performance Shares. The Compensation Committee is authorized under the LTI
Plan to grant performance share units to selected employees. Typically each
performance share unit will be deemed to be the equivalent of one share of
Common Stock. As of June 30, 1996, no performance shares have been awarded
under the LTI Plan.
Dividend Equivalents. The Compensation Committee may also grant dividend
equivalent rights in conjunction with the grant of options of SARs.
Dividend equivalent rights entitle the holder to receive an additional
amount of Common Stock upon the exercise of the underlying option or SAR.
As of June 30, 1996, no dividend equivalents have been awarded under the
LTI Plan.
401(k) Plan
Due to the Acquisitions, the Company currently has four defined
contribution 401(k) salary reduction plans intended to qualify under section
401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), one for
each of FFI, CSC, Airpure and Precisionaire (collectively, the "401(k) Plans").
The Company is in the process of combining all of the plans into a single plan.
See "Business -- Strategies - Increase Operating Efficiency."
Employees of Flanders and Airpure are immediately eligible to enroll in
their 401(k) Plans upon employment. Employees of CSC and Precisionaire are
eligible after one year of service. Eligible employees may enroll in the
appropriate 401(k) Plan as of any January 1 or July 1 of each year. For each
of the 401(k) Plans, a participating employee, by electing to defer a portion
of his or her compensation, may make pre-tax contributions to the 401(k) Plan,
subject to limitations under the Code, of a percentage of his or her total
compensation which varies between the 401(k) Plans between 15% and 20%.
Flanders, Airpure and CSC may make matching contributions to the appropriate
401(k) Plans at the discretion of their Boards of Directors. Precisionaire
contributes 25 cents for each dollar contributed, up to the first 4% of
compensation deferred. Participant contributions and earnings are 100% vested,
while Company matching contributions vest in increments over a six-year period
(for FFI, Airpure and CSC) or a seven-year period (for Precisionaire).
Participants may alter their contribution amounts as of any enrollment date.
Participants may change or transfer their investments at any time.
Contributions may be withdrawn only after the participant reaches the age of
591/2 or in the event of retirement, death disability, termination of service
or financial hardship, with possible penalties for certain early withdrawals.
The Company pays all expenses associated with administration of the 401(k)
Plans.
Executive Compensation
Board Compensation Committee Report on Executive Compensation
The Company's executive compensation program is administered by the
Compensation Committee of the Board of Directors. The role of the
Compensation Committee is to review and approve salaries and other
compensation of the executive officer of the Company, to administer the
Executive Officer Bonus Plan (the "Bonus Plan"), and administer the stock
option plans and to review and approve stock option grants to all
employees, including the executive officers of the Company. Several of the
mechanisms discussed below were not in place during 1995, but have been or
are being established as the Company further defines its executive
compensation policies and goals. For instance, the non-qualified stock
option plan discussed below was not in place during 1995, but has since
been established, and will be an important part of future compensation
decisions.
37
<PAGE>
General Compensation Philosophy
The Company's compensation philosophy is that total cash compensation
should vary with the performance of the Company and any long-term incentive
should be closely aligned with the interest of the stockholders.
Total cash compensation for the executive officers consists of the
following components:
- Base salary
- An executive officer bonus that is related to growth in sales and
operating earnings of the Company.
Long-term incentive is realized through the granting of stock options to
executives and key employees through a non-qualified stock option plan,
which was adopted by the Board and approved by a majority of the Company's
shareholders in January of 1996. The Company has no other long-term
incentive plans for its officers and employees.
Base Salary and Executive Officer Bonus Target
Current base salaries for the executive officers of the Company were
determined by arms' length negotiations with the Board of Directors, and
are set forth in the various employment contracts between the Company and
the executive officers - see "Employment Agreements."
Stock Options
Stock options are granted to aid in the retention of executive and key
employees and to align the interests of executive and key employees with
those of the stockholders. The level of stock options granted (i.e., the
number of shares subject to each stock option grant) is based on the
employees ability to impact future corporate results. An employee's ability
to impact future corporate results depends on the level and amount of job
responsibility of the individual. Therefore, the level of stock options
granted is proportional to the Compensation Committee's evaluation of each
employee's job responsibility. For example, Mr. Amerson, as the Chief
Executive Officer, has the highest level of responsibility and would
typically be awarded the highest level of stock options.
Stock options are granted at a price not less than the fair market value on
the date granted. They are granted to key employees, including the
executive officers, at the direction of the Compensation Committee at
levels believed to be appropriate for the amount and level of
responsibility of each key employee.
The members of the Audit Committee are Messrs. Claytor and Allan. Mr.
Claytor is a non-employee director. Mr. Allan is the Chairman of the
Board; his compensation is fixed at $71,000 per year, and he is not
eligible for bonuses.
38
<PAGE>
Summary Compensation Table.
The following table sets forth the aggregate cash compensation paid by the
Company for services rendered during the last three years to the Company's
Chief Executive Officer and to each of the Company's other executive officers
whose annual salary, bonus and other compensation exceed $100,000.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards Payouts
------ -------
Other Restricted
Annual Stock Option/s LTIP
Compen- Award(s) SARs Payouts
Name and Principal Position <F1> Year Salary ($) Bonus ($) sation<F2> ($) (#) ($)
- -------------------------------- ---- ---------- --------- ------- ---------- -------- -------
<C> <C> <C> <C> <C> <C> <C> <C>
Thomas T. Allan 1995 $ 71,000 $ - $ 137,077 $ - 150,000 $ -
Chairman of the Board 1994 71,000 - 124,500 - - -
1993 71,000 - 167,875 - - -
Robert R. Amerson 1995<F3> 128,846 - 137,077 - 1,150,000 -
President 1994 100,000 - 124,500 - - -
1993 100,000 - 167,875 - - -
Steven K. Clark 1995<F4> 15,000 - - - 1,150,000 -
Chief Financial Officer 1994 - - - - - -
1993 - - - - - -
<FN>
<F1>
Gustavo Hernandez, a Vice President of the Company and a Director, is
the Chief Executive Officer of Precisionaire. He commenced his employment with
the Company in September 1996. Mr. Hernandez will receive an annual salary of
$250,000, plus a possible bonus, commencing in September 1996, under his
Employment Agreement. See "Management -- Employment Agreements." During 1995
and 1994, Mr. Hernandez was paid $218,049 and $188,714, respectively, by
Precisionaire.
<F2>
Represents compensation paid by the Company to FEC and received by
Messrs. Allan and Amerson, respectively. See "Management -- Employment
Agreements," "Certain Relationships and Related Party Transactions."
<F3>
Mr. Amerson's annual salary is $250,000, plus a possible bonus each
year, under his Employment Agreement. See "Management -- Employment
Agreements." In 1996, Mr. Amerson has also received stock options to purchase
1,000,000 shares at $2.50 each and 1,000,000 shares at $7.50 each.
<F4>
Mr. Clark commenced his employment with the Company as of December 15,
1995. Mr. Clark's annual salary is $250,000, plus a possible bonus, under his
Employment Agreement. See "Employment Agreements." In 1996, Mr. Clark has
also received stock options to purchase 1,000,000 shares at $2.50 each and
1,000,000 shares at $7.50 each.
</FN>
</TABLE>
39
<PAGE>
Options/SARs Granted in Last Fiscal Year.
The following table sets forth the aggregate number and value of stock
options and SAR's granted by the Company for services rendered during 1995 to
the Company's Chief Executive Officer and to each of the Company's other
executive officers whose annual salary, bonus and other compensation exceed
$100,000.
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed/Annual Rates of
Stock Price/Appreciation
for Option Term
-----------------------------
% of Total
Options/SARs
Granted to Exercise or
Options/SARs Employees in Base Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date 5% ($) <F1> 10% ($) <F1>
- ------------------------- ------------ ------------ ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Thomas T. Allan 150,000 6% $ 1.00 11/15/2000 $ 42,000 $ 91,500
Robert R. Amerson <F2> 1,150,000 47% $ 1.00 11/15/2000 322,000 701,500
Steven K. Clark <F3> 1,150,000 47% $ 1.00 11/15/2000 322,000 701,500
<FN>
<F1>
The potential realizable value portion of the foregoing table
illustrates value that might be realized upon exercise of the options
immediately prior to the expiration of their term, assuming the specified
compounded rates of appreciate on the Common Stock over the term of the
options. These numbers do not take into account plan provisions providing for
termination of the option following termination of employment or non-
transferability.
<F2>
Mr. Amerson's current salary is $250,000, plus any bonuses awarded under
his Employment Agreement. See "Management -- Employment Agreements." In 1996
Mr. Amerson has also received stock options to purchase 1,000,000 shares at
$2.50 each and 1,000,000 shares at $7.50 each.
<F3>
Mr. Clark commenced his employment with the Company as of December 15,
1995. Mr. Clark's current salary is $250,000, plus any bonuses awarded under
his Employment Agreement. See "Management -- Employment Agreements." In 1996,
Mr. Clark has also received stock options to purchase 1,000,000 shares at $2.50
each and 1,000,000 shares at $7.50 each.
</FN>
</TABLE>
Aggregate Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values.
The following table sets forth the aggregate number and value of stock
options and SAR's exercised during the last year by the Company's Chief
Executive Officer and by each of the Company's other executive officers whose
annual salary, bonus and other compensation exceed $100,000.
<TABLE>
<CAPTION>
Value of
Unexercised
Number of In-the-Money
Unexercised Options/SARs
Options/SARs at Fiscal
Fiscal Year-End (#) Year-End(s)
Shares Acquired Exercisable/ Exercisable/
Name on Exericse (#) Value Realized ($) Unexercisable Unexercisable<F1>
- --------------------- --------------- ------------------ ------------------- -----------------
<S> <C> <C> <C> <C>
Thomas T. Allan - $ - 150,000/- $ 225,000/-
Robert R. Amerson - - 1,150,000/- 1,725,000/-
Steven K. Clark - - 1,150,000/- 1,725,000/-
<FN>
<F1>
The Company did not have a public market for its stock prior to its
listing on the OTC Bulletin Board in February 1996.
</FN>
</TABLE>
40
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth all individuals known to beneficially own 5%
or more of the Company's Common Stock, and all officers and directors of the
registrant, with the amount and percentage of stock beneficially owned, as of
October 18, 1996.
<TABLE>
<CAPTION>
Name and Address Shares Beneficially Owned Shares Beneficially Owned
of Beneficial Owner Prior to Offering After Offering
Number Percent <F1> Number Percent <F7>
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
A. Russell Allan, III <F2>
531 Flanders Filters Road
Washington, NC 27889 1,027,544 6.45% 1,027,544 5.86%
Thomas T. Allan <F2><F4>
531 Flanders Filters Road
Washington, NC 27889 6,041,250 37.55% 6,041,250 34.15%
Robert R. Amerson <F2><F3>
531 Flanders Filters Road
Washington, NC 27889 8,160,759 42.75% 8,160,759 39.45%
Steven K. Clark <F2><F3>
531 Flanders Filters Road
Washington, NC 27889 5,364,014 28.10% 5,364,014 25.93%
William M. Claytor <F5>
531 Flanders Filters Road
Washington, NC 27889 164,172 1.03% 164,172 0.93%
Gustavo Hernandez <F6>
2399 26th Avenue North
St. Petersburg, Fl 33734 71,613 0.45% 71,613 0.41%
William H. Clark
531 Flanders Filters Road
Washington, NC 27889 0 0.00% 0 0.00%
Officers and Directors as a
Group <F2><F3><F4><F5><F6> 15,088,808 67.25% 15,088,808 62.77%
<FN>
<F1>
Applicable percentage of ownership is based on 15,938,348 shares of
Common Stock outstanding as of October 18, 1996, together with applicable
options for such stockholders exercisable within 60 days. Shares of common
stock subject to options exercisable within 60 days are deemed outstanding for
computing the percentage ownership of the person holding such options, but are
not deemed outstanding for computing the percentage of any other person.
<F2>
Includes shares subject to an option in favor of Messrs. Amerson and
Clark (3,321,021 shares and 2,214,014 shares, respectively), from Thomas T.
Allan and A. Russell Allan, III (4,713,000 shares and 822,035 shares,
respectively).
<F3>
Includes 1,150,000 shares which are subject to an option to purchase such
shares from the Company at $1.00 per share, 1,000,000 shares which are subject
to an option to purchase such shares from the Company at $2.50 per share; and
1,000,000 shares which are subject to an option to purchase such shares from
the Company at $7.50 per share.
41
<PAGE>
<F4>
Includes 150,000 shares which are subject to an option to purchase such
shares from the Company at $1.00 per share.
<F5>
Includes 50,000 shares which are subject to an option to purchase such
shares from the Company at $1.00 per share.
<F6>
Consists of 71,613 shares which are held in escrow as part of a post-
closing purchase price adjustment to the acquisition of Precisionaire. These
shares will be released from escrow only if Precisionaire meets certain
performance criteria during the next three years.
<F7>
Assumes all shares offered by the Company and the Selling Shareholders
are sold.
</FN>
</TABLE>
SELLING SHAREHOLDERS
1,333,889 Shares registered hereunder are for the account of the Selling
Shareholders identified below. None of the Selling Shareholders had any
position, office or other material relationship with the Company or any of its
predecessors or affiliates during the three years prior to the issuance of the
Shares. Such Shares are being registered pursuant to certain registration
rights held by the Selling Shareholders. The following table summarizes the
Selling Shareholders' security ownership prior to this offering, and after
giving effect to this offering:
<TABLE>
<CAPTION>
Number of Shares
Shares Beneficially Being Registered Shares Owned
Name of Security Holder Owned Prior to Offering for Resale After this Offering
- ----------------------- ----------------------- ---------------- -------------------
Number Percent<F1> Number Percent<F2>
--------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
General Electric Pension Trust<F1> 444,445 2.79% 444,445 0 0.0%
The President and Fellows
of Harvard College<F1> 444,444 2.79% 444,444 0 0.0%
The Travelers Indemnity Company<F1> 222,222 1.39% 222,222 0 0.0%
SunAmerica Small Company Growth
Fund 600,000 3.76% 100,000 500,000 2.85%
Bert R. Cohen 26,000 0.16% 14,000 12,000 0.07%
Ronald A. Weinstein 23,500 0.15% 5,500 18,000 0.10%
Kenneth D. Tuchman<F1> 11,000 0.07% 11,000 0 0.0%
Stuart M. Sloan<F1> 14,000 0.09% 14,000 0 0.0%
G&N Associates, Ltd.<F1> 11,000 0.07% 11,000 0 0.0%
Victor O. Alhadeff 23,500 0.15% 5,500 18,000 0.10%
LZ Investment, L.L.C.<F1> 27,778 0.17% 27,778 0 0.0%
Ellen M. Dougan<F1> 6,000 0.04% 6,000 0 0.0%
The Galena Group<F1> 11,000 0.07% 11,000 0 0.0%
J. Lynn Dougan<F1> 17,000 0.11% 17,000 0 0.0%
<FN>
<F1>
Assumes all shares held by such Selling Shareholder will be offered and
sold.
<F2>
2 Percentage of ownership is based on 15,938,348 shares of Common Stock
outstanding on October 18, 1996 and 17,538,348 shares of Common Stock
outstanding after completion of this Offering.
</FN>
</TABLE>
42
<PAGE>
The 1,333,889 shares registered hereunder on behalf of the Selling
Shareholders are to be offered and sold solely through the selling efforts of
the individual Selling Shareholders or their own brokers or dealers and the
Company has no arrangement, agreement or understanding with any such broker or
dealer with respect thereto.
The Selling Shareholders may effect such transactions by selling Shares to
or through broker-dealers, and such broker-dealers may receive compensation in
the form of underwriting discounts, concessions or commissions from the Selling
Shareholders and/or purchasers of shares for whom they may act as agent (which
compensation may be in excess of customary commissions).
The sale of such shares by the Selling Shareholders will be subject to
state securities laws of states in which a transaction is sought to be effected
and cannot be sold in a particular state unless such securities have been
registered or qualified for sale in such state or an exemption from
registration or qualification is available and complied with.
The Company has agreed to pay all expenses in connection with the
registration of the Shares with the Securities and Exchange Commission for the
Selling Shareholders under this Registration Statement, including but not
limited to, legal and accounting fees, printing and certain other costs
associated with this offering.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Thomas T. Allan, Robert R. Amerson and Steven K. Clark have entered into an
Indemnity Agreement with Flanders whereby Messrs. Allan, Amerson and Clark will
collectively deposit up to $1,500,000 into an escrow fund to indemnify the
Company for the payment of any claims, judgments, and expenses arising from the
potential environmental claims made by the State of North Carolina, and
$525,000 due for the settlement of the lawsuits against the Company by Hartford
Casualty Insurance Co. v. Flanders Filters, Inc., and St. Paul Fire and Marine
Insurance Co. v. Flanders Filters, Inc. The indemnification is limited to
$1,500,000 and in no event will any of the individuals named be required to
contribute more than $500,000 each.
In connection with the issuance of Series A Convertible Debentures, Messrs.
Clark and Amerson have irrevocably granted and issued to certain unrelated
investors the right and option to sell to Clark and Amerson from time to time
such debentures at a purchase price of 105% of the face value of such
debentures plus any accrued interest thereon.
ABB Partnership, as landlord, and Airpure, as tenant, entered into a month-
to-month Lease Agreement, dated July 31, 1995. ABB Partnership is controlled
by Robert Amerson, president of the Company. The month-to-month lease was
entered into on terms believed by the Company to be fair and reasonable and
generally reflective of market conditions.
The Company paid Flanders Equity Corporation, a management company
affiliated through common ownership, management fees of $532,000, $420,000, and
$524,008 for 1995, 1994 and 1993, respectively. The Company's liabilities at
December 31, 1995, December 30, 1994 and December 31, 1993 include management
fees payable to Flanders Equity Corporation of $50,000, $0, $150,000,
respectively. This arrangement was terminated in 1995, and no management fee
expenses have been incurred in 1996 with regard to Flanders Equity Corporation.
The Company, as tenant, has entered into lease agreements with respect to
certain facilities located in Auburn, Pennsylvania, Bartow, Florida and St.
Petersburg, Florida, with the following persons or entities, as landlord: POT
Realty, LHB Realty and Gustavo and Ana Hernandez. Mr. Hernandez, Vice
President of Operations and a Director of the Company, is a principal of POT
Realty and LHB Realty. These leases were entered into as part of the
Precisionaire acquisition on terms believed by the Company to be fair and
reasonable and generally reflective of market conditions.
DESCRIPTION OF CAPITAL STOCK
The following statements are subject to the detailed provisions of the
Company's Articles of Incorporation and Bylaws, and are qualified in their
entirety by reference thereto.
43
<PAGE>
Authorized Shares
Under the Company's Articles of Incorporation ("Articles of Incorporation"
or "Articles"), the authorized capital stock of the Company consists of
50,000,000 shares of Common Stock, par value $.001 per share, and 10,000,000
shares of preferred stock, $.001 par value per share (the "Preferred Stock").
As of October 17, 1996, there are 15,938,348 shares of Common Stock issued and
outstanding. No shares of Preferred Stock have been issued.
Common Stock
Holders of Common Stock are entitled to one vote for each share on all
matters voted upon by shareholders and have no preemptive or other rights to
subscribe for additional securities of the Company.
Each share of Common Stock has an equal and ratable right to receive
dividends when, as and if declared by the Board of Directors out of assets
legally available therefor. In the event of a liquidation, dissolution or
winding up of the Company, the holders of Common Stock will be entitled to
share equally and ratably in the assets available for distribution after the
payment of liabilities, subject only to any preferential distributions to
holders of Preferred Stock, if applicable.
Preferred Stock
The Company's Articles of Incorporation authorize the Board, without any
vote or action by the holders of Common Stock, to issue Preferred Stock from
time to time in one or more series. The Board is authorized to determine the
number of shares and designation of any series of Preferred Stock and the
dividend rights, dividend rate, conversion rights and terms, voting rights
(full or limited, if any), redemption rights and terms, liquidation preferences
and sinking fund terms of any series of Preferred Stock. Depending upon the
terms of Preferred Stock established by the Board, any or all series of
Preferred Stock could have preference over the Common Stock with respect to
dividends and other distributions and upon liquidation of the Company.
Issuance of any such shares with voting powers, or issuance of additional
shares of Common Stock, would dilute the voting power of the outstanding Common
Stock. The potential issuance of Preferred Stock may have the effect of
delaying, deterring or preventing a change in control of the Company, may
discourage bids for the Common Stock at a premium over the market price of the
Common Stock and may adversely affect the market price of, and the voting and
other rights of the holders of, the Common Stock.
Series A Convertible Subordinated Debentures
In September 1996, the Company sold $2,500,000 principal amount of Series A
Convertible Subordinated Debentures to certain unrelated investors. Such
debentures are convertible prior to December 31, 1996, into a total of 277,778
shares of Common Stock based on a conversion rate of $9.00 per share. As of
October 15, 1996, none of the debentures have been converted.
10% Convertible Notes
In September 1996, the Company sold $4,000,000 principal amount of 10%
convertible notes to certain unrelated offshore investors. The 10% convertible
notes are convertible at any time commencing forty-one (41) days after issuance
into shares of Common Stock at a conversion price equal to the lower of (I)
eighty-two percent (82%) of the average closing bid price for the seven (7)
trading days immediately preceding the conversion date, or (ii) $9.00;
provided, however, that in no event shall the conversion price be less than
$5.00; provided further, that in no event shall the holder of the 10%
convertible notes be entitled to convert any portion of such notes if such
action would result in beneficial ownership by a holder and its affiliates of
more than 4.9% of the outstanding shares of Common Stock of the Company. If
the average closing bid price of the Company's Common Stock over any continuous
seven day trading period is less than $7.38 per share, the Company may redeem
the convertible notes at a price equal to 115% of the outstanding principal
amount of the notes. As of October 14, 1996, none of such notes have been
converted.
In connection with the 10% Convertible Notes, certain unrelated offshore
investors acquired, on the date of the conversion of the Notes into common
stock, the right to receive warrants equal to ten percent (10%) of the number
of common shares issued at any such conversion.
44
<PAGE>
Stock Options
The Company has reserved (i) 2,000,000 shares of Common Stock under its LTI
Plan, and (ii) 500,000 shares of Common Stock under its 1996 Director Option
Plan, for issuance in respect of stock options granted under such plans. As of
October 17, 1996, there were 176,520 outstanding options under the above-
mentioned plans. See "Management -- Executive Compensation."
The Company has reserved a total of 6,500,000 shares of Common Stock for
issuance upon the exercise of stock options granted to various officers and
directors. The Company has reserved 3,150,000 of the 6,500,000 shares for
Robert R. Amerson's exercise of the following stock options: 1,150,000 shares
at an exercise price of $1.00; 1,000,000 shares at an exercise price of $2.50;
1,000,000 shares at an exercise price of $7.50. The Company has reserved
3,150,000 of the 6,500,000 shares for Steven K. Clark's exercise of the
following stock options: 1,150,000 shares at an exercise price of $1.00;
1,000,000 shares at an exercise price of $2.50; 1,000,000 shares at an exercise
price of $7.50. The Company has reserved 150,000 of the 6,500,000 shares for
Thomas T. Allan's exercise of 150,000 stock options at an exercise price of
$1.00. The Company has reserved 50,000 of the 6,500,000 shares for William M.
Claytor's exercise of 50,000 stock options at an exercise price of $1.00.
Other Warrants
In connection with the Series A Convertible Subordinated Debentures,
certain unrelated investors acquired warrants to purchase 25,000 shares of
common stock at an exercise price of $9.63 per share.
Registration Rights
Holders of approximately 4,567,484 shares of Common Stock, and holders of
approximately 7,639,232 options or warrants to purchase Common Stock, or their
transferees, are entitled to certain rights with respect to the registration of
such shares under the Securities Act. Under the terms of an agreement between
the Company and such holders, if the Company proposes to register any of its
securities under the Securities Act, either for its own account or the account
of other security holders exercising registration rights, the holders are
entitled to notice of such registration and are entitled to include shares of
such Common Stock therein; the registration rights provide, however, among
other conditions, that the underwriters of any offering have the right to limit
the number of such shares included in such registration. In addition, the
shareholders benefiting from these rights may require the Company, on not more
than one occasion, to file a registration statement under the Securities Act
with respect to such shares, on form S-3, if such form is available to the
Company, subject to certain conditions and limitations.
Transfer Agent and Registrar
OTC Stock Transfer, Inc. is the transfer agent and registrar for the Common
Stock.
ANTI-TAKEOVER EFFECTS OF THE COMPANY'S ARTICLES AND BYLAWS
The Company's Articles of Incorporation and Bylaws may discourage certain
types of transactions that may involve an actual or threatened change of
control of the Company and they encourage any person who might seek to acquire
control of the Company to negotiate with the Company's Board of Directors.
Management of the Company believes that generally the interests of the
Company's shareholders would be served best if any change in control results
from negotiations with its Board of Directors on the proposed terms, such as
the price to be paid, the form of consideration and the anticipated tax effects
of the transaction.
The provisions described herein are designed to reduce the vulnerability of
the Company to an unsolicited proposal for a takeover of the Company that does
not contemplate the acquisition of all its outstanding shares of capital stock
at an adequate price or that is otherwise unfair to its shareholders or an
unsolicited proposal for the restructuring or sale of all or part of the
Company. Management of the Company believes that, as a general rule, such
proposals would not be in the best interests of the Company and its
shareholders. However, to the extent that these provisions do discourage
takeover attempts, they could make it more difficult to accomplish transactions
that are opposed by the
45
<PAGE>
incumbent Board and could deprive shareholders of opportunities to realize
temporary takeover premiums for their shares or other advantages that large
accumulations of stock would provide.
The description below is a summary only and is qualified in its entirety by
reference to the Company's Articles and Bylaws filed as exhibits to the
Company's S-1 Registration Statement of which this Prospectus is a part.
Number of Directors; Removal; Vacancies
The Company's Bylaws provide that the number of directors shall not be less
than four nor more than nine. The exact number of directors is set in
accordance with the Bylaws by resolution from time to time by a majority of the
entire Board. Interim vacancies on the Board, or vacancies created by an
increase in the number of directors, may be filled by vote of a majority of the
directors then in office.
Shareholder Action
The Bylaws of the Company also provide that special meetings of
shareholders may only be called by the Board of Directors or by any person or
committee expressly so authorized by the Board of Directors and by the holders
of at least ten percent (10%) of all shares entitled to vote at the proposed
special meeting.
The provisions limiting the ability of minority shareholders to call a
special meeting may have the effect of delaying consideration of a shareholder
proposal until the next annual meeting of the shareholders unless a special
meeting is called for such purpose.
Any call for a special meeting must specify the matters to be acted upon at
the meeting. Shareholders are not permitted to submit additional matters or
proposals for consideration of any special meeting.
Shareholder Proposals
The Company's Bylaws establish an advance notice procedure for nominations
(other than by or at the direction of the Board) of candidates for election as
directors at, and for proposals to be brought before, an annual meeting of
shareholders of the Company. Subject to any other applicable requirements,
only such nominations may be considered and such business may be conducted at
an annual meeting as has been brought before the meeting by or at the direction
of the Board or by a shareholder who has given to the Secretary of the Company
timely written notice, in proper form, of the same.
Preferred Stock and Additional Common Stock
Under the Company's Articles, the Board has authority to provide by
resolution for issuance of shares of one or more series of Preferred Stock.
The Board is authorized to fix by resolution the terms and conditions of each
series. See "Description of Capital Stock -- Preferred Stock."
The Company believes that the availability of Preferred Stock will provide
the Company with increased flexibility to facilitate possible future financings
and acquisitions and to meet other corporate needs that might arise. The
authorized shares of Preferred Stock will be available for issuance without the
expense and delay of shareholder action, unless shareholder action is required
by applicable law or the rules of any stock exchange or organization on which
any class of stock of the Company may then be quoted or listed.
These provisions give the Board of Directors the power to approve the
issuance of a series of Preferred Stock with terms that could either impede or
facilitate the completion of a merger, tender offer or other takeover attempt.
For example, the issuance of new shares might impede a business combination if
the terms of those shares include series voting rights that would enable the
holder to block business combinations or the issuance of new shares might
facilitate a business combination if those shares have general voting rights
sufficient to cause an applicable percentage vote requirement to be satisfied.
The Board of Directors of the Company will make any determination regarding
issuance of additional shares based on its judgment as to the best interest of
its shareholders, customers, employees or other constituencies.
46
<PAGE>
Control Share Acquisition Statute
The Control Share Acquisition Act provides that any person or entity that
acquires control shares of a publicly held North Carolina corporation shall not
have voting rights with respect to the acquired shares unless a majority of the
disinterested shareholders of the corporation votes to grant such voting
rights. The Control Share Acquisition Act provides that a person or entity
acquires "control shares" whenever it acquires shares that, but for the
operation for the Control Share Acquisition Act, would bring its voting power
within any of the following three ranges: (I) one-fifth (1/5) of all voting
power, (ii) one-third (1/3) of all voting power, or (iii) a majority of all
voting power. A "control share acquisition" is generally defined as the direct
or indirect acquisition of either ownership or voting power associated with
issued and outstanding control shares; however, an acquisition pursuant to an
agreement to which the corporation is a party (which would require affirmative
action on the part of the Board of Directors) and which is conducted pursuant
to the merger provisions of North Carolina law, which generally requires
shareholder approval, is not considered a "control share acquisition" and is
therefore exempt from the provisions of the Control Share Acquisition Act.
Under the Control Share Acquisition Act, a person or entity that acquires
control shares pursuant to a control share acquisition acquires voting rights
with respect to those shares only to the extent granted by a majority of
disinterested shareholders of each class of capital stock outstanding prior to
the acquisition. The shareholders of the corporation must consider the status
of those voting rights at the next annual or special meeting of shareholders.
The acquiror may accelerate the decision and require the corporation to hold a
special meeting of shareholders for the purpose of considering the status of
those rights if the acquiror (I) files an "acquiring person statement" with the
corporation, and (ii) agrees to pay all expenses of the meeting. Unless
otherwise provided in the articles of incorporation or bylaws of a corporation,
shareholders have the right to have their shares redeemed by the corporation at
fair market value if the control shares are accorded full voting rights and the
acquiror has obtained a majority or more control shares.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 17,538,348 shares
of Common Stock outstanding (assuming no exercise of the Underwriters' over-
allotment option). Of these shares, 3,267,668 shares (including the 2,933,889
shares sold in this offering) will be freely tradable without restriction under
the Securities Act.
As of October 17, 1996, there were stock options and warrants outstanding
to purchase an aggregate of 7,639,232 shares of Common Stock, 5,582,232 of
which are currently exercisable. In addition, the Company has agreed to sell
to the Representative or its designees, for nominal consideration, the
Representative's Warrant to purchase up to 160,000 shares of Common Stock at an
exercise price equal to 120% of the public offering price set forth herein.
Holders of the Company's Series A Convertible Debentures can convert such
debentures into an aggregate of 277,778 shares of Common Stock at a conversion
rate of $9.00 per share. Additionally, the Holders of the Company's 10%
convertible notes can convert such notes into Common Stock at the lesser of 82%
of the average bid and ask price for the immediately preceding seven (7)
trading days or $9.00. As of October 17, 1996, such holders would receive
approximately 490,000 shares of Common Stock.
Holders of approximately 4,567,484 shares of Common Stock, 1,333,889 of
which are being registered herein, and holders of approximately 7,639,232
options or warrants to purchase Common Stock, or their transferees, are
entitled to certain rights with respect to the registration of such shares
under the Securities Act. Under the terms of an agreement between the Company
and such holders, if the Company proposes to register any of its securities
under the Securities Act, either for its own account or the account of other
security holders exercising registration rights, the holders are entitled to
notice of such registration and are entitled to include shares of such Common
Stock therein; the registration rights provide, however, among other
conditions, that the underwriters of any offering have the right to limit the
number of such shares included in such registration. In addition, the
shareholders benefiting from these rights may require the Company, on not more
than one occasion, to file a registration statement under the Securities Act
with respect to such shares, on form S-3, if such form is available to the
Company, subject to certain conditions and limitations.
The Company makes no prediction as to the effect, if any, that future sales
of shares or the availability of shares for future sale will have on the
prevailing market price of the Common Stock. Sales of substantial amounts of
the
47
<PAGE>
Company's Common Stock in the public market or the perception that such
sales could occur could have an adverse affect on the prevailing market
price of the Common Stock.
UNDERWRITING AND PLAN OF DISTRIBUTION
The Underwriters named below (the "Underwriters"), for whom Gilford
Securities Incorporated is acting as the Representative, have agreed, subject
to the terms and conditions contained in the Underwriting Agreement (the
"Underwriting Agreement") to purchase from the Company, and the Company has
agreed to sell to the Underwriters on a firm commitment basis, the respective
number of Shares set forth opposite their names:
Underwriter Number of Shares
----------- ----------------
Gilford Securities Incorporated __________________________
_______________________________ __________________________
Total 1,600,000
===========
The Underwriters are committed to purchase 1,600,000 Shares offered hereby,
if any of the Shares are purchased. The Underwriting Agreement provides that
the obligations of the several Underwriters are subject to the conditions
precedent specified therein.
The Company has been advised by the Representative that the Underwriters
initially propose to offer the Shares to the public at the public offering
price set forth on the cover page of this Prospectus and may allot to certain
dealers who are members of the National Association of Securities Dealers, Inc.
("NASD") concessions not in excess of $______ per Share, of which amount a sum
not in excess of $_______ per Share may in turn be reallowed by such dealers to
other dealers. After the commencement of the offering, the public offering
price, concessions and reallowances may be changed. The Representative has
informed the Company that it does not expect sales to discretionary accounts by
the Underwriters to exceed five percent of the securities offered by the
Company hereby.
The Company has granted to the Underwriters an option, exercisable within
45 days of the date of this Prospectus, to purchase from the Company at the
offering price, less underwriting discounts and the non-accountable expense
allowance, all or part of an additional 240,000 Shares on the same terms and
conditions of the Offering for the sole purpose of covering over-allotments, if
any.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. The company has
agreed to pay to the Representative a non-accountable expense allowance equal
to two percent of the gross proceeds derived from the sale of the Shares
underwritten, $25,000 of which has been paid to date.
All officers and directors of the Company have agreed not to, directly or
indirectly, issue, offer to sell, sell, grant an option for the sale of,
transfer, assign, or otherwise or dispose of any securities issued by the
Company, including shares of Common Stock or securities convertible into or
exchangeable or exercisable for or evidencing any right to purchase or
subscribe for any shares of Common Stock for a period of ninety days from the
effective date of the Registration Statement (the "Lock-Up Period"), without
the prior written consent of the Representative. An appropriate legend shall
be marked on the face of certificates representing all such securities. In
addition, the Company has agreed not to sell or offer for sale any of its
securities for a period of twelve months commencing on the date of this
Prospectus, without the prior written consent of the Representative.
In connection with the offering, the Company has agreed to issue and sell
to the Representative and/or its designees, at the closing of the proposed
underwriting, for nominal consideration, five year Representative's Warrants
(the "Representative's Warrants") to purchase 160,000 shares of Common Stock.
The Representative's Warrants are exercisable at any time during a period of
four years commencing at the beginning of the second year after their issuance
and sale at a price of $_______ [120% of the initial public offering price per
share of Common Stock] per share of
48
<PAGE>
Common Stock. The Representative's Warrants contain anti-dilution
provisions providing for adjustment of the number of shares of Common Stock
and exercise price under certain circumstances. The Representative's
Warrants grant to the holders thereof and to the holders of the underlying
securities certain rights of registration of the securities underlying the
Representative's Warrants.
The Underwriting Agreement provides that the Representative has a right of
first refusal for a period of three years from the date of this Prospectus with
respect to any sale of securities by the Company or any present or future
subsidiaries.
The Company has agreed that for five years from the effective date of
the Registration Statement, the Underwriter may designate one person to attend
all meetings of the Company's Board of Directors. The Company has agreed to
reimburse the Representative's designee for all out-of-pocket expenses incurred
in connection with the designee's attendance at meetings of the Board of
Directors.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a
copy of each such agreement which are filed as exhibits to the Registration
Statement. See "Additional Information."
EXPERTS
The consolidated financial statements and schedules of the Company included
in this Prospectus and Registration Statement, have been audited by McGladrey &
Pullen, LLP, independent auditors, for the periods indicated, in their reports
which appear elsewhere herein and in the Registration Statement, and are
included in reliance upon such reports given upon the authority of such firm as
experts in accounting and auditing. The Financial Statements and schedules of
Precisionaire included in this Prospectus and Registration Statement have been
audited by Arthur Andersen & Co., SC, independent auditors, for the periods
indicated, in their reports which appear elsewhere herein and in the
Registration Statement and are included in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
The law firm of Snell & Wilmer L.L.P., Salt Lake City, Utah, has acted as
counsel to the Company in connection with this offering and will render an
opinion as to the legality of the shares of Common Stock being offered hereby.
Orrick, Herrington & Sutcliffe, LLP, New York, New York, has acted as counsel
to the Underwriters in connection with the offering.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the United
States Securities Exchange Act of 1934 (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following
regional offices of the Commission: New York Regional Office, 7 World Trade
Center, Suite 1300, New York, New York 10048, and Chicago Regional Office,
North Western Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials can be obtained from the Public
Reference Section of the Commission, Washington, D. C. 20549 at prescribed
rates. The Commission also maintains a site on the World Wide Web that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The
address of such site is http://www.sec.gov. The Common Stock is quoted on the
Nasdaq National Market System. Reports, proxy or information statements and
other information concerning the Company may be inspected at the offices of the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
49
<PAGE>
The Company's Common Stock is traded on the Nasdaq National Market System.
Reports, proxy statements, information statements, and other information
concerning the Company can be inspected at the offices of the National
Association of Securities Dealers, Inc., located at 1735 K Street, N. W.,
Washington, D. C. 20006.
The Company has filed with the Commission in Washington, D. C. a
Registration Statement under the Securities Act of 1933, as amended, relating
to this Prospectus. This Prospectus does not contain all of the information
set forth in the Registration Statement, certain parts of which are omitted in
accordance with the Rules and Regulations of the Commission. For further
information pertaining to the shares hereby offered and to the Company,
reference is made to the Registration Statement, including exhibits filed as
part thereof, copies of which may be obtained from the Public Reference Section
of the Commission, Washington, D. C. 20549 at prescribed rates.
50
FINANCIAL STATEMENTS
51
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Financial Statements of Flanders Corporation
Unaudited Consolidated Condensed Interim Financial Statements
Audited Consolidated Financial report
Audited Financial Statements of Precisionaire, Inc.
Unaudited Pro Forma Financial Statements
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1996 1995
- -------------------------------------------------------------- -------------- --------------
(unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 406,018 $ 2,973,797
Receivables:
Trade, less allowance for doubtful accounts
of $148,000 12,703,523 7,243,557
Other 532,912 321,356
Inventories 5,248,974 2,321,367
Deferred taxes 157,285 137,961
Other current assets 344,596 46,586
-------------- --------------
Total current assets 19,393,308 13,044,624
-------------- --------------
Other assets 23,116 183,542
Intangible assets 1,825,965 -
Property and equipment, net of accumulated
depreciation and amortization of $5,963,998
at 6/30/96; $5,590,677 at 12/31/95 8,789,593 5,301,063
-------------- --------------
$ 30,031,982 $ 18,529,229
============== ==============
LIABILITIES AND STOCKHOLDERS'EQUITY
- -------------------------------------------------------------- -------------- --------------
Current liabilities
Notes payable $ 2,757,369 $ 3,890,425
Current maturities of long-term debt 259,026 454,181
Accounts payable 5,182,040 3,984,140
Accrued expenses 1,732,881 685,482
-------------- --------------
Total current liabilities 9,931,316 9,014,228
-------------- --------------
Long-term debt, less current maturities 1,465,254 1,306,584
Deferred income taxes 503,934 -
Commitments and contingencies - -
Stockholders' equity
Preferred stock, no par value, 10,000,000 shares
authorized; none issued - -
Common stock, $.OOI par value; 50,000,000 shares
authorized; issued and outstanding: 13,532,595
at 6/30/96, 11,434,000 at December 31, 1995 13,533 11,434
Additional paid-in capital 11,991,664 3,418,671
Retained earnings 6,126,281 4,778,312
-------------- --------------
Total stockholders' equity 18,131,478 8,208,417
-------------- --------------
$ 30,031,982 $ 18,529,229
============== ==============
</TABLE>
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended Six Months ended
June 30, June 30,
1996 1995 1996 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 14,402,607 $ 9,096,048 $ 26,241,260 $ 18,930,435
Cost of goods sold 10,814,485 6,654,484 19,773,754 13,961,512
-------------- -------------- -------------- --------------
Gross Profit 3,588,122 2,441,564 6,467,506 4,968,923
-------------- -------------- -------------- --------------
Operating expenses 2,576,142 1,757,094 4,548,468 3,552,250
-------------- -------------- -------------- --------------
Operating income 1,011,980 684,470 1,919,038 1,416,673
-------------- -------------- -------------- --------------
Nonoperating income (expense):
Other income (expense) 310,160 (43,105) 392,375 (58,195)
Interest expense (83,035) (171,049) (145,568) (328,282)
-------------- -------------- -------------- --------------
227,125 (214,154) 246,807 (386,477)
-------------- -------------- -------------- --------------
Income before income taxes 1,239,105 470,316 2,165,845 1,030,196
Income taxes 435,000 215,196 817,876 391,474
Net income $ 804,105 $ 255,120 $ 1,347,969 $ 638,722
============== ============== ============== ==============
Earnings per weighted average
common and common equivalent
share outstanding:
Primary $ 0.05 $ 0.03 $ 0.09 $ 0.07
============== ============== ============== ==============
Fully diluted $ 0.05 $ 0.03 $ 0.08 $ 0.07
============== ============== ============== ==============
Weighted average common and common
equivalent shares outstanding:
Primary 16,553,915 9,693,478 15,252,025 9,693,478
============== ============== ============== ==============
Fully diluted 17,157,171 9,693,478 15,860,484 9,693,478
============== ============== ============== ==============
</TABLE>
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained
Stock Capital Earnings
-------------- -------------- --------------
<S> <C> <C> <C>
Balance, January 1, 1995 $ 9,643 $ 310,741 $ 3,632,992
Issuance of 378,411 shares of
common stock 378 165,543 -
Issuance of 1, I 00,000 shares of
common stock related to December 11, 1995
Private Placement 1,100 2,429,004 -
Reverse acquisition of Elite Acquisitions, Inc. 334 - (334)
Purchase and retirement of 21,197 shares of
common stock (21) (11,617) -
Indemnification of claim by Stockholders - 525,000 -
Net income - - 1,145,654
-------------- -------------- --------------
Balance, December 31, 1995 11,434 3,418,671 4,778,312
Issuance of common stock related to two
Private Placements 2,038 8,419,854 -
Issuance of stock upon exercise of
warrants and options 61 153,139 -
Net income - - 1,347,969
-------------- -------------- --------------
Balance, June 30, 1996 (unaudited) $ 13,533 $ 11,991,664 $ 6,126,281
============== ============== ==============
</TABLE>
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended Six Months ended
June 30, June 30,
1996 1995 1996 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
NET CASH (USED) BY
OPERATING ACTIVITIES $ (1,184,116) $ 630,538 $ (2,148,729) $ 80,898
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash received (6,707,955) - (6,707,955) -
Purchase of equipment (287,247) (537,517) (719,279) (699,681)
-------------- -------------- -------------- --------------
NET CASH (USED) BY
INVESTING ACTIVITIES (6,995,202) (537,517) (7,427,234) (699,681)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in revolving credit
agreements 839,524 (136,522) (1,439,652) 1,158,380
Net change in long-term borrowings 215,030 102,641 25,944 (47,844)
Proceeds from issuance of common
stock 7,339,573 - 8,421,892 -
Purchase of common stock for
retirement - - - (571)
-------------- -------------- -------------- --------------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 8,394,127 (33,881) 7,008,184 1,109,965
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH 214,809 59,140 (2,567,779) 491,182
CASH AT BEGINNING OF PERIOD 191,209 (315,496) 2,973,797 (747,538)
-------------- -------------- -------------- --------------
CASH AT END OF PERIOD $ 406,018 $ (256,356) $ 406,018 $ (256,356)
============== ============== ============== ==============
CASH PAID FOR TAXES $ 270,000 $ 1,000 $ 754,033 $ 1,000
============== ============== ============== ==============
</TABLE>
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1. Nature of Business and Interim Financial Statements
Nature of business: Flanders Corporation (the "Company") primarily manufactures
high-efficiency air filters, filtration systems, and housings which are used in
many applications, including commercial and industrial air conditioning and the
construction of ultra-clean manufacturing environments (cleanrooms). The Company
also provides installation supervision, filter testing, and certification
services for installed systems. The Company sells its products primarily to
cleanroom contractors and industrial users in North America, based on credit
terms established for individual customers.
Interim financial statements: The interim financial statements presented herein
are unaudited and have been prepared in accordance with the instructions to Form
10-Q. These statements should be read in conjunction with financial statements
and notes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1995. The accompanying financial statements have not
been examined by independent accountants in accordance with generally accepted
auditing standards, but in the opinion of management such financial statements
include all adjustments (consisting only of normal recurring adjustments)
necessary to summarize fairly the Company's financial position, results of
operations, and cash flows. The results of operations and cash flows for the
three months and six months ended June 30, 1996 may not be indicative of the
results that may be expected for the year ending December 31, 1996.
Earnings per Common Share: The computation of earnings per common share and
common share equivalent is based upon the weighted average number of common
shares outstanding during the period. Earnings per common and common equivalent
share include the effect of the stock options and warrants mentioned in Note 4
as if the options and warrants had been exercised at the date the options and
warrants were granted. The number of common shares outstanding was increased by
the number of shares issuable under the stock options and warrants and this
theoretical increase in the number of common shares was reduced by the number of
common shares which are assumed to have been repurchased with the applicable
portion of the proceeds from the exercise of the options and warrants.
Note 2. Inventories
Inventories consist of the following at June, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
6/30/96 12/31/95
-------------- --------------
(unaudited)
<S> <C> <C>
Finished goods $ 473,926 $ 198,607
Work in progress 1,537,041 879,987
Raw materials 3,298,007 1,302,773
-------------- --------------
5,308,974 2,381,367
Less allowance for obsolete raw materials 60,000 60,000
-------------- --------------
$ 5,248,974 $ 2,321,367
============== ==============
</TABLE>
Note 3. Acquisitions
Effective March 1, 1996, the Company completed the acquisition of all of the
outstanding capital stock of Charcoal Service Corporation ("CSC"), a North
Carolina Corporation, along with certain land and buildings formerly owned by
the shareholders of CSC, pursuant to a stock purchase agreement. The purchase
price for CSC was $4,435,690. In addition, 100,000 shares of the Company's
common stock are to be issued and held in escrow as a valuation allowance
pending the realized value of future cash flows. The Company also capitalized
$143,474 of offering expenses, consisting of legal fees, professional fees and
other miscellaneous offering-related expenses. The acquisition by the Company of
CSC has been accounted for by the Company as a purchase.
CSC, headquartered in Bath, North Carolina, manufactures high-efficiency
charcoal filters, specialized housings, containment environments and related
services. CSC's operations are contained in a 44,282 square foot facility, which
was included in the purchase.
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 3. Acquisitions - Continued
Effective June 1, 1996, the Company acquired all of the outstanding capital
stock of Air Seal Filter Housings, Inc. ("Air Seal"), along with certain land
and buildings formerly owned by the shareholders of Air Seal, pursuant to a
stock purchase agreement. The purchase price for Air Seal was $2,150,000. In
addition, 150,000 shares of the Company's common stock are to be issued and held
in escrow as a valuation allowance pending the realized value of future cash
flows. The Company also capitalized $102,440 of offering expenses, consisting of
legal fees, professional fees and other miscellaneous offering-related expenses.
The acquisition of Air Seal by the Company has been accounted for by the Company
as a purchase.
Air Seal, located in Stafford, Texas, manufactures specialty and standard
housings for air filtration and HVAC systems, as well as integrated custom
industrial-grade HVAC systems. Air Seal conducts its operations from an 18,000
square foot facility, which was included in the purchase.
The excess of purchase price plus expenses over fair value of assets acquired
was $450,503 and $887,052 for CSC and Air Seal, respectively, and is being
amortized on a straight-line basis over 40 years.
Note 4. Capital Transactions
On June 3, 1996, the Company completed a private offering of 1,537,315 shares of
Common Stock at $5.00 per share to accredited investors. Net proceeds to the
Company from the offering after commissions and expenses of $347,002 were
$7,339,573.
Note 5. Stock Options and Warrants
On June 3, 1996, the Company granted options to purchase 30,000 shares to
certain key employees under its Long- Term Incentive Plan at an exercise price
of $7.50 per share.
On June 3, 1996, the Company granted to its President and its Vice President of
Finance options to purchase 1,000,000 shares each of the Company's common stock
at an exercise price of $7.50 per share.
The following table summarizes the activity related to the Company's stock
options and warrants for the six months ended June 30, 1996 and the year ended
December 31, 1995:
<TABLE>
<CAPTION>
Price
per Share
Stock ---------------------------
Warrants Options Warrants Options
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1995 - -
Granted 61,280 2,500,000 $2.50 $1.00
Exercised - -
Canceled or expired - -
----------- -----------
Outstanding at December 31, 1995 61,280 2,500,000 $2.50 $1.00
Granted 72,712 5,078,520 $2.50 - $5.00 $2.50 - $7.00
Exercised 61,280 - $2.50
Canceled or expired - -
----------- -----------
Outstanding at June 30, 1996 72,712 7,578,520 $2.50 - $5.00 $1.00 - $7.00
=========== ===========
Exercisable at June 30, 1996 72,712 2,500,000 $2.50 - $5.00 $1.00
=========== ===========
</TABLE>
The warrants expire at various periods through December 1996. The options expire
at various times through June 3, 2001.
<PAGE>
FLANDERS CORPORATION
AND SUBSIDIARY
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1995
<PAGE>
FLANDERS CORPORATION
OFFICERS
ROBERT R. AMERSON
President
STEVEN K. CLARK DEBRA E. HILL
Vice President/CFO Secretary/Treasurer
DIRECTORS
THOMAS T. ALLAN
Chairman
WILLIAM M. CLAYTOR ROBERT R. AMERSON
STEVEN K. CLARK
<PAGE>
CONTENTS
INDEPENDENT AUDITOR'S REPORT 1
FINANCIAL STATEMENTS
Consolidated balance sheets 2
Consolidated statements of operations 3
Consolidated statements of stockholders' equity 4
Consolidated statements of cash flows 5 - 6
Notes to consolidated financial statements 7 - 20
INDEPENDENT AUDITOR'S REPORT ON THE
SUPPLEMENTAL SCHEDULE 21
Valuation and qualifying accounts 22
<PAGE>
McGLADREY & PULLEN, LLP
Certified Public Accountants and Consultants
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Flanders Corporation
Washington, North Carolina
We have audited the accompanying consolidated balance sheets of Flanders
Corporation and Subsidiary as of December 31, 1995 and December 30, 1994 and the
related statements of operations, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Flanders Corporation
and Subsidiary as of December 31, 1995 and December 30, 1994, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in Note 10 to the consolidated financial statements, the Company
changed its method of accounting for income taxes in 1993.
/s/ McGladrey & Pullen, LLP
New Bern, North Carolina
February 8, 1996, except for Note 20,
as to which the date is October 17, 1996
1
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and December 30, 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
- --------------------------------------------------- -------------- --------------
<S> <C> <C>
Current Assets
Cash hand cash equivalents (Note 15) $ 2,973,797 $ 156,692
Receivables:
Trade, less allowance for doubtful accounts
1995 $148,000; 1994 $40,000 (Notes 5 and 6) 7,243,557 5,711,231
Other 321,356 23,930
Inventories (Notes 2, 5 and 6) 2,321,367 3,067,314
Deferred taxes (Note 10) 137,961 224,000
Other current assets 46,586 124,349
-------------- --------------
Total current assets 13,044,624 9,307,516
-------------- --------------
Other Assets (Note 3) 183,542 133,970
-------------- --------------
Property and equipment, net (Notes 4, 5 and 6) 5,301,063 4,972,576
-------------- --------------
$18,529,229 $14,414,062
============== ==============
LIABILITIES AND STOCKHOLDERS EQUITY
- --------------------------------------------------- -------------- --------------
Current Liabilities
Notes payable (Notes 5, 15 and 20) $ 3,890,425 $ 4,122,861
Current maturities of ling-term debt
(Notes 6 and 15) 454,181 389,724
Accounts payable (Note 7) 3,984,140 3,769,021
Accrued expenses (Note 8) 685,482 676,892
-------------- --------------
Total current liabilities 9,041,228 8,958,498
-------------- --------------
Long-Term Debt, less current maturities
(Notes 6 and 15) 1,306,584 1,502,188
-------------- --------------
Commitments and Contigencies (Notes 11, 14, 16 and 19)
Stockholders' Equity (Notes 9, 13, 16, and 20):
Preferred Stock, no par value, authorized
10,000,000 shares; issued none - -
Common Stock, $.001 par value; authorized
50,000,000 shares; issued and outstanding
1995 11,434,000; 1994 9,643,000 shares 11,434 9,643
Additional paid-in capital 3,418,671 310,741
Ratined earnings 4,778,312 3,632,992
-------------- --------------
8,208,417 3,953,376
-------------- --------------
$18,529,229 $14,414,062
============== ==============
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1995, December 30, 1994, and December 31, 1993
<TABLE>
<CAPTION>
1995 1994 1993
- --------------------------------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
Net Sales $38,494,261 $26,072,225 $20,568,732
Cost of Good Sold (Notes 11, 12,13 and 14) 29,953,729 18,845,385 14,064,800
-------------- -------------- --------------
Gross profit 9,540,532 7,226,840 6,503,932
-------------- -------------- --------------
Other Operating Revenue:
Freight revenue - 552,807 466,992
Other 141,549 81,372 80,102
-------------- -------------- --------------
141,549 634,179 547,094
-------------- -------------- --------------
Operating Expenses (Notes 11, 12, 13 and 14):
General and administrative 3,729,238 4,258,827 4,095,976
Selling 2,506,445 2,252,034 1,915,435
Research and development 119,985 157,748 159,108
Insurance companys' claim 375,000 150,000 -
Management fees 532,000 420,000 524,008
-------------- -------------- --------------
7,262,668 7,238,609 6,694,527
-------------- -------------- --------------
Operating income 2,419,413 622,410 356,499
-------------- -------------- --------------
Nonoperaating Income (Expense):
Other income 43,852 26,371 42,976
Interest expense (633,029) (477,822) (374,342)
-------------- -------------- --------------
(589,177) (451,451) (331,366)
-------------- -------------- --------------
Income before income taxes and
consulative effect of change
in accounting principle 1,830,236 170,959 25,133
Income taxes (Note 10) 684,582 176,402 14,627
-------------- -------------- --------------
Income (loss) before cumulative effect
of change in accounting principle 1,145,654 (5,443) 10,506
Cumulative effect on prior years of changing
to a different method of accounting for
deferred income taxes (Note 10) - - 306,800
-------------- -------------- --------------
Net income (loss) $ 1,145,654 $ (5,443) 317,306
============== ============== ==============
Earnings per common and common equivalent
share (Note 17):
Income (Loss) before cumulative effectc of change
in accounting principle $ 0.12 $ - $ -
Cumulative effect on prior years of changing to a
different method of accounting for deferred
income taxes - - 0.03
-------------- -------------- --------------
Net income $ 0.12 $ - $ 0.03
============== ============== ==============
Weighted average common and common
equivalent shares oustanding 9,831,996 9,693,478 9,654,093
============== ============== ==============
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1995, December 30, 1994 and December 31, 1993
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained
Stock Capital Earnings
-------------- -------------- --------------
<S> <C> <C> <C>
Balance, January 1, 1993 $ 9,565 $ 281,202 $ 3,321,129
Issuance of 111,630 shares of
common stock 112 48,047 -
Purchase and retirements of 21,099
shares of common stock (21) (9,901) -
Net income - - 317,316
-------------- -------------- --------------
Balance, Decmeber 31, 1993 9,656 319,348 3,638,435
Issuance of 49,274 shares of
common stock 49 21,740 -
Purchase and retirement of 61,630
shares of common stock (62) (30,347) -
Net loss - - (5,443)
-------------- -------------- --------------
Balance, December 30, 1994 9,643 310,741 3,632,992
Issuance of 378,411 shars of
common stock 378 165,543 -
Issuance of 1,100,000 shares of
common stock related to
December 11,1995 Private
Placement (Note 9) 1,100 2,429,004 -
Reverse Acquisition of Elite
Acquisitions, Inc. (Note 18) 334 - (334)
Purchase and retirement of 21,197
shares of common stock (21) (11,617) -
Indemnification of claim by
Stockholders (Note 13) - 525,000 -
Net income - - 1,145,654
-------------- -------------- --------------
Balance, December 31, 1995 $ 11,434 $ 3,418,671 $ 4,778,312
============== ============== ==============
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995, December 30, 1994 and December 31, 1993
<TABLE>
<CAPTION>
1995 1994 1993
- --------------------------------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ 1,145,654 $ (5,443) $ 317,316
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 636,178 631,476 605,147
Stock compensation - 12,500 25,000
Provision for doubtful accounts 108,000 (25,500) (46,521)
Allowance for obsolete inventory (45,000) (69,134) (93,972)
Loss on sale of property and equipment - 18,091 13,883
Unrealized gain on matketable equity securitis - - (21,736)
Deferred income taxes - (32,941) -
Indemnification of claim by Stockholders 160,000 70,000 (363,940)
Chnage in assets and liabilities:
Receivables (1,937,752) (1,730,577) (165,628)
Inventories 790,947 (1,209,802) 33,373
Other current assets 77,763 (95,573) 16,100
Accounts payable (339,999) 1,443,504 362,566
Accrued expenses 158,591 (511,765) 506,217
Income tax payable 481,157 (65,307) 65,307
-------------- -------------- --------------
Net cash provided by (used in)
operating activities 1,610,539 (1,570,471) 1,253,102
-------------- -------------- --------------
Cash Flows from Investing Activities
Purchase of equipment (611,713) (1,052,669) (705,573)
Proceeds from sale of marketable equity securities - 580,918 (27,207)
Proceeds from sale of property and equipment - 82,620 -
Desbursement on deferred debt expense - (9,600) -
Purchase of real estate held for sale - (60,486) -
Increase in cash value of life insurance (52,524) - -
-------------- -------------- --------------
Net cash used in investing activities (664,237) (459,217) (732,780)
-------------- -------------- --------------
Cash Flows from Financing Activities
Payments on revolving credit agreement (38,562,227) (27,064,360) (20,937,512)
Proceeds on revolving credit agreement 38,329,791 28,369,813 21,313,426
Proceeds or long-term borrowings - 562,932 -
Principal payments on long-term borrowings (481,147) (437,786) (454,097)
Proceeds from issuance of common stock 2,596,024 9,289 23,159
Pruchase of common stock for retirement (11,638) (30,409) (9,922)
-------------- -------------- --------------
Net cash provided by (used in)
financing activities 1,870,803 1,373,479 (64,946)
-------------- -------------- --------------
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995, December 30, 1994 and December 31, 1993
<TABLE>
<CAPTION>
1995 1994 1993
- --------------------------------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
Net increase (decrease) in cash and
cash equivaltents 2,817,105 (656,209) 455,376
Cash and Cash Equivalents
Beginning 156,692 812,901 357,525
-------------- -------------- --------------
Ending $ 2,973,797 $ 156,692 $ 812,901
============== ============== ==============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 667,117 $ 446,019 $ 372,589
============== ============== ==============
Income taxes $ 43,425 $ 118,934 $ 8,420
============== ============== ==============
Supplemental Schedule of Noncash Financing Activities
Issuance of common stock as compensation $ - $ 12,500 $ 25,000
============== ============== ==============
Capital lease obligation incurred for use
of equipment $ 350,000 $ - $ -
============== ============== ==============
Indemnification of claims by Officers and
Directores (Note 13) $ 525,000 $ - $ -
============== ============== ==============
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
FLANDERS COPRPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies
Nature of business: The Company primarily manufactures high-efficiency air
filters, filtration systems, and housings which are used primarily in ultra
clean manufacturing environments (cleanrooms). The Company also provides
installation supervision, filter testing, and certification services for
installed systems. The Company sells it products primarily to cleanroom
contractors and industrial users in North America, based on credit terms
established for individual customers.
A summary of the Company's significant accounting policies follows:
Principles of consolidation: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary, Flanders Filters, Inc.
("FFI") and its subsidiary, Flanders Airpure Products, Co. ("Airpure"), which is
63.0 and 55.9 percent owned for the years ended December 31, 1995 and December
30, 1994 respectively. The year ended December 31, 1993 included the accounts of
FFI and its subsidiary, Foremost Freight, Inc. which was 67.5 percent owned.
During 1994, Foremost Freight, Inc. ceased operations and the remaining assets
and liabilities were absorbed by FFI. All material intercompany accounts and
transactions have been eliminated in consolidation.
Estimates: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and cash equivalents: The Company maintains its cash in bank deposit
accounts, which at times, may exceed federally insured limits. The Company has
not experienced any losses in such accounts. The Company believes it is not
exposed to any significant credit risk on cash and cash equivalents. For
purposes of reporting cash flows, the Company considers all certificates of
deposit which have an original maturity of three months or less to be cash
equivalents.
Inventories: Inventories are valued at lower of cost (first-in, first-out
method) or market.
Property and equipment: Property and equipment are stated at cost. Depreciation
is computed by the straight-line method over estimated useful lives.
Export Sales: The Company sells some products for end users outside of the
United States through domestic specialty cleanroom contractors. These sales are
accounted for as domestic sales. The Company also sells products through foreign
distributors, primarily in Europe. These sales account for less than 5% of net
sales.
7
<PAGE>
FLANDERS COPRPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Income taxes: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductibile temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilitites and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
Note 2. Inventories
Inventories consists of the following at December 31, 1995 and December 30,
1994:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Finished goods $ 198,607 $ 277,685
Work in progress 879,987 845,935
Raw materials 1,302,773 2,048,694
-------------- --------------
2,381,367 3,172,314
Less allowance of obsolete raw materials 60,000 105,000
-------------- --------------
$ 2,321,367 $ 3,067,314
============== ==============
</TABLE>
Note 3. Other Assets
Other assets consists of the following at December 31, 1995 and December 30,
1994:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Real estate held for sale $ 116,486 $ 116,486
Cash value of officers life insurance 52,524 -
Deferred debt expensem net of accumulated amortization
of 1995 $20,766; 1994 $17,814 14,532 17,484
-------------- --------------
$ 183,542 $ 133,970
============== ==============
</TABLE>
8
<PAGE>
FLANDERS COPRPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 4. Property and Equipment
Property and equipment consists of the following at December 31, 1995 and
December 30, 1994:
<TABLE>
<CAPTION>
Estimated
1995 1994 Useful Lives
-------------- -------------- -----------------
<S> <C> <C> <C>
Land $ 275,595 $ 275,595
Buildings 5,534,094 5,460,277 15 - 30 years
Machinery and equipment, including assets
acquired under capital lease; 1995 3,637,497 2,939,447 10 years
Office equipment 1,106,730 1,069,867 5 years
Vehicles 201,065 166,839 5 years
Construction in progress 136,759 45,735
-------------- --------------
10,891,740 9,957,760
Less accumulated depreciation,
including amortization applicable to
assets acquired under captial lease;
1995 $20,906 5,590,677 4,985,184
-------------- --------------
$ 5,301,063 $ 4,972,576
============== ==============
</TABLE>
Note 5. Pledged Assets and Noted Payable
The Company had prime plus 0.75 and prime plus 1.00 percent revolving loan
agreements with a bank, which provided for maximum borrowings based on the
lessor of defined borrowing bases and $5,000,000 and $1,500,000, respectively,
at December 31, 1995. The weighted average interest rate at December 31, 1995
was 9.34 percent. The agreement expires in June 1996. The Company had prime plus
0.75 and prime plus 1.00 percent revolving loan agreements with a bank, which
provided for maximum borrowings based on the lessor of defined borrowing bases
and $4,500,000 and $1,000,000, respectively at December 30, 1994. The weighted
average interest rate at December 31, 1994 was 9.30 percent. The lender's prime
rate at December 31, 1995 and December 30, 1994 was 8.50 and 8.50 percent,
respectively. The notes are collateralized by a first security interest on
equipment, accounts receivable, inventory and a second deed of trust on real
property. See Note 6 for restrictive covenants which apply to both the revolving
loan agreements and the term loan agreements.
Note 6. Pledged Assets and Long-Term Debt
A summary of the Company's long-term debt,and collateral pledged thereon,
consists of the following at Decemeber 31, 1995 and December 30, 1994:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Prime plus 1.0 percent note payable to a bank due in monthly
payments of $25,000 plus interest, with a balloon payment
due June 1996, collateralized by a first security
interest on receivables, inventory and substantially all
machinery and equipment, and a second deed of trust on
real property $ 300,000 $ 600,000
</TABLE>
9
<PAGE>
FLANDERS COPRPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 6. Pledged Assets and Long-Term Debt (Continued)
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
10.125 percent note payable to insurance company,
due in monthly payments of $13,775, including interest
through July 2004, collateralized by a first deed of trust
on real property and a second security interest in machinery
and equipment. $ 938,576 $ 1,005,139
9.99 percent fixed rate capital lease obligation, due in monthly
payments of $7,435, including interest through July 30,
2000, collateralized by equipment with a carrying value
of $397,205 327,016 -
Various contracts payable including uncollateralized obligations;
interest rates from 7.0 percent to 10 percent and 6.75 percent to
10.0 percent at December 31, 1995 and December 30, 1994,
respectively, collateralized by certain equipment; due in monthly
and quarterly payments of approximately $2,500 and $2,665,
respectively, including interest, at December 31, 1995 and
monthly and quarterly payments of approximately $2,500 and
$3,600, respectively including interest at December 30, 1994
expiring December 1997 to October 2002. 195,173 286,773
-------------- --------------
1,760,765 1,891,192
Less current maturities 454,181 389,724
-------------- --------------
$ 1,306,584 $ 1,502,188
============== ==============
</TABLE>
In connection with the revolving (See Note 5) and certain term loan agreements
the Company has agreed to certain restrictive covenants which includes among
other things the lenders approval to pay dividends with both the bank and the
insurance company. The Company was in violation of certain covenants with its
lenders as of December 31, 1995; however, these violations have been waived by
the lenders through January 1, 1997.
Aggregate maturities required on long-term debt as of December 31, 1995 are due
in future years as follows:
<TABLE>
<CAPTION>
<S> <C>
Fiscal Years Ending
1996 $ 454,181
1997 168,364
1998 192,778
1999 209,890
2000 191,009
Later years 544,543
-------------
$ 1,760,765
=============
</TABLE>
10
<PAGE>
FLANDERS COPRPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 6. Pledged Assets and Long-Term Debt (Continued)
The following is a schedule of the future minimum lease payments under the
capital lease together with the present value of the net minimum lease payment
as of December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
Fiscal Years Ending
1996 $ 89,217
1997 89,217
1998 89,217
1999 89,217
2000 52,043
-------------
Total minimum lease payments 408,911
Less amounts representing interest 81,895
-------------
$ 327,016
=============
</TABLE>
Note 7. Accounts Payable
Accounts payable consists of the following at December 31, 1995 and December 30,
1994:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Accounts payable, trade $ 2,940,716 $ 3,329,770
Commissions payable 460,092 324,271
Customer deposits 24,214 110,980
Income taxes payable (Note 10) 481,157 -
Deferred taxes (Note 10) 77,961 4,000
-------------- --------------
$ 3,984,140 $ 3,769,021
============== ==============
</TABLE>
Note 8. Accrued Expenses
Accrued expenses consists of the following at December 31, 1995 and December 30,
1994:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Payroll (Note 11) $ 277,911 $ 201,705
Managements fees (Note 13) 50,000 -
Sales and use taxes 92,940 109,008
Interest 31,884 65,972
Insurance Claim (Note 19) - 150,000
Other 232,747 155,207
-------------- --------------
$ 685,482 $ 676,892
============== ==============
</TABLE>
11
<PAGE>
FLANDERS COPRPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 9. Stockholders' Equity
On December 29, 1995, the Company completed a private placement offering dated
December 11, 1995 of 1,100,000 shares of the Company's common stock at $2.50 per
share to accredited investors. The net proceeds to the Company after commissions
and expenses from the offering totaling $319,897 amounted to $2,430,103.
The President and Vice President/Chief Financial Officer of the Company have
options to purchase 3,321,021 and 2,214,014, respectively, of the Company's
common stock from two stockholders of the Company at an option price of $2.50
per share. The options expire November 29, 1997.
Note 10. Income Tax Matters
The components of income tax expense in the total and for the deferred portion
for the years ended December 31, 1995, December 30, 1994 and December 31, 1993
are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Current:
Federal $ 419,492 $ 106,402 $ 74,627
State 105,090 - -
-------------- -------------- --------------
524,582 106,405 74,627
-------------- -------------- --------------
Deferred:
Federal 130,000 40,000 (67,000)
State 30,000 30,000 7,000
-------------- -------------- --------------
160,000 70,000 (60,000)
-------------- -------------- --------------
$ 684,582 $ 176,402 $ 14,627
============== ============== ==============
Components of deferred tax expense (credit):
Loss carryforwards $ - $ 89,912 $ 8,963
Accounts receivable (33,546) 10,982 16,753
Inventory 53,719 (20,869) 32,310
Accrued expenses 126,054 (65,038) (105,430)
Other 13,773 55,013 (12,596)
-------------- -------------- --------------
160,000 70,000 (60,000)
============== ============== ==============
</TABLE>
12
<PAGE>
FLANDERS COPRPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 10. Income Tax Matters (Continued)
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate of 34% to pretax income for the years
ended December 31, 1995, December 30, 1994 and December 31, 1993 due to the
following:
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Computed "expected" tax expense $ 622,280 $ 58,126 $ 8,545
Increase (decrease) in income taxes
resulting from:
Nondeductible expenses 50,980 37,102 15,529
State income taxes net of federal tax
benefit 89,159 19,818 3,170
Change in valuation allowance (32,490) (23,680) (7,300)
Benefit of income taxed at lower rates - (7,309) (4,056)
Tax credits (45,347) (10,590) (1,261)
-------------- -------------- --------------
$ 684,582 $ 176,402 $ 14,627
============== ============== ==============
</TABLE>
Net deferred tax assets consist of the following components as of December 31,
1995 and December 30, 1994:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable allowance $ 46,150 $ 12,604
Inventory allowances 107,786 161,505
Accrued expenses - 126,054
AMT credit carryforwards - 26,347
-------------- --------------
133,936 326,510
Less valuation allowance 15,975 48,465
-------------- --------------
137,961 278,045
Deferred tax liabilities:
Property and equipment 77,961 58,045
-------------- --------------
$ 60,000 $ 220,000
============== ==============
</TABLE>
The components giving rise to the net deferred tax assets described above have
been included in the accompanying consolidated balance sheets at December 31,
1995 and December 30, 1994 as follows:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Current assets $ 137,961 $ 224,000
Noncurrent liabilities (77,961) (4,000)
-------------- --------------
$ 60,000 $ 220,000
============== ==============
</TABLE>
13
<PAGE>
FLANDERS COPRPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 10. Income Tax Matters (Continued)
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which
required a change from the deferred method to the liability method of accounting
for income taxes. The Company adopted SFAS No, 109 as of the beginning of the
year ended December 31, 1993. The cumulative effect on prior years of this
change in accounting principle increased the net income by $306,800 and is
reported separately in the consolidated statement of operations for the year
ended December 31, 1993.
Note 11. Employment Agreements and Discretionary Bonuses
The Company has employment agreements with its President and Vice
President/Chief Financial Officer which have expiration dates of December 31,
2000. In addition to a base salary, the agreements provide for a termination
payment ranging from one hundred to two hundred and fifty percent of their base
compensation in the event the officers' employment is terminated under various
circumstances.
The Company pays discretionary cash bonuses to its employees. The amount of
these cash bonuses included in cost of goods sold and operating expenses totaled
$50,000, $30,000 and $100,000 for the years ended December 31, 1995, December
30, 1994 and December 31, 1993, respectively. During the year ended December 30,
1994, the Company issued 28,543 shares of common stock with a value of $12,500
to employees of the Company and charged to operating expesnes with credits to
common stock for $28 and paid-in capital for $12,472. During the year ended
December 31, 1993, the Company issued 57,086 shares of common stock with a value
of $25,000 to employees of the Company and charged to operating expenses with
credits to common stock for $57 and paid-in capital for $24,943.
Note 12. Employee Benefit Plans
The Company has a salary deferral 401(k) Plan, which allows employees to defer
up to the lesser of 20 percent of their salary of such amount as determined by
the U.S. Secretary of the Treasury with the Company contributing an amount
determined by its Board of Directors each year. The Company contributed $17,671
and $32,551 to the plan for years ended December 31, 1995 and December 30, 1994,
respectively. There were no Company contributions in 1993.
The Company employee benefit program also includes health, accident, dental and
life insurance and disability benefits. The Company has elected to self-insure
the health and accident insurance at an individual maximum of $1 million each.
The Company also maintains a stop loss policy which covers 100 percent of
liability from $50,000 to $100,000. The insurance plans are provided for on a
shared basis. The employers portion of claims charged to operations for the
years ended December 31, 1995, December 30, 1994 and December 31, 1993 totaled
approximately $314,000, $251,000 and $190,000, respectively.
14
<PAGE>
FLANDERS COPRPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 13. Related Party Transactions and Balances
Three of the officers and directors of the Company have entered into an
Indemnity Agreements with FFI whereby the officers and directors will
collectively deposit $1,500,000 into an escrow fund to indemnify FFI for the
payment of any claims, judgments, and expenses arising from the lawsuits against
FFI by Hartford Casualty Insurance Co. ("Hartford") and St. Paul Fire and Marine
Insurance Co. ("St. Paul"), and potential environmental issues. The
indemnification is limited to $1,500,000 and in no event will any of the
individuals named be required to contribute more than $500,000 each. FFI,
Hartford and St. Paul entered into an arbitration agreement whereby all issues
were abritrated to a final bidding conclusion. A decision from the arbitrator
was rendered December 23, 1995 upholding the claims of both St. Paul and
Harford, in the total sum of $525,000. The indemnification of FFI's liability by
certain officers and directors has been recorded as a contribution to capital.
ABB Partnership, as landlord, and Airpure, as tenant, entered into a Lease
Agreement, dated July 31, 1995. ABB Partnership is controlled by the president
of FFI. The lease, which is a month to month lease of $6,250 per month, was
entered into on terms believed by Airpure to be fair and reasonable and
generally reflective of market conditions. The expese under this lease for 1995
amounted to $6,250.
Transactions with Flanders Equity Corporation, a company affiliated through
common ownership, are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Management fees expense $ 532,000 $ 420,000 $ 524,008
Rental expense - - 16,800
</TABLE>
Liabilities at December 31, 1995, December 30, 1994 and December 31, 1993
include amounts owed to Flanders Equity as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Accrued managements fees (Note 8) $ 50,000 $ - $ 150,000
</TABLE>
Note 14. Lease Commitments and Total Rental Expense
Certain equipment is leased under agreements expiring between 1996 and 2000.
The following is a schedule of the total rental commitments under these leases
as of December 30, 1994:
<TABLE>
<CAPTION>
<S> <C>
1995 $ 42,179
1996 42,179
1997 36.657
1998 26,101
1999 18,837
------------
$ 165,953
============
</TABLE>
The total rental expense charged to operations totaled $147,787, $207,618 and
$225,511 for the years ended December 31, 1995, December 30, 1994 and December
31, 1993, respectively.
15
<PAGE>
FLANDERS COPRPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 15. Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash equivalents: The carrying amount approximates fair value because of the
short maturity of those instruments.
Notes payable and long-term debt: Based on the borrowing rates currently
available to the company for bank loans with similar maturities and similar
collateral requirements, the fair value of notes payable and long-term debt
approximates the carrying amounts.
Note 16. Stock Options and Warrants
The following table summarize the activity related to the Company's stock
options and warrants for the years ended December 31, 1993, December 30, 1994
and December 31, 1995:
<TABLE>
<CAPTION>
Price
Stock per Share
-----------------------
Warrants Options Warrants Options
--------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1993,
December 31, 1993 and
December 30, 1994 - -
Granted 61,280 2,500,000 $ 2.50 $ 1.00
Exercised - -
Canceled or expired - -
--------- ----------
Outstanding at December 31, 1995 61,280 2,500,000 $ 2.50 $ 1.00
========= ==========
Exercisable at December 31, 1995 61,280 2,500,000
========= ==========
</TABLE>
The warrants and options expire June 11, 1996 and November 15, 2000,
respectively.
Note 17. Earnings Per Common Share and Common Equivalent Share
The computation of earnings per common share and common share equivalent share
is based upon the weighted average number of common shares outstanding during
the period. Earnings per common share and common equivalent share include the
effect of the stock options and warrants mentioned in Note 16 as if the options
and warrants had been exercised at the date the options and warrants were
granted. The number of common shares outstanding was increased by the number of
shares issuable under the stock options and warrants and this theoretical
increase in the number of common shares was reduced by the number of common
shares which are assumed to have been repurchased with the applicable portion of
the proceeds from the exercise of the options and warrants.
16
<PAGE>
FLANDERS COPRPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 18. Merger
Effective December 29, 1995, Elite Acquisitions, Inc. ("Elite"), predecessor to
Flanders Corporation (See Note 20), acquired all of the outstanding common stock
of Flanders Filters, Inc. ("FFI"). For accounting purposes, the acquisition has
been treated as a recapitalization of FFI, with FFI as the acquirer (reverse
acquisition).
Elite was a public shell company incorporated in the state of Nevada in 1986
which prior to a December 11, 1995 private placement offering had no meaningful
operations or assets and minimal liabilities. Elite and FFI entered into a stock
purchase agreement on December 15, 1995 conditioned upon the satisfaction of
certain conditions including 1) a successful private placement offering dated
December 11, 1995 of 1,100,000 shares of Elite stock at $2.50 per share, 2)
execution of a $1,500,000 Indemnification Agreement by certain stockholders of
FFI and Elite concerning certain litigation and environmental matters (See Note
13), 3) execution of certain stock option agreements with stockholders of Elite
and FFI, and 4) a 255 to 1 reverse stock split of Elite's 66,045,000 shares
along with the issuance of 75,000 shares of recapitalized Elite stock to FFI's
Vice President of Finance/Chief Financial Officer whereby Elite had 334,000
shares of outstanding common stock prior to the December 11, 1995 private
placement offering. All conditions of the stock purchase agreement were met and
the reverse acquisition was effected December 29, 1995 whereby Elite issued
10,000,000 shares of its stock to the stockholders of FFI in exchange for all of
their outstanding Class A and Class B common stock.
The Stockholders' equity of FFI prior to the merger is retroactively restated (a
recapitalization) for the equivalent number of shares received in the merger
after giving effect to any difference in par value of Elite's and FFI's stock
with an offset to paid-in capital. Retained earnings of FFI is carried forward
after the acquisition. Operations prior to the merger are those of FFI. Earnings
per share for periods prior to the merger are restated to reflect the number of
equivalent shares received by FFI shareholders.
Note 19. Litigation
In 1994, FFI settled a product liability claim for $225,000 which amount was
reflected in the December 31, 1993 consolidated financial statements. FFI was
then sued by its former insurance carriers (Hartford and St. Paul) for $525,000
which represents the amount of the claim paid by them.
In 1995, FFI entered into an arbitration agreement whereby all issues were
arbitrated to a final binding conclusion. A decision from the arbitrator was
rendered December 23, 1995 upholding the reimbursement claims of both St. Paul
and Hartford, in the total sum of $525,000. An accrual of $150,000 was made at
December 31, 1994. The additional $375,000 has been charged to expense in 1995.
FFI has been indemnified from this obligation by certain officers and directors
through an Indemnification Agreement dated December 15, 1995, (See Note 13).
17
<PAGE>
FLANDERS COPRPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 20. Subsequent Events
Merger and Acquisitions:
On January 22, 1996, Elite Acquisitions, Inc. stockholders approved a
reincorporation merger with Flanders Corporation, a newly formed wholly-owned
company, whereby Elite Acquisitions, Inc. would merge with Flanders Corporation
in a share for share stock exchange with Flanders Corporation being the
surviving company. The Merger Agreement and Articles of Merger were effective as
of January 29, 1996. As a result of the merger, the financial statements of
Elite Acquisitions, Inc. have been presented as those of Flanders Corporation
and the authorized capitalization of Flanders Corporation consisting of
50,000,000 shares of common stock at a par value of .001 and 10,000,000 shares
of preferred stock, with no par value, has been presented as the capital
structure of the company.
On May 31, 1996, the company acquired all the outstanding stock of Charcoal
Services Corporation, a competing carbon filter and containment manufacturer, as
well as the land and building on which Charcoal Service Corporation operates
that is owned by the stockholders of Charcoal Service Corporation. The purchase
price was approximately $4,435,000, and up to 100,000 shares of the Company's
common stock if certain performance criteria are met. The acquisition was funded
by private placement memorandums dated April 11, 1996 and May 13, 1996 which
were completed on June 3, 1996.
On June 15, 1996, the Company acquired all the outstanding stock of Air Seal
Filter Housings, Inc. as well as the land and building on which Air Seal filter
Housings, Inc. operates that is owned by the stockholders of Air Seal Filter
Housings, Inc. The purchase price was approximately $2,150,000 and up to 150,000
shares of the Company's common stock if certain performance criteria are met.
The acquisition was funded by private placement memorandums dated April 11, 1996
and May 13, 1996 which were completed on June 3, 1996.
On September 24, 1996, the company acquired all the outstanding stock of
Precisionaire, Inc., a leading manufacture of precision air filters, containment
systems and filtration equipment, as well as a tract of land and a building on
which Precisionaire, Inc. operates that is owned effectively by the majority
stockholders of Precisionaire, Inc. The purchase price was approximately
$27,300,000 with a post closing valuation allowance of up to 786,885 shares of
the Company's common stock, which are held in escrow, to be released only if
certain performance criteria are met. The acquisition of Precisionaire, Inc. was
funded by a private placement of the Company's common stock and convertible
debt, closed on October 16, 1996, a credit facility provided by NationsBank
consisting of (1) a revolving credit facility in the maximum principal amount of
$25,000,000 and (2) a term loan facility in the maximum principal amount of
$6,500,000, and the assumption of approximately $2,200,000 of debt associated
with a mortgage on the purchased land and building.
18
<PAGE>
FLANDERS COPRPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 20. Subsequent Events (Continued)
Stock Offerings:
On January 24, 1996, the Company completed a private placement offering dated
January 10, 1996 of 500,000 shares of the Company's common stock at $2.50 per
share to accredited investors. The net proceeds to the Company after commissions
and expenses from the offering totaling $147,251 amounted to $1,102,749.
Subsequent to year end, the Company utilized the proceeds from this offering
along with the proceeds from the December 11, 1995 offering to reduce the
revolving loan agreements to zero. In conjunction with the offering, the Company
issued 35,000 warrants, expiring July 10, 1996, to the placement agents for the
offering to purchase common stock at $2.50 per share.
On June 3, 1996, the Company completed private placement memorandums dated April
11, 1996 and May 13, 1996 of 1,537,315 shares of the Company's common stock at
$5.00 per share to accredited investors. The net proceeds to the Company after
commissions and expenses from the offering totaling approximately $347,000
amounted to approximately $7,340,000. The Company utilized approximately
$4,435,000 and $2,150,000 of proceeds from this offering to acquire Charcoal
Service Corporation and Air Seal Filter Housings, Inc. , respectively, while the
remainder of the offering proceeds were utilized to reduce the revolving loan
agreements.
On October 16, 1996, the Company completed a private placement of 1,333,889
shares of the Company's common stock at $9.00 per share to accredited investors.
The Company plans to utilize the net proceeds to reduce the revolving loan
agreements. The Company incurred commissions and expenses totaling approximately
$1,382,000 in conjunction with the stock offering and the issuance of
convertible debt and notes totaling $6,500,000 which are discussed below.
Stock Options:
On January 22, 1996 the Company approved a Long-term Incentive Plan and a
Director Option Plan which results in reserving 2,500,000 shares of the
company's common stock for issuance under these plans.
On February 12, 1996, the Company granted options to purchase 819,520 shares of
the Company's common stock at an exercise price of $2.50 per share, of which,
options to purchase 119,520 shares were granted to certain key employees under
its Long-term Incentive Plan and options to purchase 700,000 shares were granted
to consultants to the Company. On that same date, options to purchase 200,000
shares of the Company's common stock were granted to a consultant to the Company
at an exercise price of $3.50 per share.
On February 22, 1996 the Company granted to its President and its Vice-President
of Finance options to purchase 1,000,000 shares each of the Company's common
stock at an exercise price of $2.50 per share.
19
<PAGE>
FLANDERS COPRPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 20. Subsequent Events (Continued)
On June 3, 1996 the Company granted to its President and its Vice-President of
Finance options to purchase 1,000,000 shares of the Company's common stock at an
exercise price of $7.50 per share. On the same date the Company granted options
to purchase 57,000 shares of the Company's common stock at an exercise price of
$7.50 per share to certain key employees under its Long-term Incentive Plan.
Financing Agreements:
On September 19, 1996, the Company entered into a loan agreement (the "Credit
Facility") with NationsBank, N.A. The Credit Facility consists of (i) a
revolving credit facility in the maximum amount of $25,000,000 which bears
interest at a rate of prime plus 1 percent, and (ii) a term facility in the
maximum principal amount of $6,500,000 which bears interest at the rate of prime
plus 1.5%. The Credit Facility is secured by all of the Company's tangible and
intangible property.
On October 16, 1996, the Company completed a private placement of $2,500,000 in
A Series Subordinated Convertible Debentures to accredited investors and
$4,000,000 from the sale of 10 percent Convertible Notes pursuant to Regulation
S to certain offshore investors. The A Series Subordinated Convertible
Debentures are convertible prior to December 31, 1996 into a total of 277,778
shares of the Company's common stock based on a conversion rate of $9 per share.
The 10 percent Convertible Notes are convertible at any time commencing
forty-one (41) days after issuance into shares of Common Stock at a conversion
price equal to the lower of (i) eighty-two percent (82%) of the average closing
bid price for the seven (7) trading days immediately preceding the conversion
date, or (ii) $9.00: provided, however, that in no event shall the conversion
price be less than $5.00; provided further, that in no event shall the holder of
the 10% Convertible Notes be entitled to convert any portion of such notes if
such action would result in beneficial ownership by a holder and its affiliates
of more than 4.9% of the outstanding shares of Common Stock of the Company. If
the average closing bid price of the Company's Common stock over any continuous
seven day trading period is less than $7.38 per share, the Company may redeem
the Convertible Notes at a price equal to 115% of the outstanding principal
amount of the notes.
In conjunction with the issuance of A Series Subordinated Convertible Debentures
the Company issued 25,000 warrants, expiring September 9, 1996, to the debenture
holders to purchase common stock at $9.625 per share.
20
<PAGE>
McGLADREY & PULLEN, LLP
Certified Public Accountants and Consultants
INDEPENDENT AUDITOR'S REPORT ON THE SUPPLEMENTAL SCHEDULE
To the Board of Directors
Flanders Corporation
Washington, North Carolina
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The consolidated
Supplemental Schedule II is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audits of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic consolidated financial statements taken as a whole.
/s/ McGladrey & Pullen, LLP
New Bern, North Carolina
February 8, 1996
21
<PAGE>
<TABLE>
FLANDERS CORPORATION AND SUBSIDIARY
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1995, December 30, 1994 and December 31, 1993
<CAPTION>
Additions
---------------------------
Balance at Charged to Charged to Balance
Beginning Cost and Other at End
Description of Period Expense Accounts Deductions of Period
- --------------------------------------------- ------------ ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
For the year ended Dec. 31, 1995
Allowance for doubtful accounts $ 40,000 $ 121,799 $ - $ (13,799)<F1> $ 148,000
Allowance for inventory value 105,000 (45,000) - - 60,000
Valuation allowance for deferred tax assets 48,465 - - (32,490)<F2> 15,975
----------- ----------- ------------ ----------- ----------
Total $ 193,465 $ 76,799 $ - $ (46,289) $ 223,975
=========== =========== ============ =========== ==========
For the year ended Dec. 30, 1994
Allowance for doubtful accounts $ 65,500 $ (17,344) $ - $ (8,156)(1) $ 40,000
Allowance for inventory value 174,134 (69,134) - - 105,000
Valuation allowance for deferred tax assets 72,145 - - (23,680)(2) 48,465
----------- ----------- ------------ ----------- ----------
Total $ 311,799 $ (86,478) $ - $ (31,836) $ 193,463
=========== =========== ============ =========== ==========
For the year ended Dec. 31, 1993
Allowance for doubtful accounts $ 112,021 $ 262,025 $ - $(308,546)(1) $ 65,500
Allowance for inventory value 268,106 (93,972) - - 174,134
Valuation allowance for deferred tax assets 79,445 - - (7,300)(2) 72,145
----------- ----------- ------------ ----------- ----------
Total $ 459,572 $ 168,053 $ - $(315,846) $ 311,779
=========== =========== ============ =========== ==========
- ------------------------------------------
<FN>
<F1>
Uncollected receivables written-off, net of recoveries.
<F2>
Reduction in valuation allowance.
</FN>
</TABLE>
22
<PAGE>
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995 AND 1994
AND FOR EACH OF THE THREE YEARS ENDED DECEMBER 31,1995
TOGETHER WITH REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
Precisionaire, Inc.:
We have audited the accompanying balance sheets of Precisionaire, Inc. (a
Florida corporation) as of December 31, 1995 and 1994, and the related
statements of income and retained earnings, and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Precisionaire, Inc. as of
December 31, 1995 and 1994, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Tampa, Florida,
March 8, 1996
<PAGE>
PRECISIONAIRE, INC.
<TABLE>
BALANCE SHEETS -- DECEMBER 31, 1995 AND 1994
<CAPTION>
ASSETS 1995 1994
-------- -------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 468,085 $ 219,239
Certificate of deposit (Note 5) 276,168 272,305
Trade accounts and notes receivable, less
allowances of approximately $333,500
and $458,600 for doubtful accounts, returns
and credits at December 31, 1995 and 1994,
respectively (Note 4) 5,624,399 5,193,305
Inventories (Note 4) 4,115,158 3,661,201
Deferred tax asset (Note 3) 535,000 435,119
Prepaid expenses and other current assets 13,500 191,080
-------------- --------------
Total current assets 11,032,310 9,972,249
EQUIPMENT AND FURNISHINGS, net (Notes 2 and 4) 5,536,799 5,658,049
OTHER ASSETS (Notes 4 and 5) 915,901 849,410
-------------- --------------
$ 17,485,010 $ 16,479,708
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,549,695 $ 6,161,576
Accrued expenses and other liabilities 2,114,618 1,515,899
Current maturities of long-term debt (Note 4) 1,283,593 2,277,461
-------------- --------------
Total current liabilities 7,947,906 9,954,936
LONG-TERM DEBT, less current maturities (Note 4) 2,317,264 1,029,800
DEFERRED TAX LIABILITY (Note 3) 310,000 247,243
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Class A common stock, voting, $.10 par value,
10,000 shares authorized, 3,767 shares issued
and outstanding 377 377
Class B common stock, non-voting, $.10 par
value, 90,000 shares authorized, 33,834
shares issued and outstanding 3,383 3,383
Additional paid-in capital 276,420 276,420
Retained earnings 6,629,660 4,967,549
Total stockholders' equity 6,909,840 5,247,729
-------------- --------------
$ 17,485,010 $ 16,479,708
============== ==============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE>
PRECISIONAIRE, INC.
<TABLE>
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
NET SALES $ 61,809,501 $ 54,289,237 $ 50,747,523
COST OF SALES 47,202,625 42,149,288 39,583,348
-------------- -------------- --------------
Gross profit 14,606,876 12,139,949 11,164,175
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 11,497,186 10,897,308 9,683,643
-------------- -------------- --------------
Operating income 3,109,690 1,242,641 1,480,532
INTEREST EXPENSE (391,400) (255,841) (251,828)
OTHER, net 132,321 101,353 195,380
-------------- -------------- --------------
INCOME BEFORE TAXES 2,850,611 1,088,153 1,424,084
INCOME TAX PROVISION (Note 3) 1,170,803 439,702 521,736
-------------- -------------- --------------
NET INCOME 1,679,808 648,451 902,348
DIVIDENDS DECLARED 17,697 - -
RETAINED EARNINGS, BEGINNING OF YEAR 4,967,549 4,319,098 3,416,750
-------------- -------------- --------------
RETAINED EARNINGS, END OF YEAR $ 6,629,660 $ 4,967,549 $ 4,319,098
============== ============== ==============
NET INCOME PER SHARE $ 44.67 $ 17.25 $ 24.00
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
PRECISIONAIRE, INC.
<TABLE>
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,679,808 $ 648,451 $ 902,348
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 1,097,670 1,031,039 896,572
Loss on sale of equipment and furnishings 21,479 96,859 6,745
Deferred income taxes (37,124) (42,685) (59,664)
(Increase) decrease in assets-
Trade accounts and notes receivable, net (431,094) 84,518 272,186
Inventories (453,957) (274,388) (532,504)
Prepaid expenses and other current assets 177,580 (67,165) (99,916)
Other assets (66,491) (50,032) (34,709)
(Decrease) increase in liabilities-
Accounts payable (1,611,881) 358,221 928,908
Accrued expenses and other liabilities 592,986 (227,612) 418,283
-------------- -------------- --------------
Net cash provided by
operating activities 968,976 1,557,206 2,698,249
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (985,757) (2,023,230) (1,641,383)
Increase in certificate of deposit (3,863) (10,473) (108,399)
Proceeds from sale of equipment and furnishings 24,668 24,914 35,035
-------------- -------------- --------------
Net cash used in
investing activities (964,952) (2,008,789) (1,714,747)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 1,649,081 738,825 856,219
Principal payments on long-term debt (892,295) (693,054) (1,127,069)
Dividend payments (11,964) - -
Principal payments on related party notes - (715,000) -
Net (payments) borrowings on line of credit (500,000) 1,200,000 (600,000)
-------------- -------------- --------------
Net cash provided by (used in)
financing activities 244,822 530,771 (870,850)
-------------- -------------- --------------
NET INCREASE IN CASH 248,846 79,188 112,652
CASH, beginning of year 219,239 140,051 27,399
-------------- -------------- --------------
CASH, end of year $ 468,085 $ 219,239 $ 140,051
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
PRECISIONAIRE, INC.
<TABLE>
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest $ 385,176 $ 242,543 $ 256,671
Cash paid for income taxes $ 924,800 $ 556,248 $ 710,972
SUPPLEMENTAL DISCLOSURES OF NONCASH
TRANSACTIONS:
Dividends declared included in accrued
expenses and other liabilities $ 5,733 $ - $ -
Equipment acquired by assumption of
capital lease obligation (trade-in
value received in 1994 for
equipment - $50,000) $ 36,810 $ 293,952 $ -
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
PRECISIONAIRE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
Business
Precisionaire, Inc. (the Company) produces, distributes and sells air filters
and related products from several manufacturing and distributing locations
throughout the eastern United States. The Company's primary customers are
heating, ventilation and air-conditioning wholesalers, retailers, supermarkets,
mass merchandisers, filter sales and service companies, hardware wholesalers,
and original equipment manufacturers.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expense during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
All sales are recognized when shipments are made to customers.
Inventories
Inventories are stated at the lower of cost or market. The Company is using
the last-in, first-out (LIFO) method to determine the cost of its inventories.
If the first-in, first-out method had been used, inventories would have been
higher by approximately $56,000 and $35,000 at December 31, 1995 and 1994,
respectively.
During 1994, the Company liquidated certain LIFO inventories. The effect of
this liquidation on earnings was not material.
<PAGE>
Inventories consisted of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Raw materials $ 2,077,307 $ 1,702,595
Finished goods 2,037,851 1,958,606
-------------- --------------
$ 4,115,158 $ 3,661,201
============== ==============
</TABLE>
Equipment and Furnishings
Equipment and furnishings are recorded at cost. Depreciation and amortization
are calculated on a straight-line basis over the estimated useful lives of the
assets. Accelerated methods are used for income tax purposes.
The estimated useful lives used in computing depreciation and amortization are
as follows:
<TABLE>
<CAPTION>
Years
---------
<S> <C>
Plant machinery and transportation equipment 3 - 10
Office and computer equipment 3 - 5
Leasehold improvements 5 - 10
Equipment under capital lease 5
</TABLE>
2. EQUIPMENT AND FURNISHINGS:
The Company's equipment and furnishings consisted of the following at December
31:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Plant machinery and transportation equipment $ 8,388,297 $ 7,186,146
Leasehold improvements 2,277,468 2,256,748
Office and computer equipment 1,770,123 1,595,683
Construction in progress 433,048 952,740
Equipment under capital lease 330,648 293,952
-------------- --------------
13,199,584 12,285,269
Less- Accumulated depreciation and
amortization (7,662,785) (6,627,220)
-------------- --------------
Equipment and furnishings, net $ 5,536,799 $ 5,658,049
============== ==============
</TABLE>
<PAGE>
3. INCOME TAXES:
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS
109 uses the liability method where deferred taxes are determined based on the
estimated future tax effects of differences between the financial statement and
tax basis of assets and liabilities given the provisions of enacted tax laws
and tax rates.
Income tax provision consisted of the following for the years ended December
31:
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Current:
Federal $ 1,036,927 $ 401,387 $ 494,250
State 171,000 81,000 87,150
-------------- -------------- --------------
Total current provision 1,207,927 482,387 581,400
-------------- -------------- --------------
Deferred:
Federal (33,411) (38,416) (53,698)
State (3,713) (4,269) (5,966)
-------------- -------------- --------------
Total deferred benefit (37,124) (42,685) (59,664)
-------------- -------------- --------------
Total tax provision $ 1,170,803 $ 439,702 $ 521,736
============== ============== ==============
</TABLE>
The Company provides deferred taxes on significant temporary differences
between income determined by different accounting methods for financial
reporting and income tax purposes. These differences result primarily from the
use of accelerated methods of depreciation for tax purposes and the timing of
the deduction of various accrual and reserve accounts for tax purposes and
financial reporting purposes. Significant components of the Company's deferred
tax assets and liabilities at December 31, were as follows:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Current deferred tax assets:
Reserves $ 163,000 $ 172,000
Accruals 372,000 263,119
-------------- --------------
Total current deferred tax assets 535,000 435,119
Noncurrent deferred tax liabilities:
Equipment and furnishings 310,000 247,243
-------------- --------------
Total noncurrent deferred tax liabilities 310,000 247,243
Net deferred tax assets $ 225,000 $ 187,876
============== ==============
</TABLE>
<PAGE>
There was no valuation allowance at December 31, 1995 and 1994. The income tax
provisions differ from the amount of income tax determined by applying the U.S.
statutory federal income tax rate of 34 percent to pretax income due to the
following:
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Expected tax provision $ 969,000 $ 370,000 $ 484,000
Increase (decrease) in income tax
provision resulting from:
Nondeductible expenses 39,000 44,000 16,000
State income taxes, net of federal benefit 116,000 53,000 41,000
Other 46,803 (27,298) (19,264)
-------------- -------------- --------------
Total income tax provision $ 1,170,803 $ 439,702 $ 521,736
============== ============== ==============
</TABLE>
4. LONG-TERM DEBT:
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
(A) Borrowings under line of credit, limited
to the lesser of $2,500,000 or a
percentage of qualifying receivables plus
interest at prime plus .25% (8.75% at
December 31, 1995) through May 1998, at
which time all unpaid principal is due,
secured by all accounts receivable,
inventory and equipment, guaranteed by the
stockholders of the Company. The line
restricts acquisition and disposition of
assets, restricts incurrence of additional
indebtedness and requires maintenance of
certain financial ratios of which the
Company was in compliance or had obtained
waivers for noncompliance. $ 1,200,000 $ 1,700,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
(B) Note payable, monthly payments of $55,556
plus interest at prime plus .75% (9.25% at
December 31, 1995) through May 1998, at
which time all unpaid principal is due,
secured by all equipment, accounts
receivable, inventory,
cross-collateralized with the line of
credit and guaranteed by the stockholders
of the Company. 1,591,565 -
(C) Note payable, monthly payments of $4,000
plus interest at prime (8.5% at December
31, 1995) through November 1996, at which
time all unpaid principal is due, secured
by the cash surrender value of life
insurance (see Note 5). 331,953 379,953
(D) Note payable, monthly payments of $10,278
plus interest at prime plus .75% (9.25% at
December 31, 1995) through November 1997,
at which time all unpaid principal is due,
secured by inventory and accounts
receivable, cross- collateralized with the
line of credit, guaranteed by the
stockholders of the Company. 236,389 367,244
(E) Note payable, monthly payments of $6,084
plus interest at prime plus .625% (9.125%
at December 31, 1995) through November
1996, at which time all unpaid principal
is due, secured by computer equipment. 66,892 139,900
(F) Notes payable, monthly payments totaling
$10,704 plus interest at prime plus 1.25%
(9.75% at December 31, 1995) through May
1995, at which time all unpaid principal
was consolidated into (A), above. - 200,600
(G) Note payable, monthly payments of $5,268
plus interest at prime plus 1.25% (9.75%
at December 31, 1995) through May 1995, at
which time all unpaid principal was
consolidated into (A), above. - 142,230
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
(H) Note payable, monthly payments of $2,834
and $2,094 plus interest at prime plus 1%
(9.5% at December 31, 1995) through May
1995, at which time all unpaid principal
was consolidated into (A), above. - 146,787
(I) Note payable, monthly payments of $413
plus interest at prime plus 1% (9.5% at
December 31, 1995) through December 1995,
at which time the principal was paid,
secured by copy machines. - 6,192
(J) Capital lease obligation, monthly
payments of $1,122, including imputed
interest at 5.9%, through April 1998. 27,865 -
(K) Capital lease obligation, monthly
payments of $7,473, including imputed
interest at 6.5%, through September 1997. 146,193 224,355
-------------- --------------
3,600,857 3,307,261
Less- Current maturities (1,283,593) (2,277,461)
-------------- --------------
$ 2,317,264 $ 1,029,800
============== ==============
</TABLE>
Principal payments due on long-term debt are as follows:
<TABLE>
<CAPTION>
Amount
--------------
<S> <C>
1997 $ 855,555
1998 1,461,709
--------------
$ 2,317,264
==============
</TABLE>
5. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company leases certain buildings and equipment under noncancellable
operating leases and leases substantially all of its real property located in
Florida, Pennsylvania and Texas from key officers or stockholders. Total rent
payments for these related party leases totaled approximately $894,000,
$888,000 and $839,000 for the years ended December 31, 1995, 1994, and 1993,
respectively. The Company and stockholders have guaranteed the lease payments
under terms of the related party leases. These related party leases, which
have expiration dates ranging from February 1995 to January 2005, are, in the
opinion of the Company, at terms not less favorable than could have been
obtained if the properties were leased from unrelated parties.
<PAGE>
The future minimum payments under these noncancellable operating leases are as
follows:
<TABLE>
<CAPTION>
Year Ending Related Other
December 31, Parties Parties
------------ -------------- --------------
<S> <C> <C>
1996 $ 964,987 $ 251,597
1997 887,576 129,597
1998 720,444 34,521
1999 644,934 8,000
2000 633,684 -
Thereafter 2,645,220 -
-------------- --------------
$ 6,496,845 $ 423,715
============== ==============
Total rent expense for all operating leases was approximately $1,210,000,
$1,132,000 and $1,019,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
Guaranty
The Company leases land and facilities in Florida from a related party. The
related party financed the purchase of the land and facilities with proceeds
from the sale of an industrial development revenue bond (the Bond). The
Company and the stockholders have unconditionally guaranteed the repayment of
the Bond. Additionally, the Company has agreed to lease the land and
facilities through January 2005.
Letter of Credit
The Company had available $575,000 in a letter of credit to guarantee payment
of insurance claims. The letter of credit is partially collateralized by the
certificate of deposit and cross-collateralized with the line of credit. As of
December 31, 1995, no amount was outstanding under the letter of credit.
Employee Health Insurance Conversion
During 1995, the Company's health insurance carrier converted from a mutual
insurance company to a stock insurance company. In connection with this
change, the Company received approximately 17,000 shares of stock in the new
stock insurance company. Management intends to convert the stock to the
benefit of the employees.
<PAGE>
Stock Repurchase Agreement
The Company has a stock restriction and repurchase agreement with the holders
of voting and nonvoting common stock which provides that the Company has a
right of first refusal if a stockholder desires to sell shares and requires the
Company to purchase the stock of a stockholder who dies, is totally disabled or
ceases to be an employee of the Company, as long as the Company is legally able
to do so. The purchase price shall be paid in cash, insurance proceeds or by a
promissory note. The purchase price is to be equal to
one and one-half times the book value per share.
The Company owns and is the beneficiary of term and whole life insurance
policies on the lives of certain key officers. As of December 31, 1995, the
total face value of these policies was approximately $8,100,000, and the cash
surrender value (included in other assets) was approximately $828,000. Of
these policies, approximately $1,600,000 of the term policies is
unconditionally assigned to the bank. The cash surrender value of the whole
life policy is collateral for the $331,953 note payable (see Note 4). Benefit
proceeds from the life insurance are to be distributed to the banks as assigned
and then used to redeem the Company stock in accordance with the stock
repurchase agreement as approved by the Board of Directors.
6. EMPLOYEE BENEFIT PLANS:
Profit Sharing Plan
The Company maintains a contributory profit sharing plan covering all eligible
employees. The Company's contribution to the plan is discretionary and is
determined by the Board of Directors each year. The Company accrued $100,000
at December 31, 1995, to be contributed to the plan during 1996, and the
Company elected not to contribute to the plan for 1994. The Company
contributed $100,000 to the plan in 1993.
401(k) Savings Plan
In July 1995, the Company started a 401(k) savings plan covering substantially
all employees. Employer contributions totaled approximately $33,000 for the
year ended December 31, 1995, and are included in selling, general and
administrative expenses in the accompanying statements of income. The employee
contribution included a maximum of 12 percent of plan compensation per
employee. The 401(k) employer matching contribution was 25 percent for the
first 4 percent of the employee's contribution up to $9,240 per employee per
year. Employees are eligible to participate in the plan on the January 1 or
July 1 after the first year of employment, completion of at least 1,000 hours
of service and attaining 21 years of age.
<PAGE>
FLANDERS CORPORATION
Unaudited Pro Forma Financial Information
The Unaudited Pro Forma Consolidated Balance Sheet as of June 30, 1996 and the
Unaudited Pro Forma Consolidated Statements of Income for the six months ended
June 30, 1996 and the year ended December 31, 1995 for Flanders Corporation are
set forth below.
The Unaudited Pro Forma Consolidated Balance Sheet has been prepared as if the
September Offering and the Precisionaire Acquisition had occurred on June 30,
1996.
The Unaudited Pro Forma Consolidated Statements of Income have been prepared
assuming that the Precisionaire Acquisition had occurred on the first day of the
periods presented therein. These Unaudited Pro Forma Consolidated Statements of
Income do not purport to represent the operations of the Company had the
Acquisition, in fact, occurred at the beginning of the respected periods, or to
project the results of operations for any future period.
</TABLE>
<TABLE>
FLANDERS CORPORATION
UNAUDITED PRO-FORMA CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 1996
<CAPTION>
Precisionaire Combined
ASSETS The Company Precisionaire PPO #4 Acquisition Pro Forma
- ------------------------------------------ -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents $ 406,018 $ 19,244 $ 17,122,605 $ (7,565,750)<F1> $ 9,982,116
Receivables:
Trade 12,703,523 8,758,563 - - 21,462,086
Other 532,912 83,790 - - 616,702
Inventories 5,248,974 5,898,610 - - 11,147,584
Deferred income taxes 157,285 871,000 - - 1,028,285
Other current assets 344,596 311,653 - - 656,249
-------------- -------------- -------------- -------------- --------------
Total current assets 19,393,308 15,942,860 17,122,605 (7,565,750) 44,893,022
Intangible Assets 1,825,965 - - 8,892,043 <F2> 10,718,006
Other assets 23,116 1,390,111 - - 1,413,227
Property, Plant and Equipment, net 8,789,593 5,401,550 - 11,608,292 <F3> 25,799,432
-------------- -------------- -------------- -------------- --------------
$ 30,031,982 $ 22,734,521 $ 17,122,605 $ 12,934,585 $ 82,823,687
============== ============== ============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------
Current liabilities
Notes payable $ 2,757,369 $ - $ - $ - $ 2,757,369
Current maturities of long-term debt 259,026 1,281,732 - - 1,540,758
Accounts payable 5,182,040 7,980,350 - - 13,162,390
Accrued expenses 1,732,881 2,536,595 - - 4,269,476
-------------- -------------- -------------- -------------- --------------
Total current liabilities 9,931,316 11,798,677 - - 21,729,993
Long-Term Debt, less current maturities 1,465,254 2,417,004 - 20,623,425 24,505,683
Deferred income taxes 503,934 546,000 - - 1,049,934
Commitments - - - - -
-------------- -------------- -------------- -------------- --------------
Total liabilities 11,900,504 14,761,681 - 20,623,425 47,285,610
Stockholders' Equity
Capital stock 13,533 3,760 1,334 (3,760) 14,867
Paid-in capital 11,991,664 276,420 17,121,271 (276,420) 29,112,935
Unrealized gain/(loss) on investments - 284,000 - - 284,000
Retained earnings 6,126,281 7,408,660 - (7,408,660) 6,126,281
-------------- -------------- -------------- -------------- --------------
Total Stockholders' Equity 18,131,478 7,972,840 17,122,605 (7,688,840) 35,538,083
-------------- -------------- -------------- -------------- --------------
$ 30,031,982 $ 22,734,521 $ 17,122,605 $ 12,934,585 $ 82,823,693
============== ============== ============== ============== ==============
<FN>
<F1>
To reflect cash paid for Precisionaire, net of money raised in the September Offering.
<F2>
To reflect good will from purchase of PrecisionAire
<F3>
To reflect write-up of fixed assets to market value and buildings and land acquired with PrecisionAire.
</FN>
</TABLE>
<PAGE>
FLANDERS CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended 6/30/96
<TABLE>
<CAPTION>
Historical
----------------------------------------------------------
Purchase
Flanders CSC AirSeal Precisionaire Adjustments Pro Forma
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 24,603,283 $ 2,196,604 $ 1,869,036 $ 32,705,927 $ - $ 61,374,850
Cost of goods sold 18,657,185 1,537,623 1,532,774 25,414,924 - 47,142,506
------------- ------------- ------------- ------------- ------------- -------------
Gross profit 5,946,098 658,981 336,262 7,291,003 - 14,232,344
General and administrative expenses 4,162,089 477,660 327,860 6,155,125 430,000 <F1> 10,876,219
(650,000)<F2>
54,000 <F3>
(32,000)<F4>
(33,515)<F5>
5,000 <F6>
(20,000)<F7>
------------- ------------- ------------- ------------- ------------- -------------
Operating income 1,784,009 181,321 8,402 1,135,878 246,515 3,356,125
------------- ------------- ------------- ------------- ------------- -------------
Nonoperating income (expense):
Interest income 17,282 2,988 - - - 20,270
Other income 303,847 76,416 - 245,372 - 625,635
Interest (expense) (138,235) (8,418) (1,456) (133,309) (883,912)<F8> (1,165,330)
------------- ------------- ------------- ------------- ------------- -------------
182,894 70,986 (1,456) 112,063 (883,912) (519,425)
------------- ------------- ------------- ------------- ------------- -------------
Income before income taxes 1,966,903 252,307 6,946 1,247,941 (637,397) 2,836,700
Income taxes 747,423 96,000 2,600 414,099 (242,211) 1,017,911
------------- ------------- ------------- ------------- ------------- -------------
Net income $ 1,219,480 $ 156,307 $ 4,346 $ 833,842 $ (395,186) $ 1,818,789
============= ============= ============= ============= ============= =============
Earnings per weighted average
common and common equivalent
share outstanding $ 0.08 $ 0.11
============= =============
Weighted average common and
common equivalent shares
outstanding 15,921,741 1,333,889 17,255,630
============= ============ =============
<FN>
<F1>
To reflect amortization of good will and depreciation of write-up to market
value of plant and equipment from Precisionaire purchase.
<F2>
To reflect removal of remuneration paid to current owners of Precisionaire.
<F3>
To reflect amortization of good will and depreciation of write-up to market
value of plant and equipment from AirSeal purchase.
<F4>
To reflect removal of remuneration paid to prior owners of AirSeal
<F5>
To reflect removal of leases paid on buildings included in purchase of
AirSeal.
<F6>
To reflect amortization of good will and depreciation of write-up to market
value of plant and equipment from CSC purchase.
<F7>
To reflect removal of leases paid on buildings included in purchase of CSC.
<F8>
To reflect increase in interest expense from financing of Acquisitions, net
of cash received in September Offerings.
</FN>
</TABLE>
<PAGE>
FLANDERS CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, 1995
<TABLE>
<CAPTION>
Historical
----------------------------------------------------------
Purchase
Flanders CSC AirSeal Precisionaire Adjustments Pro Forma
------------- ------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 38,494,261 $ 5,076,557 $ 2,603,440 $ 61,809,501 $ - $ 107,983,759
Cost of goods sold 28,953,729 3,334,545 1,554,277 47,202,625 - 81,045,176
Gross profit 9,540,532 1,742,012 1,049,163 14,606,876 - 26,938,583
Other operating revenue 141,549 - - - - 141,549
General and administrative expenses 7,262,668 1,659,503 812,759 11,497,186 558,070 <F1> 20,437,829
(1,293,681)<F2>
96,257 <F3>
(63,140)<F4>
(64,193)<F5>
93,895 <F6>
(121,495)<F7>
------------- ------------- ------------- ------------- ------------- --------------
Operating income 2,419,413 82,509 236,404 3,109,690 794,287 6,642,303
------------- ------------- ------------- ------------- ------------- --------------
Nonoperating income (expense):
Interest income - 28,859 - - - 28,859
Other income 43,852 67,358 2,382 132,321 - 245,913
Interest (expense) (633,029) (7,970) - (391,400) (1,383,947)<F8> (2,416,346)
------------- ------------- ------------- ------------- ------------- --------------
(589,177) 88,247 2,382 (259,079) (1,383,947) (2,141,574)
------------- ------------- ------------- ------------- ------------- --------------
Income before income taxes 1,830,236 170,756 238,786 2,850,611 (589,660) 4,500,729
Income taxes 684,582 59,912 90,739 1,170,803 (224,071) 1,781,965
------------- ------------- ------------- ------------- ------------- --------------
Net income $ 1,145,654 $ 110,844 $ 148,047 $ 1,679,808 $ (365,589) $ 2,718,764
============= ============= ============= ============= ============= ==============
Earnings per weighted average
common and common equivalent
share outstanding $ 0.12 $ 0.21
============= ==============
Weighted average common and
common equivalent shares
outstanding 9,831,996 3,371,204 13,203,200
============= ============= ==============
<FN>
<F1>
To reflect amortization of good will and depreciation of write-up to market
value of plant and equipment from Precisionaire acquisition.
<F2>
To reflect removal of remuneration paid to current owners of Precisionaire
of $1,293,681.
<F3>
To reflect amortization of good will and depreciation of write-up to market
value of plant and equipment from AirSeal acquisition.
<F4>
To reflect removal of remuneration paid to prior owners of AirSeal.
<F5>
To reflect removal of leases paid on buildings included in purchase of
AirSeal.
<F6>
To reflect amortization of good will and depreciation of write-up to market
value of plant and equipment from CSC acquisition.
<F7>
To reflect removal of leases paid on buildings included in purchase of CSC.
<F8>
To reflect increase in interest expense from financing of Acquisitions, net
of money received in Private Offerings.
</FN>
</TABLE>
<PAGE>
No dealer, salesman or other person has
been authorized to give any information
or to make any representations other
than those contained in this Prospectus,
and, if given or made, such information
or representations must not be relied
upon as having been authorized by the
Company. Neither the delivery of this
Prospectus nor any sale made hereunder
shall under any circumstances create an 1,600,000
implication that there has been no Shares of Common Stock
change in the affairs of the Company
since the date hereof. This Prospectus FLANDERS CORPORATION
does not constitute an offer or
solicitation by anyone in any
jurisdiction in which such offer or
solicitation is not authorized or in
which the person making such offer or
solicitation is not qualified to do so
or to anyone to whom it is unlawful to
make such offer or solicitation. Neither
delivery of this Prospectus nor any sale
made hereunder shall, under any
circumstances, create an implication
that there has been no change in the
affairs of the Company since the date
hereof.
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUMMARY................. 3
THE COMPANY........................ 3
THE OFFERING....................... 4
SUMMARY CONSOLIDATED FINANCIAL
DATA............................. 5
RISK FACTORS....................... 7
USE OF PROCEEDS.................... 11
DILUTION........................... 12
MARKET INFORMATION................. 13
PRICE RANGE OF COMMON STOCK........ 13
DIVIDEND POLICY.................... 13
CAPITALIZATION..................... 14
SELECTED CONSOLIDATED FINANCIAL
DATA............................. 15 PROSPECTUS
UNAUDITED PRO-FORMA FINANCIAL
INFORMATION...................... 16 GILFORD SECURITIES, INCORPORATED
PRO-FORMA CONSOLIDATED STATEMENT
OF OPERATIONS.................... 18
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........ 19
SUMMARY COMBINED PRO-FORMA
RESULTS OF OPERATIONS............ 22
BUSINESS........................... 25
MANAGEMENT......................... 34
PRINCIPAL SHAREHOLDERS............. 40
SELLING SHAREHOLDERS............... 41
CERTAIN RELATIONSHIPS AND RELATED
PARTY TRANSACTIONS............. 42
DESCRIPTION OF CAPITAL STOCK....... 43
ANTI-TAKEOVER EFFECTS OF THE
COMPANY'S ARTICLES AND BYLAWS.... 44
SHARES ELIGIBLE FOR FUTURE SALE.... 46
UNDERWRITING AND PLAN OF
DISTRIBUTION..................... 46
EXPERTS............................ 47
LEGAL MATTERS...................... 48
ADDITIONAL INFORMATION............. 48
FINANCIAL STATEMENTS............... 48 _____________, 1996
<PAGE>
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission initial registration fee $ 17,000 <F1>
Legal fees and expenses 200,000 <F1>
NASD filing fee 10,000 <F1>
Nasdaq additional listing fee 10,000 <F1>
Accounting fees and expenses 100,000 <F1>
Transfer agent fees 5,000 <F1>
Printing and engraving expenses 25,000 <F1>
Miscellaneous 133,000 <F1>
--------------
Total 500,000
<FN>
<F1>
Estimated
</FN>
</TABLE>
Item 14. Indemnification of Directors and Officers
The law of North Carolina permits extensive indemnification of present and
former directors, officers, employees or agents of a North Carolina company,
whether or not authority for such indemnification is contained in the
indemnifying company's articles of incorporation or bylaws. Specific authority
for indemnification of present and former directors and officers, under certain
circumstances, is contained in Section 12 of the Company's Bylaws. Under North
Carolina law, for a company to provide indemnification, the company must find
that the director, officer, employee or agent conducted himself in good faith
and in a manner he reasonably believed, in the case of conduct in his official
capacity with the company, was in the best interests of the company and, in all
other cases, was at least not opposed to the company's best interests, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. Statutory indemnification is permissive,
except in the event of a successful defense, in which case, unless limited by
the Articles of Incorporation, when a director, officer, employee or agent must
be indemnified against reasonable expenses incurred by him in connection
therewith. Indemnification is permitted with respect to expenses, judgments,
fines, and amounts paid in settlement by such persons.
The Company's Bylaws provide that the Company may indemnify any person who
was or is a party or is threatened to be made a party to any threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (other than an action by or in the right of
the Company), by reason of the fact that he is or was a director, officer,
employee, fiduciary or agent of the Company or is or was serving at the request
of the Company as a director, officer, employee, fiduciary or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines, and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit, or proceeding if he acted in good faith and in a manner he
reasonably believed to be in the best interests of the Company and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
The Company's Bylaws also provide that a corporation may indemnify any
director or officer of the Company who was or is a party or is threatened to be
made a party to any proceeding by or in the right of the Company to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee, or agent of the Company, or is or was serving at the request
of the Company as a director, officer, employee, fiduciary or agent of another
corporation or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action if he acted in good faith and in a manner he
reasonably believed to be in the best interests of the Company. No
indemnification shall be made in respect of any claim or matter as to which
such person has been adjudged to be liable for negligence or misconduct in the
performance of his duty to the Company unless and only to the extent that the
court in which the action is brought determines that in view of all
circumstances such person is fairly and reasonably entitled to indemnification
for expenses which the court deems proper.
The Company's Bylaws also provide that an authorized representative of the
Company who neither was or is a director or officer of the Company may, to the
extent that he is successful on the merits and defense of any action, be
indemnified against expenses (including attorneys' fees) actually and
reasonably incurred in connection therewith. A determination of whether
indemnification is proper shall be made by the Board of Directors by a majority
vote of a quorum consisting of disinterested directors or, if such a quorum is
not obtainable or even if obtainable a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or by the
shareholders. The Company may advance expenses (including attorneys' fees)
upon receipt of an undertaking by or on behalf of an authorized representative
to repay such amount unless it is determined that he is entitled to be
indemnified.
<PAGE>
Item 15. Recent Sales of Unregistered Securities
Since December 28, 1995, the Registrant has sold the following unregistered
securities:
1. On December 29, 1995, the Company completed a private offering under
Regulation D of 1,100,000 shares of stock at $2.50 per share to accredited
investors. Net proceeds to the Company after commissions and expenses from the
offering were $2,430,601. Commissions totaling $153,200 were paid to ACAP
Financial and H.D. Brouse & Co. In addition, ACAP Financial and H.D. Brouse &
Co. were granted a total of 61,280 stock warrants at $2.50/share which expire
in July, 1996. The warrants were exercised in full.
2. On January 24, 1996, the Company completed a private offering under
Regulation D of 500,000 shares of its common stock to accredited investors at
$2.50 per share. The Company received $1,082,319 in net proceeds from the
offering. In connection with this offering, the Company paid $87,500 in
commissions to ACAP Financial and granted to ACAP Financial 35,000 stock
warrants at $2.50 per share, which expire in July 24, 1996. The warrants were
exercised in full.
3. On June 3, 1996, the Company completed a private offering under
Regulation D of 1,537,315 shares of its common stock to accredited investors at
$5.00 per share. The Company received $7,339,573 in net proceeds from the
offering. In connection with this offering, the Company paid $188,560 in
commissions to ACAP Financial and granted 37,712 stock warrants at $5.00 per
share, which expire in December, 1996.
4. In September 1996, the Registrant sold 855,445 shares of the
Registrant's Common Stock to certain accredited investors under Regulation D of
the Securities Act of 1933. The aggregate purchase price for such shares was
$7,699,005.
5. On September 18, 1996, the Registrant issued $2,500,000 aggregate
principal amount of Series A Convertible Subordinated Debentures pursuant to
Regulation D of the Securities Act of 1933 to certain unrelated investors. As
part of this transaction, the investors also acquired warrants to purchase 100
shares of the Registrant's Common Stock for each $10,000 of Debentures
acquired. The warrants will be exercisable at a price equal to the fair market
value of the Registrant's Common Stock on the date of issuance. Net proceeds
to the Company were $2,500,000.
6. On September 19, 1996, the Registrant issued an aggregate $4,000,000
principal amount 10% convertible notes pursuant to Regulation S of the
Securities Act of 1933 to certain unrelated offshore investors. Such notes are
convertible at any time commencing forty-one (41) days after issuance into
shares of the Registrant's Common Stock at a conversion price equal to the
lower of (i) eighty-two percent (82%) of the average closing bid price for the
seven (7) trading days immediately preceding the conversion date, or (ii)
$9.00; provided, that in no event shall the conversion price be less than
$5.00; provided further, that in no event shall the holder of the 10%
convertible notes be entitled to convert any portion of such notes if such
action would result in beneficial ownership by a holder and its affiliates of
more than 4.9% of the outstanding shares of Common Stock of the Company. If
the average closing bid price of the Company's Common Stock over any continuous
seven trading day period is less than $7.38 per share, the Company may redeem
the convertible notes at a price equal to 115% of the outstanding principal
amount of the notes. As part of this transaction, the investors also shall
acquire, on the date of the conversion of such notes into Common Stock, the
right to receive warrants equal to ten percent (10%) of the number of common
shares issued at any such conversion. Net proceeds to the Company after
commissions of $280,000 were $3,720,000.
In connection with the transactions described in Items 4-6 above, the
Company paid $1,801,660 in Finders fees.
<PAGE>
Item 16. List of Exhibits and Financial Statement Schedules
Exhibit No. Description
----------- -----------
1 Underwriting Agreement (to be filed as an Exhibit)
3.1 Articles of Incorporation of 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-K
dated March 8, 1996, incorporated herein by reference
4 Registration Rights Agreement (to be filed as an Exhibit)
5.1 Opinion of Snell & Wilmer
10.1 Agreement and Plan of Merger between Elite Acquisitions and
Flanders Filters, Inc., filed with the December 31, 1995
Form 10-K, incorporated herein by reference
10.2 Stock Purchase Agreement between Flanders Corporation and
the Shareholders of Charcoal Service Corporation, filed
with May 31, 1996 Form 8-K, incorporated herein by
reference
10.3 Stock Purchase Agreement between Flanders Corporation and
the Shareholders of Air Seal Filter Housings, Inc.
10.4 Stock Purchase Agreement between Flanders Corporation and
the Shareholders of Precisionaire, Inc., filed with the
Form 8-K dated September 23, 1996, incorporated herein by
reference
10.5 Employment Agreement between Elite Acquisitions, Inc.,
Flanders Filters, Inc., and Steven K. Clark, filed with the
Form 10-K dated December 31, 1995, incorporated herein by
reference
10.6 Stock Option Agreement from Elite Acquisitions, Inc. to
Steven K. Clark, filed with the Form 10-K dated December
31, 1995, incorporated herein by reference
10.7 Employment Agreement between Elite Acquisitions, Inc.,
Flanders Filters, Inc. and Robert R. Amerson, filed with
the Form 10-K dated December 31, 1995, incorporated herein
by reference
10.8 Stock Option Agreement between Elite Acquisitions, Inc. and
Robert R. Amerson, filed with the Form 10-K dated December
31, 1995, incorporated herein by reference
10.9 Stock Option Agreement from Elite Acquisitions, Inc. to
Thomas T. Allan, filed with the Form 10-K dated December
31, 1995, incorporated herein by reference
10.10 Stock Option Agreement between Elite Acquisitions, Inc. and
William M. Claytor, filed with the Form 10-K dated December
31, 1995, incorporated herein by reference
10.11 Employment Agreement between Flanders Corporation,
Precisionaire, Inc. and Gustavo Hernandez
10.12 Indemnification Agreement between Flanders Corporation,
Steven K. Clark, Robert Amerson and Thomas Allan, filed
with the December 31, 1995 Form 10-K, incorporated herein
by reference
10.13 Amendment to Employment Agreement between Elite
Acquisitions, Inc., Flanders Filters, Inc. and Steven K.
Clark
10.14 Amendment to Employment Agreement between Elite
Acquisitions, Inc., Flanders Filters, Inc. and Robert R.
Amerson
16 Change in Certifying Accountant, filed with Form 8-K dated
January 29, 1996, incorporated herein by reference
21.1 Subsidiaries of the registrant
23.1 Consent of McGladrey & Pullen, LLP
23.2 Consent of Arthur Anderson
23.3 Consent of Snell & Wilmer (included in Opinion filed as
Exhibit No. 5.1)
24 Power of Attorney
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement: (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act of
1933; (ii) to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement;
(iii) to
<PAGE>
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change in
such information in the registration statement; provided, however, that
paragraph (l)(i) and (l)(ii) of this section do not apply if the registration
statement is on Form S-3, Form S-8, or Form F-3, and the information required to
be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed with or furnished to the Commission by the registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification by the Company of liabilities arising under the
Act may be permitted to directors, officers, and controlling persons of the
Company pursuant to the foregoing provisions or otherwise, the Company has been
advised that, in the opinion of the Commission, such indemnification is against
public policy as expressed in the Act and is therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer, or
controlling person of the Company in the successful defense of any action,
suit, or proceeding) it is asserted by such director, officer, or controlling
person in connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Washington, State of North Carolina, on the ____ day of October, 1996.
FLANDERS CORPORATION
BY:
/s/ Robert R. Amerson
________________________
President, Chief Executive Officer
Each person whose signature appears below on this Registration
Statement hereby constitutes and appoints Robert R. Amerson and Steven K.
Clark, and each of them, his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution for him or her and in his or her
name, place, and stead, in any and all capacities (until revoked in writing) to
sign any and all amendments (including post-effective amendments and amendments
thereto) to this Registration Statement on Form S-1 of Flanders Corporation and
to so file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite or necessary
to be done in and about the premises, as fully to all intents and purposes, as
he might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either of them, or their or his substitute or
substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ Robert R. Amerson
________________________ President, 10/21/96
________________________ Chief Executive Officer ____________
/s/ Steven K. Clark
________________________ Chief Financial Officer and 10/21/96
________________________ Chief Accounting Officer ____________
/s/ Thomas T. Allan
________________________ Director 10/21/96
________________________ ____________
/s/ Gustavo Hernandez
________________________ Director 10/21/96
________________________ ____________
/s/ William M. Claytor
________________________ Director 10/21/96
________________________ ____________
/s/ William H. Clark
________________________ Director 10/21/96
________________________ ____________
EXHIBIT 5.1
OPINION OF SNELL & WILMER
<PAGE>
Snell & Wilmer SALT LAKE CITY, UTAH
Law Offices
---------------- PHOENIX, ARIZONA
111 East Broadway, Suite 900 TUCSON, ARIZONA
Broadway Center
Salt Lake City, Utah 84111 IRVINE, CALIFORNIA
(801) 237-1900
Fax: (801) 237-1950
October 21, 1996
FLANDERS CORPORATION
531 Flanders Filters Road
Washington, NC 27889
Ladies and Gentlemen:
Reference is made to your proposed registration and offering of up to
1,600,000 shares of Common Stock of Flanders Corporation, as contemplated by the
Prospectus contained in the Registration Statement (the "Registration
Statement") on Form S-1 to be filed by you on October 21, 1996, with the
Securities and Exchange Commission under the Securities Act of 1933, as amended.
We have examined originals or copies, certified or otherwise identified to
our satisfaction, of such corporate records, agreements, and other instruments,
certificates, orders, opinions, correspondence with public officials,
certificates provided by your officers and representatives, and other documents,
as we have deemed necessary or advisable for the purpose of rendering the
opinions set forth herein.
Based on the foregoing, and without further inquiry, it is our opinion that
the 1,600,000 shares of Common Stock described in the Registration Statement
will be validly issued, fully paid and non-assessable at the time of issuance.
Consent is hereby given to the use of this opinion as part of the
Registration Statement referred to above and to the use of our name wherever it
appears in said Registration Statement and the related Prospectus.
Very truly yours,
/s/ William. C. Gibbs
SNELL & WILMER L.L.P.
STOCK PURCHASE AGREEMENT
BY AND BETWEEN
FLANDERS CORPORATION
a North Carolina corporation,
AND
THE SHAREHOLDERS OF
AIR SEAL FILTER HOUSINGS, INC.,
a Texas corporation
June 13, 1996
<PAGE>
TABLE OF CONTENTS
SECTION PAGE
1. Purchase of Air Seal Shares........................................... 1
(a) Purchase....................................................... 1
(b) Cash Payment................................................... 1
(c) Issuance and Escrow of Adair-Flanders Shares................... 1
2. Delivery.............................................................. 2
(a) Delivery of the Air Seal Shares, the Adair-Flanders............
Shares, and the Cash Payment................................... 2
(b) Liabilities.................................................... 2
3. Representations and Warranties of the Seller.......................... 2
(a) Ownership of Air Seal Shares................................... 2
(b) Authority...................................................... 2
(c) Compliance with Law............................................ 3
(d) No Litigation.................................................. 3
(e) Solvency....................................................... 3
(f) Securities Laws Compliance..................................... 3
(g) Accuracy of Information Furnished.............................. 4
4. Representations and Warranties Concerning Air Seal.................... 4
(a) Organization, Standing and Qualification....................... 4
(b) Capitalization................................................. 5
(c) Subsidiaries................................................... 5
(d) Stock Transfer Books........................................... 5
(e) Corporate Records.............................................. 5
(f) No Defaults.................................................... 5
(g) No Conflict.................................................... 5
(h) Consents and Approvals......................................... 5
(i) Related-Party Transactions..................................... 6
(j) Safety Laws.................................................... 6
(k) Environmental Compliance....................................... 6
(l) Compliance With Law............................................ 8
(m) Financial Statements........................................... 8
(n) Properties and Assets.......................................... 8
(o) Equipment Leases............................................... 9
(p) Inventory...................................................... 9
(q) Intellectual Property.......................................... 9
(r) Material Contracts............................................. 9
(s) No Undisclosed Liabilities..................................... 10
(t) Litigation..................................................... 10
(u) Taxes.......................................................... 10
i
<PAGE>
(v) Employment Contracts........................................... 10
(w) Air Seal Personnel Matters..................................... 10
(x) Employee Restrictions.......................................... 11
(y) Labor Matters.................................................. 11
(z) Employee Benefit Plans......................................... 11
(aa) No Adverse Change.............................................. 12
(ab) Discrimination................................................. 12
(ac) Disputes and Charges........................................... 13
5. Representations, Warranties and Agreements of Buyer................... 13
(a) Organization, Standing and Qualification....................... 13
(b) Authority...................................................... 13
(c) Compliance with Law............................................ 13
(d) Shares Purchased for Investment................................ 13
(e) Shares in Escrow............................................... 13
(f) Cash Payment................................................... 13
(g) Employment Contracts and Options............................... 14
(h) Consents and Approvals......................................... 14
6. The Closing........................................................... 14
7. Conditions of Buyer's and Seller's Performance........................ 14
(a) Buyer's Conditions............................................. 14
(b) Seller's Conditions............................................ 16
8. Indemnification 17
(a) General Indemnification Obligation of Charles Adair............ 17
(b) General Indemnification Obligation of Buyer.................... 18
(c) Limitation of Indemnity........................................ 18
(d) Method of Asserting Claims, Etc................................ 18
(e) Payment........................................................ 20
(f) Arbitration.................................................... 20
(g) Other Rights and Remedies Not Affected......................... 20
9. Non-Disclosure Covenants.............................................. 21
(a) Proprietary Information........................................ 21
(b) Publicity...................................................... 21
10. Other Matters......................................................... 21
(a) No Share Purchases............................................. 21
(b) Director Appointment........................................... 21
(c) Further Actions................................................ 21
(d) Separate Subsidiary............................................ 22
(e) Building Capacity and Equipment................................ 22
ii
<PAGE>
11. Termination and Amendment............................................. 22
(a) Pre-Closing.................................................... 22
(b) Waiver......................................................... 23
12. Miscellaneous......................................................... 23
(a) Attorneys' Fees................................................ 23
(b) Brokers and Finders............................................ 23
(c) Expenses....................................................... 23
(d) Survival....................................................... 23
(e) Severability................................................... 23
(f) Notices........................................................ 23
(g) Entire Agreement............................................... 24
(h) Counterparts................................................... 25
(i) Binding Effect................................................. 25
(j) Governing Law.................................................. 25
Signatures............................................................ 25
iii
<PAGE>
EXHIBITS
A. Shareholder Ownership
B. Description of Real Estate Conveyed by Seller to Air Seal
C. Adair-Flanders Shares Escrow Agreement
D. Registration Rights Agreement
SCHEDULES
4(i) Related-Party Transactions
4(m) Financial Statements - Air Seal
4(r) Contracts Matters
4(s) Job Completion
4(aa)(v) Distributions
4(w) Personnel at Closing - Air Seal
4(z) Employee Benefit Plans - Air Seal
5(g) Employment Contract With Wes Adair
7(a)(ix) Form of Seller's Closing Certificate
7(a)(x) Form of Legal Opinion - Seller
7(b)(iii) Buyer Closing Certificate
7(b)(ix) Form of Legal Opinion - Buyer
iv
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT ("Agreement") is executed as of this 17th day
of June, 1996 by and between FLANDERS CORPORATION, a North Carolina corporation
("Buyer" or "Flanders"), and CHARLES ADAIR and WES ADAIR (collectively,
"Seller"), who are all of the shareholders of Air Seal Filter Housings, Inc., a
Texas corporation ("Air Seal"), as described on Exhibit A.
R E C I T A L S
WHEREAS, Buyer is a publicly-held North Carolina corporation which is in
the business of, among other things, designing, manufacturing and selling high
performance filter systems; and
WHEREAS, Air Seal is a privately-held Texas corporation which is in the
business of designing, manufacturing and selling filter housings; and
WHEREAS, the parties intend by this Agreement to provide for the acquisition
by Buyer of all the issued and outstanding capital stock of Air Seal, as well as
the land and buildings where Air Seal is currently located, in exchange for:
Two million two hundred fifty-five thousand dollars ($2,255,000) to be received
by Charles Adair; and up to 150,000 shares of Flanders' common stock (the
"Adair-Flanders Shares") to be granted to Wes Adair pursuant to the terms
hereof.
NOW, THEREFORE, in consideration of the mutual covenants and obligations
set forth herein, it is agreed as follows:
1. Purchase of Air Seal Shares.
(a) Purchase. Subject to the terms and conditions contained herein,
Buyer agrees to purchase from Seller, and Seller agrees to sell to Buyer,
for the consideration set forth below, one hundred percent (100%) of Air
Seal's issued and outstanding shares of common stock (the "Air Seal
Shares"), as well as the land and buildings located at 1112 Staffordshire
Road, Stafford, Texas 77477 (the "Real Property"), as more particularly
described on Exhibit B.
(b) Cash Payment. In consideration for the Air Seal Shares and the
Real Property, Buyer shall pay to Charles Adair at Closing the amount of
two million two hundred fifty-five thousand dollars ($2,255,000)
(hereinafter referred to as the "Cash Payment").
(c) Issuance and Escrow of Adair-Flanders Shares. In addition to
the Cash Payment, Buyer shall place the Adair-Flanders Shares into escrow at
Closing. The Adair-Flanders Shares shall be held in escrow and shall be
released to Wes Adair over a three year period (five, if necessary) if Air
Seal meets certain performance objectives
1
<PAGE>
as set forth in the escrow agreement attached as Exhibit C ("Adair-Flanders
Shares Escrow Agreement"). Wes Adair will be granted registration rights, per
the registration rights agreement attached as Exhibit D ("Registration Rights
Agreement"), with respect to the Adair-Flanders Shares. Shelton Jones shall act
as Escrow Agent under such Agreement.
2. Delivery.
(a) Delivery of the Air Seal Shares, the Adair-Flanders Shares, and
the Cash Payment. At Closing (i) Seller shall deliver to Buyer
certificates evidencing the Air Seal Shares owned by Seller immediately
prior to Closing, endorsed in blank, together with duly executed and
medallion guaranteed stock powers and otherwise in proper form for
transfer, and (ii) Buyer shall deliver to the Escrow Agent certificates
representing the Adair-Flanders Shares, in the name of Wes Adair, and Wes
Adair shall concurrently deliver to the Escrow Agent the related duly
executed and medallion guaranteed stock powers. Buyer shall not be
obligated to purchase any of the Air Seal Shares unless ALL such shares are
delivered at Closing. Also at Closing, Buyer shall deliver to Seller both
the executed Adair-Flanders Share Escrow Agreement and the executed
Registration Rights Agreement. Finally, at Closing, Buyer shall deliver to
Seller the amount of two million two hundred fifty-five thousand dollars
($2,255,000) in the form of a cashiers check or by wire transfer to the
Seller's bank accounts as Seller shall direct.
(b) Liabilities. All shareholder notes payable or other amounts
owed by Air Seal to Seller shall be canceled prior to or at Closing.
3. Representations and Warranties of the Seller. Seller represents and
warrants to Buyer that the following statements are true, correct and complete
as of the date hereof:
(a) Ownership of Air Seal Shares. Seller owns, beneficially and of
record, one hundred percent (100%) of the issued and outstanding Air Seal
Shares, free and clear of any lien, security interest, pledge, claim,
demand, encumbrance or restriction of any kind or character whatsoever, and
the Air Seal Shares represent all of the issued and outstanding shares of
capital stock and equity securities of Air Seal. All such Air Seal Shares
are duly authorized, validly issued, fully paid and nonassessable and have,
in the hands of the Seller, and will have in the hands of Buyer, all the
rights, privileges and preferences ordinarily accorded to owners of Air
Seal's common stock.
(b) Authority. Seller now has and will have, at the Closing, full
power, authority and legal right to sell the Air Seal Shares to Buyer
pursuant to this Agreement. This Agreement has been duly and validly
authorized, executed and delivered by, and is the valid and binding
obligation of, Seller, subject to (i) the effect of applicable bankruptcy,
insolvency, reorganization, moratorium, arrangement, preference, fraudulent
conveyance or other similar laws and regulations now or hereafter in effect
relating to or limiting creditors' rights generally or the enforcement of
specific rights provided for in agreements, (ii) general principles of
equity and/or the discretion of the court governing or limiting the
availability of specific performance, injunctive relief and other
2
<PAGE>
equitable remedies (regardless of whether such enforceability is considered in a
proceeding in equity or at law), and (iii) the application of principles of
public policy underlying any such laws and regulations.
(c) Compliance with Law. The consummation of the transactions
contemplated hereby will be in compliance with all applicable laws, rules,
regulations and requirements of all Federal, state and local governmental
authorities without the necessity for any license or permit or other action
or permission in the nature thereof, or any registration with, or consent
of, any such governmental authority.
(d) No Litigation. There are no suits or proceedings at law or in
equity, or before or by any governmental agency or arbitrator, pending, or
to Seller's knowledge, threatened, anticipated or contemplated, which in
any way affect the consummation of the transactions contemplated hereby or,
if valid, would constitute or result in a breach of any representation,
warranty or agreement of the Seller set forth herein.
(e) Solvency. Seller is not bankrupt or insolvent. Additionally,
Seller has not assigned Seller's estate for the benefit of creditors or
entered into any arrangements with creditors. Furthermore, Seller does not
have any present intention to file a petition in bankruptcy, to assign
Seller's estate for the benefit of creditors, or to enter into any
arrangements with creditors. Seller has no knowledge of any basis for the
filing by any other person of an involuntary petition in bankruptcy with
respect to Seller or Air Seal.
(f) Securities Laws Compliance.
(i) Seller has been represented by such legal and tax counsel
and others, each of whom has been personally selected by Seller, as Seller
has found necessary to consult concerning this transaction, and such
representation has included an examination of applicable documents,
and an analysis of all tax, financial, and securities law aspects.
Seller, his counsel and advisors, and such other persons with whom
Seller has found it necessary to consult, have sufficient knowledge
and experience in business and financial matters to evaluate the above
information, and the merits and risks of the transactions contemplated
by this Agreement, and to make an informed investment decision with
respect thereto;
(ii) Seller has had, prior to the date hereof, the opportunity
to ask questions of, and to receive answers from, Buyer and its
representatives, concerning the terms and conditions of the
acquisition of the Adair-Flanders Shares and access to obtain any
information, documents, financial statements, records and books (A)
relative to Buyer, Buyer's business and an investment in Buyer, and
(B) necessary to verify the accuracy of any information furnished to
Seller. All materials and information requested by Seller, his
counsel and advisors, or others representing Seller, including any
information requested to verify any information furnished to Seller,
have been made available and examined.
3
<PAGE>
(iii) Seller has had, prior to the date hereof, the opportunity
to review all of Buyer's reports filed with the Securities and
Exchange Commission, including, but not limited to, Buyer's Form 10-K
for December 31, 1995, and Form 10-Q for March 31, 1996.
(iv) Seller is acquiring the shares for Seller's own account and
not as a fiduciary for any other person and for investment purposes
only and not with a view to or for the transfer, assignment, resale,
or distribution thereof, in whole or in part. Seller understands the
meaning and legal consequences of the representations and warranties
contained in this paragraph. Seller is not an "underwriter" of the
securities, as that term is defined in Section 2(11) of the Securities
Act of 1933 ("Securities Act"), and Seller will not take or cause to
be taken any action that would cause Seller or Buyer to be deemed an
"underwriter" of the securities.
(v) Seller understands that the Adair-Flanders Shares have not
been registered under the Securities Act nor pursuant to the
provisions of the securities or other laws of any applicable
jurisdictions. Seller further understands that the Adair-Flanders
Shares cannot be sold, assigned, pledged, transformed or otherwise
disposed of unless such shares are registered or an exemption from
registration is available, and that the Adair-Flanders Shares will
bear a restrictive legend to that effect.
(g) Accuracy of Information Furnished. Seller has not made any
material misstatement of fact or omitted to state any material fact
necessary or desirable to make complete, accurate and not misleading the
representations, warranties and agreements set forth herein, or in any
Exhibit hereto or certificate or other document furnished in connection
herewith.
4. Representations and Warranties Concerning Air Seal. Seller
represents and warrants to Buyer that the following statements concerning the
affairs of Air Seal are true, correct and complete as of the date hereof:
(a) Organization, Standing and Qualification. Air Seal is duly
organized, validly existing and in good standing under the laws of the
State of Texas and is authorized and qualified to own and operate its
properties and assets and conduct its business in all jurisdictions where
such properties and assets are owned and operated and such business
conducted. Air Seal has duly filed any and all certificates and reports
required to be filed to date by the laws of Texas and any other applicable
law. Air Seal has all franchises, permits, licenses, and any similar
authority necessary for the conduct of its business as now being conducted
by it, the lack of which could materially adversely affect the business,
properties, prospects, or its financial condition. Air Seal is not in
default in any material respect under any of such franchises, permits,
licenses or other similar authority.
4
<PAGE>
(b) Capitalization. As of the date of Closing, the authorized
capital stock of Air Seal consists of 1,000,000 shares of common stock, par
value $1.00 per share, of which 10,000 shares are issued and outstanding.
All of the outstanding shares of common stock of Air Seal were issued to
Seller, and when issued, were duly authorized and validly issued and are
fully paid and nonassessable. Air Seal has no treasury shares, outstanding
subscriptions, options, warrants, calls, contracts, demands, commitments,
convertible securities or other rights, agreements or arrangements of any
character or nature whatsoever relating to the issuance of common stock or
other securities of Air Seal. No holder of any security of Air Seal is
entitled to any preemptive or similar rights to purchase any securities of
Air Seal.
(c) Subsidiaries. Air Seal has no subsidiaries and no other
investment in any entity. Air Seal is not a participant in any joint
venture, partnership or other similar arrangement.
(d) Stock Transfer Books. Air Seal's stock transfer books and stock
ledgers are in good order, complete, accurate and up to date, and they
include all necessary signatures, and set forth all stock and securities
issued, transferred and surrendered. No duplicate certificate has been
issued at any time heretofore. No transfer has been made without surrender
of the proper certificate duly endorsed. All certificates so surrendered
have been duly canceled and are attached to the proper stubs with all
necessary stock powers attached thereto.
(e) Corporate Records. Air Seal's minute books and other corporate
record books are in good order, complete, accurate, up to date, and they
include all necessary signatures and set forth all meetings and actions
taken by the stockholders and directors, including all actions set forth in
all certificates of votes of stockholders or directors furnished to anyone
at any time. The copies of Air Seal's Articles of Incorporation and Bylaws
which have been delivered to Buyer are complete and correct, as amended, to
the date of execution of this Agreement.
(f) No Defaults. Air Seal is not in default under or in violation
of any provisions of its Articles of Incorporation or Bylaws or any
restriction, lien, encumbrance, indenture, contract, lease, sublease, loan
agreement, note or other obligation or liability relating to Air Seal's
business.
(g) No Conflict. Neither the execution and delivery of this
Agreement nor consummation of the transactions contemplated hereby will
conflict with or result in a breach of or constitute a default under (1)
any provision of Air Seal's Articles of Incorporation or Bylaws, (2) any
law, rule, regulation, judgment, decree, order or other such requirement,
or (3) any material restriction, lien, encumbrance, indenture, contract,
lease, sublease, loan agreement, note or other material obligation or
liability to which Air Seal is a party or by which it is bound, or to which
any of its assets are subject.
(h) Consents and Approvals. The execution, delivery and performance
of this Agreement by Seller and the consummation of the transactions
contemplated hereby do
5
<PAGE>
not require Air Seal or Seller to obtain any consent, approval or action of, or
make any filing with or give notice to any corporation, person or firm or any
public, governmental or judicial authority except: (i) such as have been duly
obtained or made, as the case may be, and are in full force and effect on the
date hereof, (ii) those which the failure to obtain or make would have no
material adverse effect on the transactions contemplated hereby or on Air Seal's
business or financial condition, and (iii) any filings required under the
Securities Act, or any applicable state securities laws.
(i) Related-Party Transactions. Except as set forth in Schedule
4(i), no employee, officer, or director of Air Seal or member of his or her
immediate family is indebted to Air Seal, nor is Air Seal indebted (or
committed to make loans or extend or guarantee credit) to any such
individuals. To the best of Seller's knowledge, and except as set forth on
Schedule 4(i), none of such individuals has any direct or indirect
ownership interest in any firm or corporation with which Air Seal is
affiliated or with which Air Seal has a business relationship, or any firm
or corporation that competes with Air Seal, except that employees,
officers, or directors of Air Seal and members of their immediate families
may own stock in publicly traded companies that may compete with Air Seal.
No member of the immediate family of any officer or director of Air Seal
is directly or indirectly interested in any material contract with Air
Seal.
(j) Safety Laws. Air Seal is not in violation of any applicable
statute, law or regulation relating to occupational health and safety
(including, but not limited to OSHA and any similar state laws), and to the
best of Seller's knowledge, no material expenditures are or will be
required to comply with any such existing statute, law or regulation.
(k) Environmental Compliance.
(i) Definitions. As used in this Agreement:
(A) "Environmental Law" means any federal, state or local
law, statute, ordinance, or regulation pertaining to health,
industrial hygiene, or environmental conditions, including,
without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, 42 U.S.C. '' 9601, et
seq.; the Resource Conservation and Recovery Act of 1976, 42
U.S.C. '' 6901, et seq.; the Toxic Substances Control Act of
1976, 15 U.S.C. '' 2601, et seq.; the Superfund Amendments and
Reauthorization Act of 1986, Title III, 42 U.S.C. '' 11001, et
seq.; the Hazardous Materials Transportation Act, 49 U.S.C.
'' 1801, et seq.; the Clean Air Act, 42 U.S.C. '' 7401, et seq.;
the Federal Water Pollution Control Act, 33 U.S.C. '' 1251, et
seq.; the Safe Drinking Water Act, 42 U.S.C. '' 300f, et seq.;
the Solid Waste Disposal Act, 42 U.S.C. '' 3251, et seq.; and any
other federal, state or local law, statute, ordinance, or
regulation now in effect or hereafter enacted which pertains to
health, industrial hygiene, or the regulation or
6
<PAGE>
protection of the environment, including, without limitation, ambient air, soil,
groundwater, surface water, and/or land use.
(B) "Hazardous Substance" means any material, waste,
substance, pollutant, or contaminant which may or could pose a
risk of injury or threat to health of the environment, including,
without limitation:
(1) Those substances included within the definitions of
"hazardous substance," "hazardous waste," "hazardous
material," "toxic substance," "solid waste," or "pollutant
or contaminant" in, or otherwise regulated by any
Environmental Law;
(2) Those substances listed in the United States
Department of Transportation Hazardous Materials Table (49
CFR 172.101, including appendices and amendments thereto),
or by the Environmental Protection Agency (or any successor
agency) as hazardous substances (40 CFR Part 302 and
amendments thereto);
(3) Such other substances, materials, or wastes which
are or become regulated or classified as hazardous or toxic
under federal, state, or local laws or regulations; and
(4) Any material, waste, or substance which is I)
petroleum or refined petroleum products; ii) asbestos in any
form; iii) polychlorinated biphenyls; iv) flammable
explosives; v) radioactive materials; or vi) radon.
Any reference in this paragraph to statutory or regulatory sections
shall be deemed to include any amendments thereto and any
successor sections.
(ii) Environmental Representations.
(A) All property owned, leased or occupied by Air Seal (the
"Property") is free from, and to Seller's knowledge, has always
been free from, Hazardous Substances, and is not now, and to
Seller's knowledge, has never been in violation of any
Environmental Law. Air Seal has not caused or allowed the use,
generation, manufacture, production, treatment, storage, release,
discharge, or disposal of any Hazardous Substances on, under, or
about the Property, and has not caused or allowed the
transportation to or from the Property of any Hazardous
Substance.
(B) There are not now, and to Seller's knowledge, have never
been, any buried or partially buried storage tanks located on the
Property.
7
<PAGE>
(C) Air Seal has received no warning, notice of violation,
administrative complaint, judicial complaint, or other formal or
informal notice alleging that conditions on the Property or
adjacent property are or have been in violation of any
Environmental Law, or informing Seller that the Property is
subject to investigation or inquiry regarding the presence of
Hazardous Substances on or about the Property, or informing
Seller of a potential violation of any Environmental Law.
(D) Air Seal is not aware of any facts or circumstances
which could give rise to a violation of any Environmental Law.
(E) No environmental lien in favor of any governmental
entity has attached to any of the Property.
(iii) Archeological Matters. There are no historical or
archeological materials or artifacts of any kind or any Indian ruins
of any kind located on the Property.
(iv) Endangered Species Act. No part of the Property is
"critical habitat" as defined in the Federal Endangered Species Act,
16 U.S.C. ''1531 et seq., as amended, or in regulations promulgated
thereunder, nor are any "endangered species" or "threatened species"
located on the Property, as defined therein.
(l) Compliance With Law. To the best of Seller's knowledge, neither
Air Seal nor any of its directors, officers, fiduciaries, agents or
employees, is in violation of any applicable law, rule, regulation or
requirement of any governmental authority in any way relating to Air Seal's
business.
(m) Financial Statements. The Financial Statements of Air Seal for
the periods ending December 31, 1991 through December 31, 1995, attached
hereto as Schedule 4(m), are correct and complete and present fairly in all
material respects the financial condition of Air Seal as of the dates
described therein, and have been prepared in accordance with Generally
Accepted Accounting Principles consistently applied. The books and records
of the Company are complete in all material respects and are in an
auditable condition such that a complete audit of Air Seal can be performed
as of the Closing without unreasonable cost or expense.
(n) Properties and Assets. The properties and assets presently
owned by Air Seal and shown on its books, include all properties and assets of
every kind, class and description, real and personal, tangible and
intangible, used in Air Seal's business and necessary to the conduct of its
business as presently conducted. Air Seal has, or will have at Closing
after transfer of the Real Property, good and indefeasible title to and
possession of all such known properties and assets, free and clear of all
liens, claims, security interests, encumbrances, restrictions and rights,
title and interests in others, and there are no existing agreements,
options or commitments or rights with, to or in any
8
<PAGE>
third party to acquire any of Air Seal's properties or assets or any interest
therein, except for those entered into in the ordinary course of business and
not materially adversely affecting Air Seal's properties, assets or rights. Air
Seal's assets on the Closing shall include all of the assets described
hereinabove or otherwise reflected on the Financial Statements, adjusted only
for inventory and other assets acquired or disposed of in the ordinary course of
business after December 31, 1995, and before the Closing Date.
(o) Equipment Leases. Air Seal does not have any equipment leases.
(p) Inventory. The inventory, as reflected on the latest Financial
Statements and as in existence at the Closing, was acquired and has been
maintained in the ordinary course of Air Seal's business practices, and is
valued at reasonable amounts based on the ordinary course of business.
None of such inventory is obsolete, unusable, damaged, or unsalable in the
ordinary course of business, except to the extent reflected on said
Financial Statements.
(q) Intellectual Property. To Seller's best knowledge, Air Seal has
full rights of use for all unregistered trademarks and service marks and
does not infringe on any third party rights, and Air Seal owns all U.S. or
foreign, inventions, franchises, discoveries, ideas, research, engineering,
methods, practices, processes, systems, formulae, designs, drawings,
products, projects, improvements, developments, know-how, and trade secrets
which are used in or necessary for the conduct of its business
(collectively the "Proprietary Rights"). All of the foregoing Proprietary
Rights that are not in the public domain stand solely in the name of Air
Seal and not in the name of any stockholder, director, officer, agent,
partner or employee or anyone else known to Seller, and none of the same
have any right, title, interest, restriction, lien or encumbrance therein,
thereon or thereto. To the best of Seller's knowledge, Air Seal's
ownership and use of the Proprietary Rights do not and will not infringe
upon, conflict with or violate in any material respect any patent,
copyright, trade secret or other lawful proprietary right of any other
party, and no claim is pending or, to the best of Seller's and Air Seal's
knowledge, threatened to the effect that the operations of Air Seal
infringe upon or conflict with the asserted rights of any other person
under any proprietary right, and there is no reasonable basis for any such
claim (whether or not pending or threatened). No claim is pending or, to
the best of Seller's knowledge, threatened to the effect that any
Proprietary Rights owned or licensed by Air Seal, or which Air Seal
otherwise has the right to use, is invalid or unenforceable by Air Seal,
and, to the best of Seller's knowledge, there is no reasonable basis for
any such claim (whether or not pending or threatened). Air Seal has not
granted or assigned to any other person or entity any right to manufacture,
have manufactured, assemble or sell the products or proposed products or to
provide the services or proposed services of Air Seal. To the best of
Seller's knowledge, all patents, copyrights, trademarks, service marks and
federal, state and foreign registrations thereof, are valid and in full
force and effect and are not subject to any taxes, maintenance fees, or
actions falling due within ninety (90) days of Closing.
(r) Material Contracts. Except as set forth in Schedule 4(r), Air
Seal does not have any material obligations, contracts, agreements, leases,
subleases, commitments
9
<PAGE>
or understandings of any kind, nature or description, oral or written, fixed or
contingent, due or to become due, existing or inchoate, other than customer
purchase orders or service contracts, all of which are either reflected in the
Financial Statements for the periods such were in effect, or which impose upon
Air Seal a liability of less than $5,000 individually or $25,000 in the
aggregate.
(s) No Undisclosed Liabilities. Except as set forth on Schedule
4(s), Air Seal does not have any material liabilities or obligations,
including, without limitation, contingent liabilities for the performance
of any obligation, except for (i) liabilities or obligations which are
disclosed or fully provided for in Air Seal's Financial Statements, (ii)
liabilities or obligations disclosed in this Agreement or in any exhibit or
schedule to this Agreement, and (iii) liabilities not in excess of $5,000
individually or $25,000 in the aggregate.
(t) Litigation. There are no suits or proceedings at law or in
equity, or before or by any governmental agency or arbitrator, pending, or
to Seller's knowledge, threatened, anticipated or contemplated, which, if
decided against Air Seal, would have a material adverse effect on its
business or financial condition, and there are no unsatisfied or
outstanding judgments, orders, decrees or stipulations which in any way
affect Air Seal or its properties or assets or to which it is or may become
a party. There are no claims against Air Seal pending, or to Seller's
knowledge threatened, anticipated, or contemplated which, if valid, would
constitute or result in a breach of any representation, warranty or
agreement set forth herein.
(u) Taxes. Air Seal is an "S Corporation" and as such Air Seal has
duly filed all federal, state, local and other tax returns and reports
required to be filed by Air Seal on or prior to the date hereof with
respect to all taxes withheld by or imposed upon Air Seal. All such
returns or reports reflect in all material respects the liability for such
taxes of Air Seal as computed therein for the periods indicated, and all
taxes shown on such returns or reports and all assessments received by Air
Seal have been paid, or fully reserved for, to the extent that such taxes
have become due. There are no waivers or agreements by Air Seal for the
extension of time for the assessment of such taxes. There are no material
questions of taxation which are, as at the date hereof, the subject of
dispute with any taxing authority. With respect to any period through the
date hereof for which tax returns have not yet been filed, or for which
taxes are not yet due or owing, Air Seal has made adequate reserves,
determined in accordance with Generally Accepted Accounting Principles, for
all liabilities for taxes as set forth in its financial statements. Air
Seal is not presently the subject of any tax audit by any taxing authority.
(v) Employment Contracts. Air Seal has no written or oral contracts
of employment with any of its shareholders, employees or sales
representatives.
(w) Air Seal Personnel Matters. As of the date of Closing, the Air
Seal employees shall only include the individuals as set forth on Schedule
4(w). All such employees are either United States citizens or have
obtained permission to reside and work within the United States, and Air
Seal's employee files have copies of all legally
10
<PAGE>
required documentation evidencing the same. With the exception of vacation
accrued since the end of the 1995 calendar year, all accrued vacation of such
employees has been taken or payment made with respect thereto prior to Closing.
Any and all severance benefits owed to terminated employees has been paid in
full by Air Seal prior to Closing.
(x) Employee Restrictions. To Seller's knowledge, no Air Seal
employee is subject to any secrecy or non-competition agreement or any
other agreement or restriction of any kind that would impede in any way the
ability of such employee to carry out fully all activities of such employee
in furtherance of Air Seal's business.
(y) Labor Matters. Air Seal is not party to nor subject to any
collective bargaining agreement, nor is any union organizing action or
certification vote pending or threatened.
(z) Employee Benefit Plans.
(i) Identification. Schedule 4(z) contains a complete and
accurate list of all employee benefit plans (the "Employee Benefit
Plans") (within the meaning of Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")) (A) sponsored by
Air Seal, (B) to which Air Seal contributes on behalf of its
employees, (C) with respect to which Air Seal participates on behalf
of its employees, or (D) previously sponsored or contributed to by Air
Seal on behalf of its employees within the three years preceding the
date hereof. Each of the Employee Benefit Plans can be terminated or
amended at will by Air Seal, with no unfunded liability to Air Seal.
No unwritten amendment exists with respect to any Employee Benefit
Plan.
(ii) Compliance. Each Employee Benefit Plan has been
administered and maintained in compliance with all Laws. No Employee
Benefit Plan is currently the subject of an audit, investigation,
enforcement action or other similar proceeding conducted by any
governmental authority. No prohibited transactions (within the
meaning of Section 4975 of the Code) have occurred with respect to any
Employee Benefit Plan. No pending or, to the knowledge of Seller,
threatened claims, suits or other proceedings exist with respect to
any Employee Benefit Plan other than normal benefit claims filed by
participants or beneficiaries.
(iii) Funding Status. No accumulated funding deficiency (within
the meaning of Section 412 of the Internal Revenue Code), whether
waived or unwaived, exists with respect to any Employee Benefit Plan.
(iv) Multi-employer Plans. Air Seal has never been obligated to
contribute to a Multi-employer plan within the meaning of Section
3(37) of ERISA.
11
<PAGE>
(v) PBGC. No facts or circumstances exist that would result in
the imposition of liability against Buyer by the Pension Benefit
Guaranty Corporation as a result of any act or omission by Air Seal.
No reportable event (within the meaning of Section 4043 of ERISA) for
which the notice requirement has not been waived has occurred with
respect to any Employee Benefit Plan subject to the requirements of
Title IV of ERISA.
(vi) Retirees. Air Seal does not have, except as may be
required by law, any obligation or commitment to provide medical, dental or
life insurance benefits to or on behalf of any of its employees who
may retire or any of its former employees who have retired from
employment with Air Seal, including those receiving disability
benefits.
(aa) No Adverse Change. Since December 31, 1995, there has not
been:
(i) any material adverse change in the properties, assets,
business, affairs, material contracts or prospects of Air Seal and, to
Seller's knowledge, no such changes currently are threatened,
anticipated or contemplated;
(ii) any actual or, to Seller's knowledge, threatened,
anticipated or contemplated damage, destruction, loss, conversion,
termination, cancellation, default or taking by eminent domain or
other action by governmental authority, which has affected or may
hereafter affect the properties, assets, business, affairs, contracts
or prospects of Air Seal;
(iii) any material and adverse dispute pending or, to Seller's
knowledge, threatened, anticipated or contemplated, of any kind with
any customer, supplier, source of financing, employee, landlord,
subtenant or licensee of Air Seal, or any pending or, to Seller's
knowledge, threatened, anticipated or contemplated occurrence or
situation of any kind, nature or description which is reasonably
likely to result in any material reduction in the amount, or any
change in the terms or conditions, of business with any substantial
customer, supplier or source of financing;
(iv) any pending or, to Seller's knowledge, threatened,
anticipated or contemplated occurrence or situation of any kind,
nature or description peculiar to Air Seal's business and materially
and adversely affecting its properties, assets, business, affairs or
prospects; or
(v) except as set forth in Schedule 4(aa)(v), any material
reduction of capital, or any redemption of stock or dividend or
distribution by Air Seal.
(bb) Discrimination. Air Seal has not received any written claim of
any unfair labor practice or illegal discrimination on the basis of race,
color, religion, gender, national origin, age or handicap in its employment
conditions or practices. To the best of Seller's knowledge, Air Seal has
not engaged in any unfair labor practice or illegal
12
<PAGE>
discrimination on the basis of race, color, religion, gender, national origin,
age or handicap in its employment conditions or practices.
(cc) Disputes and Charges. There are no existing or, to the best of
Seller's knowledge, threatened disputes, grievances, harassment charges,
controversies or other employment or labor troubles affecting Air Seal.
Air Seal's employees are not represented by a labor union, and no
organizing effort is currently in process or threatened.
5. Representations, Warranties and Agreements of Buyer. Buyer
represents and warrants to and agrees with the Seller that:
(a) Organization, Standing and Qualification. Buyer is duly
organized and validly existing and in good standing under the laws of the
State of North Carolina, and is authorized and qualified to own and operate
its properties and assets and conduct its business in all jurisdictions
where such properties and assets are owned and operated and such business
is conducted.
(b) Authority. Buyer has full right, power and authority to
execute, deliver and perform the terms of this Agreement. This Agreement has
been duly authorized by Buyer and constitutes a binding obligation of Buyer,
enforceable in accordance with its terms.
(c) Compliance with Law. Neither the execution and delivery of this
Agreement nor consummation of the transactions contemplated hereby will
conflict with or result in a breach of or constitute a default under any
provision of Buyer's Articles of Incorporation or Bylaws, any law, rule,
regulation, judgment, decree, order or other such requirement, or any
material restriction, lien, encumbrance, indenture, contract, lease,
sublease, loan agreement, note or other material obligation or liability to
which it is a party or by which it is bound, or to which its assets are
subject.
(d) Shares Purchased for Investment. Buyer is acquiring the Air
Seal Shares for its own account for investment purposes and not with a view to
or in connection with, any distribution thereof within the meaning of the
Securities Act.
(e) Shares in Escrow. The Adair-Flanders Shares held in escrow for
Wes Adair are duly authorized, validly issued, fully paid, non-assessable,
not issued in violation of the preemptive rights of any Flanders'
shareholder, identical to all other shares of Flanders' common stock, and,
in Seller's hands will have all the rights, privileges and preferences
accorded to all other holders of shares of Flanders common stock.
(f) Cash Payment. Buyer currently has or has immediate access to
sufficient funds with which to pay the Cash Payment.
13
<PAGE>
(g) Employment Contracts and Options. Buyer has full right, power
and authority to execute and deliver, and to perform its obligations under,
the employment contract attached as Schedule 5(g) hereto (the "Employment
Contract"). The Employment Contract has been duly authorized by Buyer and,
upon its execution thereof, will constitute a valid and binding obligation
of Buyer, enforceable against it in accordance with its terms, subject to
(i) the effect of applicable bankruptcy, insolvency, reorganization,
moratorium, arrangement, preference, fraudulent conveyance or other similar
laws and regulations now or hereafter in effect relating to or limiting
creditors' rights generally or the enforcement of specific rights provided
for in agreements, (ii) general principles of equity and/or the discretion
of the court governing or limiting the availability of specific
performance, injunctive relief and other equitable remedies (regardless of
whether such enforceability is considered in a proceeding in equity or at
law), and (iii) the application of principles of public policy underlying
any such laws and regulations.
(h) Consents and Approvals. The execution, delivery and performance
of this Agreement by Buyer and the consummation of the transactions
contemplated hereby do not require Buyer to obtain any consent, approval or
action of, or make any filing with or give notice to any corporation,
person or firm or any public, governmental or judicial authority except:
(i) such as have been duly obtained or made, as the case may be, and are in
full force and effect on the date hereof, or (ii) those which the failure
to obtain or make would not have a material adverse effect on the
transactions contemplated hereby or on Buyer's business.
6. The Closing. The closing of the purchase and sale of the Air Seal
Shares shall take place at Seller's offices on or before June 21, 1996, or at
such other time or place as shall be fixed by the mutual consent of the
parties. Said date of conveyance is herein called the "Closing."
7. Conditions of Buyer's and Seller's Performance.
(a) Buyer's Conditions. The obligation of Buyer to consummate this
Agreement is subject to the satisfaction at the Closing, or waiver by Buyer
in writing, of each of the following conditions:
(i) Seller shall have executed this Agreement;
(ii) Seller shall have canceled any notes payable from Air Seal
to the Seller or any other employee of Air Seal, and Buyer shall be
furnished with written evidence thereof;
(iii) Seller shall have canceled any notes payable from Seller
to Air Seal, and Buyer shall be furnished with written evidence thereof;
(iv) Seller shall have conveyed to Air Seal the Real Property;
14
<PAGE>
(v) A Phase I Environmental Survey shall have been completed on
the Real Property, at Buyer's direction and expense, showing no
liabilities for Remedial Work (or otherwise);
(vi) Buyer shall have received an executed Employment Contract
in substantially the form set forth in Schedule 5(g) from Wes Adair;
(vii) Buyer shall have received an executed Registration Rights
Agreement in substantially the form set forth in Exhibit D from Wes
Adair;
(viii) At the Closing, no governmental agency or body, or other
person or entity, shall have instituted or threatened any action to
restrain or prohibit any of the transactions contemplated by this
Agreement;
(ix) The representations and warranties of the Seller contained
in this Agreement or in any certificate or document delivered to Buyer
pursuant hereto shall be deemed to have been made again at the Closing
and shall then be true in all material respects; Seller shall have
performed and complied in all material respects with all agreements
and conditions required by this Agreement to be performed or complied
with by Seller prior to or at the Closing; Seller shall not be in
default under any of the provisions of this Agreement; and Buyer shall
have been furnished with one or more closing certificates of Seller
dated as of the Closing, in substantially the form of Schedule
7(a)(ix) certifying (A) to the fulfillment of the foregoing conditions
and the due performance of such covenants and agreements, (B) except
as set forth in Schedule 4(aa)(v), that no material change has
occurred in Air Seal's Financial Statements since December 31, 1995,
(C) that the representations and warranties set forth in this
Agreement are true and correct as of Closing, and (D) that neither Air
Seal nor Seller is a party to any litigation or has knowledge of any
claim, brought or threatened, seeking to recover damages from Air Seal
or to prevent Air Seal or Seller from continuing to use Air Seal
assets or to conduct business in the manner as the same were used or
conducted prior thereto, and which litigation or claim is likely to
result in any judgment, order, decree or settlement which will
materially and adversely affect the financial condition or business of
Air Seal;
(x) Buyer shall have received a legal opinion of Seller's
counsel in the form set forth in Schedule 7(a)(x), dated as of the Closing
date;
(xi) Buyer shall have received summaries of the accounts payable
and accounts receivable of Air Seal, dated not later than five (5)
days prior to Closing and not materially different from those dated
May 9, 1996, except for changes occurring in the ordinary course of
Air Seal's business;
(xii) Seller shall deliver to Buyer at Closing certificates of
search of the Uniform Commercial Code for filings against Air Seal in
form and substance
15
<PAGE>
satisfactory to Buyer. Such certificates shall show searches of filings with
respect to Air Seal and all names under which Air Seal has conducted its
business;
(xiii) Seller shall deliver to Buyer at Closing evidence of
title in the form of Title Insurance, at Buyer=s expense, insuring Air
Seal's interest in the Real Property under this Agreement for the
amount of the property value, subject only to this Agreement and
standard exceptions;
(xiv) All proceedings taken in connection with the transactions
contemplated herein and all instruments and documents required in
connection therewith or incident thereto shall be satisfactory in form
to Snell & Wilmer, legal counsel for Buyer.
(b) Seller's Conditions. The obligation of Seller to consummate
this Agreement is subject to the satisfaction at the Closing, or waiver by
Seller in writing, of each of the following conditions:
(i) Buyer shall have executed and delivered the Employment
Contract with Wes Adair in substantially the form set forth in
Schedule 5(g);
(ii) At the Closing date, no governmental agency or body, or other
person or entity, shall have instituted or threatened any action to
restrain or prohibit any of the transactions contemplated by this
Agreement.
(iii) Buyer shall not be in default under any of the provisions
of this Agreement; and Seller shall have been furnished with one or
more closing certificates of Buyer dated as of the Closing date, in
substantially the form of Schedule 7(b)(iii) certifying (A) to the
fulfillment of the foregoing conditions and the due performance of
such covenants and agreements, (B) that the representations and
warranties set forth in this Agreement are true and correct as of
Closing, and (C) that Buyer is not a party to any litigation and has
no knowledge of any claim, brought or threatened, seeking to prevent
Buyer from entering into this Agreement or consummating the
transactions contemplated hereby;
(iv) Buyer shall have delivered to Escrow Agent the Adair-
Flanders Shares;
(v) All proceedings taken in connection with the transactions
contemplated herein and all instruments and documents required in
connection therewith or incident thereto shall be satisfactory in form
to Seller's legal counsel;
(vi) The representations and warranties of Buyer contained in
this Agreement or in any closing certificate or document delivered to
Seller pursuant hereto shall be deemed to have been made again at the
Closing and shall then be true in all material respects; Buyer shall
have performed and complied with all
16
<PAGE>
agreements and conditions required by this Agreement to be performed or complied
with by it prior to or at the Closing;
(vii) Buyer shall have executed the Registration Rights
Agreement with Wes Adair in substantially the form set forth in Exhibit D;
(viii) Buyer shall have executed and delivered such other
documents, instruments, certificates or agreements and shall have
taken such other actions as, in the opinion of Seller's legal counsel,
shall be reasonably necessary to consummate this transaction;
(ix) Seller shall have received a legal opinion of Buyer's
counsel in the form set forth in Schedule 7(b)(ix), dated as of the
Closing;
(x) Buyer shall have executed this Agreement; and
(xi) Air Seal shall have canceled any notes or other obligations
of Seller to Air Seal.
8. Indemnification.
(a) General Indemnification Obligation of Charles Adair. From and
after the Closing, Charles Adair will indemnify and hold harmless Buyer and
its successors and assigns (an "Indemnified Buyer Party") against and in
respect of:
(i) Damages. Any and all damages, losses, deficiencies,
liabilities, costs and expenses (collectively "Damages") incurred or
suffered by the Indemnified Party that result from, relate to or arise
out of:
(A) Any and all liabilities and obligations of Air Seal of
any nature whatsoever, in existence as of the Closing, except for
those liabilities and obligations of Air Seal set forth in the
Financial Statements or schedules to this Agreement;
(B) Any and all actions, suits, claims or legal,
administrative, arbitration, governmental or other proceedings or
investigations against an Indemnified Buyer Party or Air Seal
that relate to Seller or Air Seal to the extent that the event
giving rise thereto occurred prior to the Closing or which result
from or arise out of any action or inaction prior to the Closing
of Seller, Air Seal, or any director, officer, employee, agent,
representative or subcontractor of Air Seal, except for those set
forth in the Financial Statements or schedules to this Agreement;
or
(C) Any material misrepresentation, breach of warranty or
nonfulfillment of any agreement or covenant on Seller's part
under this Agreement, or from any material misrepresentation in
or omission from
17
<PAGE>
any certificate, schedule, statement, document or instrument furnished to Buyer
pursuant hereto; and
(ii) Actions. Any and all actions, suits, claims, proceedings,
investigations, demands, assessments, fines, judgments, costs and
other expenses (including, without limitation, reasonable legal fees
and expenses) (collectively "Actions") incident to any of the
foregoing.
(b) General Indemnification Obligation of Buyer. From and after the
Closing, Buyer will reimburse, indemnify and hold harmless Charles Adair
and Charles Adair's successors and assigns (an "Indemnified Seller Party")
against and in respect of:
(i) Damages. Any and all Damages incurred or suffered by any
Indemnified Seller Party that result from, relate to or arise out of
(A) any misrepresentation, breach of warranty or non-fulfillment of
any agreement or covenant on the part of Buyer under this Agreement or
any other document delivered by Buyer pursuant to this Agreement, or
from any misrepresentation in or omission from any certificate,
schedule, statement, document or instrument furnished to Seller
pursuant hereto or thereto; and
(ii) Actions. Any and all Actions incident to any of the
foregoing or to the enforcement of this paragraph 8(b).
(c) Limitation of Indemnity. Notwithstanding any provision in this
Agreement to the contrary, neither Buyer nor Charles Adair shall be liable
to the other under this paragraph 8 for:
(i) Dollar Amounts. Damages or actions in an amount less than
$5,000 in connection with any claim hereunder relating to a single
occurrence or event, or for Damages or Actions in an aggregate amount
less than $25,000 in connection with all claims hereunder;
(ii) Failure of Notice. Any claim for which either party has
not received a Claim Notice (as defined below) from the other on or before
a date two (2) years following the Closing;
(iii) Aggregate Liability. Damages or actions in an amount in
excess of $200,000.
(iv) Insurance. Any claim hereunder to the extent such claim is
paid by any insurer.
(d) Method of Asserting Claims, Etc. In the event that any claim or
demand is asserted against or sought to be collected from an Indemnified
Purchaser Party or Indemnified Seller Party (an "Indemnified Party") by a
third party, the Indemnified Party shall promptly notify the party from
which indemnification is sought pursuant to paragraphs 8(a) or 8(b) above
(the "Indemnifying Party") of such claim or demand,
18
<PAGE>
specifying the nature of such claim or demand and the amount or the estimated
amount thereof to the extent then feasible (which estimate shall not be
conclusive of the final amount of such claim and demand) (the "Claim Notice").
The Indemnifying Party shall have twenty (20) days from the Indemnifying Party's
receipt of the Claim Notice (the "Notice Period") to notify the Indemnified
Party (i) whether or not the Indemnifying Party disputes its liability to the
Indemnified Party hereunder with respect to such claim or demand, and (ii)
notwithstanding any such dispute, whether or not the Indemnifying Party desires,
at its sole cost and expense, to defend the Indemnified Party against such claim
or demand.
(i) Dispute of Liability. If the Indemnifying Party disputes
its liability with respect to such claim or demand or the amount thereof
(whether or not the Indemnifying Party desires to defend the
Indemnified Party against such claim or demand as provided herein),
such dispute shall be resolved in accordance with paragraph 8(f)
hereof. Pending the resolution of any dispute by the Indemnifying
Party of its liability with respect to any claim or demand, such claim
or demand shall not be settled without the prior written consent of
the Indemnified Party.
(ii) Defense. In the event that the Indemnifying Party notifies
the Indemnified Party within the Notice Period that it desires to
defend the Indemnified Party against such claims or demand, then,
provided: (i) that the Indemnifying Party acknowledges that it is
liable to indemnify the Indemnified Party with respect to a particular
claim; and (ii) the Indemnifying Party has financial resources which
are reasonably adequate to pay the amount of the claim, except as
hereinafter provided, the Indemnifying Party shall have the right to
defend the Indemnified Party by appropriate proceedings, which
proceedings shall be promptly settled or prosecuted by the
Indemnifying Party to a final conclusion in such a manner as to avoid
any risk of the Indemnified Party becoming subject to liability for
any other matter. If any Indemnified Party desires to participate in,
but not control, any such defense or settlement, it may do so at its
sole cost and expense.
(iii) Defense Unsuccessful. (1) If the Indemnifying Party
elects not to defend the Indemnified Party against such claim or
demand, whether by not giving the Indemnified Party timely notice as
provided above or otherwise, then the amount of any such claim or
demand, or if the same be defended by the Indemnifying Party or by the
Indemnified Party (but no Indemnified Party shall have any obligation
to defend any such claim or demand), then that portion thereof as to
which such defense is unsuccessful, in each case shall be conclusively
deemed to be a liability of the Indemnifying Party hereunder, unless
the Indemnifying Party shall have disputed its liability to the
Indemnified Party hereunder, as provided herein, in which event such
dispute shall be resolved as provided in paragraph 8(f) hereof; (2)
In the event an Indemnified Party should have a claim against the
Indemnifying Party hereunder that does not involve a claim or demand
being asserted against or sought to be collected from it by a third
party, the Indemnified Party shall promptly send a Claim Notice with
19
<PAGE>
respect to such claim to the Indemnifying Party. If the Indemnifying Party
disputes its liability with respect to such claim or demand, such dispute shall
be resolved in accordance with paragraph 8(f) hereof; if the Indemnifying Party
does not notify the Indemnified Party within the Notice Period that it disputes
such claim, the amount of such claim shall be conclusively deemed a liability of
the Indemnifying Party hereunder.
(e) Payment. Upon determination of liability hereunder, the
appropriate party shall pay to the other, as the case may be, within twenty
(20) days after such determination, the amount of any claim for
indemnification made hereunder. Upon the payment in full of any claim
hereunder, the entity making payment shall be subrogated to the right of
the Indemnified Party against any person, firm or corporation with respect
to the subject matter of such claim.
(f) Arbitration. All disputes under this Section 8 shall be settled
by arbitration in North Carolina before a single arbitrator pursuant to the
rules of the American Arbitration Association. Arbitration may be
commenced at any time by any party hereto giving written notice to each
other party to a dispute that such dispute has been referred to arbitration
under this paragraph 8(f). The arbitrator shall be selected by the joint
agreement of Charles Adair and Buyer, but if they do not so agree within 20
days after the date of the notice referred to above, the selection shall be
made pursuant to the rules from the panels of arbitrators maintained by
such Association. Any award rendered by the arbitrator shall be conclusive
and binding upon the parties hereto; provided, however, that any such award
shall be accompanied by a written opinion of the arbitrator giving the
reasons for the award. This provision for arbitration shall be
specifically enforceable by the parties and the decision of the arbitrator
in accordance herewith shall be final and binding and there shall be no
right of appeal therefrom. Each party shall pay its own expenses of
arbitration and the expenses of the arbitrator shall be equally shared;
provided, however, that if in the opinion of the arbitrator any claim for
indemnification or any defense or objection thereto was unreasonable, the
arbitrator may assess, as part of his award, all or any part of the
arbitration expenses of the other party (including reasonable attorneys'
fees) and of the arbitrator against the party raising such unreasonable
claim, defense or objection. Nothing contained in this paragraph 8(f)
shall prevent the parties from settling any dispute by mutual agreement at
any time.
(g) Other Rights and Remedies Not Affected. The indemnification
rights of the parties under this Section 8 are independent of and in
addition to such rights and remedies as the parties may have at law or in
equity or otherwise for any misrepresentation, breach of warranty or
failure to fulfill any agreement or covenant hereunder on the part of any
party hereto, including without limitation the right to seek specific
performance, rescission or restitution, none of which rights or remedies
shall be affected or diminished hereby; provided that any recovery for a
claim for monetary damages for any breach of a representation or warranty
hereunder shall be limited to the amount of $200,000 as provided in Section
8(e)(iii) above.
(h) No Indemnification by Wes Adair. Wes Adair is providing no
indemnification under this Stock Purchase Agreement, it being understood that
this Section 8 describes the only indemnification being provided by any of the
parties hereto.
20
<PAGE>
9. Non-Disclosure Covenants.
(a) Proprietary Information. Seller acknowledges that Seller's
relationship with Air Seal may have created or may hereafter create a
relationship of confidence and trust with respect to information of a
confidential or secret nature that may be disclosed to Seller by Air Seal
that relates to the business of Air Seal or to the business of any
affiliate, customer, or supplier of Air Seal ("Proprietary Information").
Such Proprietary Information includes, but is not limited to, any
information regarding inventions, marketing plans, product plans, business
strategies, financial information, forecasts, personnel information,
customer lists, software, hardware, processes, formulas, development or
experimental work, work in process, business, trade secrets, or any other
secret or confidential matter relating to the products, projects, programs,
sales, customer lists, price lists, or data, or business of Air Seal which
is not generally known to the public. Seller agrees to keep all such
Proprietary Information in confidence and trust, and will not use or
disclose any of such Proprietary Information without the prior written
consent of Air Seal, except as may be necessary to perform any duties
Seller may now or hereafter have as an employee of Air Seal. Seller
further agrees that at the Closing hereunder, and subsequently upon request
of Air Seal or at the time of the termination of the Seller's employment
(if any) with Air Seal, Seller will deliver to Air Seal only, and shall not
retain for Seller's own or others' use, any and all software programs,
documents, and any other material and all copies thereof relating to
Seller's work or Air Seal's products, projects, programs, or business of
which the Seller had knowledge, or which contain any Proprietary
Information.
(b) Publicity. Seller agrees not to disclose to any person or
entity, without the prior written consent of Buyer, any of the terms of
this Agreement at any time prior to Closing and for a period of ninety (90)
days thereafter, except as may be necessary for the performance of their
obligations hereunder or the operation of Air Seal in the ordinary course
of business. Air Seal and Buyer shall jointly disclose and publicize this
transaction in a press release as and when agreed upon between them or as
required by law.
10. Other Matters.
(a) No Share Purchases. Seller agrees to not purchase any of the
shares of the Buyer from any source whatsoever at any time after the date
hereof and prior to Closing.
(b) Director Appointment. At Closing, Seller and Buyer agree to
appoint to the Board of Directors Buyer's selected Directors, including but
not limited to Steven Clark, Robert Amerson and Wes Adair.
(c) Further Actions. Seller warrants and agrees that, from time to
time, Seller will use Seller's best efforts to cause any present or
previous shareholder, director or officer of Air Seal to execute such
minutes of meetings or other instruments and take
21
<PAGE>
whatever actions as shall be reasonably necessary or desirable to effect, or to
carry out the intent and purposes of, the transactions contemplated hereby.
(d) Separate Subsidiary. From the time of Closing until the
Adair-Flanders Shares either vest or fail to vest, Buyer agrees to operate
Air Seal as a separate subsidiary in a manner similar to the current
operation with its Financial Statements prepared in compliance with
Generally Accepted Accounting Principles and other relevant rules and
regulations.
(e) Building Capacity and Equipment. Buyer agrees to finance the
purchase of the building which is across the street to the Real Property to
provide Air Seal an additional 15,000 square feet of light industrial or
warehouse building capacity on commercially reasonable terms. If Air Seal
is unable to acquire the adjacent building on commercially reasonable
terms, Air Seal will use its best efforts to acquire similar facilities
which will be financed by Buyer. In addition, Buyer agrees to finance the
purchase of two (2) press breaks and one (1) shear of twelve (12) foot
length and twelve (12) gauge capacity and any necessary related equipment.
The full purchase price of any such building and equipment purchase will
be treated as a loan from Buyer to Air Seal, and such loan will accrue
interest at the lowest borrowing rate currently available to Buyer.
11. Termination and Amendment.
(a) Pre-Closing. This Agreement may be terminated by Buyer or
Seller at any time prior to the Closing upon written notice to the other party:
(i) If the representations, warranties and agreements or
conditions of this Agreement to be complied with or performed by Air
Seal or the Seller (in the case of Buyer) or Buyer (in the case of
Seller) on or before the Closing shall not have then been complied
with or performed in some material respect and such material
noncompliance or nonperformance shall not have been waived by the
party giving notice of termination or shall not have been cured by the
defaulting party, or cure thereof commenced and diligently prosecuted
thereafter by such party within three (3) business days after written
notice of such material noncompliance or nonperformance is given by
the non-defaulting party;
(ii) If any governmental action is commenced to prevent the
consummation of the transactions contemplated hereby; or
(iii) By mutual written agreement of the parties;
(iv) By either party upon written notice to the other if a Phase
I Environmental Survey of the Real Property reveals any environmental
liabilities for Remedial Work (or otherwise) in excess of $5,000;
(v) If the Closing has not occurred by July 31, 1996.
22
<PAGE>
(b) Waiver. Any representations, warranties, agreements or
conditions of this Agreement may be waived at any time by the party
entitled to the benefit thereof by action taken and evidenced by a written
waiver executed by any such party.
12. Miscellaneous.
(a) Attorneys' Fees. In any action or proceeding arising out of or
related to this Agreement, the prevailing party shall be entitled to its
reasonable attorney fees and related costs, including fees and costs
incurred prior to formal initiation of an action or proceeding, and
including fees and costs incurred for collecting or attempting to collect
any judgment or award.
(b) Brokers and Finders. Except as otherwise provided herein, each
of the parties hereto represents and warrants that it has dealt with no
broker or finder in connection with any of the transactions contemplated by
this Agreement. In the event that any finder's fee or broker's commission
shall become payable by any party hereto as a result of another party's
actions which constitute a misrepresentation or breach of warranty under
this Section 12(b), such fee and commission shall be the sole and exclusive
responsibility and liability of such breaching party with no right of
contribution and the breaching party shall indemnify, defend and hold all
other parties harmless in respect of all claims, losses, expenses and
obligations (including reasonable attorneys' fees) to the extent that the
same arise or result from such finder's fee or broker's commission.
(c) Expenses. Buyer will bear both its own legal fees and other
expenses and Seller's legal fees and other expense in connection with the
transactions contemplated by this Agreement, up to $10,000, to be paid at
Closing.
(d) Survival. Except as specified below, all parties agree that the
representations, warranties and agreements contained in this Agreement
shall survive and remain in full force and effect following the Closing,
for a period of eighteen (18) months. This Section 12(d) shall have no
effect on Buyer's obligations under the Employment Contract, the Stock
Option Agreement, the Adair-Flanders Share Escrow Agreement, and the
Registration Rights Agreement.
(e) Severability. If any term or provision of this Agreement,
including the exhibits hereto, or the application thereof to any person,
property or circumstances, shall to any extent be invalid or unenforceable,
the remainder of this Agreement, including the exhibits or the application
of such term or provision to persons, property or circumstances other than
those as to which it is invalid and unenforceable, shall not be affected
thereby, and each term and provision of this Agreement and the exhibits
shall be valid and enforced to the fullest extent permitted by law.
(f) Notices. Any notices, requests or consents hereunder shall be
deemed given, and any instrument delivered, two days after they have been
mailed by first class mail, postage prepaid, or twelve hours after such
notice has been sent by telecopier or
23
<PAGE>
straight telegram, telegraphic charges prepaid, or upon receipt if delivered
personally, as follows:
To Seller: Charles W. Adair
Air Seal Filter Housings, Inc.
1112 Staffordshire Road
Stafford, TX 77477
with simultaneous copy to:
Jones & Gillaspia L.L.P.
1100 Louisiana #650
Houston, Texas 77002
Attn: Shelton Jones
Telecopier: (713) 225-6126
To Buyer: Flanders Corporation
531 Flanders Filters Road
Washington, North Carolina 27889
Attn: Chief Financial Officer
Telecopier: (919) 946-4738
with simultaneous copy to:
Snell & Wilmer
111 E. Broadway, Suite 900
Salt Lake City, Utah 84111
Attn: William C. Gibbs, Esq.
Telecopier: (801) 237-1950
except that any of the foregoing may from time to time by written notice to the
others designate another address which shall thereupon become its effective
address for the purposes of this Section.
(g) Entire Agreement. This Agreement, including the exhibits,
schedules and documents referred to herein which are a part hereof,
contains the entire understanding of the parties hereto with respect to the
subject matter contained herein and may be amended only by a written
instrument executed by the Buyer and the Seller or their respective
successors or assigns. There are no restrictions, promises, warranties,
covenants, or undertakings other than those expressly set forth or referred
to herein. Any Section headings or table of contents contained in this
Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement.
24
<PAGE>
(h) Counterparts. This Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original but all
of which together shall constitute one and the same instrument.
(i) Binding Effect. This Agreement shall inure to the benefit of
and be binding upon Seller and Buyer and their respective heirs and successors,
but shall not inure to the benefit of anyone other than the parties signing
this Agreement and their respective heirs and successors.
(j) Governing Law. This Agreement shall be governed by the laws of
the State of North Carolina.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the date first above written.
BUYER:
FLANDERS CORPORATION, a North Carolina
Corporation
By: /s/ Steven K. Clark
__________________________
/s/ CFO
Its: __________________________
SELLER:
/s/ Charles Adair
___________________________________
Charles Adair
/s/ Wes Adair
___________________________________
Wes Adair
25
<PAGE>
EXHIBIT C
ADAIR-FLANDERS SHARES ESCROW AGREEMENT
<PAGE>
ADAIR-FLANDERS SHARES ESCROW AGREEMENT
DATED: June 17, 1996
PARTIES: Flanders Corporation ("Buyer"), Charles W. Adair and Wes Adair
(collectively, "Seller") and Shelton Jones ("Escrow Agent")
RECITALS
WHEREAS, Buyer and Seller have entered into a Stock Purchase Agreement
dated June 17, 1996 (the "Stock Purchase Agreement"). All capitalized terms
used herein shall have the meaning assigned to them in the Stock Purchase
Agreement.
WHEREAS, to facilitate the performance of the Stock Purchase Agreement,
Buyer shall deliver the Adair-Flanders Shares into escrow to be held by the
Escrow Agent. The Escrow Agent has agreed to hold and distribute the Adair-
Flanders Shares pursuant to the terms and conditions set forth in this
Agreement. Any term used herein not otherwise defined shall have the meaning
set forth in the Stock Purchase Agreement.
Accordingly, in consideration of the covenants and agreements contained in
this Agreement and in the Stock Purchase Agreement, the parties agree as
follows:
1. ESCROW AGENT. Buyer and Seller hereby appoint and designate Shelton
Jones as Escrow Agent for the purposes set forth herein and the Escrow Agent
accepts such appointment and designation.
2. DELIVERY OF FLANDERS SHARES. Prior to or simultaneously with the
execution of this Agreement by all parties, Buyer shall deliver to the Escrow
Agent the Adair-Flanders Shares, consisting of 150,000 shares of Flanders
Corporation common stock. During the term of this Agreement, the Escrow Agent
shall take no action with respect to the Adair-Flanders Shares inconsistent
with the terms of this Agreement, and shall deliver the Adair-Flanders Shares
only as permitted by the provisions hereof.
(a) INSTRUCTIONS TO ESCROW AGENT REGARDING RELEASE OF ESCROWED
SHARES. Escrow Agent shall release the Adair-Flanders Shares to Wes Adair (or
his surviving spouse, or to his estate if there is no surviving spouse) upon
written notice signed by both Buyer and Seller (or his surviving spouse, or his
estate if there is no surviving spouse), based on the achievement of certain
performance criteria of Air Seal Filter Housings, Inc. ("Air Seal") as set
forth on the attached Exhibit A, incorporated herein by this reference. If
such criteria are not reached by Air Seal by June 13, 2001, the remaining
<PAGE>
Adair-Flanders Shares shall be forfeited by Seller, and returned to the Buyer
for cancellation.
(b) IN THE EVENT OF TERMINATION OTHER THAN DEATH OR DISABILITY.
Buyer agrees to execute on the Termination Date a written notice to Escrow
Agent to release all remaining Adair-Flanders Shares to Wes Adair or his
surviving spouse, or to his estate if there is no surviving spouse, if Wes
Adair's employment is terminated by Buyer under the Employment Agreement
between Buyer and Wes Adair, for any reason other than Cause. Wes Adair agrees
to execute a written notice to Escrow Agent to return all remaining Adair-
Flanders Shares to Flanders Corporation for cancellation if his employment is
terminated by Wes Adair for any reason other than Good Reason, as defined in
the Employment Agreement.
3. NO VOTING OF SHARES. So long as the Adair-Flanders Shares are held
in Escrow, the Seller shall not be entitled to exercise any rights of ownership
with respect thereto, including, but not limited to, voting rights or rights to
receive dividends. While the Adair-Flanders Shares are held in Escrow, Seller
appoints Robert Amerson or his assignee with full power of subscriber to vote
such shares.
4. ESCROW AGENT'S COMPENSATION AND EXPENSES. For its services
hereunder, the Escrow Agent shall be entitled to be reimbursed for all out of
pocket expenses incurred by it in connection with the performance of its duties
under this Agreement. The expenses of the Escrow Agent shall be paid by the
Buyer.
5. ESCROW AGENT'S LIABILITY. The Escrow Agent shall not be liable for
any error of judgment or for any act done or omitted by it in good faith, or
for anything which the Escrow Agent may in good faith do or refrain from doing
in connection herewith, or for any negligence other than its gross negligence;
no liability shall be incurred by the Escrow Agent, if, in the event of any
dispute or question as to its duties or obligations hereunder, it acts in
accordance with Paragraph 6. The Escrow Agent is authorized to act upon any
document believed by it to be genuine and to be signed by the proper parties
and shall incur no liability in so acting. Buyer and the Seller shall jointly
and severally indemnify, defend and hold the Escrow Agent harmless from any and
all loss, damage, or liability, and all expenses (including without limitation,
reasonable legal costs and fees) except to the extent arising out of the gross
negligence or bad faith of the Escrow Agent, incurred, arising out of, or in
connection with, its entering into or performing its duties pursuant to this
Agreement.
6. DISPUTES. In the event of a dispute concerning the subject matter of
this Agreement such that the Escrow Agent deems it necessary for its
protection, the Escrow Agent may (i) deposit the Adair-Flanders Shares,
together with any notices received by it, into a court of competent
jurisdiction until such time as a civil action shall have been finally
concluded determining any rights hereunder, (ii) may appoint a new escrow
agent, provided such new agent agrees to be bound by the terms hereof, or (iii)
at its discretion at any time, commence a civil action to interplead any
conflicting demands to a court of competent
2
<PAGE>
jurisdiction to determine its rights and the rights of Buyer and Seller.
7. NOTICES. All notices, requests, demands and other communications
pursuant to this Agreement shall be in writing and shall be given to the Escrow
Agent at Jones & Gallaspia, L.L.P., 1100 Louisiana, Suite 650, Houston, Texas
77002, Attention: Shelton Jones. All notices, requests, demands, other
communications and deliveries pursuant to this Agreement shall be made as
follows:
If to Buyer: Flanders Corporation
531 Flanders Filters Road
Washington, NC 27889
Fax No. (919) 946-4738
If to the Seller:
Wes Adair
Air Seal Filter Housings, Inc.
1112 Staffordshire Road
Stafford, TX 77477
Fax No. (713) 499-6060
or to such other address as a party may have furnished to the others in
writing. Communications shall be effective only when received.
8. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, which together shall constitute one instrument.
9. BINDING EFFECT; GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the laws of the State of North Carolina, and
shall be binding upon and inure to the benefit of the parties and their heirs,
successors and assigns.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
hereof.
FLANDERS CORPORATION
/s/ Steven K. Clark
By: ___________________________________
/s/ CFO
Its:___________________________________
3
<PAGE>
Seller
/s/ Charles W. Adair
___________________________________
Charles W. Adair
/s/ Wes Adair
___________________________________
Wes Adair
ESCROW AGENT
By: /s/ Shelton Jones
4
EMPLOYMENT
AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of
the ______ day of ___________, 1996, by and between FLANDERS CORPORATION, a
North Carolina corporation ("Flanders"), PRECISIONAIRE, INC., a Florida
corporation ("Precision") (Flanders and Precision are sometimes hereinafter
collectively referred to as the "Company"), and GUSTAVO HERNANDEZ (hereinafter
referred to as the "Executive").
W I T N E S S E T H:
WHEREAS, Flanders Corporation has contemporaneously herewith acquired one
hundred percent (100%) of the issued and outstanding stock of Precision and
Precision is now a wholly owned subsidiary of Flanders;
WHEREAS, the Executive is currently employed as the President and Chief
Executive Officer of Precision; and
WHEREAS, the continued employment of the Executive is a condition of the
purchase of Precision by Flanders, and Flanders and Precision desire to have
the benefit of the Executive's efforts and services;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements hereinafter set forth, the parties hereto mutually
covenant and agree as follows:
1. DEFINITIONS.
Whenever used in this Agreement, the following terms shall have the
meanings set forth below:
(a) "Accrued Benefits" shall mean the amount payable not later than
ten (10) days following an applicable Termination Date and which shall be
equal to the sum of the following amounts:
(i) All salary earned or accrued through the Termination Date;
(ii) Reimbursement for any and all monies advanced in connection
with the Executive's employment for reasonable and necessary expenses
incurred by the Executive through the Termination Date;
(iii) Any and all other cash benefits previously earned through
the Termination Date and deferred at the election of the Executive or
pursuant to any deferred compensation plans then in effect;
1
<PAGE>
(iv) The full amount of any stated bonus payable to the
Executive in accordance with Section 6(c) herein with respect to the
year in which termination occurs; and
(v) All other payments and benefits to which the Executive may
be entitled under the terms of any benefit plan of the Company.
(b) "Act" shall mean the Securities Exchange Act of 1934;
(c) "Affiliate" shall have the same meaning as given to that term in
Rule 12b-2 of Regulation 12B promulgated under the Act;
(d) "Board" shall mean the Board of Directors of the Precision;
(e) "Cause" shall mean any of the following:
(i) The engaging by the Executive in fraudulent conduct, as
evidenced by a determination in a binding and final judgment, order
or decree of a court or administrative agency of competent
jurisdiction, in effect after exhaustion or lapse of all rights of
appeal, in an action, suit or proceeding, whether civil, criminal,
administrative or investigative, which the Board determines, in its
sole discretion, has a significant adverse impact on the Company in
the conduct of the Company's business;
(ii) Conviction of a felony, as evidenced by a binding and final
judgment, order or decree of a court of competent jurisdiction, in
effect after exhaustion or lapse of all rights of appeal, which the
Board determines, in its sole discretion, has a significant adverse
impact on the Company in the conduct of the Company's business;
(iii) Neglect or refusal by the Executive to perform the
Executive's duties or responsibilities (unless significantly changed
without the Executive's consent); or
(iv) A significant violation by the Executive of Precision's
established policies and procedures;
Notwithstanding the foregoing, Cause shall not exist under Sections
1(e)(iii) and (iv) herein unless the Company furnishes written notice to
the Executive of the specific offending conduct and the Executive fails to
correct such offending conduct within the thirty (30) day period
commencing on the receipt of such notice.
(f) "Disability" shall mean a physical or mental condition whereby
the Executive is unable to perform on a full-time basis the customary
duties of the Executive under this Agreement;
(g) "Good Reason" shall mean:
2
<PAGE>
(i) The required relocation of the Executive, without the
Executive's consent, to an employment location which is more than
seventy-five (75) miles from the Executive's employment location on
the day preceding the date of this Agreement;
(ii) The removal of the Executive from or any failure to reelect
the Executive to any of the positions held by the Executive as of the
date of this Agreement or any other positions to which the Executive
shall thereafter be elected or assigned except in the event that such
removal or failure to reelect relates to the termination by the
Company of the Executive's employment for Cause or by reason of
death, Disability or voluntary retirement;
(iii) A significant adverse change, without the Executive's
written consent, in the nature or scope of the Executive's authority,
powers, functions, duties or responsibilities, or a material
reduction in the level of support services, staff, secretarial and
other assistance, office space and accoutrements available to a level
below that which was provided to the Executive on the day preceding
the date of this Agreement and that which is necessary to perform any
additional duties assigned to the Executive following the date of
this Agreement, which change or reduction is not generally effective
for all executives employed by the Company (or its successor) in the
Executive's class or category; or
(iv) Breach or violation of any material provision of this
Agreement by the Company;
(h) "Notice of Termination" shall mean the notice described in
Section 14 herein;
(i) "Termination Date" shall mean, except as otherwise provided in
Section 14 herein,
(i) The Executive's date of death;
(ii) Thirty (30) days after the delivery of the Notice of
Termination terminating the Executive's employment on account of
Disability pursuant to Section 9 herein, unless the Executive returns
on a full-time basis to the performance of his duties prior to the
expiration of such period;
(iii) Thirty (30) days after the delivery of the Notice of
Termination if the Executive's employment is terminated by the
Executive voluntarily; and
(iv) Thirty (30) days after the delivery of the Notice of
Termination if the Executive's employment is terminated by the
Company for any reason other than death or Disability;
(j) "Termination Payment" shall mean the payment described in
Section 13 herein.
3
<PAGE>
2. EMPLOYMENT.
The Company hereby agrees to employ the Executive and the Executive hereby
agrees to serve the Company, on the terms and conditions set forth herein.
3. TERM.
The Company's employment of the Executive under the provisions of this
Agreement shall commence on the date hereof and end on June 30, 2001, unless
further extended or sooner terminated as hereinafter provided. On June 30,
2001, and on the last day of June each year thereafter, the term of the
Executive's employment shall, unless sooner terminated as hereinafter provided,
be automatically extended for an additional one year period from the date
thereof unless, at least six (6) months before such June 30, the Company shall
have delivered to the Executive or the Executive shall have delivered to the
Company written notice that the term of the Executive's employment hereunder
will not be extended beyond its existing duration.
4. POSITIONS AND DUTIES.
The Executive shall serve as President and Chief Executive Officer of
Precision and in such additional capacities as set forth in Section 7 herein.
In connection with the foregoing positions, the Executive shall have such
duties, responsibilities and authority as may from time to time be assigned to
the Executive by the Board. The Executive shall devote substantially all the
Executive's working time and efforts to the business and affairs of the
Company.
5. PLACE OF PERFORMANCE.
In connection with the Executive's employment by the Company, the Executive
shall be based at the principal executive offices of Precision in St.
Petersburg, Florida except for required travel on Company business.
6. COMPENSATION AND RELATED MATTERS.
(a) Salary. Commencing on the date hereof, the Company shall pay to
the Executive an annualized base salary at a rate of $250,000 in equal
installments as nearly as practicable on the fifteenth and last days of
each month, in arrears. Such annualized base salary may be increased from
time to time in accordance with normal business practices of the Company.
The annualized base salary of the Executive shall not be decreased below
its then existing amount during the term of this Agreement;
(b) Signing Bonus. Upon execution of this Agreement, the Company
shall pay Executive a signing bonus of $_______ (this bonus is calculated
based on the difference between $250,000 and $175,000 multiplied by the
number of months that have expired since July 1, 1996 and divided by
twelve);
(c) Bonuses. The Executive shall receive annual bonuses as may be
declared from time to time by the Board in its discretion; In addition, the
Executive shall be paid the
4
<PAGE>
amount to which he is entitled pursuant to the provisions of Section 10(e) of
the Stock Purchase Agreement dated __________, between Flanders and the
stockholders of Precision.
(d) Other Benefits. Precision shall maintain in full force and
effect, and the Executive shall be entitled to participate in Precision's
Group Medical Insurance Plan. Precision shall also maintain in full force
and effect, and subject to Precision being profitable, the Executive shall
be entitled to participate in (during each such year Precision is
profitable), Precision's Profit Sharing Plan and SMART 401(k) Plan. If
any such plans or benefits are discontinued by Precision, Precision will
provide the Executive with at least equivalent benefits or will increase
the Executive's compensation under paragraph 6(a) hereof to compensate for
such reduction in an amount equivalent to the benefits reduced or
eliminated. Precision shall not make any changes in such plans or
arrangements which would adversely affect the Executive's rights or
benefits thereunder, unless (i) such change occurs pursuant to a program
applicable to all executives of Precision, (ii) does not result in a
proportionately greater reduction in the rights of or benefits to the
Executive as compared with any other executive of Precision, and (iii) the
Executive's salary is increased as provided in the second sentence of this
paragraph. The Executive shall be entitled to participate in or receive
benefits under any employee benefit plan or arrangement made available by
Precision in the future to its executives and key management employees,
subject to and on a basis consistent with the terms, conditions and
overall administration of such plans and arrangements. Nothing paid to
the Executive under any plan or arrangement presently in effect or made
available in the future shall be deemed to be in lieu of the salary
payable to the Executive pursuant to paragraph 6(a). Any payments or
benefits payable to the Executive hereunder in respect of any calendar
year during which the Executive is employed by Precision for less than the
entire year shall, unless otherwise provided in the applicable plan or
arrangement, be prorated in accordance with the number of days in such
calendar year during which he is so employed.
(e) Expenses. During the term of the Executive's employment
hereunder, the Executive shall be entitled to receive prompt reimbursement
for all reasonable expenses incurred by the Executive in performing
services hereunder, including all travel and living expenses while away
from home on business at the request of and in the service of the Company,
provided that such expenses are incurred and accounted for in accordance
with the policies and procedures presently established by the Company;
(f) Vacations. The Executive shall be entitled to six (6) weeks of
vacation each calendar year, and to compensation in respect of earned but
unused vacation days, determined in accordance with the Company's vacation
plan or policy. The Executive shall also be entitled to all paid holidays
provided by the Company to its executives;
(g) Automobile. The Company shall promptly reimburse the Executive
for all reasonable expenses incurred by the Executive in connection with
the insurance, maintenance, and operating costs (including gasoline and
oil changes) of the Executive's ______________ automobile;
5
<PAGE>
(h) Services Furnished. The Company shall furnish the Executive
with office space, and such other facilities and services as shall be
suitable to the Executive's position and adequate for the performance of
the Executive's duties.
7. OFFICES.
(a) The Executive agrees to serve without additional compensation,
if elected or appointed thereto, as a member of the Board of Directors of
the Company or any subsidiary of the Company; provided, however, that the
Executive is indemnified for serving in any and all such capacities on a
basis no less favorable than is currently provided in the Company's
bylaws, or otherwise.
(b) Upon execution of this Agreement, the Company agrees to appoint
the Executive to the Board of Directors of Flanders and to the Board of
Directors of Precision, and to propose Executive's reelection as a
director at the expiration of his initial term as a director of each of
the Boards of Directors of Flanders and Precision. Additionally, Flanders
agrees to vote shares of stock it holds in Precision in favor of the
election of the Executive as a director of Precision.
8. TERMINATION AS A RESULT OF DEATH.
If the Executive shall die during the term of this Agreement, the
Executive's employment shall terminate on the Executive's date of death and the
Executive's surviving spouse, or the Executive's estate if the Executive dies
without a surviving spouse, shall be entitled to the Executive's Accrued
Benefits as of the Termination Date and any applicable Termination Payment
described in Section 13(a).
9. TERMINATION FOR DISABILITY.
If, as a result of the Executive's Disability, the Executive shall have
been unable to perform the Executive's duties hereunder on a full-time basis
for four (4) consecutive months and within sixty (60) days after the Company
provides the Executive with a Termination Notice, the Executive shall not have
returned to the performance of the Executive's duties on a full-time basis, the
Company may terminate the Executive's employment, subject to Section 14 herein.
During the term of the Executive's Disability prior to termination, the
Executive shall continue to receive all salary and benefits payable under
Section 6 herein, including participation in all employee benefit plans,
programs and arrangements in which the Executive was entitled to participate
immediately prior to the Disability; provided, however, that the Executive's
continued participation is permitted under the terms and provisions of such
plans, programs and arrangements. In the event that the Executive's
participation in any such plan, program or arrangement is barred as the result
of such Disability, the Executive shall be entitled to receive an amount equal
to the contributions, payments, credits or allocations which would have been
paid by the Company to the Executive, to the Executive's account or on the
Executive's behalf under such plans, programs and arrangements. In the event
the Executive's employment is terminated on account of the Executive's
Disability in accordance with this Section 9, the Executive shall receive the
Executive's Accrued Benefits as of the Termination Date and shall remain
eligible for all benefits provided by any long-term disability programs of the
6
<PAGE>
Company in effect at the time of such termination. The Executive shall also be
entitled to the Termination Benefit described in Section 13(a).
10. TERMINATION FOR CAUSE.
If the Executive's employment is terminated by the Company for Cause,
subject to the procedures set forth in Section 14 herein, the Executive shall
be entitled to receive the Executive's Accrued Benefits as of the Termination
Date. The Executive shall not be entitled to receipt of any Termination
Payment.
11. OTHER TERMINATION BY COMPANY.
If the Executive's employment with the Company is terminated by the Company
other than by reason of death, Disability or Cause, subject to the procedures
set forth in Section 14 herein, the Executive (or in the event of the
Executive's death following the Termination Date, the Executive's surviving
spouse or the Executive's estate if the Executive dies without a surviving
spouse) shall receive the applicable Termination Payment. The Executive shall
not, in connection with any consideration receivable in accordance with this
Section 11, be required to mitigate the amount of such consideration by
securing other employment or otherwise and such consideration shall not be
reduced by reason of the Executive securing other employment or for any other
reason.
12. VOLUNTARY TERMINATION BY EXECUTIVE.
From and after June 30, 1999, provided that the Executive furnishes thirty
(30) days prior written notice to the Company, the Executive shall have the
right to voluntarily terminate this Agreement at any time. If the Executive's
voluntary termination is without Good Reason, the Executive shall receive the
Executive's Accrued Benefits as of the Termination Date and shall not be
entitled to any Termination Payment. If the Executive's voluntary termination
is for Good Reason, the Executive (or in the event of the Executive's death
following the Termination Date, the Executive's surviving spouse or the
Executive's estate if the Executive dies without a surviving spouse) shall
receive the applicable Termination Payment. The Executive shall not, in
connection with any consideration receivable in accordance with this Section
12, be required to mitigate the amount of such consideration by securing other
employment or otherwise and such consideration shall not be reduced by reason
of the Executive securing other employment or for any other reason.
13. TERMINATION PAYMENT.
(a) If the Executive's employment is terminated as a result of death
or Disability, the lump sum Termination Payment payable to the Executive
shall be equal to the Executive's then current annual base salary;
(b) If, during the first twelve (12) months, the Executive's
employment is terminated by the Executive for Good Reason or by the
Company for any reason other than death, Disability or Cause, the
Termination Payment payable to the Executive by the Company or an
Affiliate of the Company shall be one hundred fifty percent (150%) of the
current annual base salary. Thereafter, the Termination Payment payable
to the Executive by
7
<PAGE>
the Company or an Affiliate of the Company will be two
hundred percent (200%) of the amount includable in gross income of the
Executive during the preceding one (1) year period ending on the
Executive's Termination date;
(c) The Termination Payment shall be payable in a lump sum not later
than ten (10) days following the Executive's Termination Date. Such lump
sum payment shall not be reduced by any present value or similar factor.
Further, the Executive shall not be required to mitigate the amount of
such payment by securing other employment or otherwise and such payment
shall not be reduced by reason of the Executive securing other employment
or for any other reason.
14. TERMINATION NOTICE AND PROCEDURE.
Any termination by the Company or the Executive of the Executive's
employment during the Employment Period shall be communicated by written Notice
of Termination to the Executive, if such Notice of Termination is delivered by
the Company, and to the Company, if such Notice of Termination is delivered by
the Executive, all in accordance with the following procedures:
(a) The Notice of Termination shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances alleged to provide a basis
for termination;
(b) Any Notice of Termination by the Company shall be approved by a
resolution duly adopted by a majority of the directors of the Company then
in office;
(c) If the Executive shall in good faith furnish a Notice of
Termination for Good Reason and the Company notifies the Executive that a
dispute exists concerning the termination, within the fifteen (15) day
period following the Company's receipt of such notice, the Executive shall
continue the Executive's employment during such dispute. If it is
thereafter determined that (i) Good Reason did exist, the Executive's
Termination Date shall be the earlier of (A) the date on which the dispute
is finally determined, either by mutual written agreement of the parties
or pursuant to Section 19 herein, (B) the date of the Executive's death or
(C) one day prior to the second (2nd) anniversary of a Change of Control,
and the Executive's Termination Payment, if applicable, shall reflect
events occurring after the Executive delivered the Executive's Notice of
Termination; or (ii) Good Reason did not exist, the employment of the
Executive shall continue after such determination as if the Executive had
not delivered the Notice of Termination asserting Good Reason;
(d) If the Executive gives notice to terminate his employment for
Good Reason and a dispute arises as to the validity of such dispute, and
the Executive does not continue his employment during such dispute, and it
is finally determined that the reason for termination set forth in such
Notice of Termination did not exist, if such notice was delivered by the
Executive, the Executive shall be deemed to have voluntarily terminated
the Executive's employment other than for Good Reason.
8
<PAGE>
15. NONDISCLOSURE OF PROPRIETARY INFORMATION.
Recognizing that the Company is presently engaged, and may hereafter
continue to be engaged, in the research and development of processes, the
manufacturing of products or performance of services, which involve
experimental and inventive work and that the success of its business depends
upon the protection of the processes, products and services by patent,
copyright or by secrecy and that the Executive has had, or during the course of
his engagement may have, access to Proprietary Information, as hereinafter
defined, of the Company or other information and data of a secret or
proprietary nature of the Company which the Company wishes to keep confidential
and the Executive has furnished, or during the course of his engagement may
furnish, such information to the Company, the Executive agrees that:
(a) "Proprietary Information" shall mean any and all methods,
inventions, improvements or discoveries, whether or not patentable or
copyrightable, and any other information of a similar nature related to
the business of the Company disclosed to the Executive or otherwise made
known to him as a consequence of or through his engagement by the Company
(including information originated by the Executive) in any technological
area previously developed by the Company or developed, engaged in, or
researched, by the Company during the term of the Executive's engagement,
including, but not limited to, trade secrets, processes, products,
formulae, apparatus, techniques, know-how, marketing plans, data,
improvements, strategies, forecasts, customer lists, and technical
requirements of customers, unless such information is in the public domain
to such an extent as to be readily available to competitors.
(b) The Executive acknowledges that the Company has exclusive
property rights to all Proprietary Information and the Executive hereby
assigns all rights he might otherwise possess in any Proprietary
Information to the Company. Except as required in the performance of his
duties to the Company, the Executive will not at any time during or after
the term of his engagement, which term shall include any time in which the
Executive may be retained by the Company as a consultant, directly or
indirectly use, communicate, disclose or disseminate any Proprietary
Information or any other information of a secret, proprietary,
confidential or generally undisclosed nature relating to the Company, its
products, customers, processes and services, including information
relating to testing, research, development, manufacturing, marketing and
selling.
(c) All documents, records, notebooks, notes, memoranda and similar
repositories of, or containing, Proprietary Information or any other
information of a secret, proprietary, confidential or generally
undisclosed nature relating to the Company or its operations and
activities made or compiled by the Executive at any time or made available
to him prior to or during the term of his engagement by the Company,
including any and all copies thereof, shall be the property of the
Company, shall be held by him in trust solely for the benefit of the
Company, and shall be delivered to the Company by him on the termination
of his engagement or at any other time on the request of the Company.
(d) The Executive will not assert any rights under any inventions,
copyrights, discoveries, concepts or ideas, or improvements thereof, or
know-how related thereto,
9
<PAGE>
as having been made or acquired by him prior to
his being engaged by the Company or during the term of his engagement if
based on or otherwise related to Proprietary Information.
16. ASSIGNMENT OF INVENTIONS.
(a) For purposes of this Paragraph 16, the term "Inventions" shall
mean discoveries, concepts, and ideas, whether patentable or copyrightable
or not, including but not limited to improvements, know-how, data,
processes, methods, formulae, and techniques, as well as improvements
thereof or know-how related thereto, concerning any past, present or
prospective activities of the Company which the Executive makes, discovers
or conceives (whether or not during the hours of his engagement or with
the use of the Company's facilities, materials or personnel), either
solely or jointly with others during his engagement by the Company or any
Affiliate and, if based on or related to Proprietary Information, at any
time after termination of such engagement. All Inventions shall be the
sole property of the Company, and Executive agrees to perform the
provisions of this paragraph 16 with respect thereto without the payment
by the Company of any royalty or any consideration therefor other than the
regular compensation paid to the Executive in the capacity of an employee
or consultant.
(b) The Executive shall maintain written notebooks in which he shall
set forth, on a current basis, information as to all Inventions,
describing in detail the procedures employed and the results achieved as
well as information as to any studies or research projects undertaken on
the Company's behalf. The written notebooks shall at all times be the
property of the Company and shall be surrendered to the Company upon
termination of his engagement or, upon request of the Company, at any time
prior thereto.
(c) The Executive shall apply, at the Company's request and expense,
for United States and foreign letters patent or copyrights either in the
Executive's name or otherwise as the Company shall desire.
(d) The Executive hereby assigns to the Company all of his rights to
such Inventions, and to applications for United States and/or foreign
letters patent or copyrights and to United States and/or foreign letters
patent or copyrights granted upon such Inventions.
(e) The Executive shall acknowledge and deliver promptly to the
Company, without charge to the Company, but at its expense, such written
instruments (including applications and assignments) and do such other
acts, such as giving testimony in support of the Executive's inventorship,
as may be necessary in the opinion of the Company to obtain, maintain,
extend, reissue and enforce United States and/or foreign letters patent
and copyrights relating to the Inventions and to vest the entire right and
title thereto in the Company or its nominee. The Executive acknowledges
and agrees that any copyright developed or conceived of by the Executive
during the term of Executive's employment which is related to the business
of the Company shall be a "work for hire" under the copyright law of the
United States and other applicable jurisdictions.
10
<PAGE>
(f) The Executive represents that his performance of all the terms
of this Agreement and as an employee of or consultant to the Company does
not and will not breach any trust prior to his employment by the Company.
The Executive agrees not to enter into any agreement either written or
oral in conflict herewith and represents and agrees that he has not
brought and will not bring with him to the Company or use in the
performance of his responsibilities at the Company any materials or
documents of a former employer which are not generally available to the
public, unless he has obtained written authorization from the former
employer for their possession and use, a copy of which has been provided
to the Company.
(g) No provisions of this Paragraph shall be deemed to limit the
restrictions applicable to the Executive under Paragraph 15.
17. SHOP RIGHTS.
The Company shall also have the royalty-free right to use in its business,
and to make, use and sell products, processes and/or services derived from any
inventions, discoveries, concepts and ideas, whether or not patentable,
including but not limited to processes, methods, formulas and techniques, as
well as improvements thereof or know-how related thereto, which are not within
the scope of Inventions as defined in Paragraph 16 but which are conceived or
made by the Executive during the period he is engaged by the Company or with
the use or assistance of the Company's facilities, materials or personnel.
18. NON-COMPETE.
The Executive hereby agrees that during the term of this Agreement and for
the period of two years from the termination hereof, that the Executive will
not:
(a) Within any jurisdiction or marketing area in the United States
in which the Company or any subsidiary thereof is doing business, own,
manage, operate or control any business of the type and character engaged
in and competitive with the Company or any subsidiary thereof. For
purposes of this paragraph, ownership of securities of not in excess of
five percent (5%) of any class of securities of a public company shall not
be considered to be competition with the Company or any subsidiary
thereof; or
(b) Within any jurisdiction or marketing area in the United States
in which the Company or any subsidiary thereof is doing business, act as,
or become employed as, an officer, director, employee, consultant or agent
of any business of the type and character engaged in and competitive with
the Company or any of its subsidiaries; or
(c) Solicit any similar business to that of the Company's for, or
sell any products that are in competition with the Company's products to,
any company in the United States, which is, as of the date hereof, a
customer or client of the Company or any of its subsidiaries, or was such
a customer or client thereof within two years prior to the date of this
Agreement; or
11
<PAGE>
(d) Solicit the employment of, or hire, any full time employee
employed by the Company or its subsidiaries as of the date of termination
of this Agreement.
19. REMEDIES AND JURISDICTION.
(a) The Executive hereby acknowledges and agrees that a breach of
the agreements contained in this Agreement will cause irreparable harm and
damage to the Company, that the remedy at law for the breach or threatened
breach of the agreements set forth in this Agreement will be inadequate,
and that, in addition to all other remedies available to the Company for
such breach or threatened breach (including, without limitation, the right
to recover damages), the Company shall be entitled to injunctive relief
for any breach or threatened breach of the agreements contained in this
Agreement;
(b) All claims, disputes and other matters in question between the
parties arising under this Agreement, shall, unless otherwise provided
herein, be decided by arbitration in Tampa, Florida, in accordance with
the Model Employment Arbitration Procedures of the American Arbitration
Association (including such procedures governing selection of the specific
arbitrator or arbitrators), unless the parties mutually agree otherwise.
The Company shall pay the costs of any such arbitration. The award by the
arbitrator or arbitrators shall be final, and judgment may be entered upon
it in accordance with applicable law in any state or Federal court having
jurisdiction thereof.
20. ATTORNEYS' FEES.
In the event that either party hereunder institutes any legal proceedings
in connection with its rights or obligations under this Agreement, the
prevailing party in such proceeding shall be entitled to recover from the other
party, all costs incurred in connection with such proceeding, including
reasonable attorneys' fees, together with interest thereon from the date of
demand at the rate of twelve percent (12%) per annum.
21. SUCCESSORS.
This Agreement and all rights of the Executive shall inure to the benefit
of and be enforceable by the Executive's personal or legal representatives,
estates, executors, administrators, heirs and beneficiaries. In the event of
the Executive's death, all amounts payable to the Executive under this
Agreement shall be paid to the Executive's surviving spouse, or the Executive's
estate if the Executive dies without a surviving spouse. This Agreement shall
inure to the benefit of, be binding upon and be enforceable by, any successor,
surviving or resulting corporation or other entity to which all or
substantially all of the business and assets of the Company shall be
transferred whether by merger, consolidation, transfer or sale.
22. ENFORCEMENT.
The provisions of this Agreement shall be regarded as divisible, and if any
of said provisions or any part hereof are declared invalid or unenforceable by
a court of competent jurisdiction, the
12
<PAGE>
validity and enforceability of the remainder of such provisions or parts hereof
and the applicability thereof shall not be affected thereby.
23. AMENDMENT OR TERMINATION.
This Agreement may not be amended or terminated during its term, except by
written instrument executed by the Company and the Executive.
24. SURVIVABILITY.
The provisions of paragraphs 15, 16, 17 and 18 shall survive termination of
this Agreement.
25. ENTIRE AGREEMENT.
This Agreement sets forth the entire agreement between the Executive and
the Company with respect to the subject matter hereof, and supersedes all prior
oral or written agreements, negotiations, commitments and understandings with
respect thereto.
26. VENUE; GOVERNING LAW.
This Agreement and the Executive's and Company's respective rights and
obligations hereunder shall be governed by and construed in accordance with the
laws of the State of Florida without giving effect to the provisions,
principles, or policies thereof relating to choice or conflict laws.
27. NOTICE.
Notices given pursuant to this Agreement shall be in writing and shall be
deemed given when received, and if mailed, shall be mailed by United States
registered or certified mail, return receipt requested, addressee only, postage
prepaid, if to the Company, to:
Flanders Corporation
531 Flanders Filters Road
Washington, NC 27889
Attention: Steven Clark
If to Executive, to:
Gustavo Hernandez
Precisionaire, Inc.
2399 26th Ave. North
P. O. Box 7568
St. Petersburg, Florida 33734-7568
Fax No. (813) 823-5510
13
<PAGE>
or to such other address as the Company shall have given to the Executive or,
if to the Executive, to such address as the Executive shall have given to the
Company.
28. NO WAIVER.
No waiver by either party at any time of any breach by the other party of,
or compliance with, any condition or provision of this Agreement to be
performed by the other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same time or any prior or subsequent time.
29. HEADINGS.
The headings herein contained are for reference only and shall not affect
the meaning or interpretation of any provision of this Agreement.
30. COUNTERPARTS.
This Agreement may be executed in one or more counterparts, each of which
shall be deemed to be an original but all of which together will constitute one
and the same instrument.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by
its duly authorized officer, and the Executive has executed this Agreement, on
the date and year first above written.
FLANDERS CORPORATION
By:___________________________________
Its:___________________________________
PRECISIONAIRE, INC.
By:___________________________________
Its:___________________________________
EXECUTIVE
______________________________________
Gustavo Hernandez
14
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") is made and
entered into this 1st day of October, 1996, by and between Flanders
Corporation, a North Carolina corporation (formerly known as Elite
Acquisitions, Inc.) ("Flanders Corporation"), Flanders Filters, Inc., a North
Carolina corporation ("Flanders Filters"), and Steven K. Clark ("Clark" or the
"Executive"). In this Amendment, Flanders Corporation, Flanders Filters, and
Clark, together with their successors and permitted assignees, are separately
referred to as a "Party" and collectively as the "Parties."
W I T N E S S E T H:
WHEREAS, Flanders Corporation, Flanders Filters, and Clark entered into an
Employment Agreement (the "Agreement"), dated December 15, 1995; and
WHEREAS, Flanders Corporation, Flanders Filters, and Clark desire to amend
the Agreement upon the terms provided herein;
A G R E E M E N T
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Parties hereby agree to amend
the Agreement as follows:
1. AMENDMENT TO ANNUAL SALARY.
Section 6(a) of the Agreement is hereby amended as follows:
Commencing on October 1, 1996, the Company shall pay
to the Executive an annualized base salary at a rate of
$250,000 in equal installments as nearly as practicable
on the fifteenth and last days of each month, in
arrears. Such annualized base salary may be increased
from time to time in accordance with normal business
practices of the Company. Except as may occur on one
occasion in accordance with Section 1(m)(ii) of the
Agreement, the annualized base salary of the Executive
shall not be decreased below its then existing amount
during the term of the Agreement.
2. NO FURTHER AMENDMENT.
Except as provided above, the Agreement shall remain in full
force and effect, unless further amended pursuant to the terms of
the Agreement.
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed and
delivered this Amendment as of the day and year first above
written.
FLANDERS CORPORATION
By:____________________________________________
Its:___________________________________________
FLANDERS FILTERS, INC.
By:____________________________________________
Its:___________________________________________
STEVEN K. CLARK
_______________________________________________
Steven K. Clark
- 2 -
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") is made and
entered into this 1st day of October, 1996, by and between Flanders
Corporation, a North Carolina corporation (formerly known as Elite
Acquisitions, Inc.) ("Flanders Corporation"), Flanders Filters, Inc., a North
Carolina corporation ("Flanders Filters"), and Robert R. Amerson ("Amerson" or
the "Executive"). In this Amendment, Flanders Corporation, Flanders Filters,
and Amerson, together with their successors and permitted assignees, are
separately referred to as a "Party" and collectively as the "Parties."
W I T N E S S E T H:
WHEREAS, Flanders Corporation, Flanders Filters, and Amerson entered into
an Employment Agreement (the "Agreement"), dated December 15, 1995; and
WHEREAS, Flanders Corporation, Flanders Filters, and Amerson desire to
amend the Agreement upon the terms provided herein;
A G R E E M E N T
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Parties hereby agree to amend
the Agreement as follows:
1. AMENDMENT TO ANNUAL SALARY.
Section 6(a) of the Agreement is hereby amended as follows:
Commencing on October 1, 1996, the Company shall pay to the
Executive an annualized base salary at a rate of $250,000 in equal
installments as nearly as practicable on the fifteenth and last days
of each month, in arrears. Such annualized base salary may be
increased from time to time in accordance with normal business
practices of the Company. Except as may occur on one occasion in
accordance with Section 1(m)(ii) of the Agreement, the annualized
base salary of the Executive shall not be decreased below its then
existing amount during the term of the Agreement.
2. NO FURTHER AMENDMENT.
Except as provided above, the Agreement shall remain in full force and
effect, unless further amended pursuant to the terms of the Agreement.
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed and delivered this
Amendment as of the day and year first above written.
FLANDERS CORPORATION
By:________________________________________
Its:_______________________________________
FLANDERS FILTERS, INC.
By:________________________________________
Its:_______________________________________
ROBERT R. AMERSON
___________________________________________
Robert R. Amerson
- 2 -
EXHIBIT 21.1
Flanders Corporation
Subsidiaries of the Registrant
Air Seal Filters Housings, Inc.
Charcoal Service Corporation
Flanders Filters, Inc.
Precisionaire, Inc.
Flanders International Pte, Ltd.
EXHIBIT 24.1
CONSENT OF McGLADREY & PULLEN, LLP
<PAGE>
McGLADREY & PULLEN, LLP RSM
- ----------------------- -------------
Certified Public Accountants and Consultants International
CONSENT OF INDEPENDENT AUDITOR
To the Board of Directors
Flanders Corporation
Washington, North Carolina
We hereby consent to the use in this Form S-1 Registration Statement of our
report, dated February 8, 1996, except for Note 20 as to which the date is
October 17, 1996 relating to the consolidated financial statements of Flanders
Corporation and subsidiary, and to the reference to our Firm under the caption
"Experts" in the Prospectus.
New Bern, North Carolina /s/ McGladrey & Pullen, LLP
October 21, 1996
901 College Court Worldwide
P.O. Box 15409 Services
New Bern, North Carolina, 28561-5409 Through
(919) 637-5154 FAX (919) 637-5383 RSM International
EXHIBIT 24.2
CONSENT OF ARTHUR ANDERSEN
<PAGE>
ARTHUR
ANDERSEN
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use of our
report dated March 8, 1996, on the Precisionaire, Inc. financial statements,
included as an exhibit, and to all references to our firm included in or made a
part of this registration statement.
/s/ Arthur Andersen LLP
Tampa, Florida
October 18, 1996
