<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 24, 1996
REGISTRATION NO. 333-14655
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
---------------
AMENDMENT NO. 2
TO
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, OF 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. [X]
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. [_]
---------------
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.
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<PAGE>
FLANDERS CORPORATION
CROSS-REFERENCE SHEET
(SHOWING LOCATION IN PROSPECTUS OF PART I ITEMS OF FORM S-1)
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM AND HEADING LOCATION IN PROSPECTUS
- --------------------------------------- ----------------------
<S> <C> <C>
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; Additional
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 Shareholders....................... Cover Page; Selling Shareholders
8. Plan of Distribution....................... Underwriting; Plan of Distribution
9. Description of Capital Stock to be Regis-
tered..................................... Description of Capital Stock
10. Interests of Named Experts and Counsel..... Experts
11. Information with Respect to the Regis-
trant..................................... 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 Shareholders; 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>
<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 DECEMBER 24, 1996
PROSPECTUS
[FLANDERS LOGO APPEARS HERE]
FLANDERS CORPORATION
1,600,000 SHARES OF COMMON STOCK
Flanders Corporation (the "Company") hereby offers 1,600,000 shares of Common
Stock (the "Offering"), par value $.001 per share (the "Shares"). The Company's
Common Stock is quoted on the Nasdaq National Market System under the symbol
"FLDR." On December 20, 1996, the last reported sale price of the Common Stock
was $9 7/8 per share. See "Price Range of Common Stock."
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 SECURITIES OFFERED HEREBY INVOLVE A HIGH
DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL
DILUTION. SEE "RISK FACTORS"
LOCATED ON PAGE 8, 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.
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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO PUBLIC DISCOUNTS(1) PROCEEDS TO COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................... $ $ $
- --------------------------------------------------------------------------------
Total(3).................... $ $ $
</TABLE>
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(1) 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.
(2) Before deducting estimated expenses of $800,000 payable by the Company,
including the Underwriter's non-accountable expense allowance.
(3) 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."
-----------
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]
Six inch green square with text centered reading "Leading the Way,"
surrounded by the following photographs:
Upper left hand corner, photograph of person checking for filter leaks in a
cleanroom; center left, picture of standard HEPA filters produced by the
Company; bottom left photograph of the Company's charcoal filter products;
bottom right, Flanders' logo; center right, picture of person working in an
isolation barrier; upper left, picture of person testing the Company's
filter media as it comes off the production line.
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 UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES
EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS 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.
----------------
2
<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 broad 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 Abbot
Pharmaceuticals, E.I. Dupont, Home Depot, Inc., Lucent Technologies, Inc.,
Merck & Co., Inc., Motorola, Inc., Upjohn Co., Walmart Stores, Inc.,
Westinghouse Electric Corp., 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 will be approximately $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
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. 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.
3
<PAGE>
The Company's growth strategy is to: (i) increase the Company's market share
by selling a broad 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.
Elite, the predecessor of the Company, was incorporated on July 2, 1986 in
the State of Nevada. Effective December 29, 1995, Elite acquired FFI, 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 acquisition of
FFI was accounted for as a reverse acquisition. Under a reverse acquisition,
FFI is treated for accounting purposes as having acquired Elite and the
historical financial statements of FFI become the historical financial
statements of Elite. Therefore, all references to the historical activities of
the Company refer to the historical activities of FFI.
Effective January 29, 1996, Elite changed its domicile to North Carolina
through a reincorporation merger with and into the Company, which was a newly
formed North Carolina corporation and wholly owned subsidiary of Elite. As part
of the reincorporation merger, Elite changed its name to Flanders Corporation.
The reincorporation merger did not result in any material change in the
Company's business, management, assets, liabilities or net worth.
The Company's headquarters are located at 531 Flanders Filters Road,
Washington, North Carolina 27889, (919) 946-8081.
4
<PAGE>
THE OFFERING
<TABLE>
<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....... 17,551,548 shares(1)
Common Stock Outstanding before the Offering...... 15,951,548 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
</TABLE>
- --------
(1) The foregoing excludes (i) 240,000 shares that the Underwriters have the
option to purchase to cover over-allotments, if any, (ii) 7,623,320 shares
of Common Stock issuable upon exercise of outstanding stock options, (iii)
2,500,000 shares of Common Stock reserved for future issuance under the
Company's Long Term Incentive Plan and Director Option Plan, (iv)
1,077,778 shares of Common Stock reserved for issuance upon conversion of
certain convertible promissory notes and convertible debentures, (v)
25,000 shares of Common Stock issuable upon exercise of outstanding
warrants and (vi) Representative's Warrants to purchase 160,000 Shares of
Common Stock. 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."
5
<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." 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."
STATEMENT OF OPERATIONS DATA
For the years ended December 27, 1991, December 31, 1992, December 31, 1993,
December 30, 1994 and December 31, 1995 and the nine months ended September 30,
1995 and 1996 and pro-forma for the year ended December 31, 1995 and the nine
months ended September 30, 1996.
<TABLE>
<CAPTION>
PRO- PRO-
09/30/95 09/30/96 FORMA(1) FORMA(1)
1991 1992 1993 1994 1995 (UNAUDITED) (UNAUDITED) 12/31/95 09/30/96
------- ------- ------- ------- ------- ----------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $18,257 $20,757 $20,569 $26,072 $38,494 $28,250 $40,695 $107,984 $95,860
Cost of goods sold...... 12,577 14,682 14,065 18,845 28,953 20,944 30,327 81,045 71,893
Gross profit............ 5,680 6,075 6,504 7,227 9,541 7,305 10,368 26,939 23,967
Operating expenses...... 4,946 5,411 6,695 7,239 7,263 5,221 6,988 20,438 16,791
Operating income........ 911 915 356 622 2,419 2,084 3,380 6,642 7,176
Earnings before income
taxes.................. 572 451 25 171 1,830 1,560 3,586 4,501 6,736
Income taxes............ 238 207 15 176 684 615 1,373 1,782 2,440
Income (loss) from
continuing operations.. 334 244 10 (5) 1,146 945 2,213 2,719 4,296
Cumulative effect of
accounting changes..... -- -- 307 -- -- -- -- -- --
Extraordinary items..... 238 89 -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------- -------
Net earnings (loss)..... $ 572 $ 333 $ 317 $ (5) $ 1,146 $ 945 $ 2,213 $ 2,719 $ 4,296
======= ======= ======= ======= ======= ======= ======= ======== =======
Earnings per common and
common equivalent and
shares from continuing
operations............. $ 0.03 $ 0.03 $ -- $ -- $ 0.12 $ 0.10 $ 0.13 $ 0.21 $ 0.23
======= ======= ======= ======= ======= ======= ======= ======== =======
Earnings per common and
common equivalent
share.................. $ 0.06 $ 0.03 $ 0.03 $ -- $ 0.12 $ 0.10 $ 0.13 $ 0.21 $ 0.23
======= ======= ======= ======= ======= ======= ======= ======== =======
Weighted average common
and common equivalent
shares outstanding..... 9,654 9,654 9,654 9,693 9,832 9,693 16,975 13,203 18,587
======= ======= ======= ======= ======= ======= ======= ======== =======
</TABLE>
- --------
1. The unaudited Pro-Forma Statement of Operations includes the Acquisitions as
if they had occurred at the beginning of the period and are presented for
informational purposes only. They do not purport to represent what the
results of operations would have been for the applicable period had the
Acquisitions, in fact occurred at the beginning of the period, or to project
the results of operations for any future period.
6
<PAGE>
BALANCE SHEET DATA
As of December 27, 1991, December 31, 1992, December 31, 1993, December 30,
1994, December 31, 1995, September 30, 1996 and September 30, 1996.
<TABLE>
<CAPTION>
PRO-FORMA
9/30/96 PRO-FORMA AS ADJUSTED
1991 1992 1993 1994 1995 (UNAUDITED) 9/30/96(1) 09/30/96(1)(2)
------ ------ ------ ------ ------ ----------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Working Capital......... $1,187 $ 788 $ 675 $ 349 $4,030 $21,963 $25,869 $25,869
Total Assets............ 10,259 11,026 12,213 14,414 18,529 85,487 89,393 89,393
Long-Term
Obligations(3)......... 2,657 2,258 1,803 1,892 1,761 39,134 43,134 21,134
Total Shareholders
Equity................. 3,264 3,612 3,967 3,953 8,208 21,801 22,107 44,107
</TABLE>
- --------
(1) Gives pro-forma effect to the October Offering. See Note 6 to the Company's
Unaudited Consolidated Condensed Interim Financial Statements.
(2) As adjusted to reflect the receipt and initial application of the estimated
net proceeds from the sale of 1,600,000 shares of Common Stock offered
hereby at an assumed offering price of $10.00 per share. Also assumes that
$8,000,005 of cash received in the September Offering and the October
Offering, subject to rescission rights in favor of certain investors after
January 15, 1997 if a Registration Statement under the Securities Act of
1933 is not declared effective as of January 15, 1997 will be available to
the Company upon completion of the Offering. If such a Registration
Statement is not declared effective, and the investors exercise their
rights of rescission, pro-forma as adjusted working capital would be
$18,269,000, pro-forma as adjusted total assets would be $81,793,000 and
pro-forma as adjusted total shareholders' equity would be $36,507,000.
(3) Consists of long-term-debt, including current portion, convertible debt and
committed capital.
7
<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
pro-forma average monthly revenues through September 30, 1996 have more than
doubled compared to monthly revenues of the Company in 1995 without the
acquisitions. 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.
8
<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.
Additionally, FFI is currently subject to certain environmental claims by
the State of North Carolina. The Company estimates that any liability
resulting from any alleged contamination will not exceed $200,000, based upon
an environmental survey conducted by Aquaterra, Inc.; however, there can be no
assurance that the liability will not exceed the projected amount. Robert
Amerson, Steven Clark and Thomas Allan (directors, officers and shareholders
of the Company) have contractually agreed to indemnify the Company up to
approximately $975,000 with respect to the claims by the State of North
Carolina, however, there can be no assurance that the amount of this
indemnification will be sufficient to cover the aggregate of liabilities
asserted by the State of North Carolina. To the extent the Company incurs
costs or becomes subject to any liability with respect to such claims, it must
tender such claim to Messrs. Allan, Amerson and Clark to receive such
indemnified amounts.
PRODUCT LIABILITY; DEVELOPMENT OF NEW PRODUCTS
The Company is subject to possible liability for damages arising from filter
failure and 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
9
<PAGE>
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.
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 an aggregate of approximately 62.74% 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.
Additionally, the Company is prohibited from paying dividends without the
prior written consent of NationsBank, N.A., under its revolving credit line.
See "Dividend Policy."
VOLATILITY OF STOCK PRICE
The Company has only recently listed its Common Stock on the Nasdaq National
Market System. 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
10
<PAGE>
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.
EXERCISE OF OPTIONS; POSSIBLE ISSUANCE OF ADDITIONAL SHARES
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. To date, the Company has
granted options to employees, officers and directors of the Company
representing 6,723,320 shares in the aggregate, all of which were exercisable
as of December 3, 1996. See "Management." In addition, 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. Furthermore, the holders of the Company's 10% Convertible Notes can
convert such notes into Common Stock on a per share basis 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 November 27, 1996, such holders would receive
approximately 490,000 shares of Common Stock, based on a conversion rate of
82% of the average bid and sale price of the Company's common stock for the
preceding seven trading days ($8.16 per share). 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. The Company has issued outstanding options and warrants to
purchase 900,000 shares in aggregate to various underwriters 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.
ANTITAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS AND STATE LAW
The Company's Articles of Incorporation and Bylaws may discourage certain
types of transactions that involve an actual or threatened change in control
of the Company, unless approved by the Board of Directors of the Company.
Additionally, the Company is subject to the Control Shares Acquisition Act of
the State of North Carolina, which provides that any person who acquires
"control shares" of a publicly held North Carolina corporation will not have
voting rights with respect to the acquired shares unless a majority of the
disinterested shareholders of the corporation vote to grant such rights. This
could deprive shareholders of opportunities to realize takeover premiums for
their shares or other advantages that large accumulations of stock would
provide. See "Anti-Takeover Effects of the Company's Articles and Bylaws."
The Company's Board of Directors also has the authority to issue 10,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the Company's shareholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock may have the effect of delaying,
deterring or preventing a change in control of the Company without further
action by the shareholders and may adversely affect the voting and other
rights of the holders of Common Stock. The Company has no present plans to
issue shares of Preferred
11
<PAGE>
Stock. Furthermore, certain provisions of the Company's charter documents may
have the effect of delaying or preventing changes in control or management of
the Company, which could have an adverse effect on the market price of the
Common Stock. See "Description of Capital Stock."
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 will incur immediate and substantial dilution of
$8.22 per share or 82.2%. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 17,551,548 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 December 20, 1996, there were stock options and warrants outstanding
to purchase an aggregate of 7,648,320 shares of Common Stock at a weighted
average exercise price of $3.46 per share, all 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 November 27, 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 7,425,000
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. The holders of such
rights have not waived in writing their right to have shares included in this
Registration Statement and such holders, therefore continue to retain such
rights subject to the Underwriters right to limit the number of shares to be
included herein. 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 MANUFACTURER'S 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 broader range of products, however,
the Company does not have any written agreements with such
12
<PAGE>
distributors that require exclusivity for the Company's entire product line.
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."
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;
(v) product obsolescence due to the development of new technologies, and (vi)
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.
13
<PAGE>
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 $14,000,000 (approximately
$16,200,000 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
a portion of the principal and accrued interest on certain outstanding
indebtedness to NationsBank, comprised of a revolving line of credit and a
term loan. As of November 30, 1996 the outstanding principal amounts under the
revolving line of credit and the term loan were approximately $15,000,000 and
$5,000,000, respectively. The revolving line of credit bears interest based at
the NationsBank prime rate plus 1.0% (9.25% per annum as of November 30, 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 November 30, 1996) and
matures in September, 1998. Of the revolving loan and the term loan,
$9,006,000 and $6,500,000, respectively, were initially used to finance the
acquisition of Precisionaire. If the Over-Allotment Option is exercised in
full, the additional net proceeds so received will be used to repay any
remaining amount of indebtedness to NationsBank.
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.
None of the net proceeds from the Offering will be available for working
capital, however, the Company believes that it has sufficient funds available
for working capital from operations and cash on hand to continue the
operations of the Company for the forseeable future.
14
<PAGE>
DILUTION
As of September 30, 1996, after giving pro-forma effect to the October
Offering, the Company had a pro-forma net tangible book value of $9,641,685 or
$0.60 per share of Common Stock, not including $8,000,005 subject to potential
rescission rights if certain shares are not registered in a Registration
Statement under the Securities Act of 1933 by January 15, 1997. Pro-forma net
tangible book value per share of Common Stock represents the Company's pro-
forma net worth 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 initial application of the net proceeds therefrom),
the Company's adjusted pro-forma net tangible book value at September 30,
1996, assuming that this Registration Statement is declared effective before
January 1997, and including the $8,000,005 subject to potential rescission,
would have been $31,641,685 or $1.78 per share. This represents an immediate
increase in pro-forma net tangible book value to existing shareholders of
$1.18 per share and an immediate dilution of $8.22, or 82.2% to new investors.
"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:
<TABLE>
<S> <C> <C>
Assumed Offering Price......................................... $10.00
Pro-forma net tangible book value before the Offering........ $0.60
Increase in net tangible book value attributable to net
proceeds of the Offering.................................... $0.75
Increase in net tangible book value attributable to
$8,000,005 no longer subject to potential right of
rescission.................................................. $0.43
Adjusted pro-forma net tangible book value after the Offering.. $ 1.78
------
Dilution to new investors...................................... $ 8.22
======
</TABLE>
The foregoing excludes (i) 7,623,320 shares of Common Stock issuable upon
exercise of outstanding stock options, at a weighted average exercise price of
$3.43 per share (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) 277,778 shares of Common Stock reserved for issuance upon
conversion of certain convertible debentures at a conversion rate of $9.00 per
share, (iv) 800,000 shares of Common Stock reserved for issuance upon
conversion of certain convertible promissory notes at a conversion price equal
to the lower of (A) eighty-two percent (82%) of the average closing bid price
for the seven (7) trading days immediately preceding the conversion date, or
(B) $9.00 (provided, however, that the conversion price shall not be less than
$5.00), and (v) 25,000 shares of Common Stock issuable upon exercise of
outstanding warrants at an exercise price of $9.63. The foregoing gives effect
to the October Offering. 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.
15
<PAGE>
MARKET INFORMATION
The Company's Common Stock is listed on the Nasdaq National Market System
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 National Market
System and the Nasdaq Small-Cap Market System. Such quotations do not include
retail mark-ups, mark-downs, or other fees or commissions. The Company was
listed on the Nasdaq National Market System on November 11, 1996. Prior to that
time, the Company's Common Stock was traded on the Nasdaq Small-Cap Market
System from April 8, 1996 to November 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's Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
FISCAL YEAR 1996
First Quarter ended March 31, 1996............................. $ 2.50 $5.00
Second Quarter ended June 30, 1996............................. 10.00 5.00
Third Quarter ended September 30, 1996......................... 10.50 9.00
Fourth Quarter (through December 20, 1996)..................... 10.25 8.38
------ -----
</TABLE>
On December 20, 1996, the closing price for the stock was $9 7/8. As of
December 2 , 1996 there were approximately 400 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. Under the terms of the revolving credit line with NationsBank, the
Company cannot pay dividends without the prior written consent of NationsBank,
N.A.
16
<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 September 30, 1996, to the
October Offering and (iii) the historical consolidated capitalization of the
Company as adjusted to give effect, as of September 30, 1996, to the October
Offering and the sale of 1,600,000 shares of Common Stock offered by the
Company hereby (after deduction of underwriting discounts 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.
IN THOUSANDS EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
----------------------------------
PRO- PRO-FORMA
ACTUAL FORMA(1) AS ADJUSTED(1)(2)
------- -------- -----------------
<S> <C> <C> <C>
Current portion of long-term obligations,
including notes payable.................... $ 2,279 $ 2,279 $ 2,279
Long-term debt, less current portion........ 27,752 27,752 13,752
Convertible debt............................ 6,500 6,500 6,500
Committed capital........................... 4,000 8,000 --
Stockholders' equity:
Preferred stock, authorized 10,000,000
shares of $0.001 par value,
0 shares issued and outstanding.......... -- -- --
Common Stock, authorized 50,000,000 shares
of $0.001 par value, 15,459,905 shares
issued and outstanding actual; 15,938,348
shares issued and outstanding pro-
forma(1)(3); 17,537,348 shares issued and
outstanding pro-forma as
adjusted(1)(2)(3)........................ 15 16 18
Additional paid-in capital................ 14,794 15,099 37,097
Retained earnings......................... 6,992 6,992 6,992
------- ------- -------
Total stockholders' equity.............. 21,801 22,107 44,107
------- ------- -------
Total capitalization.................. $62,332 $66,638 $66,638
======= ======= =======
</TABLE>
- --------
(1) Gives pro-forma effect to the October Offering. See Note 6 to the
Company's Unaudited Consolidated Condensed Interim Financial Statements.
(2) As adjusted to reflect the receipt and initial application of the
estimated net proceeds from the sale of 1,600,000 shares of Common Stock
offered hereby at an assumed offering price of $10.00 per share. Also
assumes that $8,000,005 of cash received in the September Offering and the
October Offering, subject to rescission rights in favor of certain
investors after January 15, 1997 if a Registration Statement under the
Securities Act of 1933 is not declared effective, as of January 15, 1997
will be available to the Company upon completion of the Offering. If such
a Registration Statement is not declared effective and the investors
exercise their rights of rescission, pro forma as adjusted working capital
would be $18,269,000, pro forma as adjusted total assets would be
$81,793,000 and pro forma as adjusted total shareholders' equity would be
$36,507,000.
(3) The foregoing excludes (i) 7,623,320 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) 25,000 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."
17
<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 nine months ended September
30, 1995 and September 30, 1996 have 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.
SELECTED HISTORICAL OPERATIONS DATA
For the years ended December 27, 1991, December 31, 1992, December 31, 1993,
December 30, 1994 and December 31, 1995 and for the nine months ended
September 30, 1995 and 1996
IN THOUSANDS EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 09/30/95 09/30/96
------- ------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $18,257 $20,757 $20,569 $26,072 $38,494 $28,250 $40,695
Cost of goods sold...... 12,577 14,682 14,065 18,845 28,953 20,944 30,327
Gross profit............ 5,680 6,075 6,504 7,227 9,541 7,305 10,368
Operating expenses...... 4,946 5,411 6,695 7,239 7,263 5,222 6,988
Operating income........ 911 915 356 622 2,419 2,084 3,380
Earnings before income
taxes.................. 572 451 25 171 1,830 1,560 3,586
Income taxes............ 238 207 15 176 685 615 1,373
Income (loss) from
continuing operations.. 334 244 10 (5) 1,145 945 2,213
Cumulative effect of
accounting changes..... -- -- 307 -- -- -- --
Extraordinary items..... 238 89 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net earnings (loss)..... $ 572 $ 333 $ 317 $ (5) $ 1,145 $ 945 $ 2,213
======= ======= ======= ======= ======= ======= =======
Earnings per common and
common equivalent share
from continuing
operations............. 0.03 0.03 -- -- 0.12 0.10 0.13
======= ======= ======= ======= ======= ======= =======
Earnings per common and
common equivalent
share(1)............... $ 0.06 $ 0.03 $ 0.03 $ -- $ 0.12 $ 0.10 $ 0.13
======= ======= ======= ======= ======= ======= =======
Weighted average common
and common equivalent
shares outstanding..... 9,654 9,654 9,654 9,693 9,832 9,693 16,975
======= ======= ======= ======= ======= ======= =======
</TABLE>
- --------
1. Supplemental Earnings per Share. Assuming the Offering, and the repayment
of debt from the proceeds thereof, had occurred on January 1, 1996, net
income for the nine months ended September 30, 1996, would have been
$2,393,519, or $0.14 per share ($0.14 fully diluted), on 16,862,415
(17,441,285 fully diluted) shares common and common equivalent shares
outstanding. Assuming the Offering, and the repayment of debt from the
proceeds thereof, had occurred on January 1, 1995, net income for the year
ended December 31, 1995, would have been $1,538,132, or $0.15 per share, on
10,532,535 shares outstanding.
SELECTED HISTORICAL BALANCE SHEET DATA
As of December 27, 1991, December 31, 1992, December 31, 1993, December 30,
1994, December 31, 1995 and September 30, 1996
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 9/30/96
------- ------- ------- ------- ------- -------
(000'S OMITTED)
<S> <C> <C> <C> <C> <C> <C>
Working capital................ $ 1,187 $ 788 $ 675 $ 349 $ 4,030 $21,963
Total assets................... 10,259 11,026 12,213 14,414 18,529 85,487
Long-term obligations(1)....... 2,657 2,258 1,803 1,892 1,761 39,134
Total shareholders equity...... 3,264 3,612 3,967 3,953 8,208 21,801
</TABLE>
- --------
(1) Long-term obligations includes long-term debt, current portion of long-
term debt, convertible debt and committed capital.
18
<PAGE>
UNAUDITED PRO-FORMA FINANCIAL INFORMATION
The Unaudited Pro-Forma Consolidated Statement of Operations for the nine
months ended September 30, 1996 and the year ended December 31, 1995 (the
"Unaudited Pro-Forma Consolidated Financial Statements") are set forth below.
The Unaudited Pro-Forma Statements of Operations present the combined
results of the Company, Precisionaire, CSC and AirSeal as though the
Acquisitions had occurred at January 1, 1995, and include only adjustments
directly attributable to the Acquisitions, such as additional depreciation
from the write-up of assets attributable to the purchase, additional
amortization due to recognition of goodwill from the Acquisitions, decrease in
rental expense for certain land and buildings leased by the acquired companies
which were acquired as part of the Acquisitions, additional interest expense
from financing the Acquisitions, and decrease in compensation expense to non-
recurring salaries paid to former shareholders of the acquired companies. The
Unaudited Pro-Forma Statements of Operations are presented for informational
purposes only and do not purport to represent what the results of operations
for the nine months ended September 30, 1996 and the year ended December 31,
1995 would have been had the Acquisitions, in fact, occurred at 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.
PRO-FORMA STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 1996 (in thousands, except per share data)
<TABLE>
<CAPTION>
PRE-ACQUISITION PRO-FORMA PRO-FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO-FORMA HISTORICAL PRECISIONAIRE TOTAL
COMPANY CSC & AIRSEAL CSC & AIRSEAL W/ CSC & AIRSEAL PRECISIONAIRE ADJUSTMENTS PRO-FORMA
---------- --------------- ------------- ---------------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $40,695 $2,203 $-- $42,898 $52,962 $ -- $95,860
Cost of goods sold...... 30,327 1,681 -- 32,008 39,885 -- 71,893
------- ------ ---- ------- ------- ----- -------
Gross profit........... 10,368 522 -- 10,890 13,077 -- 23,967
Other Operating
Revenue................ -- -- -- -- -- -- --
General and
administrative
expenses............... 6,988 481 (67)/1/ 7,403 9,874 (486)/2/ 16,791
------- ------ ---- ------- ------- ----- -------
Operating income........ 3,380 41 67 3,487 3,203 486 7,176
Nonoperating income
(expense):
Interest income........ 3 1 -- 4 -- -- 4
Other income........... 494 7 -- 501 418 -- 919
Interest expense....... (290) (3) -- (293) (212) (858)/3/ (1,363)
------- ------ ---- ------- ------- ----- -------
207 5 -- 212 206 (858) (439)
------- ------ ---- ------- ------- ----- -------
Income before income
taxes................. 3,586 46 67 3,699 3,409 (372) 6,736
Income taxes............ 1,373 19 25 1,417 1,163 (140) 2,440
------- ------ ---- ------- ------- ----- -------
Net income............. $ 2,213 $ 27 $ 42 $ 2,282 $ 2,246 $(232) $ 4,296
======= ====== ==== ======= ======= ===== =======
Earnings per share--
Primary................ $ 0.13 $ 0.23
======= =======
Earnings per share--
Fully Diluted.......... $ 0.13 $ 0.22
======= =======
Average shares--
Primary................ 16,396 2,190/4/ 18,587
======= ===== =======
Average shares--Fully
Diluted................ 16,975 2,884/4/ 19,860
======= ===== =======
</TABLE>
19
<PAGE>
- --------
(1) Consists of $21,542 and $22,396 of additional depreciation for the write-
up of fixed assets to market value of AirSeal and CSC, respectively;
$9,000 and $1,877 of additional amortization of goodwill for AirSeal and
CSC, respectively; $33,315 and $43,314 of reduced rents due to property
acquired as part of the acquisition of AirSeal and CSC, respectively; and
$44,718 of non-recurring compensation paid to a shareholder of AirSeal
not actively involved in the business, whose position was contractually
removed in the purchase agreement with the intent that no replacement
would be hired for the position. Adjustments are for five months and
three months of operations prior to the acquisition of AirSeal and CSC,
respectively. The Company recognized $1,173,750 and $716,179 of goodwill
with respect to the acquisition of AirSeal and CSC, respectively.
Goodwill for both transactions is being amortized on a straight-line
basis over 40 years.
(2) Consists of $374,840 of additional depreciation due to write-up of fixed
assets to market value, $126,947 of additional amortization of write-up
of intangible assets to market value and goodwill from the acquisition of
Precisionaire, $273,067 of reduced rental expense to reflect the purchase
of the Terrell, Texas facility, and $714,415 of reduced compensation
expense to reflect the non-recurring salaries of previous Precisionaire
shareholders, whose positions were contractually removed in the purchase
agreement with the stated intent that no replacements would be hired. The
Company recognized $9,534,286 of goodwill with respect to the acquisition
of Precisionaire. Goodwill from the acquisition of Precisionaire is being
amortized on a straight-line basis over 40 years.
(3) Interest was calculated by assuming that the Acquisitions and the private
offerings had been completed, and the NationsBank credit facility had
been in place at January 1, 1996. The interest rates used were the
weighted average prime rate for NationsBank (8.5%) over the year plus
1.5% and 1.0% for the $6,500,000 term loan and the $25,000,000 revolving
credit line, respectively; 10.0% for the 10% Convertible Notes; and 18.0%
for the Series A Convertible Subordinated Debentures.
(4) Assuming that the shares issued in the private offerings and the
Acquisitions were issued on January 1, 1995, leads to the following
increases in weighted average common and common equivalent shares
outstanding.
<TABLE>
<CAPTION>
INCREASE IN
NUMBER OF SHARES
-----------------------
TRANSACTION PRIMARY FULLY DILUTED
----------- ------- -------------
<S> <C> <C>
Private placement of 500,000 shares completed on Janu-
ary 24, 1996......................................... 59,000 59,000
Purchase of CSC....................................... -0- 42,000
Private placement of 1,537,000 shares completed on
June 3, 1996......................................... 1,168,000 1,168,000
Purchase of AirSeal................................... -0- 69,000
Purchase of Precisionaire............................. -0- 578,000
Private placement of 900,000 shares completed on Sep-
tember 30, 1996...................................... 900,000 900,000
Associated warrants................................... 63,000 68,000
--------- ---------
2,190,000 2,884,000
========= =========
</TABLE>
20
<PAGE>
PRO-FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED AND HISTORICAL, IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------
THE PRO-FORMA PRO-
COMPANY CSC AIRSEAL PRECISIONAIRE ADJUSTMENTS 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 11,497 794(1) 20,438
------- ------ ------ ------- ------- --------
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)(2) (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,
primary................ $ 0.12 $ 0.20
Earnings per weighted
average share, fully
diluted................ $ 0.12 $ 0.18
======= ========
Weighted average common
and common equivalent
shares outstanding,
primary................ 9,832 4,028(3) 13,860
Weighted average common
and common equivalent
shares outstanding,
fully diluted.......... 9,832 5,064(3) 14,896
======= ======= ========
</TABLE>
- --------
(1) Consists of: $319,713, $66,921 and $75,990 of additional depreciation for
the write-up of fixed assets to market value of Precisionaire, AirSeal
and CSC, respectively; $238,357, $29,344 and $17,905 of additional
amortization of goodwill for Precisionaire, AirSeal and CSC,
respectively; $64,193 and $121,495 of reduced rents due to property
acquired as part of the acquisition of AirSeal and CSC, respectively; and
$1,293,681 and $63,140 of non-recurring compensation paid to shareholders
of Precisionaire and AirSeal, respectively whose positions were
contractually removed in the respective purchase agreements with the
intent that no replacements would be hired. The Company recognized
$1,173,759, $716,179 and $9,534,286 of goodwill with respect to the
acquisition of AirSeal, CSC and Precisionaire, respectively. Goodwill
from the acquisitions is being amortized on a straight-line basis over 40
years.
(2) Interest was calculated by assuming that the Acquisitions and the prior
offerings had been completed, and the NationsBank credit facility had
been in place at January 1, 1995. The interest rates used were the
weighted average prime rate for NationsBank (8.5%) over the year plus
1.5% and 1.0% for the $6,500,000 term loan and revolving credit line,
respectively; 10.0% for the 10% Convertible Notes; and 18.0% for the
Series A Convertible Subordinated Debentures.
(3) Assuming that the shares issued in the Private Offerings and the
Acquisitions were issued on January 1, 1995, leads to the following
increases in weighted average common and common equivalent shares
outstanding:
<TABLE>
<CAPTION>
INCREASE IN
TRANSACTION NUMBER OF SHARES
- ----------- -------------------
FULLY
PRIMARY DILUTED
--------- ---------
<S> <C> <C>
Private placement of 1,100,000 shares completed on
December 29, 1995........................................ 1,091,000 1,091,000
Private placement of 500,000 shares completed on January
24, 1996................................................. 500,000 500,000
Purchase of CSC........................................... 0 100,000
Private placement of 1,537,000 shares completed on June 3,
1996..................................................... 1,537,000 1,537,000
Purchase of AirSeal....................................... 0 150,000
Purchase of Precisionaire................................. 0 786,000
Private placement of 900,000 shares completed on September
30, 1996................................................. 900,000 900,000
--------- ---------
4,028,000 5,064,000
========= =========
</TABLE>
21
<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. Unless otherwise stated, the
following discussion does not include the financial results or information of
Precisionaire for the periods indicated. 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 an 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 companies. Flanders Airpure Products
Company, LLC, was organized on February 24, 1994 and it is a sixty-three
percent (63%) subsidiary of Flanders Filters, Inc. Flanders Airpure West, Inc.
was organized on March 25, 1996 and is a wholly owned subsidiary of Flanders
Filters, Inc. Flanders Airpure Products Company, L.L.C. and Flanders Airpure
West, Inc. (collectively, "Airpure"), manufacture and market industrial and
commercial bags, pleats and industrial grade HEPA filters. As of May 31, 1996,
the Company acquired CSC, and on June 15, 1996, acquired AirSeal. As of
September 23, 1996, the Company acquired Precisionaire. CSC specializes in the
manufacture of high-end charcoal filters and containment environments, and has
a service arm. AirSeal produces customized mid-range housings and HVAC
equipment. Precisionaire manufactures air filters and related products for
commercial and residential air conditioning and heating systems. The results
of operations for the acquired businesses are included in the Company's
financial statements only from the applicable date of acquisition. As a
result, the Company's historical results of operations for the periods
presented should be evaluated specifically in the context of the Acquisitions.
Additionally, 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. In particular, the Unaudited Pro-Forma Consolidated Statements of
Operations do not purport to represent the operations of the Company had the
Acquisitions, in fact, occurred at the beginning of the respective periods, or
to project the results of operations for any future period. There can be no
guarantee that the Company will be able to achieve these gains in efficiency.
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.
22
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended September 30, 1995 Compared to September 30, 1996
The following table summarizes the Company's results of operations as a
percentage of net sales for the three months ended September 30, 1995 and 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1995 1996
----------- ------------
<S> <C> <C> <C> <C>
Net sales......................................... 9,319 100.0% 14,453 100.0%
Gross profit...................................... 2,336 25.1 3,901 27.0
Operating expenses................................ 1,669 17.9 2,440 16.9
Operating income.................................. 667 7.2 1,461 10.1
Income before income taxes........................ 530 5.7 1,420 9.8
Income taxes...................................... 224 2.4 555 3.8
Net income........................................ 306 3.3 865 6.0
</TABLE>
Net sales: Net sales for the three months ended September 30, 1996 increased
by $5,134,000, or 55.1%, to $14,453,000, from $9,319,000 for the three months
ended September 30, 1995. The increase was due primarily to the acquisition of
CSC and AirSeal, which accounted for $2,818,000 of the increase in sales. The
remaining increase of $2,316,000 was due to increases in sales to both new and
existing customers.
Gross Profit: Gross profits for the three months ended September 30, 1996
increased by $1,565,000, or 67.0%, to $3,901,000, which represented 27.0% of
net sales, compared to $2,336,000, or 25.1% of net sales for the three months
ended September 30, 1995. The primary reason for the increase in gross profit
margin was the increase in operating efficiency associated with focusing each
manufacturing facility on a particular type of product, which reduced direct
costs in the following areas: reduced down time due to switching lines between
products; eliminated individual lot inventory tracking at the Company's
Washington, NC facility by moving all containment environment manufacturing
operations to CSC's plant in Bath, NC; and other increases in efficiencies
achieved through reduced training and coordination time at each location as a
result of reducing the number of certification and training hours by producing
fewer types of products at each facility.
Operating expenses: Operating expenses increased by $771,000, or 46.2%, to
$2,440,000, compared to $1,669,000 for the three months ended September 30,
1996 and 1995, respectively. Of this increase, $327,000 was due to the
acquisition of CSC and AirSeal. The remaining $444,000 of this increase was due
to additional sales, marketing and commission expense associated with the
increase in sales, salaries for new positions in financial administration,
support and sales, and other operational expenses. Operating expenses decreased
as a percentage of net sales, to 16.9%, compared to 17.9% for the quarters
ended September 30, 1996 and 1995, respectively. This decrease in operating
expenses as a percentage of net sales was due to the spreading of fixed costs
over a larger revenue base.
Income taxes: Income tax expense increased by $331,000, or 147.8%, to
$555,000, or 39.1% of net income before income taxes, for the three months
ended September 30, 1996, compared to $224,000, or 42.3% of net income before
income taxes, for the three months ended September 30, 1995.
Net income: Net income increased $559,000, or 182.7%, to $865,000, or $.05
per share, from $306,000, or $.03 per share, for the three months ended
September 30, 1996 and 1995, respectively.
23
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO SEPTEMBER 30, 1996
The following table summarizes the Company's results of operations as a
percentage of net sales for the nine months ended September 30, 1995 and 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1995 1996
------------ ------------
<S> <C> <C> <C> <C>
Net sales........................................ 28,250 100.0% 40,695 100.0%
Gross profit..................................... 7,305 25.9 10,368 25.5
Operating expenses............................... 5,222 18.5 6,988 17.2
Operating income................................. 2,084 7.4 3,380 8.3
Income before income taxes....................... 1,560 5.5 3,586 8.8
Income taxes..................................... 615 2.2 1,373 3.4
Net income....................................... 945 3.3 2,213 5.4
</TABLE>
Net sales: Net sales for the nine months ended September 30, 1996 increased
by $12,445,000, or 44.1%, to $40,695,000 compared to $28,250,000 for the nine
months ended September 30, 1995. Approximately $4,688,000 of the increase was
due to the acquisition of CSC and AirSeal. The remaining increase of
$7,757,000 was due to increased sales to new and existing customers.
Gross Profit: Gross profits for the nine months ended September 30, 1996
increased by $3,063,000, or 41.9%, to $10,368,000, which represented 25.5% of
net sales, compared to $7,305,000, which represented 25.9% of net sales for
the nine months ended September 30, 1995.
Operating expenses: Operating expenses increased by $1,766,000, or 33.8%, to
$6,988,000 from $5,222,000 for the nine months ended September 30, 1996 and
1995, respectively. Of this increase, $761,000 was due to the acquisition of
CSC and AirSeal. The remaining $1,005,000 of this increase was due to
additional sales, marketing and commission expense associated with the
increase in sales, salaries for new positions in financial administration,
support and sales, and other operational expenses. Operating expenses
decreased as a percentage of net sales, to 17.2%, compared to 18.5% for the
nine months ended September 30, 1996 and 1995, respectively. This decrease in
operating expenses as a percentage of net sales is due to the spreading of
fixed costs over a larger revenue base.
Income taxes: For the nine months ended September 30, 1996, the Company's
tax expense increased $758,000, or 123.3%, to $1,373,000, or 38.3% of income
before income taxes, compared to $615,000, or 39.4% of income before income
taxes for the nine months ended September 30, 1995.
Net income: Net income for the nine months ended September 30, 1996
increased $1,268,000, or 134.2%, to $2,213,000, or $.13 per share, from
$945,000, or $.10 per share, for the nine months ended September 30, 1995.
24
<PAGE>
YEAR ENDED DECEMBER 30, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The following table summarizes the Company's results of operations as a
percentage of net sales for the years ended December 31, 1994 and December 30,
1995.
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
DECEMBER 31, 1994 DECEMBER 30, 1995
------------------- ------------------
<S> <C> <C> <C> <C>
Net sales............................. $ 26,072 100.0% $ 38,494 100.0%
Gross profit.......................... 7,227 27.7 9,541 24.8
Operating expenses.................... 7,239 27.8 7,263 18.8
Operating income...................... 622 2.4 2,419 6.3
Income before income taxes............ 171 0.7 1,830 4.8
Income taxes.......................... 176 0.7 684 1.8
Net income............................ (5) -- 1,146 3.0
</TABLE>
Net Sales: Net sales for 1995 increased by $12,422,000, or 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 $4,500,000 of increased net sales from Airpure, a subsidiary
established in 1994.
Other Operating Revenue. Other operating revenue decreased $492,000, or
77.7%, to $142,000, compared to $634,000 in 1994. During 1994, the Company
dissolved Foremost Freight, Inc., a nonprofitable subsidiary, and absorbed its
remaining assets and liabilities, resulting in the elimination of $553,000 of
freight revenue.
Gross Profit: 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 a
resource scarcity increased these costs to approximately $370,000 over budget
for the year. The Company does not anticipate that shortages in these
materials will result in any significant increased costs in the foreseeable
future because the Company has increased the number of suppliers from which it
purchases such materials, and the number of suppliers in the industry have
also increased. Other normal fluctuations in materials prices and product mix
accounted for the rest of the change in gross margin percentage.
Operating Expenses: 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 Income (Loss): Net income for 1995 was $1,146,000, or $0.12 per share,
compared to a net loss of $5,000, or $0.00 per share, for 1994. Net income
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.
25
<PAGE>
YEAR ENDED DECEMBER 31, 1993 COMPARED TO YEAR ENDED DECEMBER 30, 1994
The following table summarizes the Company's results of operations as a
percentage of net sales for the years ended December 31, 1993 and December 30,
1994
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
DECEMBER 31, 1993 DECEMBER 30, 1994
------------------ -------------------
<S> <C> <C> <C> <C>
Net sales........................... $ 20,569 100.0% $ 26,072 100.0%
Gross profit........................ 6,504 31.6 7,227 27.7
Operating expenses.................. 6,695 32.6 7,239 27.8
Operating income.................... 356 1.7 622 2.4
Income before income taxes.......... 25 0.1 171 0.7
Income taxes........................ 15 0.1 176 0.7
Cumulative effect of accounting
changes............................ 307 1.5
Net income.......................... 317 1.5 (5) --
</TABLE>
Net Sales: Net sales for 1994 increased by $5,503,000, or 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 $1,500,000 of net sales from Airpure, a newly established
subsidiary.
Gross Profit: 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: Operating expenses for the Company increased 8.1%, to
$7,239,000 in 1994, compared to $6,695,000 in 1993. This 8.1% 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."
Net Income (Loss): The Company experienced a net loss of $5,000 in 1994,
compared to net income of $317,000 in 1993. The loss in 1994 was the result of
a larger than normal income tax expense due to an audit settlement with the
Internal Revenue Service of $76,000. The $317,000 of net income in 1993 would
have been net income 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 results of operations reflect the
acquisitions of Precisionaire, CSC and AirSeal as if each had occurred at the
beginning of each period presented. The pro-forma results of operations for
the nine months ended September 30, 1996 include the results of operations of
the Company, Precisionaire, CSC and AirSeal for such period. Adjustments to
the pro-forma combined results of operations 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 previous owners; 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 results of
operations 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.
26
<PAGE>
PRO-FORMA NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO PRO-FORMA NINE
MONTHS ENDED SEPTEMBER 30, 1995
The following table summarizes the Company's pro forma results of operations
both in dollars and as a percentage of net sales for the nine month periods
ended September 30, 1995 and 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1995 1996
------------- -------------
<S> <C> <C> <C> <C>
Net sales...................................... $81,938 100.0% $95,860 100.0%
Gross profit................................... 20,550 25.1 23,967 25.0
Operating expenses............................. 14,909 18.2 16,791 17.5
Operating income............................... 5,641 6.9 7,176 7.5
Income before income taxes..................... 4,159 5.1 6,736 7.0
Income taxes................................... 1,554 1.9 2,440 2.5
Net income..................................... 2,605 3.2 4,296 4.5
</TABLE>
Net sales: Pro forma net sales for the nine months ended September 30, 1996
increased $13,922,000, or 17.0%, to $95,860,000, compared to $81,938,000 for
the nine months ended September 30, 1995. The increase was due primarily to
each of the subsidiaries increasing its sales through enhanced marketing and
increased production. The following table illustrates the increases in net
sales from each subsidiary.
<TABLE>
<CAPTION>
NET SALES FOR NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------------
% INCREASE
1995 1996 1996
----------- ----------- --------------
<S> <C> <C> <C>
Precisionaire....................... $ 47,743 $ 52,962 10.9%
Flanders Filters.................... 24,348 30,692 26.1%
Airpure & Airpure West.............. 4,236 7,291 72.1%
CSC................................. 3,916 4,216 7.7%
AirSeal............................. 2,028 2,654 30.9%
Consolidation of intercompany
activity.......................... (333) (1,955)
----------- ----------- --------
Total net sales................... $ 81,938 $ 95,860 17.0%
=========== =========== ========
</TABLE>
Gross profit: Pro forma gross profits represented 25.0% and 25.1% of pro
forma net sales for the periods ended September 30, 1996 and September 30,
1995, respectively.
Operating expenses: Pro forma operating expenses increased by $1,882,000, or
12.6%, to $16,791,000 for the nine months ended September 30, 1996, from
$14,909,000 for the nine months ended September 30, 1995. Pro forma operating
expenses decreased as a percentage of pro forma net sales, to 17.5% from 18.2%
for the periods ended September 30, 1996 and 1995, respectively. This decrease
in operating expenses as a percentage of net sales is due to the spreading of
fixed costs over a larger revenue base.
Income taxes: For the nine months ended September 30, 1996 and 1995, the
Company's pro forma provision for income taxes represented approximately 36.2%
and 37.4%, respectively, of net income before income taxes.
Net income: Pro forma net income increased $1,691,000, or 64.9%, to
$4,296,000, for the nine months ended September 30, 1996, from $2,605,000 for
the nine months ended September 30, 1995.
27
<PAGE>
PRO-FORMA YEAR ENDED DECEMBER 31, 1995 COMPARED TO PRO-FORMA YEAR ENDED
DECEMBER 30, 1994
The following table summarizes the Company's unaudited pro-forma results of
operations as a percentage of net sales for the years ended December 30, 1994
and December 31, 1995.
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------
DECEMBER 31,
DECEMBER 30, 1994 1995
------------------ --------------
<S> <C> <C> <C> <C>
Net sales................................. $ 87,210 100.0% $107,984 100.0%
Gross profit.............................. 22,014 25.2 26,939 24.9
Operating expenses........................ 19,764 22.7 20,438 18.9
Operating income.......................... 2,884 3.3 6,642 6.2
Income before income taxes................ 1,082 1.2 4,501 4.2
Income taxes.............................. 554 0.6 1,782 1.7
Net income................................ 528 0.6 2,719 2.5
</TABLE>
Net Sales: Pro-forma net sales for 1995 increased 23.8%, 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.
Gross Profit: 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."
Operating Expenses: 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.
Net Income: Pro-forma net income for 1995 was $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
The following table summarizes the Company's unaudited pro-forma results of
operations as a percentage of net sales for the years ended December 31, 1993
and December 30, 1994.
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------
DECEMBER 31, 1993 DECEMBER 30, 1994
------------------ ------------------
<S> <C> <C> <C> <C>
Net sales............................ $ 77,910 100.0% $ 87,210 100.0%
Gross profit......................... 20,140 25.9 22,014 25.2
Operating expenses................... 17,859 22.9 19,764 22.7
Operating income..................... 2,828 3.6 2,884 3.3
Income before income taxes........... 1,244 1.6 1,528 1.2
Income taxes......................... 464 0.6 554 0.6
Cumulative effect of accounting
change.............................. 307 0.4 -- --
Net income........................... 1,087 1.4 528 0.6
</TABLE>
Net Sales: Pro-forma net sales for 1994 increased 11.9%, 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.
Gross Profit: 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.
28
<PAGE>
Operating expenses: 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.
Net Income (Loss): Pro-forma net income for 1994 was $528,000 compared to
$1,087,000 for 1993, a decrease of 51.4%. The decrease in net income was the
result of an audit settlement with the Internal Revenue Service of $76,000 as
well as an increase in deferred tax liability of $33,000 related to the
Company's changing its method of accounting for income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $21,963,000 at September 30, 1996, compared to
$4,030,000 at December 31, 1995. This includes cash and cash equivalents of
$2,603,000 and $2,974,000 at September 30, 1996 and December 31, 1995,
respectively. Working capital at September 30, 1996 does not include the
unused portion of the Company's revolving credit line or the proceeds from the
October Offering. Trade receivables increased $14,206,000, or 196.1%, to
$21,450,000 at September 30, 1996 from $7,244,000 at December 31, 1995. The
increase in receivables is primarily attributable to the Acquisitions, which
accounted for $10,411,000 of the increase. The remaining $3,795,000 of the
increase is primarily due to increases associated with the increased volume in
net sales and timing differences in shipments and payments received. The
majority of sales of the Company are on terms ranging from 30 to 90 days, and
the average days outstanding for payment of the Company's invoices is from 65
to 90 days.
Operations consumed $67,000 of cash during the nine months ended September
30, 1996, compared to generating $1,211,000 for the nine months ended
September 30, 1995. The difference in cash flows was caused by an increase in
cash and working capital requirements associated with increased sales, which
is primarily composed of the increases in payables, receivables and
inventories at September 30, 1996. Investing activities during the nine months
ended September 30, 1996 consumed $33,729,000 of cash, consisting primarily of
the cash payments made for the Acquisitions. Financing activities during the
nine months ended September 30, 1996 resulted in $33,426,000 of cash, from the
private placement of the Company's common stock, incurrence of long-term debt,
and the issuance of convertible debentures.
Effective September 23, 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 $25,123,425 and 786,885 shares of the
Company's common stock, subject to a post-closing purchase price adjustment,
and was paid by the delivery of both $25,123,425 in cash to the Precisionaire
sellers and 786,885 shares of the Company's common stock to an escrow agent to
be held in escrow and released to the Precisionaire sellers over a three year
period if certain gross revenue targets are met by Precisionaire.
Contemporaneously therewith, Precisionaire entered into an agreement to
acquire from POT Realty (owned by the former shareholders of Precisionaire) a
manufacturing facility, warehouse and related real property, located in
Terrell, Texas, whereby Precisionaire would assume $2,191,575 of debt with
respect to such building. This transaction was completed as of October 31,
1996. The Company's balance sheet at September 30, 1996 contains accruals in
long-term debt and fixed assets to reflect this assumed purchase. For
financial statement purposes, the acquisition of Precisionaire is being
accounted for as having occurred on September 30, 1996, such that the
Company's balance sheet at September 30, 1996 includes the assets of
Precisionaire.
To finance the acquisition of Precisionaire, the Company arranged a credit
facility with NationsBank, N.A. consisting of (i) a working capital revolving
credit facility in the maximum principal amount of $25,000,000 which bears
interest at the prime rate as established by NationsBank, N.A., plus one
percent (1%) per annum and is due and payable in full on September 30, 1998
and (ii) a term loan facility in the maximum principal amount of $6,500,000
which bears interest at the prime rate as established by NationsBank, N.A.,
plus one and one-half percent (1.50%) per annum and is due and payable in full
on September 30, 1998. All of the Company's assets secure both the revolving
credit facility and the term loan facility. The Company is required to repay
the outstanding balance of the term loan upon the consummation of a public
offering. At September 30, 1996, the Company had used approximately
$14,783,000 of the revolving credit facility, $9,006,000 of which was used for
the acquisition of Precisionaire, and $6,500,000 of the term loan facility.
See "Use of Proceeds".
29
<PAGE>
As of September 30, 1996, the Company raised, (i) through a private offering
of its Common Stock at $9.00 per share, $7,699,005, for 855,445 shares of
stock, (ii) $2,500,000 through a private offering of Series A Subordinated
Convertible Debentures to certain unrelated investors; such debentures are due
and payable on the earlier of the release of $4,000,005 from escrow to the
Company, upon the Company having filed a Registration Statement made effective
by January 15, 1997, or September 17, 1999, and are convertible into an
aggregate of 277,778 shares of the Company's Common Stock, based upon a
conversion price of $9.00 per share, and (iii) $4,000,000 from the sale of 10%
Convertible Notes pursuant to Regulation S to certain unrelated offshore
investors (collectively called the "September Offering"). The 10% Convertible
Notes are convertible at any time commencing forty-one (41) days after
issuance into shares of the Company'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, 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 the 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. Net proceeds to the Company for the September
Offering after commissions and expenses of $982,400 were $13,216,605. Of the
$7,699,005 raised through the September Offering, $4,000,005 is subject to
certain rights of rescission in favor of an investor if a Registration
Statement under the Securities Act of 1933 registering such shares for re-sale
is not declared effective as of January 15, 1997. 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, at an exercise price equal to the conversion rate.
Subsequent to the end of the quarter, in October 1996, the Company raised an
additional $4,306,000 from a private placement of 478,444 shares of stock at
$9.00 per share to accredited investors. Net proceeds from the Offering, after
commissions of $400,000, were $3,906,000. Of the $4,306,000 raised in October,
1996, $4,000,000 is subject to certain rights of rescission in favor of an
investor if a Registration Statement under the Securities Act of 1933
registering such shares for re-sale is not declared effective as of January
15, 1997. Combined with the September Offering, total net proceeds from
September and October were $17,122,605.
Expansion of the Company will require substantial continuing capital
investment for the manufacture of filtration products. Although the Company
has been able to arrange debt facilities or equity financing to date, there
can be no assurance that sufficient debt financing or equity will continue to
be available in the future, or that it will be available on terms acceptable
to the Company. Substantial additional debt or equity financing may be needed
for the Company to achieve its short-term and long-term business objectives.
Failure to obtain sufficient capital could materially affect the Company's
acquisition strategy. The Company expects that future financing will include
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.
OUTLOOK
This Outlook contains many forward-looking statements. See "Risk Factors--
Forward-Looking Statements and Associated Risks." Important factors to
consider in evaluating such forward-looking statements include (i) the
shortage of reliable market data regarding the air filtration market; (ii)
changes in external competitive market factors or in the Company's internal
budgeting process which might impact trends in the Company's results of
operations; (iii) anticipated working capital or other cash requirements; (iv)
changes in the Company's business strategy or an inability to execute its
strategy due to unanticipated changes in the market; (v) product obsolescence
due to the development of new technologies, and (vi) various competitive
factors that may prevent the Company from competing successfully in the
marketplace. In light of these risks and uncertainties, there can be no
assurance that the events contemplated by the forward-looking statements
contained in this Registration Statement will in fact occur.
30
<PAGE>
The Company believes its future results of operations could be affected by a
variety of factors, including the successful integration of CSC, AirSeal and
Precisionaire into the Company, whether management can successfully manage the
Company's growth, the ability of the Company to keep up with technological
changes, the success of the Company's efforts to automate its stock product
lines, increased pricing pressure from the Company's competition, changing
government regulations governing indoor air quality, rate of growth in
worldwide semiconductor manufacturing, and any adverse changes in general
economic conditions in locations where the Company does business.
The Acquisitions give the Company a broader product line of air filtration
products. As part of the integration of the Acquisitions, the Company has
adopted a strategy of increasing its market share by providing its existing
manufacturers' representatives with the Company's complete product line.
The Company intends to continue to seek increased 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 under-utilized 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-diluted equity
financing for such 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. The Company has no specific plans or agreements with respect to
future acquisitions. Substantial equity or debt financing may be needed for
the Company to continue to grow through the acquisition of other businesses.
Failure to obtain sufficient equity or debt financing could adversely affect
the Company's growth strategies.
The Company has begun a program to increase its gross margins by automating
portions of its production lines at FFI, Precisionaire and Airpure using
technology developed at Precisionaire and FFI. Currently, approximately ten
percent of the Company's product lines incorporate the new automated equipment
designs. The Company will continue to implement the additional automation for
these production lines one at a time, to minimize down time. The Company
estimates the total cost for this automation equipment will be $1,000,000 to
$2,000,000.
The Company intends to continue building capacity for production of air
filtration products, and has announced plans to expand upon or build
facilities on the West Coast, the Mid-West, and the Asia/Pacific Basin. These
new or expanded facilities, as well as the automation of existing production
lines, are part of the Company's growth strategies, and will require
substantial continuing investment in capital equipment during 1997. Although
the Company has been able to arrange equity financing or debt facilities to
date, there can be no assurance that additional equity or debt financing will
continue to be available in the future, nor that it will be available on terms
acceptable to the Company.
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment
of Long-Lived Assets for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles held and
used by the entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected future cash flows is less than the
carrying amount of the asset, an impairment loss is recognized. Measurement of
that loss would be based on the fair value of the asset. Generally, SFAS No.
121 requires that long-lived assets and certain intangibles to be disposed of
be reported at the lower of carrying amount or fair value less cost to sell.
The provisions of SFAS No. 121 were adopted by the Company.
31
<PAGE>
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 establishes a
new, fair value based method of measuring stock-based compensation, but does
not require an entity to adopt the new method for preparing its basic
financial statements. For entities not adopting the new method for preparing
basic financial statements, SFAS No. 123 requires disclosure in the footnotes
of pro forma net earnings and earnings per share information as if the fair
value based method had been adopted. The disclosure requirements of SFAS No.
123 are effective for financial statements for fiscal years beginning after
December 31, 1995. The Company will comply with the disclosure requirements of
SFAS No. 123 in its financial statements for its year ending December 31,
1996.
32
<PAGE>
BUSINESS
OVERVIEW
The Company designs, manufactures and markets a broad 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 Abbot Pharmaceuticals, E.I. Dupont, Home Depot, Inc.,
Lucent Technologies, Inc., Merck & Co., Inc., Upjohn Co., Walmart Stores,
Inc., Westinghouse Electric Corp., 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. Flanders Airpure Products Company, LLC, was
organized on February 24, 1994 and it is a sixty-three percent (63%)
subsidiary of Flanders Filters, Inc. Flanders Airpure West, Inc. was organized
on March 25, 1996 and is a wholly owned subsidiary of Flanders Filters, Inc.
Airpure manufactures and markets industrial and commercial bags, pleats and
industrial grade HEPA filters. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview." 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 will be approximately $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 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. The Company believes air filtration products
are necessary to meet the increasingly stringent manufacturing environment
requirements of semiconductor manufacturers. Laminar flow grade final
filters are an essential component of a semiconductor manufacturers'
cleanrooms.
33
<PAGE>
The Company believes a typical state-of-the-art semiconductor product line
with 75,000 square feet of laminar flow grade filters, would be worth
approximately $2.0 million.
Pharmaceutical and Biotechnology. 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, there are industry reports indicating that 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 that air
quality in working facilities has an impact upon human health. OSHA
regulations, in particular, have made IAQ a consideration in a wide variety
of industries, ranging from those industries using spray-paint booths to
those using automobile assembly lines.
Sick Building Syndrome. Sick Building Syndrome ("SBS"), which is
characterized by lethargy, frequent headaches, eye irritation and fatigue,
has recently been shown to be a valid concern, and is a major design
consideration in new and renovated commercial and industrial buildings. The
identification of "sick" buildings, and the solutions to SBS, involve
complex issues which need to be examined on a case-by-case basis by
qualified engineers; solutions typically include improving the HVAC and
filtration systems of the "sick" buildings.
Hazardous Emission Regulation and Liability. Electrical utilities became
subject to emissions regulations under Title I of the Clean Air Act
Amendments of 1990. In addition, OSHA's Hazardous Communication Standard,
the Toxic Release Inventory and community "right to know" regulations
regarding liability for claims made by employees or neighboring communities
have made many industries, in particular the chemical and semiconductor
industries, more aware of clean air regulations. As a result, these
industries have taken voluntary steps, including the utilization of air
filtration systems, to 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.
34
<PAGE>
Increase Market Share
Sell Broad 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 broad range of air filtration products. Management believes
that many of the Company's representatives and distributors will elect to
offer the Company's products exclusively now that the Company offers such a
broad range of products; however, the Company currently has no such
exclusive agreements.
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.
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. 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.
35
<PAGE>
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.
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 historically used manufacturers'
representatives for their respective product lines. Each representative
typically represents a group of end users with similar filtration needs, in a
relatively small geographical region. For example, FFI typically has at least
one "exclusive" representative with respect to its HEPA products in each major
urban center in the 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 have historically also sold mid-range ASHRAE
filters, standard-grade filters and related products and housings from other
manufacturers to fill out their product offerings. Now that the Company offers
all of these products, management believes that many of these distributors
will elect to offer the Company's line of products exclusively, and
discontinue offering other competitors' products; however, the Company
currently has no such exclusive agreements.
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 manufacturers high performance air
filtration products. It currently offers filters of 99.999997% efficiency
on particles 0.1 microns or larger, which the Company believes is the
highest efficiency rating available anywhere. Flanders has provided 8
pharmaceutical isolators which are currently in use for production of
cytotoxic and mutagenic drugs.
Name Recognition. The Company believes that each of its product lines has
high name recognition in its target markets. The Company's representatives
have indicated that they believe their sales will be increased with
additional products associated with the Company.
Single Source Supplier. The Company provides a broad spectrum of air
filtration products. The ability to work with a single source for filters
will enable representatives to operate more efficiently, only needing to be
trained on one filtration system, maintain contacts with a single
organization and order from a central source.
Product Promotion and Innovation. The Company plans to introduce the
public to new applications it is developing for filtration products.
Representatives will be able to take advantage of the additional name
recognition and public knowledge associated with the marketing of the new
products, 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.
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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
"High-End" Products.
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. The Company produces its own fiber-glass based filter media so that
it can maintain quality control over the production of the media. Besides
allowing more immediate and effective product quality control, the Company
has developed unique processes which enable them to manufacture "completely
separatorless" filters, while competing filters use aluminum, tape, glue or
strings to separate adjacent pleats of the media which obstruct air flow
and contribute to off-gassing and particle generation. Laminar flow grade
filters are essential for the production of semiconductors, pharmaceuticals
and many other high-technology products.
HEGA Products. High-Efficiency Gas Adsorbers ("HEGAs") collect gaseous
contaminants through "adsorption," or collecting contaminants in a
condensed form on a surface. HEGA filters are used to control or eliminate
gaseous contaminants, odors, bacteria and, toxic chemicals. HEGA products
typically contain one of several forms of activated charcoal, selected to
match the types of contaminant which need to be filtered for the particular
application. HEGA filters, in combination with ASHRAE-grade and HEPA
filters, are critical to many applications, including the production and
disposal of chemical and biological warfare agents, the removal of
radioactive gases from the exhaust of nuclear facilities and the removal of
volatile organic compounds generated by many industries including hospital
operating rooms.
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 including isolating contagion in critical
care wards. These containment environments are potentially adaptable,
especially in combination with gas-phase filtration technologies, to many
other industries, including the pharmaceutical and semiconductors
industries.
"Mid-Range" Filtration Products.
The Company also manufactures and sells products intended for "mid-range"
applications. These filters are also known as ASHRAE filters, because they
fall under specifications and are categorized by efficiency ratings
established by the American Society of Heating, Refrigeration and Air-
conditioning Engineers. These applications are generally characterized by
requiring filtration of at least 20% efficiency.
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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 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.
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, located in Bath, North Carolina, 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 enclosures for the production and
containment of potentially dangerous biologically engineered microorganisms.
Precisionaire has three separate manufacturing facilities, in Bartow, Florida,
Terrell, Texas and Auburn, Pennsylvania, 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
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residential replacement filters to individual testing and certification with
patented proprietary particle scanning technologies for each laminar-grade
HEPA filter. The Company believes that its ability to comprehensively test and
certify its filters provides it with a competitive advantage.
SOURCE AND AVAILABILITY OF RAW MATERIALS
The Company's principal raw materials are cardboard, fiberglass fibers,
extruded glass, sheet metal, extruded aluminum and wood. These raw materials
are readily available in sufficient quantities from many suppliers.
COMPETITION
The air-filtration market is fragmented and highly competitive. There are
many companies which compete in 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, Farr Company, HEPA Corporation,
Purolator Products Air Filtration Company, Donaldson Corporation, and Clark
Corporation.
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), E-Z flow(R), Smilie(R), Airvelope(TM),
Channel-Ceil(R), Channel-Hood(TM), Pureform(TM), Econocell(TM) and
Pureseal(R). Although management believes that the patents and trademarks
associated with the Company's various product lines and subsidiaries are
valuable to the Company, it does not consider any of them to be essential to
its business.
The Company currently licenses some of its manufacturing products to
specialty HVAC and ASHRAE filter manufacturers who produce products under
their own name and with their own identifying labels.
BACKLOG
The Company had approximately $19,259,000 in firm backlog, on a pro-forma
basis, at September 30, 1996, compared to $16,537,000 at December 31, 1995,
and $14,564,000 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 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. Manufacturer's
representatives are not employees of the Company.
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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> <C> <C> <C> <C>
Headquarters and Washington, 220,000 square feet N/A N/A--owned
manufacturing North Carolina
facility
Manufacturing, Bath, North Carolina 44,282 square feet N/A N/A--owned
service and office
facility
Plant and office Selma, North Carolina 22,500 square feet $ 6,250.00 Monthly Lease
facility(1)
Manufacturing Bartow, Florida 175,000 square feet $16,304.17 10 year, expires in
plant(2),(3) 2006
Lakeland facility-- Lakeland, Florida 30,000 square feet $ 5,962.50 3 year, expires
manufacturing plant February 15, 1997
Manufacturing plant Terrell, Texas 146,256 square feet $21,800.00 N/A--owned
Manufacturing Auburn, Pennsylvania 91,000 square feet $16,304.17 10 year, expires in
plant(2),(3) 2006
Office Space St. Petersburg, Florida 12,000 square feet $ 7,650.50 5 year, expires in
2001
Office Space Terrell, Texas 13,200 square feet $ 1,000.00 5 year, expires
April 1, 2000
R&D; Cafeteria(3) St. Petersburg, Florida 6,000 square feet $ 1,464.38 5 year, expires in
2001
Warehouse South Holland, Illinois 33,226 square feet $ 8,307.00 4 year, expires on
March 31, 1998
Manufacturing plant Sonoma, California 40,000 square feet $ 6,675.00 1 year, expires
April 30, 1997
Manufacturing plant Stafford, Texas 8,000 square feet $ 1,600.00 1 year, expires
January 8, 1997
Office space Stafford, Texas 18,000 square feet N/A N/A--owned
</TABLE>
- --------
(1) The Selma facility is leased from a related party pursuant to a month-to-
month lease. See "Certain Relationships and Related Transactions."
(2) 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.
(3) These facilities are leased from a related party pursuant to leases. See
"Certain Relationships and Related Transactions."
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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, including the Acquisitions on a pro forma
basis, for the nine months ending September 30, 1996, and fiscal years 1995,
1994 and 1993 were 700,000, $1,000,000, $650,000 and $550,000, respectively.
Research and development costs for the Company for the nine months ended
September 30, 1996 and fiscal 1995, 1994 and 1993 were $180,000, $120,000,
$158,000 and $159,000, respectively. Research and development costs were
expended and included in general and administration expenses during the period
incurred.
GOVERNMENT REGULATION
The Company's operations are subject to certain federal, state and local
requirements relating to environmental, waste management, health and safety
regulations. The Company believes its business is operated in compliance with
all applicable government, environmental, waste management, health and safety
regulations and that its products meet standards from applicable government
agencies. However, there can be no assurance that future regulations will not
require the Company to modify its products to meet revised particulate or
other requirements.
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 $25,123,425, 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 AirSeal, a mid-range custom filter housing
manufacturer based in Stafford, Texas, as well as the land and building where
AirSeal'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, and up to 100,000 shares of
the Company's common stock if certain performance criteria are met, 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.
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<PAGE>
Elite, the predecessor of the Company, was incorporated on July 2, 1986 in
the State of Nevada. FFI was started in 1950 by A.R. Allan, Jr. in Riverhead,
New York, and moved its entire plant and office from New York to Washington,
North Carolina in 1968. In December 1995 Elite acquired FFI, in a stock-for-
stock exchange, and FFI became a subsidiary of Elite. Prior to the acquisition
of FFI, Elite was a "public shell" company with no significant operations or
assets. The 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. In January of 1996, Elite
incorporated a newly formed subsidiary under the laws of North Carolina,
Flanders Corporation, and entered into a Merger Agreement therewith. As a
result of this reincorporation merger, Elite was merged into its wholly owned
subsidiary, Flanders Corporation, and changed its name to Flanders Corporation
and its domicile to North Carolina.
LEGAL PROCEEDINGS
The Company is currently under investigation by the State of North Carolina
for possible environmental contamination at a portion of its main facility.
The Company estimates that any liability resulting from any alleged
contamination will not exceed $200,000, based upon an environmental survey
conducted by Aquaterra, Inc.; however, there can be no assurance that the
liability will not exceed the projected amount. The Company has received a
limited indemnification from Robert Amerson, Steven Clark and Thomas Allan
(directors, officers and shareholders of the Company) of approximately
$975,000 with respect to the claims by the State of North Carolina, however,
there can be no assurance that the amount of this indemnification will be
sufficient to cover the aggregate of liabilities asserted by the State of
North Carolina.
Additionally, from time to time, the Company is also a party to various
legal proceedings incidental to its business. None of these proceedings are
material to the conduct of the Company's business, operations or financial
condition.
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MANAGEMENT
The Company's directors and executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Thomas T. Allan......... 58 Chairman of the Board
Robert R. Amerson....... 46 President, Chief Executive Officer and Director
Gustavo Hernandez....... 61 Vice President of Operations, Director
Steven K. Clark......... 43 Vice President of Finance/Chief Financial Officer and Director
William M. Claytor...... 54 Director
William H. Clark........ 53 Director
</TABLE>
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.
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.
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<PAGE>
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. 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 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
44
<PAGE>
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 December 3, 1996 the Company has granted options
to purchase 236,520 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 such terms as the Compensation Committee may
determine, subject to the provisions of the LTI Plan. As of December 3,
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 December 3,
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
45
<PAGE>
the equivalent of one share of Common Stock. As of December 2, 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 December 3, 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
59 1/2 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.
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.
46
<PAGE>
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 Compensation 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.
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 $100,000.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------- ----------------------------
AWARDS PAYOUTS
-------------------- -------
OTHER RESTRICTED
ANNUAL STOCK OPTION/S LTIP
COMPEN- AWARD(S) SARS PAYOUTS
NAME AND PRINCIPAL POSITION(1) YEAR SALARY ($) BONUS ($) SATION ($)(2) ($) (#) ($)
- ------------------------------ ---- ---------- --------- ------------- ---------- --------- -------
<S> <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(3) 128,846 -- 137,077 -- 1,150,000 --
President 1994 100,000 -- 124,500 -- -- --
1993 100,000 -- 167,875 -- -- --
Steven K. Clark......... 1995(4) 15,000 -- -- -- 1,150,000 --
Chief Financial Officer 1994 -- -- -- -- -- --
1993 -- -- -- -- -- --
</TABLE>
- --------
(1) 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
47
<PAGE>
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.
(2) Represents compensation paid by the Company to Flanders Equity
Corporation, a company owned principally by Messrs. Allan and Amerson. See
"Management--Employment Agreements," "Certain Relationships and Related
Party Transactions."
(3) 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.
(4) 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.
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
$100,000.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
ASSUMED/ANNUAL
% OF TOTAL RATES OF STOCK
OPTIONS/SARS PRICE/APPRECIATION
GRANTED TO EXERCISE OR FOR OPTION TERM
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION --------------------
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% ($)(1) 10% ($)(1)
---- ------------ ------------ ----------- ---------- --------- ----------
<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(2).... 1,150,000 47% $1.00 11/15/2000 322,000 701,500
Steven K. Clark(3)...... 1,150,000 47% $1.00 11/15/2000 322,000 701,500
</TABLE>
- --------
(1) The potential realizable value portion of the foregoing table illustrates
value that might be realized upon exercise of the options immediately
prior to the expiration of their term, assuming the specified compounded
rates of 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.
(2) 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.
(3) 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.
48
<PAGE>
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 $100,000.
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SAR'S
FISCAL YEAR- AT FISCAL
END (#) YEAR-END(S)
SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) VALUE REALIZED ($) UNEXERCISABLE UNEXERCISABLE(1)
---- --------------- ------------------ --------------- ----------------
<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/--
</TABLE>
- --------
(1) The Company did not have a public market for its stock prior to its
listing on the OTC Bulletin Board in February 1996.
49
<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
December 3, 1996.
<TABLE>
<CAPTION>
NAME AND ADDRESS SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
OF BENEFICIAL OWNER PRIOR TO OFFERING AFTER OFFERING
------------------- ------------------------------ ------------------------------
NUMBER PERCENT(1) NUMBER PERCENT(7)
--------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
A. Russell Allan, 1,027,544 6.44% 1,027,544 5.85%
III(2).................
531 Flanders Filters
Road
Washington, NC 27889
Thomas T. Allan(2)(4)... 6,041,250 37.52% 6,041,250 34.13%
531 Flanders Filters
Road
Washington, NC 27889
Robert R. 8,160,759 42.72% 8,160,759 39.42%
Amerson(2)(3)..........
531 Flanders Filters
Road
Washington, NC 27889
Steven K. Clark(2)(3)... 5,364,014 28.08% 5,364,014 25.91%
531 Flanders Filters
Road
Washington, NC 27889
William M. Claytor(5)... 164,172 1.03% 164,172 .93%
531 Flanders Filters
Road
Washington, NC 27889
Gustavo Hernandez(6).... 71,613 .45% 71,613 .41%
2399 26th Avenue North
St. Petersburg, FL
33734
William H. Clark........ 0 0.00% 0 0.00%
531 Flanders Filters
Road
Washington, NC 27889
Officers and Directors 15,088,808 67.21% 15,088,808 62.74%
as a
Group(2)(3)(4)(5)(6)...
</TABLE>
- --------
(1) Applicable percentage of ownership is based on 15,951,548 shares of Common
Stock outstanding as of December 3, 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.
(2) 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).
(3) 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.
(4) Includes 150,000 shares which are subject to an option to purchase such
shares from the Company at $1.00 per share.
(5) Includes 50,000 shares which are subject to an option to purchase such
shares from the Company at $1.00 per share.
(6) Includes 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.
(7) Assumes all shares offered by the Company are sold.
50
<PAGE>
SELLING SHAREHOLDERS
Of the shares registered hereunder, 1,333,889 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>
SHARES BENEFICIALLY
OWNED PRIOR SHARES OWNED
TO OFFERING AFTER THIS OFFERING
----------------------- -----------------------
NUMBER OF SHARES
BEING REGISTERED
NAME OF SECURITY HOLDER NUMBER PERCENT(2) FOR RESALE NUMBER PERCENT(2)
----------------------- ----------- ----------- ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
General Electric Pension
Trust(1)............... 444,445 2.79% 444,445 0 0.0%
The President and Fel-
lows of Harvard Col-
lege(1)................ 444,444 2.79% 444,444 0 0.0%
The Travelers Indemnity
Company(1)............. 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 .16% 14,000 12,000 .07%
Ronald A. Weinstein..... 23,500 .15% 5,500 18,000 .10%
Kenneth D. Tuchman(1)... 11,000 .07% 11,000 0 0.0%
Stuart M. Sloan(1)...... 14,000 .09% 14,000 0 0.0%
G&N Associates,
Ltd.(1)................ 11,000 .07% 11,000 0 0.0%
Victor O. Alhadeff...... 23,500 .15% 5,500 18,000 .10%
LZ Investment,
L.L.C.(1).............. 27,778 .17% 27,778 0 0.0%
Ellen M. Dougan(1)...... 6,000 .04% 6,000 0 0.0%
The Galena Group(1)..... 11,000 .07% 11,000 0 0.0%
J. Lynn Dougan(1)....... 17,000 .11% 17,000 0 0.0%
</TABLE>
- --------
(1) Assumes all shares held by such Selling Shareholder will be offered and
sold.
(2) Percentage of ownership is based on 15,951,548 shares of Common Stock
outstanding on December 3, 1996 and 17,551,548 shares of Common Stock
outstanding after completion of this Offering.
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 Selling Shareholders and any broker-dealers that act in connection with
the sale of the Shares as principals may be deemed to be "underwriters" within
the meaning of Section 2(11) of the Securities Act and any commission received
by them and any profit on the resale of such securities as principals might be
deemed to be underwriting discounts and commissions under the Securities Act.
The Selling Shareholders may agree to indemnify any agent, dealer or broker-
dealer that participates in transactions involving sales of such securities
against certain liabilities, including liabilities arising under the
Securities Act. The Company will not receive any proceeds from the sales of
the Shares by the Selling Shareholders. Sales of the Shares by the Selling
Shareholders, or even the potential of such sales, would likely have an
adverse effect on the market price of the Common Stock.
At the time a particular offer of Shares is made, except as herein
contemplated, by or on behalf of a Selling Shareholder, to the extent
required, a Prospectus will be distributed which will set forth the number of
Shares being offered and the terms of the offering, including the name or
names of any underwriters, dealers or agents,
51
<PAGE>
if any, the purchase price paid by any underwriter for shares purchased from
the Selling Shareholder and any discounts, commissions or concessions allowed
or reallowed or paid to dealers.
Under the Exchange Act, and the regulations thereunder, any person engaged
in a distribution of the securities of the Company offered by this Prospectus
may not simultaneously engage in market-making activities with respect to such
securities of the Company during the applicable "cooling-off" period prior to
the commencement of such distribution. In addition, and without limiting the
foregoing, the Selling Shareholders will be subject to applicable provisions
of the Exchange Act and the rules and regulations thereunder, including,
without limitation. Rules 10b-6 and 10b-7, in connection with transactions in
such securities, which provisions may limit the timing of purchases and sales
of such securities by the Selling Shareholders.
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.
52
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Thomas T. Allan, Robert R. Amerson and Steven K. Clark entered into an
Indemnity Agreement with Flanders whereby Messrs. Allan, Amerson and Clark
agreed to 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. and St. Paul Fire and Marine
Insurance Co. The Company has waived the escrow fund requirement. 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. With
respect to the environmental claim, the Company has retained Aquaterra, Inc.
to conduct Phase I and Phase II environmental surveys, and to provide the
Company with an estimate of the dollar amount required to remediate the
affected property. Based upon Aquaterra, Inc.'s evaluation, the Company,
estimates that any liability resulting from any alleged contamination will not
exceed $200,000, including the cost of the Phase I and Phase II environmental
surveys. Messrs. Allan, Amerson and Clark have assumed all liability to
Aquaterra, Inc. with respect to the Phase I and Phase II environmental reports
undertaken to date. With respect to the lawsuits against the Company by
Hartford Casualty Insurance Company and St. Paul Fire & Marine Insurance
Company, Messrs. Allan, Amerson and Clark have collectively paid $262,500 of
the $525,000 for the settlement of the lawsuits, and they will pay the
remaining $262,500 in January, 1997.
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 Messrs. 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. This, in effect, is a personal
guaranty by Messrs. Amerson and Clark of repayment of the Debentures.
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 owned by
Robert Amerson and Thomas Allan, officers and directors of the Company,
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, or will be,
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.
53
<PAGE>
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.
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 December 3, 1996, there are 15,951,548 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. The shares of Common Stock
when issued, are fully paid and non-assessable, and no shareholder will be
personally liable for any obligations of the Company solely by reason of being
a shareholder 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
Subordinated Convertible Debentures to certain unrelated investors. Such
debentures are due and payable on the earlier of the release of $4,000,005 in
escrow to the Company upon the Company having filed a Registration Statement
made effective by January 15, 1997, or September 17, 1999, and 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. The Debentures bear interest at
a rate of 18% per annum. As of December 3, 1996, no debentures have been
converted.
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.
54
<PAGE>
10% CONVERTIBLE NOTES
In September 1996, the Company sold $4,000,000 principal amount of 10%
Convertible Notes pursuant to Regulation S to certain unrelated offshore
investors. The 10% Convertible Notes are due and payable on September 20, 1999
and are convertible at any time commencing forty-one (41) days after issuance
into shares of the Company'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, 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 December 3, 1996, no notes have been converted.
In connection with the 10% Convertible Notes, certain unrelated offshore
investors were given a contractual right to receive, on the date of the
conversion of the Notes into common stock, warrants to purchase such number of
shares of common stock equal to ten percent (10%) of the number of common
shares issued upon any such conversion. The exercise price of the warrants is
equal to the amount per share at which the 10% Convertible Notes were converted
into Common Stock.
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
December 3, 1996, there were 223,320 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.
REGISTRATION RIGHTS
Holders of approximately 4,567,484 shares of Common Stock, and holders of
approximately 7,425,000 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.
55
<PAGE>
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 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.
56
<PAGE>
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.
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.
57
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 17,551,548 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 tradeable without restriction
under the Securities Act.
As of December 20, 1996, there were stock options and warrants outstanding
to purchase an aggregate of 7,648,320 shares of Common Stock at a weighted
average exercise price of $3.46 per share, all 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 November 27, 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 7,425,000
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. The holders of such
rights have not waived in writing their right to have shares included in this
Registration Statement, and such holders therefore continue to retain such
rights, subject to the Underwriters right to limit the number of shares to be
included herein. 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.
58
<PAGE>
UNDERWRITING
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:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Gilford Securities Incorporated................................
---------
---------
Total........................................................ 1,600,000
=========
</TABLE>
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 $200,000, of which $25,000 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 one year from the effective date of the Registration
Statement at a price of $ [120% of the initial public offering price
59
<PAGE>
per share of Common Stock] per share of Common Stock and are restricted from
sale, transfer, assignment or hypothecation for a period of twelve months from
the effective date of the Registration Statement, except to officers of the
Representative. 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 Company has also agreed to reimburse the Representative for
approximately $8,000 in due diligence expenses incurred in connection with
this offering.
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 agreements which are filed as exhibits to the Registration
Statement. See "Additional Information."
In connection with this Offering, certain Underwriters and selling group
members or their affiliates may engage in "passive" market making transactions
of the Common Stock on the Nasdaq National Market in accordance with Rule 10b-
6A of the Securities Exchange Act of 1934, as amended. Rule 10b-6A allows
certain qualified brokers and dealers to engage in passive market making for
the Nasdaq National Market securities during the two (2) day "cooling off"
period before a distribution of securities. In general, market makers,
including both prospective underwriters and selling group members, registered
in the security during the two (2) calendar months prior to the filing of a
registration statement with respect to the offering of securities are eligible
to engage in passive market making. Market makers who intend to engage in
passive market making must account for at least thirty percent of the average
daily trading volume in the security during the prior two (2) month period.
Passive market makers may not enter a bid or effect a purchase at a price
which is higher than the highest bid otherwise displayed on the Nasdaq
National Market of a market maker who is not a participant in the
distribution. A passive market maker must close its market in the security if
the amount of securities it has purchased minus the amount of securities it
has sold exceeds thirty percent (30%) of its average daily trading volume in
the security.
EXPERTS
The consolidated financial statements and schedules of the Company and the
financial statements of CSC for the periods indicated, 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., 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.
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.
60
<PAGE>
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.
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.
61
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Statements of Flanders Corporation
Unaudited Consolidated Condensed Interim Financial Statements............ F-2
Audited Consolidated Financial Report.................................... F-10
Financial Statements of Precisionaire, Inc.
Unaudited Consolidated Condensed Interim Financial Statements............ F-29
Audited Consolidated Financial Report.................................... F-35
Financial Statements of Charcoal Service Corporation
Audited Consolidated Financial Report.................................... F-47
</TABLE>
F-1
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET(1)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents......................... $ 2,603,039 $ 2,973,797
Restricted cash (See Note 4)...................... 4,000,005 --
Short-term investments............................ 835,519 --
Receivables:
Trade, less allowance for doubtful accounts of
$466,903 at September 30, 1996; $148,000 at
December 31, 1995............................... 21,449,645 7,243,557
Other............................................ 1,237,603 321,356
Inventories (See Note 2).......................... 10,432,883 2,321,367
Deferred taxes.................................... 1,028,285 137,961
Other current assets.............................. 739,495 46,586
----------- -----------
Total current assets............................ 42,326,474 13,044,624
----------- -----------
Other assets........................................ 925,685 183,542
Intangible assets................................... 12,465,344 --
Property and equipment, net of accumulated
depreciation and amortization of $6,212,398 at
September 30, 1996; $5,590,677 at December 31,
1995............................................... 29,769,357 5,301,063
----------- -----------
$85,486,860 $18,529,229
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable..................................... $ 1,397,318 $ 3,890,425
Current maturities of long-term debt.............. 881,627 454,181
Accounts payable.................................. 12,824,179 3,984,140
Accrued expenses.................................. 5,260,832 685,482
----------- -----------
Total current liabilities....................... 20,363,956 9,014,228
----------- -----------
Long-term debt, less current maturities............. 27,752,260 1,306,584
Convertible debt.................................... 6,500,000 --
Deferred income taxes............................... 5,069,610 --
Commitments and contingencies....................... -- --
Committed Capital (See Note 4, Capital
Transactions)...................................... 4,000,005 --
Stockholders' equity
Preferred stock, $.001 par value, 10,000,000
shares authorized; none issued................... -- --
Common stock, $.001 par value; 50,000,000 shares
authorized; issued and outstanding: 15,459,905 at
September 30, 1996; 11,434,000 at December 31,
1995............................................. 15,460 11,434
Additional paid-in capital........................ 14,793,837 3,418,671
Retained earnings................................. 6,991,732 4,778,312
----------- -----------
Total stockholders' equity...................... 21,801,029 8,208,417
----------- -----------
$85,486,860 $18,529,229
=========== ===========
</TABLE>
- --------
(1) The Company's Unaudited Consolidated Condensed Balance Sheet at September
30, 1996 includes the balance sheet of Precisionaire, Inc.,
("Precisionaire") a company acquired on September 23, 1996. See Note 3.
F-2
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS(1)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
1996 1995 1996 1995
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales.................. $14,453,452 $9,319,475 $40,694,712 $28,249,910
Cost of goods sold......... 10,552,846 6,982,977 30,326,600 20,944,489
----------- ---------- ----------- -----------
Gross Profit........... 3,900,606 2,336,498 10,368,112 7,305,421
----------- ---------- ----------- -----------
Operating expenses......... 2,440,006 1,669,356 6,988,474 5,221,606
----------- ---------- ----------- -----------
Operating income....... 1,460,600 667,142 3,379,638 2,083,815
----------- ---------- ----------- -----------
Nonoperating income
(expense):
Other income (expense)... 104,764 (7,826) 497,139 (66,021)
Interest expense......... (144,913) (129,240) (290,481) (457,522)
----------- ---------- ----------- -----------
(40,149) (137,066) 206,658 (523,543)
----------- ---------- ----------- -----------
Income before income
taxes................. 1,420,451 530,076 3,586,296 1,560,272
Income taxes............... 555,000 224,157 1,372,876 615,631
----------- ---------- ----------- -----------
Net income............. $ 865,451 $ 305,919 $ 2,213,420 $ 944,641
=========== ========== =========== ===========
Earnings per weighted
average common and common
equivalent share
outstanding:
Primary.................. $ 0.05 $ 0.03 $ 0.13 $ 0.10
=========== ========== =========== ===========
Fully diluted............ $ 0.05 $ 0.03 $ 0.13 $ 0.10
=========== ========== =========== ===========
Weighted average common and
common equivalent shares
outstanding:
Primary.................. 18,685,393 9,693,478 16,396,481 9,693,478
=========== ========== =========== ===========
Fully diluted............ 19,205,086 9,693,478 16,975,351 9,693,478
=========== ========== =========== ===========
</TABLE>
- --------
(1) The Company's Unaudited Consolidated Condensed Statements of Operations do
not include the statements of operations of Precisionaire for the periods
indicated. See Note 3.
F-3
<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 1,100,000 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 2,892,760 shares of common
stock related to the Private
Offerings.............................. 2,893 15,135,604 --
Less Committed Capital (See Note 4)..... -- (4,000,005) --
Issuance of 1,036,886 shares of common
stock related to the Acquisitions...... 1,037 (1,037)
Issuance of 96,280 shares of common
stock upon exercise of warrants........ 96 240,604
Net income.............................. 2,213,420
-------- ------------ -----------
Balance, September 30, 1996 (unaudited)... $ 15,460 $ 14,793,837 $ 6,991,732
-------- ------------ -----------
</TABLE>
- --------
(1) The Company's Consolidated Condensed Statements of Stockholders' Equity do
not include the operations of Precisionaire for the periods indicated. See
Note 3.
F-4
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ---------------------------
1996 1995 1996 1995
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
NET CASH PROVIDED
(USED) BY OPERATING
ACTIVITIES......... $ 2,081,343 $ 1,130,193 $ (67,386) $ 1,211,091
CASH FLOWS FROM
INVESTING ACTIVITIES
Acquisitions, net of
cash received........ (25,653,305) -- (32,361,260) --
Purchase of
equipment............ (648,909) (83,378) (1,368,188) (783,059)
------------- ------------ ------------- -----------
NET CASH (USED) BY
INVESTING
ACTIVITIES......... (26,302,214) (83,378) (33,729,448) (783,059)
CASH FLOWS FROM
FINANCING ACTIVITIES
Net change in
revolving credit
agreements........... 10,353,065 (1,749,991) 8,913,413 (591,611)
Proceeds from issuance
of convertible debt.. 6,220,000 -- 6,220,000 --
Net change in long-
term borrowings...... 6,548,227 27,890 6,574,171 (19,954)
Proceeds from issuance
of common stock...... 3,296,600 61,433 11,718,492 61,433
Purchase of common
stock for
retirement........... -- (23,367) -- (23,938)
------------- ------------ ------------- -----------
NET CASH PROVIDED
(USED) BY FINANCING
ACTIVITIES......... 26,417,892 (1,684,035) 33,426,076 (574,070)
------------- ------------ ------------- -----------
NET INCREASE
(DECREASE) IN
CASH............... 2,197,021 (637,220) (370,758) (146,038)
CASH AT BEGINNING OF
PERIOD................. 406,018 (256,356) 2,973,797 (747,538)
------------- ------------ ------------- -----------
CASH AT END OF
PERIOD (See
Note 4)............ $ 2,603,039 $ (893,576) $ 2,603,039 $ (893,576)
============= ============ ============= ===========
CASH PAID FOR TAXES..... $ 135,000 $ 1,000 $ 889,033 $ 1,000
------------- ------------ ------------- -----------
</TABLE>
- --------
(1) The Company's Unaudited Consolidated Condensed Statements of Cash Flows do
not include the statements of cash flows of Precisionaire for the periods
indicated. See Notes 3 and 4.
F-5
<PAGE>
NOTE 1. NATURE OF BUSINESS AND INTERIM FINANCIAL STATEMENTS
Nature of business: Flanders Corporation (the "Company") 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 commercial and residential heating, ventilation and air
conditioning systems (commonly known as "HVAC" systems), semiconductors,
ultra-pure materials, biotechnology, pharmaceuticals, synthetics, nuclear
power and nuclear materials.
Although the Company historically has specialized in HEPA and medium
efficiency filters and equipment, the Company began a strategy of growth by
acquisition in December 1995. So far this year, the Company has expanded its
product line through the purchase of three other companies: Charcoal Service
Corporation ("CSC"), Air Seal Filter Housings, Inc. ("Airseal") and
Precisionaire, Inc. ("Precisionaire"). These acquisitions are collectively
referred to herein as the "Acquisitions."
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 nine months ended September 30, 1996 may
not be indicative of the results that may be expected for the year ending
December 31, 1996.
Goodwill: The Company has classified as goodwill the cost in excess of fair
value of the net assets (including tax attributes) of companies acquired in
purchase transactions. Goodwill is being amortized on a straight line basis
over 40 years. Amortization of goodwill charged to operations during the nine
months ended September 30, 1996 and 1995 was $14,200 and $0, respectively. At
each balance sheet date, the Company evaluates goodwill for impairment by
comparing expectations of non-discounted future cash flows excluding interest
costs, and operating income with the carrying value of goodwill for each
subsidiary having a material goodwill balance. Based upon its most recent
analysis, the Company believes that no impairment of goodwill exists at
September 30, 1996.
Earnings per Common Share: The computation of earnings per common share and
common share equivalent is done according to the treasury method, which 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 5 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. The 1,036,886 shares
of common stock issued with respect to the Acquisitions which may be released
from escrow pending evaluation of certain financial targets have been treated
for the purposes of the earnings per share calculations as contingently
issuable, and have been included in fully diluted earnings per share.
F-6
<PAGE>
Primary earnings per common and common equivalent share for the three and
nine month periods ended September 30, 1996 and 1995 were calculated as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1996 1995 1996 1995
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Net income............................ $ 865,451 $ 305,919 $2,213,420 $ 944,641
Weighted average shares outstanding... 13,719,072 9,693,478 12,645,471 9,693,478
Add: exercise of weighted average
warrants and options reduced by the
number of shares purchased with
proceeds........................... 4,966,321 -- 3,751,010 --
---------- --------- ---------- ---------
Adjusted weighted average shares
outstanding.......................... 18,685,393 9,693,478 16,396,481 9,693,478
========== ========= ========== =========
Net income per common share........... $ 0.05 $ 0.03 $ 0.13 $ 0.10
========== ========= ========== =========
</TABLE>
Earnings per share--continued. Fully diluted earnings per common and common
equivalent share for the three and nine month periods ended September 30, 1996
and 1995 were calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1996 1995 1996 1995
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Net income............................ $ 865,451 $ 305,919 $2,213,420 $ 944,641
Weighted average shares outstanding... 14,037,496 9,693,478 12,777,619 9,693,478
Add: exercise of weighted average
warrants and options reduced by the
number of shares purchased with
proceeds........................... 5,167,590 -- 4,197,732 --
---------- --------- ---------- ---------
Adjusted weighted average shares
outstanding.......................... 19,205,086 9,693,478 16,975,351 9,693,478
========== ========= ========== =========
Net income per common share........... $ 0.05 $ 0.03 $ 0.13 $ 0.10
========== ========= ========== =========
</TABLE>
NOTE 2. INVENTORIES
Inventories consist of the following at September 30, 1996 and December 31,
1995:
<TABLE>
<CAPTION>
9/30/96 12/31/95
----------- ----------
<S> <C> <C>
Finished goods.......................................... $ 3,994,301 $ 198,607
Work in progress........................................ 1,468,806 879,987
Raw materials........................................... 5,029,776 1,302,773
----------- ----------
10,492,883 2,381,367
Less allowance for obsolete raw materials............... 60,000 60,000
----------- ----------
$10,432,883 $2,321,367
=========== ==========
</TABLE>
NOTE 3. ACQUISITIONS
Effective September 23, 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 $25,123,425 and 786,885 shares of the
Company's common stock, subject to a post-closing purchase price adjustment,
and was paid by the delivery of both $25,123,425 in cash to the Precisionaire
sellers and 786,885 shares of the Company's common stock to an escrow agent to
be held in escrow and released to the Precisionaire sellers over a three year
period if certain gross revenue targets are met by Precisionaire. Shares
released from escrow will be valued at the market price on the date of release
and will be added to the goodwill associated with the purchase transaction and
amortized over the remaining amortization period of the respective goodwill
asset. Contemporaneously therewith, Precisionaire entered into an agreement to
acquire from POT Realty (owned by the former shareholders of Precisionaire) a
manufacturing facility, warehouse and related real property, located in
Terrell, Texas, whereby Precisionaire would assume $2,191,575 of debt with
respect to such building. This transaction
F-7
<PAGE>
was completed as of October 31, 1996. The Company's balance sheet at September
30, 1996 contains accruals in long-term debt and fixed assets to reflect this
purchase. For financial statement purposes, the acquisition of Precisionaire
is being accounted for as having occurred on September 30, 1996, such that the
Company's balance sheet at September 30, 1996 includes the assets of
Precisionaire, and the Company's future financial statements will include the
operations of Precisionaire from September 30, 1996.
Precisionaire manufactures air filters and related products for commercial
and residential air conditioning and heating systems. Precisionaire's
headquarters are located in St. Petersburg, Florida. Precisionaire's
manufacturing operations are conducted from four main facilities with a total
of 442,000 square feet of manufacturing space, located in Bartow, Florida,
Lakeland, Florida, Terrell, Texas and Auburn, Pennsylvania. Precisionaire also
maintains 33,000 square feet of warehouse space in South Holland, Illinois.
In connection with the acquisition of Precisionaire, the Company recorded
$9,534,286 of goodwill, which represents the excess of purchase price
(including tax attributes) plus expenses over fair value of assets acquired,
which is being amortized over 40 years.
Summarized below are the unaudited pro forma results of operations of the
Company as though Precisionaire, CSC and Air Seal had been acquired at the
beginning of the nine month periods ended September 30, 1996 and 1995.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
--------------- ---------------
<S> <C> <C>
Revenues....................................... $ 95,860,032 $ 81,937,667
=============== ===============
Net income..................................... $ 4,305,827 $ 2,605,196
=============== ===============
Net income per common share, primary........... $ 0.23 $ 0.20
=============== ===============
Net income per common share, fully diluted..... $ 0.22 $ 0.20
=============== ===============
</TABLE>
NOTE 4. CAPITAL TRANSACTIONS
Private offering. As of September 30, 1996, the Company raised, through a
private offering of its Common Stock at $9.00 per share, $7,699,005, for
855,445 shares of stock, $2,500,000 through a private offering of Series A
Subordinated Convertible Debentures to certain unrelated investors, which are
convertible into an aggregate of 277,778 shares of the Company's common stock,
based upon a conversion price of $9.00 per share, 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"). The 10%
convertible notes are convertible at any time commencing forty-one (41) days
after issuance into shares of the Company'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, 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 the 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. Net proceeds to the Company after
commissions and expenses of $982,400 were $13,216,605. Of the $7,699,005
raised through the September Offering, $4,000,005 is subject to certain rights
of rescission in favor of an investor if a Registration Statement under the
Securities Act of 1933 registering such shares for re-sale is not declared
effective as of January 15, 1997. In connection with the 10% Convertible
Notes, certain unrelated offshore investors were given a contractual right to
receive, on the date of the conversion of the Notes into common stock, the
right to receive warrants to purchase common stock equal to ten percent (10%)
of the number of common shares issued upon any such conversion. The warrants
can be converted into Common Stock of the Company at an amount per share equal
to the amount per share at which the 10% Convertible Notes were converted into
Common Stock. See Note 6--Subsequent Events.
F-8
<PAGE>
Restricted cash and committed capital. Of the $7,699,005 raised through the
September Offering, $4,000,005, from the sale of 444,445 shares of common
stock, is held in escrow and subject to certain rights of rescission in favor
of an investor if a Registration Statement under the Securities Act of 1933
registering such shares for re-sale is not declared effective as of January
15, 1997. This amount is reflected on the balance sheet at September 30, 1996
as "Restricted cash" and "Committed capital." The $4,000,005 will be
reclassified as "Cash" and "Additional paid-in capital" on the date such
registration statement is declared effective.
NOTE 5. STOCK OPTIONS AND WARRANTS
The following table summarizes the activity related to the Company's stock
options and warrants for the nine months ended September 30, 1996 and the year
ended December 31, 1995. Grants of stock options and warrants to employees are
accounted for following APB Opinion No. 25 and related Interpretations.
Accordingly, since the exercise price of options granted was at or below the
market price of the Company's stock on the date granted, no compensation cost
has been recognized for grants of 5,136,520 options to employees during the
nine months ended September 30, 1996. The Company also issued 97,712 warrants
during the nine months ended September 30, 1996 to finders and broker-dealers
as part of the Private Offerings with a deemed fair value fair value,
calculated according to FASB 123, of $39,884.
<TABLE>
<CAPTION>
EXERCISE WEIGHTED
PER SHARE AVERAGE
STOCK ----------------------- EXERCISE PRICE
WARRANTS OPTIONS WARRANTS OPTIONS PER SHARE
-------- --------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Outstanding at January
1, 1995................ -- --
Granted............... 61,280 2,500,000 $2.50 $1.00 $1.04
Exercised............. -- --
Canceled or expired... -- --
------ ---------
Outstanding at December
31, 1995............... 61,280 2,500,000 $2.50 $1.00 $1.04
Granted............... 97,712 5,136,520 $2.50-$5.00 $2.50-$9.50 $4.61
Exercised............. 96,280 -- $2.50 $2.50
Canceled or expired... -- -- $ --
------ ---------
Outstanding at September
30, 1996............... 62,712 7,636,520 $2.50-$5.00 $1.00-$9.50 $3.45
====== =========
Exercisable at September
30, 1996............... 62,712 5,519,520 $2.50-$5.00 $1.00-$3.50 $1.94
====== =========
</TABLE>
The warrants expire at various periods through September 1998. The options
expire at various times through June 2001.
NOTE 6. SUBSEQUENT EVENTS
As part of the acquisition of Precisionaire by the Company, on September 23,
1996, Precisionaire entered into a purchase and sales agreement with POT
Realty, a Florida general partnership, in which Precisionaire agreed to
purchase certain real property, buildings and related improvements located in
Terrell, Texas (the "Property"). The total purchase price for the Property was
$3,315,000, $1,123,423.65 of which was paid by the Company to the shareholders
of Precisionaire as part of the Closing of the Precisionaire stock purchase.
The remainder of the purchase price was paid by Precisionaire assuming certain
debt encumbering the land and buildings. This transaction was completed as of
October 31, 1996. The Company's balance sheet at September 30, 1996 contains
accruals in long-term debt and fixed assets to reflect this purchase.
In October 1996, the Company raised an additional $4,306,000 from a private
placement of 478,444 shares of stock at $9.00 per share to certain
unaffiliated accredited investors. Net proceeds from the Offering, after
commissions of $400,000, were $3,906,000. Of the $4,306,000 raised through the
private offering, $4,000,000 is subject to certain rights of rescission in
favor of an investor if a Registration Statement under the Securities Act of
1933 registering such shares for re-sale is not declared effective as of
January 9, 1997. Combined with the September Offering, total gross proceeds
from September and October were $18,505,005. Net proceeds from September and
October were $17,122,605. See also Note 4, Capital Transactions.
F-9
<PAGE>
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.
McGladrey & Pullen, LLP
New Bern, North Carolina
February 8, 1996, except for Note 20,
as to which the date is December 2, 1996.
F-10
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND DECEMBER 30, 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash and 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
long-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............ 9,014,228 8,958,498
----------- -----------
Long-Term Debt, less current
maturities (Notes 6 and
15)........................ 1,306,584 1,502,188
----------- -----------
Commitments and
Contingencies (Notes 11,
14, 16 and 19)
Stockholders' Equity (Notes
9, 13, 16 and 20):
Preferred Stock, $.001 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
Retained 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.
F-11
<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 Goods Sold (Notes 11, 12, 13 and
14).................................... 28,953,729 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
----------- ----------- -----------
Nonoperating 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
cumulative 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 effect
of change in accounting principle.... $ 0.12 $ -- $ --
Cumulative effect on prior years of
changing to a different method of
accounting for deferred income....... -- -- 0.03
----------- ----------- -----------
Net income.......................... $ 0.12 $ -- $ 0.03
=========== =========== ===========
Weighted average common and common
equivalent shares outstanding.......... 9,831,996 9,693,478 9,654,093
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-12
<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 retirement of 21,099 shares
of common stock.......................... (21) (9,901) --
Net income................................ -- -- 317,306
-------- ---------- -----------
Balance, December 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 shares 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.
F-13
<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) $ 317,306
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 marketable equity
securities........................... -- -- (21,736)
Realized gain on sale of marketable
equity securities.................... -- (32,941) --
Deferred income taxes................. 160,000 70,000 (363,940)
Indemnification of claim by
Stockholders......................... 375,000 -- --
Change 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 --
Disbursement 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 on long-term borrowings...... -- 526,932 --
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
Purchase 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)
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents............. 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 $ 188,934 $ 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 Directors (Note 13).............. $ 525,000 $ -- $ --
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-14
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: Flanders Corporation ("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 its 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 was 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. ("Foremost")
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 cash accounts
which are not subject to withdrawal restrictions and certificates of deposit
which have an original maturity of three months or less to be cash
equivalents.
Inventories: Inventories are valued at lower of cost (first-in, first-out
method) or market.
Property and Equipment: Property and equipment are stated at cost.
Depreciation is computed by the straight-line method over estimated useful
lives.
Revenue Recognition: All sales are recognized when shipments are made to
customers. Other operating revenue consists of freight income net of freight
costs. Freight revenue for Foremost was recognized when the shipment is
completed with expenses recognized as incurred. Freight expenses associated
with freight revenue for 1995, 1994 and 1993 amounted to $0, $539,627 and
$496,228 respectively.
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.
Self insurance expenses: The Company has elected to self-insure its
employees' health and accident insurance up to a maximum of $50,000 per
occurrence. Expenses related to health claims are accrued during the period
when the Company is notified of a claim or probable claim under the policy,
including incurred but not reported claims, and adjusted when the actual claim
is submitted.
Income taxes: Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their
tax bases. Deferred tax assets are reduced by a valuation
F-15
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 for 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 expense, net of accumulated amortization
1995 $20,766;
1994 $17,814........................................... 14,532 17,484
--------- ---------
$ 183,542 $ 133,970
========= =========
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1995 and
December 30, 1994:
<TABLE>
<CAPTION>
1995 1994 ESTIMATED 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
$418,111................... 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
capital lease; 1995
$20,906.................... 5,590,677 4,985,184
----------- -----------
$ 5,301,063 $ 4,972,576
=========== ===========
</TABLE>
NOTE 5. PLEDGED ASSETS AND NOTES PAYABLE
The Company had prime plus 0.75 percent 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
F-16
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
was 9.34 percent. The agreement expires in June 1996 (See Note 20). 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 agreement.
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 December 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
10.125 percent note payable to an 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 $2,000 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.
F-17
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Aggregate maturities required on long-term debt as of December 31, 1995 are
due in future years as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDING
-------------------
<S> <C>
1996.............................................................. $ 454,181
1997.............................................................. 168,364
1998.............................................................. 192,778
1999.............................................................. 209,890
2000.............................................................. 191,009
Later years....................................................... 544,543
----------
$1,760,765
==========
</TABLE>
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 payments
as of December 31, 1995:
<TABLE>
<CAPTION>
FISCAL YEARS ENDING
-------------------
<S> <C>
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
Management fees, related party (Note 13).................. 50,000 --
Sales and use taxes....................................... 92,940 109,008
Interest.................................................. 31,884 65,972
Insurance claim (Note 19)................................. -- 150,000
Other..................................................... 232,747 150,207
-------- --------
$685,482 $676,892
======== ========
</TABLE>
F-18
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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 -- --
-------- -------- ---------
524,582 106,402 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>
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...................... 50,980 140,037 15,529
State income taxes net of federal tax bene-
fit........................................ 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>
F-19
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
-------- --------
153,936 326,510
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>
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 expenses
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.
F-20
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 or such amount as
determined by the U.S. Secretary of the Treasury with the Company contributing
an amount determined by its Board of Directors each year. 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 $1,000,000. 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.
NOTE 13. RELATED PARTY TRANSACTIONS AND BALANCES
Three of the officers and directors of the Company have entered into an
Indemnity Agreement 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 arbitrated to a final bidding 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. The indemnification of FFI's
liability by certain officers and directors has been recorded as a
contribution to capital. Management of the Company believes the impact to the
Company's financial position would be immaterial if the officers and directors
were unable to comply with the agreement. Expenses related to the Insurance
Company's claims totaled $375,000, $150,000, and $0 for the years ended
December 31, 1995, December 30, 1994, and December 31, 1993; respectively (See
Note 20).
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 expense 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
Liabilities at December 31, 1995, December 30, 1994 and December 31, 1993
include amounts owed to Flanders Equity as follows:
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Accrued management fees (Note 8)................. $ 50,000 $ -- $150,000
</TABLE>
F-21
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 31, 1995:
<TABLE>
<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.
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 summarizes 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
PER SHARE
----------------
STOCK
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 (See Note 20).
F-22
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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. Elite issued 75,000 shares
of common stock to Steven Clark in connection with consulting services
rendered to Elite in the preparation of Elite's Form 10-K's and 10-Q's for
prior reporting periods through September 30, 1995, the review of financial
statements prepared by Elite, and the selection of an independent auditor with
respect thereto, selection of legal counsel with respect to Elite's SEC
filings, and the payment of all expenses incurred by Elite with respect to
such accounting and legal personnel. Mr. Clark was not an officer, director or
employee of FFI at the time. 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
F-23
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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).
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, at a par value of $.001, has been
presented as the capital structure of the company.
On May 31, 1996, the Company completed the acquisition of 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 was 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. Upon achieving certain performance criteria, the common
stock will be released from escrow, valued at the market price on the date of
release and will be added to the goodwill associated with the purchase
transaction and amortized over the remaining amortization period of the
respective goodwill asset. The acquisition was funded by private placement
memorandums dated April 11, 1996 and May 13, 1996 which were completed on June
3, 1996. The effective date of the acquisition is March 1, 1996 whereby the
Company will recognize the operating activities of CSC from that date.
On June 15, 1996, the Company completed the acquisition of 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 was 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. Upon achieving certain
performance criteria, the common stock will be released from escrow, valued at
the market price on the date of release and will be added to the goodwill
associated with the purchase transaction and amortized over the remaining
amortization period of the respective goodwill asset. The acquisition was
funded by private placement memorandums dated April 11, 1996 and May 13, 1996
which were completed on June 3, 1996. The effective date of the acquisition is
May 31, 1996 whereby the Company will recognize the operating activities of
Air Seal Filter Housings, Inc. from that date.
On September 23, 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 was owned effectively by
the majority stockholders of Precisionaire, Inc. The purchase price was
approximately $25,123,425 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. Upon achieving certain
performance criteria, the common stock will be released from escrow, valued at
the market price on the date of release and will be added to the goodwill
associated with the purchase transaction and amortized over the remaining
amortization period of the respective goodwill asset. The acquisition of
Precisionaire, Inc. was funded by a private placement of the Company's common
stock and convertible debt, closed on October 16, 1996, a credit facility
provided by NationsBank consisting of (1) a
F-24
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
revolving credit facility in the maximum principal amount of $25,000,000 and
(2) a term loan facility in the maximum principal amount of $6,500,000, and
the assumption of approximately $2,200,000 of debt associated with a mortgage
on the purchased land and building. The effective date of the acquisition is
September 30, 1996 whereby the Company will recognize the operating activities
of Precisionaire, Inc. from that date.
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 and Warrants:
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, independent of the Company's Long-term Incentive
Plan and Director Option Plan, to purchase 1,000,000 shares each of the
Company's common stock at an exercise price of $2.50 per share.
In June 1996, 61,280 outstanding warrants were exercised at a price of $2.50
per share. In addition, 35,000 warrants issued in conjunction with the January
10, 1996 offering were exercised in July 1996 at $2.50 per share.
On May 28, 1996 the Company granted options to purchase 20,000 shares of the
Company's common stock at an exercise price of $6.94 per share to certain key
employees of Charcoal Services Corporation.
On June 3, 1996 the Company granted to its President and its Vice-President
of Finance options, independent of the Company's Long-term Incentive Plan and
Director Option Plan, 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.
F-25
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On June 26, 1996 the Company granted options to purchase 40,000 shares of
the Company's common stock at an exercise price of $9.50 per share to certain
employees of Air Seal Filter Housings, Inc.
Financing Agreements:
On September 19, 1996, the Company entered into a loan agreement (the
"Credit Facility") with NationsBank, N.A. that replaced the previous loan
agreement which had been renewed in June 1996. 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 19, 1997, to
the debenture holders to purchase common stock at $9.625 per share. In
addition, certain officers of the Company have granted to certain debenture
holders the right and option to sell to those officers from time to time such
debentures at a purchase price of 105% of the face value of such debentures
plus any accrued interest.
Indemnity Agreement:
The three officers and directors of the Company who entered into the
Indemnity Agreement with FFI (see Note 13) paid the initial payment of
$262,500 to "Hartford" and "St. Paul" in April 1996, and have agreed to pay
the final settlement of $262,500 on January 15, 1997. In addition, during
March 1996, the Company contracted with Aquaterra, Inc. to complete Phase I
and Phase II surveys of the site of the potential environmental issues.
Aquaterra has opined that completion of the Phase II survey and minimal
ongoing monitoring will resolve the issue, for a total cost of between
$180,000 and $200,000.
F-26
<PAGE>
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.
McGLADREY & PULLEN, LLP
New Bern, North Carolina
February 8, 1996
F-27
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARY
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, DECEMBER 30, 1994 AND DECEMBER 31, 1993
<TABLE>
<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)(1) $148,000
Allowance for
inventory value...... 105,000 (45,000) -- -- 60,000
Valuation allowance
for deferred tax
assets............... 48,465 -- -- (32,490)(2) 15,975
-------- -------- ---- --------- --------
Total............... $193,465 $ 76,799 $-- $ (46,289) $223,975
======== ======== ==== ========= ========
For the year ended Dec.
31, 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............... $311,779 $(86,478) $-- $ (31,836) $193,465
======== ======== ==== ========= ========
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
======== ======== ==== ========= ========
</TABLE>
- --------
(1) Uncollected receivables written-off, net of recoveries.
(2) Reduction in valuation allowance.
F-28
<PAGE>
PRECISIONAIRE, INC.
CONDENSED BALANCE SHEET(/1/)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
(UNAUDITED)
<S> <C>
ASSETS
CURRENT ASSETS
Cash.......................................................... $ 344,555
Short-term investments........................................ 835,519
Receivables:
Trade, less allowance for doubtful accounts of $318,903 at
September 30, 1996; $458,600 at December 31, 1995........... 8,475,588
Other........................................................ 500,000
Inventories (See Note 2)...................................... 5,164,287
Deferred taxes................................................ 871,000
Other current assets.......................................... 10,261
-----------
Total current assets........................................ 16,201,210
-----------
Other assets.................................................... 923,270
Property and equipment, net of accumulated depreciation and
amortization of $0 at September 30, 1996; $7,662,785 at
December 31, 1995.............................................. 7,519,478
-----------
$24,643,958
===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Notes from Flanders Corporation............................... $ 3,070,027
Current maturities of long-term debt.......................... 387,920
Accounts payable.............................................. 6,222,267
Accrued expenses.............................................. 2,922,580
-----------
Total current liabilities................................... 12,602,794
-----------
Long-term debt, less current maturities......................... 2,215,317
Deferred income taxes........................................... 506,004
Commitments and contingencies................................... --
Shareholder's equity
Class A common stock, voting, $.10 par value, 10,000 shares
authorized; 3,767 shares issued and outstanding.............. 377
Class B common stock, non-voting, $.10 par value, 90,000
shares authorized, 33,834 shares issued and outstanding...... 3,383
Additional paid-in capital.................................... 276,420
Unrealized gain on investment................................. 218,569
Retained earnings............................................. 8,821,094
-----------
Total stockholder's equity.................................. 9,319,843
-----------
$24,643,958
===========
</TABLE>
- --------
(1) This balance sheet does not include adjustments attributable to the
purchase of Precisionaire, Inc., by Flanders Corporation on September 23,
1996, which will be effective, for financial statement purposes, on
September 30, 1996.
F-29
<PAGE>
PRECISIONAIRE, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales.................. $20,256,097 $19,301,167 $52,962,024 $47,742,917
Cost of goods sold......... 14,470,023 14,532,896 39,884,947 36,454,670
----------- ----------- ----------- -----------
Gross Profit........... 5,786,074 4,768,271 13,077,077 11,288,247
----------- ----------- ----------- -----------
Operating expenses......... 3,719,176 3,151,940 9,874,301 8,713,514
----------- ----------- ----------- -----------
Operating income....... 2,066,898 1,616,331 3,202,776 2,574,733
----------- ----------- ----------- -----------
Nonoperating income
(expense):
Other income (expense)... 172,350 253,628 417,722 286,631
Interest expense......... (78,342) (118,067) (211,651) (304,291)
----------- ----------- ----------- -----------
94,008 135,561 206,071 (17,660)
----------- ----------- ----------- -----------
Income before income
taxes................. 2,160,906 1,751,892 3,408,847 2,557,073
Income taxes............... 748,472 648,889 1,162,571 947,123
----------- ----------- ----------- -----------
Net income............. $ 1,412,434 $ 1,103,003 $ 2,246,276 $ 1,609,950
=========== =========== =========== ===========
</TABLE>
F-30
<PAGE>
PRECISONAIRE, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS(1)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- --------------------------
1996 1995 1996 1995
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
NET CASH PROVIDED BY
OPERATING
ACTIVITIES......... $ 1,030,626 $ 2,586,617 $ 1,219,016 $ 1,171,764
CASH FLOWS FROM
INVESTING ACTIVITIES
Capital expenditures.. (234,170) (266,372) (676,924) (702,910)
Interest accumulated
on certificates of
deposit.............. -- -- (15,399) (10,299)
Proceeds from sale of
fixed assets......... 21,545 -- 23,782 333
------------- ------------- ------------ ------------
NET CASH (USED) BY
INVESTING
ACTIVITIES......... (212,625) (266,372) (668,541) (712,876)
CASH FLOWS FROM
FINANCING ACTIVITIES
Proceeds from issuance
of long-term debt.... -- -- -- 2,082,447
Net due to Flanders... 2,570,027 -- 2,570,027 --
Principal payments on
long-term debt....... (1,487,076) (195,721) (1,989,193) (1,038,520)
Net borrowings
(payments) on line of
credit............... (1,800,000) (1,100,000) (1,200,000) (400,000)
Dividend payments..... -- -- (54,839) --
------------- ------------- ------------ ------------
NET CASH PROVIDED
(USED) BY FINANCING
ACTIVITIES......... (717,049) (1,295,721) (674,005) 643,927
------------- ------------- ------------ ------------
NET INCREASE
(DECREASE) IN
CASH............... 100,952 1,024,524 (123,530) 1,102,815
CASH AT BEGINNING OF
PERIOD................. 243,603 297,530 468,085 219,239
------------- ------------- ------------ ------------
CASH AT END OF
PERIOD (See
Note 4)............ $ 344,555 $ 1,322,054 $ 344,555 $ 1,322,054
============= ============= ============ ============
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW
INFORMATION:
Cash paid for
interest............. $ 211,651 $ 304,291
Cash paid for income
taxes................ $ 1,314,892 $ 947,122
SUPPLEMENTAL DISCLOSURES
OF NON-CASH
TRANSACTIONS:
Equipment acquired by
assumption of capital
lease obligation..... $ -- $ 36,810
</TABLE>
- --------
(1) The Company's Unaudited Consolidated Condensed Statements of Cash Flows
does not include the statements of cash flows of Precisionaire for the
periods indicated. See Notes 3 and 4 and Part II--Item 5--Other
Information, for Certain Pro Forma Results of the Company and Precisionaire
and the Financial Statements of Precisionaire
F-31
<PAGE>
NOTE 1. NATURE OF BUSINESS AND INTERIM FINANCIAL STATEMENTS
Nature of business: Precisionaire, Inc. (the "Company") manufactures and
sells air filters and related products for commercial and residential heating,
ventilation and air conditioning systems (commonly called "HVAC" systems). The
Company's primary customers are retail and wholesale outlets, and distributors
and reps who service HVAC specialty contractors. All of the Company's issued
and outstanding stock was purchased by Flanders Corporation ("Flanders") as of
September 23, 1996.
Interim financial statements: The interim financial statements presented
herein are unaudited and have been prepared in accordance with the
instructions to Rule S-X. These statements should be read in conjunction with
financial statements and notes thereto included in the Company's audited
financial statements for the year ended December 31, 1995, and the Form 10-Q
filed by Flanders for the three months ended September 30, 1996. 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 nine
months ended September 30, 1996 may not be indicative of the results that may
be expected for the year ending December 31, 1996.
Goodwill: The Company's balance sheet at September 30, 1996 includes
goodwill "pushed down" from the purchase of the Company by Flanders. This
goodwill is being amortized on a straight line basis over 40 years, beginning
October 1, 1996, and the associated amortization expense will be included in
the Company's future financial statements.
NOTE 2. INVENTORIES
Inventories consist of the following at September 30, 1996:
<TABLE>
<CAPTION>
9/30/96
----------
<S> <C>
Finished goods....................................................... $3,077,647
Raw materials........................................................ 2,086,640
----------
$5,164,287
==========
</TABLE>
NOTE 3. ACQUISITION
Effective September 23, 1996, all of the Company's outstanding common stock
was acquired by Flanders pursuant to a stock purchase agreement dated July 1,
1996 (the "Acquisition"). The purchase price was $25,123,425 and 786,885
shares of Flanders' common stock, subject to a post-closing purchase price
adjustment, and was paid by the delivery of both $25,123,425 in cash to the
Precisionaire sellers and 786,885 shares of Flanders' common stock to an
escrow agent to be held in escrow and released to the Precisionaire sellers
over a three year period if certain gross revenue targets are met by the
Company. Shares released from escrow will be valued at the market price of
Flanders' common stock on the date of release and will be added to the
goodwill associated with the purchase transaction and amortized over the
remaining amortization period of the respective goodwill asset.
Contemporaneously therewith, the Company entered into an agreement to acquire
from POT Realty (owned by the former shareholders of the Company) a
manufacturing facility, warehouse and related real property, located in
Terrell, Texas, whereby the Company would assume $2,191,575 of debt with
respect to such building. This transaction was completed as of October 31,
1996. For financial statement purposes, the acquisition of the Company is
being accounted for as having occurred on September 30, 1996.
In connection with the Acquisition, the Company recorded $9,534,286 of
goodwill, which represents the excess of purchase price (including tax
attributes) plus expenses over fair value of assets acquired, which is being
amortized over 40 years.
F-32
<PAGE>
NOTE 5. SUBSEQUENT EVENTS
As part of the Acquisition, on September 23, 1996, Precisionaire entered
into a purchase and sales agreement with POT Realty, a Florida general
partnership, in which Precisionaire agreed to purchase certain real property,
buildings and related improvements located in Terrell, Texas (the "Property").
The total purchase price for the Property was $3,315,000, $1,123,423.65 of
which was paid by Flanders to the former shareholders of the Company as part
of the Closing of the Acquisition. The remainder of the purchase price was
paid by the Company assuming certain debt encumbering the land and buildings.
This transaction was completed as of October 31, 1996. The Company's balance
sheet at September 30, 1996 contains accruals in long-term debt and fixed
assets to reflect this purchase.
F-33
<PAGE>
PRECISIONAIRE, INC.
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
F-34
<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.
Arthur Andersen LLP
Tampa, Florida,
March 8, 1996
F-35
<PAGE>
PRECISIONAIRE, INC.
BALANCE SHEETS--DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
------
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.
F-36
<PAGE>
PRECISIONAIRE, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<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.
F-37
<PAGE>
PRECISIONAIRE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
COMMON COMMON TOTAL
SHARES STOCK SHARES STOCK APIC RETAINED STOCKHOLDERS'
CLASS A CLASS A CLASS B CLASS B CLASS A AND B EARNINGS EQUITY
------- ------- ------- ------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1992................... 3,767 $377 $33,834 $3,383 $276,420 $3,416,750 $3,696,930
Net Earnings.......... -- -- -- -- -- 902,348 902,348
----- ---- ------- ------ -------- ---------- ----------
BALANCE, December 31,
1993................... 3,767 377 33,834 3,383 276,420 4,319,098 4,599,278
Net Earnings.......... -- -- -- -- -- 648,451 648,451
----- ---- ------- ------ -------- ---------- ----------
BALANCE, December 31,
1994................... 3,767 377 33,834 3,383 276,420 4,967,549 5,247,729
Dividends Declared.... -- -- -- -- -- (17,697) (17,697)
Net Earnings.......... -- -- -- -- -- 1,679,808 1,679,808
----- ---- ------- ------ -------- ---------- ----------
BALANCE, December 31,
1995................... 3,767 $377 $33,834 $3,383 $276,420 $6,629,660 $6,909,840
===== ==== ======= ====== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-38
<PAGE>
PRECISIONAIRE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<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>
F-39
<PAGE>
PRECISIONAIRE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<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.
F-40
<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.
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>
F-41
<PAGE>
PRECISIONAIRE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
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>
F-42
<PAGE>
PRECISIONAIRE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
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>
F-43
<PAGE>
PRECISIONAIRE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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
(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
(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>
F-44
<PAGE>
PRECISIONAIRE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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
========== ========
</TABLE>
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
partnership whose partners are shareholders of the Company. 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 which
has an outstanding balance of approximately $1.2 million at December 31, 1995.
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.
F-45
<PAGE>
PRECISIONAIRE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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 (which could aggregate to
approximately $10,365,000 at December 31, 1995).
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.
F-46
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Charcoal Service Corporation
Bath, North Carolina
We have audited the accompanying balance sheets of Charcoal Service
Corporation as of February 29, 1996, April 30, 1995 and April 30, 1994, and
the related statements of income, retained earnings, and cash flows for the
ten months ended February 29, 1996 and for each of the two years in the period
ended April 30, 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 Charcoal Service
Corporation as of February 29, 1996, April 30, 1995 and April 30, 1994, and
the results of its operations and its cash flows for the ten months ended
February 29, 1996 and for each of the two years in the period ended April 30,
1995, in conformity with generally accepted accounting principles.
McGladrey & Pullen, LLP
New Bern, North Carolina
March 25, 1996, except for the first paragraph of Note 15, as to which the
date is May 31, 1996, and the second paragraph of Note 15, as to which the
date is July 24, 1996.
F-47
<PAGE>
CHARCOAL SERVICE CORPORATION
BALANCE SHEETS
FEBRUARY 29, 1996 AND APRIL 30, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................... $ 92,470 $ 172,582 $ 551,551
Receivables:
Trade (Note 4)............................. 706,630 632,805 634,720
Other...................................... 21,067 12,557 92,329
Notes receivable, stockholders (Note 11)... 435,689 298,875 --
Inventories (Note 2)........................ 1,518,834 1,449,558 1,219,452
Deferred income taxes (Note 7).............. 19,324 30,562 15,932
Income tax refund claim..................... 8,647 5,443 --
Prepaid expenses............................ 15,665 2,464 4,013
---------- ---------- ----------
Total current assets...................... 2,818,326 2,604,846 2,517,997
Notes receivable, stockholders (Note 11)...... -- -- 320,903
Leasehold improvements and equipment, net
(Note 3)..................................... 770,812 483,232 588,926
---------- ---------- ----------
$3,589,138 $3,088,078 $3,427,826
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt........ $ -- $ -- $ 63,000
Accounts payable (Note 5)................... 588,078 116,731 258,238
Accrued expenses (Note 6)................... 112,938 137,090 134,138
Income taxes payable........................ -- -- 3,984
---------- ---------- ----------
Total current liabilities................. 701,016 253,821 459,360
---------- ---------- ----------
Long-Term Debt, less current maturities....... -- -- 131,250
---------- ---------- ----------
Deferred income taxes (Note 7)................ 74,324 72,138 88,014
---------- ---------- ----------
Redeemable Common Stock, 350 shares (Note 8).. 738,622 725,056 721,665
---------- ---------- ----------
Commitments (Notes 4, 8 and 12)...............
Stockholders' Equity (Notes 8 and 11)
Common stock, $1 par value; authorized
100,000 shares;
issued 650 shares.......................... 650 650 650
Retained earnings........................... 2,074,526 2,036,413 2,026,887
---------- ---------- ----------
2,075,176 2,037,063 2,027,537
---------- ---------- ----------
$3,589,138 $3,088,078 $3,427,826
========== ========== ==========
</TABLE>
See Notes to Financial Statements.
F-48
<PAGE>
CHARCOAL SERVICE CORPORATION
STATEMENTS OF INCOME
TEN MONTHS ENDED FEBRUARY 29, 1996 AND YEARS ENDED APRIL 30, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net Sales................................... $4,098,879 $3,761,628 $4,608,206
Cost of Goods Sold (Notes 9, 10, 11 and 12).... 2,684,682 2,334,854 2,926,831
---------- ---------- ----------
Gross profit............................ 1,414,197 1,426,774 1,681,375
Selling, general and administrative expenses
(Notes 9, 10, 11 and 12).................. 1,420,231 1,481,317 1,630,302
---------- ---------- ----------
Operating income (loss)..................... (6,034) (54,543) 51,073
Nonoperating income (expenses):
Interest income (Note 11)................. 25,788 35,265 26,433
Other income.............................. 70,626 52,079 12,618
Interest expense.......................... (6,504) (13,833) (18,450)
Involuntary conversion gain (Note 14)..... -- -- 167,697
---------- ---------- ----------
Income before income taxes.............. 83,876 18,968 239,371
Federal and state income taxes (Note 7)..... 32,197 6,051 66,612
---------- ---------- ----------
Net income.............................. $ 51,679 $ 12,917 $ 172,759
========== ========== ==========
</TABLE>
See Notes to Financial Statements.
F-49
<PAGE>
CHARCOAL SERVICE CORPORATION
STATEMENTS OF RETAINED EARNINGS
TEN MONTHS ENDED FEBRUARY 29, 1996 AND YEARS ENDED APRIL 30, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Balance, beginning......................... $2,036,413 $2,026,887 $1,899,478
Net income............................... 51,679 12,917 172,759
Common stock repurchase commitment (Note
8)...................................... (13,566) (3,391) (45,350)
---------- ---------- ----------
Balance, ending............................ $2,074,526 $2,036,413 $2,026,887
========== ========== ==========
</TABLE>
See Notes to Financial Statements.
F-50
<PAGE>
CHARCOAL SERVICE CORPORATION
STATEMENTS OF CASH FLOWS
TEN MONTHS ENDED FEBRUARY 29, 1996 AND YEARS ENDED APRIL 30, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income..................................... $ 51,679 $ 12,917 $172,759
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation.................................. 116,695 121,280 119,769
Interest income on shareholder loans.......... (19,256) (20,119) (22,777)
Loss on sale of equipment..................... -- 5,625 20,783
Involuntary conversion gain................... -- -- (167,697)
Deferred income taxes......................... 13,424 (30,506) 34,628
Changes in working capital components:
Trade and other receivables.................. (82,335) 81,687 242,011
Inventories.................................. (69,276) (230,106) 92,651
Income tax refund claim...................... (3,204) (5,443) 76,855
Prepaid expenses............................. (13,201) 1,549 (2,506)
Accounts payable............................. 471,347 (141,507) (19,572)
Accrued expenses............................. (24,152) 2,952 (16,381)
Income taxes payable......................... -- (3,984) 3,984
-------- -------- --------
Net cash provided by (used in) operating
activities................................ 441,721 (205,655) 534,507
-------- -------- --------
Cash Flows from Investing Activities
Purchase of leasehold improvements and equip-
ment.......................................... (404,275) (21,211) (210,563)
Maturities of certificate of deposit........... -- -- 300,000
Proceeds from sale of leasehold improvements
and equipment................................. -- -- 3,159
Disbursements on notes receivable from stock-
holders....................................... (117,558) -- (102,922)
Proceeds from notes receivable from stockhold-
ers........................................... -- 42,147 --
Insurance proceeds received from involuntary
conversion.................................... -- -- 195,361
-------- -------- --------
Net cash provided by (used in) investing
activities................................ (521,833) 20,936 185,035
-------- -------- --------
Cash Flows from Financing Activities
Proceeds from line of credit................... 344,000 -- 408,000
Principal payments on line of credit........... (344,000) -- (533,000)
Principal payments on long-term borrowings..... -- (194,250) (63,000)
-------- -------- --------
Net cash used in financing activities...... -- (194,250) (188,000)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents............................... (80,112) (378,969) 531,542
</TABLE>
<TABLE>
<S> <C> <C> <C>
Cash and Cash Equivalents
Beginning........................................ 172,582 551,551 20,009
-------- -------- --------
Ending........................................... $ 92,470 $172,582 $551,551
======== ======== ========
Supplemental Disclosures of Cash Flow Information
Cash paid (refunded) for:
Interest........................................ $ 6,504 $ 14,451 $ 18,821
======== ======== ========
Income taxes, net of refunds 1996 $5,443; 1994
$76,855........................................ $ 21,977 $ 45,984 $(48,855)
======== ======== ========
Supplemental Schedules of Noncash Investing Activi-
ties
Increase in notes receivable, stockholders in
lieu of receiving interest payments............. $ 19,256 $ 20,119 $ 22,777
======== ======== ========
</TABLE>
See Notes to Financial Statements.
F-51
<PAGE>
CHARCOAL SERVICE CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: The Company's primary business activity is manufacturing
high-efficiency air filtration products for control of gaseous and particulate
contaminants for national and international customers and providing related
services. The Company sells its products primarily to contractors and
industrial users in North America. The Company's work is performed under
fixed-price contracts with payment provisions based on the terms the Company
negotiates with individual customers. The length of the Company's contracts
varies but typically is less than one year.
A summary of the Company's significant accounting policies follows:
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 cash accounts
which are not subject to withdrawal restrictions and certificates of deposit
which have an original maturity of three months or less to be cash
equivalents.
Inventories: Inventories are valued at lower of cost (first-in, first-out
method) or market.
Leasehold Improvements and Equipment: Leasehold improvements and equipment
are stated at cost. Depreciation is computed by the straight-line method over
estimated useful lives.
Income taxes: Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their
tax bases. Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on
the date of enactment.
NOTE 2. INVENTORIES
Inventories consists of the following at February 29, 1996, April 30, 1995
and April 30, 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Raw materials.................................. $ 415,307 $ 549,426 $ 458,695
Work in progress............................... 885,850 741,751 517,218
Finished goods................................. 217,677 158,381 243,539
---------- ---------- ----------
$1,518,834 $1,449,558 $1,219,452
========== ========== ==========
</TABLE>
F-52
<PAGE>
CHARCOAL SERVICE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3. LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment consists of the following at February
29, 1996, April 30, 1995 and April 30, 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Leasehold improvements and equipment:
Leasehold improvements....................... $ 357,826 $ 357,064 $ 356,052
Machinery and equipment...................... 995,446 637,197 661,210
Automobiles and trucks....................... 37,379 37,379 37,379
Office furniture, fixtures and equipment..... 241,782 196,518 191,808
---------- ---------- ----------
1,632,433 1,228,158 1,246,449
Less accumulated depreciation................ 861,621 744,926 657,523
---------- ---------- ----------
$ 770,812 $ 483,232 $ 588,926
========== ========== ==========
</TABLE>
NOTE 4. REVOLVING CREDIT AGREEMENT AND PLEDGED ASSETS
The Company has a revolving credit agreement with a bank, which expires
September 30, 1996. This agreement provides for maximum borrowings based on
the lessor of a defined borrowing base or $400,000. Interest is charged at the
bank's prime rate (8.25% at February 29, 1996) plus .625%. The revolving
credit agreement is collateralized by trade receivables. At February 29, 1996,
there was no balance outstanding under this agreement.
NOTE 5. ACCOUNTS PAYABLE
Accounts payable consists of the following at February 29, 1996, April 30,
1995 and April 30, 1994:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Accounts payable, trade............................. $534,593 $110,422 $169,747
Commission payable.................................. 25,285 6,309 28,233
Customer deposits................................... 28,200 -- 60,258
-------- -------- --------
$588,078 $116,731 $258,238
======== ======== ========
</TABLE>
NOTE 6. ACCRUED EXPENSES
Accrued expenses consists of the following at February 29, 1996, April 30,
1995 and April 30, 1994:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Bonuses (Note 9).........................................$.82,500.$ 95,000 $100,000
Vacation................................................ 8,124 15,090 14,167
Profit sharing (Note 10)...................................12,500 15,000 10,000
Salaries & wages........................................ 6,893 8,802 4,889
Other accrued expenses.................................. 2,921 3,198 5,082
-------- -------- --------
$112,938 $137,090 $134,138
======== ======== ========
</TABLE>
F-53
<PAGE>
CHARCOAL SERVICE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7. INCOME TAX MATTERS
Total deferred tax assets and liabilities as of February 29, 1996, April 30,
1995 and April 30, 1994, were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Inventory allowances........................... $ 18,678 $ -- $ --
Accrued expenses............................... 2,845 5,878 10,174
Deferred revenue on long-term contracts........ -- 24,684 --
Net economic loss carryforwards................ -- -- 5,758
-------- -------- --------
21,523 30,562 15,932
Less valuation allowance....................... (2,199) -- --
-------- -------- --------
19,324 30,562 15,932
Deferred tax liabilities:
Leasehold improvements and equipment........... (74,324) (72,138) (88,014)
-------- -------- --------
$(55,000) $(41,576) $(72,082)
======== ======== ========
</TABLE>
The components giving rise to the net deferred tax liabilities described
above have been included in the accompanying balance sheets at February 29,
1996, April 30, 1995 and April 30, 1994 as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Current assets................................ $ 19,324 $ 30,562 $ 15,932
Noncurrent liabilities........................ (74,324) (72,138) (88,014)
--------- --------- ---------
$ (55,000) $ (41,576) $ (72,082)
========= ========= =========
</TABLE>
The provision for income taxes charged to operations for the ten months
ended February 29, 1996, and the years ended April 30, 1995 and April 30,
1994, consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Current tax expense................................ $ 18,773 $ 36,557 $ 31,984
Deferred tax expense (benefit)..................... 13,424 (30,506) 34,628
-------- -------- --------
$ 32,197 $ 6,051 $ 66,612
======== ======== ========
</TABLE>
The provision for income taxes for the ten months ended February 29, 1996
and the years ended April 30, 1995 and 1994 differs from the amount obtained
by applying the U.S. federal income tax rate to pre-tax income due to the
following:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- --------
<S> <C> <C> <C>
Computed "expected" tax expense................... $ 28,517 $ 6,449 $ 81,386
Increase (reductions) in tax resulting from:
Nondeductible expenses.......................... 336 955 --
State income taxes net of federal tax benefit... 4,341 1,666 --
Change in valuation allowance................... 2,199 -- --
Benefit of income taxed at lower rates.......... (11,903) (3,019) (14,774)
Effect of changes in tax rates for future
periods........................................ 8,707 -- --
-------- ------- --------
$ 32,197 $ 6,051 $ 66,612
======== ======= ========
</TABLE>
F-54
<PAGE>
CHARCOAL SERVICE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8. REDEEMABLE COMMON STOCK
The company has an agreement under which it has agreed to purchase all
shares of common stock owned by its Vice-President upon the termination of his
employment. The Vice-President owned 350 shares of stock at February 29, 1996,
April 30, 1995, and April 30, 1994, respectively. The purchase price shall be
the stock's book value, determined using generally accepted accounting
principles, plus 25% if the Vice President is involuntarily terminated or less
25% if the Vice President voluntarily terminates employment. The redeemable
preferred stock has been valued at the Company's book value less 25%. The
Company changed its accounting for the redeemable common stock to comply with
the accounting rules of the Securities and Exchange Commission.
NOTE 9. DISCRETIONARY BONUSES
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 $82,500 for the ten months ended February 29, 1996, and $95,000 and
$100,000 for the years ended April 30, 1995, and 1994, respectively.
NOTE 10. PROFIT-SHARING PLAN
The Company has a contributory profit-sharing plan for those employees who
meet the eligibility requirements set forth in the plan. Substantially all of
the Company's full-time employees are covered by the plan. The Company's
contribution, which is at the discretion of the Company's Board of Directors,
is limited to 15% of participants' base salary. Participants' interest become
fully vested after six years of service and may be withdrawn upon attaining
age 55. The Company's contribution was $12,500 for the ten months ended
February 29, 1996, $15,000 for year ended April 30, 1995, and $10,000 for the
year ended April 30, 1994.
NOTE 11. RELATED PARTY TRANSACTIONS AND BALANCES
The Company had unsecured notes receivable from stockholders totaling
$435,689, $298,875 and $320,903 at February 29, 1996, April 30, 1995 and April
30, 1994, respectively. The notes bear interest rates ranging from 6.42% to
6.60%. The outstanding principal and interest are due April 30, 1996.
The Company conducts its operations from facilities rented from stockholders
under month-to-month agreements. Rental expense under these agreements was
$86,629 for the ten months ended February 29, 1996 and $113,032 for the years
ended April 30, 1995 and 1994.
On February 14, 1996, the stockholders of the Company entered into a
tentative agreement to sell their stock to Flanders Corporation. See Note 15.
NOTE 12. LEASE COMMITMENTS AND TOTAL RENTAL EXPENSE
The total rental expense charged to operations totaled $93,763 for the 10
months ended February 29, 1996, and $121,495 and $123,687 for the years ended
April 30, 1995, and 1994, respectively. As of February 29, 1996, the Company
did not have any material lease commitments.
NOTE 13. 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.
F-55
<PAGE>
CHARCOAL SERVICE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Notes receivable stockholders: The carrying amount approximates fair value
because of the short maturity of those instruments.
NOTE 14. INVOLUNTARY CONVERSION
During the fiscal year ended April 30, 1994, a building leased by the
Company was destroyed by fire. At the time of the fire, the building contained
equipment and leasehold improvements owned by the Company, which were totally
destroyed. The Company was fully insured for the replacement cost of these
assets and agreed to a settlement of $195,361.
The nonoperating gain of $167,697 represents insurance settlement proceeds
in excess of the aggregate book value of equipment and leasehold improvements
destroyed by the fire. The Company is not required to pay income taxes on this
gain until the ultimate disposition of the replacement assets.
NOTE 15. SUBSEQUENT EVENTS
On May 31, 1996 the stockholders of the company sold all of their
outstanding shares to Flanders Corporation, a manufacturer of high efficiency
air filters, filtration systems, and housings which are used primarily in
ultra-clean manufacturing environments (cleanrooms). The purchase price was
approximately $4,435,000, and up to 100,000 shares of Flanders common stock if
certain performance criteria are met by the Company.
During April 1996, the Company entered into a long term note agreement, due
March 2001, with a financing company for the purchase of manufacturing
equipment for the principal amount of $340,200. The terms of the agreement
stipulate sixty (60) monthly installments in the amount of $5,670 each, plus
the entire amount of interest accrued on this note at the time of each
installment. Interest on this Note shall accrue on the principal balance at a
rate which is two hundred sixty-seven (267) points over the One Month London
Interbank Offered Rate ("LIBOR") as such rate shall vary from month to month.
This note is collateralized by substantially all present and future accounts,
accounts receivable, and contract rights. The amount of this obligation was
included in accounts payable at February 29, 1996.
F-56
<PAGE>
DESCRIPTION OF ARTWORK INSIDE BACK COVER
Green background with Flanders logo in upper right hand corner; upper left
hand corner, picture of Precisionaire products; lower left hand corner, text
describing that the Company currently sells its products under many trade
names, and listing such names; lower right hand corner, photograph of products
produced by the Company; upper right hand corner, photograph of an isolation
barrier.
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMA-
TION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS, 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 IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COM-
PANY SINCE THE DATE HEREOF. THIS PROSPECTUS 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 HEREUN-
DER 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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY....................................................... 3
SUMMARY CONSOLIDATED FINANCIAL DATA...................................... 6
RISK FACTORS............................................................. 8
USE OF PROCEEDS.......................................................... 14
DILUTION................................................................. 15
MARKET INFORMATION....................................................... 16
PRICE RANGE OF COMMON STOCK.............................................. 16
DIVIDEND POLICY.......................................................... 16
CAPITALIZATION........................................................... 17
SELECTED CONSOLIDATED FINANCIAL DATA..................................... 18
UNAUDITED PRO-FORMA FINANCIAL INFORMATION................................ 19
PRO-FORMA CONSOLIDATED STATEMENT OF OPERATIONS........................... 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 22
BUSINESS................................................................. 33
MANAGEMENT............................................................... 43
PRINCIPAL SHAREHOLDERS................................................... 50
SELLING SHAREHOLDERS..................................................... 51
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS..................... 53
DESCRIPTION OF CAPITAL STOCK............................................. 54
ANTI-TAKEOVER EFFECTS OF THE COMPANY'S ARTICLES AND BYLAWS............... 56
SHARES ELIGIBLE FOR FUTURE SALE.......................................... 58
UNDERWRITING............................................................. 59
EXPERTS.................................................................. 60
LEGAL MATTERS............................................................ 60
ADDITIONAL INFORMATION................................................... 61
INDEX TO FINANCIAL STATEMENTS............................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1,600,000
SHARES OF COMMON STOCK
FLANDERS CORPORATION
[FLANDERS LOGO APPEARS HERE]
---------------
PROSPECTUS
---------------
GILFORD SECURITIES INCORPORATED
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission initial registration fee....... $ 17,000*
Legal fees and expenses........................................... 300,000*
NASD filing fee................................................... 10,000*
Nasdaq additional listing fee..................................... 10,000*
Accounting fees and expenses...................................... 100,000*
Transfer agent fees............................................... 5,000*
Printing and engraving expenses................................... 25,000*
Miscellaneous..................................................... 133,000*
--------
Total........................................................... 600,000
========
</TABLE>
- --------
* Estimated
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
II-1
<PAGE>
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.
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 expired December 3, 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. In connection with this offering, the Company will
pay a total of $679,900 in commissions to EGS Securities and Kelcop
Financial Inc.
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 25,000 shares of the Registrant's Common Stock at an
exercise price of $9.63 per share. 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
II-2
<PAGE>
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.
7. In October 1996, the Company raised an additional $4,306,000 from a
private placement of 478,444 shares of stock at $9.00 per share to certain
accredited investors and pursuant to Rule 506 of Regulation D adopted under
Section 4(2) of the Securities Act of 1933. Net proceeds from the Offering
after commissions of $400,000, were $3,906,000. Combined with the September
Offering, total net proceeds from September and October were $17,122,605.
In connection with this offering, the Company paid $400,000 to Gilford
Securities.
In connection with the transactions described in Items 1-7 above, the
Company paid $1,789,160 in Finders fees.
ITEM 16. LIST OF EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1 Underwriting Agreement (previously filed with Amendment No. 1 to Form S-
1, filed December 10, 1996, and incorporated herein by reference)
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
4.1 Representative's Warrant Agreement (previously filed with Amendment No.
1 to Form S-1, filed December 10, 1996, and incorporated herein by
reference)
4.2 Form of Series A Convertible Subordinated Debentures, filed with the
September 30, 1996 Form 10-Q, incorporated herein by reference
4.3 Form of Warrants, filed with the September 30, 1996 Form 10-Q,
incorporated herein by reference
4.4 Form of 10% Convertible Notes, filed with the September 30, 1996 Form
10-Q, incorporated herein by reference
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 the May 31,
1996 Form 8-K, incorporated herein by reference
10.3 Stock Purchase Agreement between Flanders Corporation and the
Shareholders of AirSeal Filter Housings, Inc. (previously filed with
Form S-1, filed October 21, 1996 (Reg. No. 333-14655) and incorporated
herein by reference)
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
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
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 (previously filed with Form S-1, filed October 21,
1996 (Reg. No. 333-14655) and incorporated herein by reference)
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 (previously filed with Form
S-1, filed October 21, 1996 (Reg. No. 333-14655) and incorporated herein
by reference)
10.14 Amendment to Employment Agreement between Elite Acquisitions, Inc.,
Flanders Filters, Inc. and Robert R. Amerson (previously filed with Form
S-1, filed October 21, 1996 (Reg. No. 333-14655) and incorporated herein
by reference)
10.15 Purchase and Sale Agreement between POT Realty and Precisionaire, Inc.,
filed with the September 30, 1996 Form 10-Q, incorporated herein by
reference
10.16 Assumption Agreement with Release of Liability between POT Realty and
Precisionaire, Inc for original principal amount of $2,069,653, filed
with the September 30, 1996 Form 10-Q, incorporated herein by reference
10.17 Assumption Agreement with Release of Liability between POT Realty and
Precisionaire, Inc. for original principal amount of $133,025, filed
with the September 30, 1996 Form 10-Q, incorporated herein by reference
10.18 Guaranty Agreement between Flanders Corporation and American National
Bank of Texas, filed with the September 30, 1996 Form 10-Q, incorporated
herein by reference
10.19 Subscription Agreement between Flanders Corporation and the President
and Fellows of Harvard College, filed with the September 30, 1996 Form
10-Q, incorporated herein by reference
10.20 Escrow Agreement between Flanders Corporation, President and Fellows of
Harvard College and State Street Bank & Trust, filed with the September
30, 1996 Form 10-Q, incorporated herein by reference
10.21 Subscription Agreement between Flanders Corporation and General Electric
Pension Trust, filed with the September 30, 1996 Form 10-Q, incorporated
herein by reference
10.22 Escrow Agreement between Flanders Corporation, General Electric Pension
Trust and State Street Bank & Trust, filed with the September 30, 1996
Form 10-Q, incorporated herein by reference
16 Change in Certifying Accountant, filed with Form 8-K dated January 29,
1996, incorporated herein by reference
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
21.1 Subsidiaries of the registrant (previously filed with Amendment No. 1 to
Form S-1, filed December 10, 1996, and incorporated herein by reference)
23.1 Consent of McGladrey & Pullen, LLP
23.2 Consent of Arthur Andersen, LLP
23.3 Consent of Snell & Wilmer (included in Opinion filed as Exhibit No. 5.1)
24 Power of Attorney (previously filed with Form S-1, filed October 21,
1996 (Reg. No. 333-14655) and incorporated herein by reference)
</TABLE>
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 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.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 2 TO THE 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 23RD DAY OF DECEMBER,
1996.
FLANDERS CORPORATION
*
By: _________________________________
ROBERT R. AMERSON PRESIDENT, CHIEF
EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS
IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE DATE
* President, Chief
- ------------------------------------- Executive Officer December 23,
ROBERT R. AMERSON 1996
/s/ Steven K. Clark Chief Financial
- ------------------------------------- Officer and Chief December 23,
STEVEN K. CLARK Accounting Officer 1996
* Chairman of the
- ------------------------------------- Board December 23,
THOMAS T. ALLAN 1996
* Director, Vice
- ------------------------------------- President of December 23,
GUSTAVO HERNANDEZ Operations 1996
* Director
- ------------------------------------- December 23,
WILLIAM M. CLAYTOR 1996
* Director
- ------------------------------------- December 23,
WILLIAM H. CLARK 1996
*By: /s/ Steven K. Clark
----------------------------------
STEVEN K. CLARK
ATTORNEY-IN-FACT
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE
EXHIBIT NO. DESCRIPTION NO.
----------- ----------- ----
<C> <S> <C>
1 Underwriting Agreement (previously filed with Amendment No. 1 to Form S-
1, filed December 10, 1996, and incorporated herein by reference)
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
4.1 Representative's Warrant Agreement (previously filed with Amendment No.
1 to Form S-1, filed December 10, 1996, and incorporated herein by
reference)
4.2 Form of Series A Convertible Subordinated Debentures, filed with the
September 30, 1996 Form 10-Q, incorporated herein by reference
4.3 Form of Warrants, filed with the September 30, 1996 Form 10-Q,
incorporated herein by reference
4.4 Form of 10% Convertible Notes, filed with the September 30, 1996 Form
10-Q, incorporated herein by reference
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 the May 31,
1996 Form 8-K, incorporated herein by reference
10.3 Stock Purchase Agreement between Flanders Corporation and the
Shareholders of AirSeal Filter Housings, Inc. (previously filed with
Form S-1, filed October 21, 1996 (Reg. No. 333-14655) and incorporated
herein by reference)
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
EXHIBIT NO. DESCRIPTION NO.
----------- ----------- ----
<C> <S> <C>
10.11 Employment Agreement between Flanders Corporation, Precisionaire, Inc.
and Gustavo Hernandez (previously filed with Form S-1, filed October 21,
1996 (Reg. No. 333-14655) and incorporated herein by reference)
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 (previously filed with Form
S-1, filed October 21, 1996 (Reg. No. 333-14655) and incorporated herein
by reference)
10.14 Amendment to Employment Agreement between Elite Acquisitions, Inc.,
Flanders Filters, Inc. and Robert R. Amerson (previously filed with Form
S-1, filed October 21, 1996 (Reg. No. 333-14655) and incorporated herein
by reference)
10.15 Purchase and Sale Agreement between POT Realty and Precisionaire, Inc.,
filed with the September 30, 1996 Form 10-Q, incorporated herein by
reference
10.16 Assumption Agreement with Release of Liability between POT Realty and
Precisionaire, Inc for original principal amount of $2,069,653, filed
with the September 30, 1996 Form 10-Q, incorporated herein by reference
10.17 Assumption Agreement with Release of Liability between POT Realty and
Precisionaire, Inc. for original principal amount of $133,025, filed
with the September 30, 1996 Form 10-Q, incorporated herein by reference
10.18 Guaranty Agreement between Flanders Corporation and American National
Bank of Texas, filed with the September 30, 1996 Form 10-Q, incorporated
herein by reference
10.19 Subscription Agreement between Flanders Corporation and the President
and Fellows of Harvard College, filed with the September 30, 1996 Form
10-Q, incorporated herein by reference
10.20 Escrow Agreement between Flanders Corporation, President and Fellows of
Harvard College and State Street Bank & Trust, filed with the September
30, 1996 Form 10-Q, incorporated herein by reference
10.21 Subscription Agreement between Flanders Corporation and General Electric
Pension Trust, filed with the September 30, 1996 Form 10-Q, incorporated
herein by reference
10.22 Escrow Agreement between Flanders Corporation, General Electric Pension
Trust and State Street Bank & Trust, filed with the September 30, 1996
Form 10-Q, incorporated herein by reference
16 Change in Certifying Accountant, filed with Form 8-K dated January 29,
1996, incorporated herein by reference
21.1 Subsidiaries of the registrant (previously filed with Amendment No. 1 to
Form S-1, filed December 10, 1996, and incorporated herein by reference)
23.1 Consent of McGladrey & Pullen, LLP
23.2 Consent of Arthur Andersen, LLP
23.3 Consent of Snell & Wilmer (included in Opinion filed as Exhibit No. 5.1)
24 Power of Attorney (previously filed with Form S-1, filed October 21,
1996 (Reg. No. 333-14655) and incorporated herein by reference)
</TABLE>
<PAGE>
[LETTERHEAD OF SNELL & WILMER APPEARS HERE]
December 23, 1996
Flanders Corporation
531 Flanders Filters Road
Washington, North Carolina 27889
Re: Registration Statement on Form S-1
----------------------------------
Gentlemen:
We have acted as counsel for Flanders Corporation, a North Carolina
corporation ("Company"), and in such capacity have examined the Company's
Registration Statement on Form S-1, Registration No. 333-14655 (the registration
statement, including the amendments thereto being referred to collectively
herein as the "REGISTRATION STATEMENT"), filed by the Company with the
Securities and Exchange Commission ("COMMISSION") initially on October 21, 1996,
under the Securities Act of 1933, as amended ("ACT"), relating to the proposed
public offering by the Company of up to 1,840,000 shares of Common Stock, $.001
par value per share, of the Company ("COMPANY SHARES") and 1,333,889 shares of
Common Stock of the selling shareholders ("SELLING SHAREHOLDERS").
As counsel for the Company and for purposes of this opinion, we have
made those examinations and investigations of legal and factual matters we
deemed advisable and have examined originals or copies, certified or otherwise
identified to our satisfaction as true copies of the originals, of those
corporate records, certificates, documents and other instruments which, in our
judgment, we considered necessary or appropriate to enable us to render the
opinion expressed below, including the Company's Articles of Incorporation, as
amended to date, the Company's Bylaws, as amended to date, and the minutes of
meetings of the Company's Board of Directors and other corporate proceedings
relating to the authorization and issuance of the Company Shares. We have
assumed the genuineness and authorization of all signatures and the conformity
to the originals of all copies submitted to us or inspected by us as certified,
conformed or photostatic copies. Further, we have assumed the due execution and
delivery of certificates representing the Company Shares.
Based upon the foregoing, and relying solely thereon, we are of the
opinion that the Company Shares and the Selling Shareholders' Shares have been
duly authorized and (i) the Company Shares will be, when issued, delivered and
paid for in the manner and
Member: LEX MUNDI, an international association of independent law firms with
members in the United States and 60 counties throughout the world.
<PAGE>
[LETTERHEAD OF SNELL & WILMER APPEARS HERE]
Flanders Corporation
December 9, 1996
Page 2
upon the terms contemplated by the Registration Statement, legally and validly
issued, fully paid and nonassessable and (ii) the Selling Shareholders' Shares,
when issued, were legally and validly issued, fully paid and nonassessable.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the reference to our name under the caption "Legal
Matters" in the Prospectus included in the Registration Statement. In giving
this consent we do not hereby admit that we are in the category of persons whose
consent is required under Section 7 of the Act or the rules and regulations of
the Commission thereunder.
Very truly yours,
SNELL & WILMER L.L.P.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITOR
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
December 2, 1996 relating to the consolidated financial statement of Flanders
Corporation and subsidiary, and to the reference to our Firm under the caption
"Experts" in the Prospectus.
McGladrey & Pullen, LLP
New Bern, North Carolina
December 23, 1996
<PAGE>
EXHIBIT 23.2
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.
Arthur Andersen LLP
Tampa, Florida,
December 23, 1996