<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 10, 1996
REGISTRATION NO. 333-14655
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
----------------
AMENDMENT NO. 1
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. [_]
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
(PURSUANT TO ITEM 501(B) OF REGULATION S-K)
<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; Available
Information
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges.............. Prospectus Summary; Risk Factors; Selected
Consolidated Financial Data
4. Use of Proceeds............................ Use of Proceeds
5. Determination of Offering Price............ The Offering; Underwriting
6. Dilution................................... Dilution
7. Selling Security Holders................... Cover Page; Selling Securities Holders
8. Plan of Distribution....................... Underwriting; Plan of Distribution
9. Description of Capital Stock to be 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 Stockholders; Certain
Relationships and Related Transactions; Description of
Capital Stock; Underwriting; Consolidated Financial
Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................... Item 17, Undertakings
</TABLE>
<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 10, 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 6, 1996, the last reported sale price of the Common Stock
was $10 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)
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<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 full range of air filtration
products ranging from high performance laminar flow High Efficiency Particulate
Air ("HEPA") filters and charcoal filters for semiconductor manufacturing
facilities, to residential furnace filters. The Company's air filtration
products are utilized by many industries, including those associated with
commercial and residential heating, ventilation and air conditioning systems
(commonly known as "HVAC" systems), semiconductor manufacturing, ultra-pure
materials, biotechnology, pharmaceuticals, synthetics, nuclear power and
nuclear materials processing. The Company's customers include 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 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.
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, and (v)
62,712 shares of Common Stock issuable upon exercise of outstanding
warrants. The exercise of any of the above described options or warrants
may result in additional dilution. See "Management--Long-Term Incentive
Plan," "Management--Director Option Plan," "Description of Capital Stock"
and "Underwriting and Plan of Distribution."
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
Total Long-Term
Debt(3)................ 2,657 2,258 1,803 1,892 1,761 35,134 35,134 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 and 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.
(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.
(3) Total Long-Term Debt, includes current portion and convertible debt.
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
monthly revenues in 1996 have more than doubled compared to monthly revenues
in 1995. There can be no assurance that the Company will continue to expand at
this rate, or at all. If the Company does continue to grow, the additional
growth will place burdens on management to manage such growth while
maintaining the Company's profitability. Additional growth may require the
Company to recruit and train additional management personnel in the areas of
corporate management, sales, accounting, marketing, research and development
and operations. There can be no assurance that the Company will be able to do
so.
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. The Company
has received a limited indemnification from Robert Amerson, Steven Clark and
Thomas Allan (directors, officers and shareholders of the Company) of
approximately $1,000,000 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.
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 6,736,520 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. 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. The Company has also issued options and warrants to
purchase 962,712 shares in aggregate to various underwriters, finders and
consultants. The issuance of additional shares by the Company in the future
may result in a reduction of the book value or market price, if any, of the
then outstanding Common Stock. Issuance of additional shares of Common Stock
may reduce the proportionate ownership and voting power of existing
shareholders.
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 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
$8.65 per share or 86.5%. See "Dilution."
11
<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 tradable without restriction
under the Securities Act.
As of December 3, 1996, there were stock options and warrants outstanding to
purchase an aggregate of 7,686,032 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 7,462,712
options or warrants to purchase Common Stock, or their transferees, are
entitled to certain rights with respect to the registration of such shares
under the Securities Act. Under the terms of an agreement between the Company
and such holders, if the Company proposes to register any of its securities
under the Securities Act, either for its own account or the account of other
security holders exercising registration rights, the holders are entitled to
notice of such registration and are entitled to include shares of such Common
Stock therein; the registration rights provide, however, among other
conditions, that the underwriters of any offering have the right to limit the
number of such shares included in such registration. In addition, the
shareholders benefiting from these rights may require the Company, on not more
than one occasion, to file a registration statement under the Securities Act
with respect to such shares, on form S-3, if such form is available to the
Company, subject to certain conditions and limitations.
The Company makes no prediction as to the effect, if any, that future sales
of shares or the availability of shares for future sale will have on the
prevailing market price of the Common Stock. Sales of substantial amounts of
the Company's Common Stock in the public market or the perception that such
sales could occur could have an adverse affect on the prevailing market price
of the Common Stock.
DEPENDENCE ON 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 full range of products, however, the
Company does not have any written agreements with such 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.
12
<PAGE>
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.
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. 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 would have been
$23,641,685 or $1.35 per share. This represents an immediate increase in pro-
forma net tangible book value to existing shareholders of $0.75 per share and
an immediate dilution of $8.65, or 86.5% 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
Adjusted pro-forma net tangible book value after the
offering..................................................... $ 1.35
------
Dilution to new investors..................................... $ 8.65
======
</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) 62,712 shares of Common Stock issuable upon exercise of
outstanding warrants at a weighted average exercise price of $6.84. 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.
<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 6, 1996)...................... 10.25 9.31
</TABLE>
On December 6, 1996, the closing price for the stock was $10. 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(1)................. $ 2,279 $ 2,279 $ 2,279
Long-term obligations, less current
portion.................................... 27,752 27,752 13,752
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 as adjusted(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 4 to the
Company's Unaudited Pro Forma Financial Information.
(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.
(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) 62,712 shares of Common Stock
issuable upon exercise of outstanding Warrants. The exercise of any of the
above described options or warrants may result in additional dilution. See
"Management--Long-Term Incentive Plan," "Management--Director Option
Plan," "Description of Capital Stock" and "Underwriting and Plan of
Distribution."
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, 1996 has been derived from the Company's unaudited Financial Statements,
which, in the opinion of management, reflect all adjustments which are of a
normal recurring nature necessary for a fair presentation of the results of
operations for such periods, and is presented on a pro-forma basis to give
effect to the Acquisitions. The results of the interim period are not
necessarily indicative of the results of a full year.
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 16,738,601
(17,317,471 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
11,432,000 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
Total long-term debt(1)........ 2,657 2,258 1,803 1,892 1,761 35,134
Total shareholders equity...... 3,264 3,612 3,967 3,953 8,208 21,801
</TABLE>
- --------
(1) Total Long-Term Debt, includes current portion and convertible debt.
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 the beginning of the respective periods, 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 the beginning of the respective periods, 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 shareholders of AirSeal not
actively involved in the business. Adjustments are for five months and
three months of operations prior to the acquisition of AirSeal and CSC,
respectively. The Company recognized $887,052 and $450,503 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. 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
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 revolving credit line,
respectively; 10.0% for the 10% Convertible Notes; and 18.0% for the
Series A Convertible Subordinated Debentures.
(4) Pro-forma weighted average common and common equivalent shares
outstanding have been increased to reflect the earlier issuance of shares
from the private offerings and the Acquisitions.
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.......... $ 0.12 $ 0.21
======= ========
Weighted average common
and common equivalent
shares outstanding..... 9,832 3,371(3) 13,203
======= ======= ========
</TABLE>
- --------
(1) Consists of: $295,070, $74,665 and $81,895 of additional depreciation for
the write-up of fixed assets to market value of Precisionaire, AirSeal
and CSC, respectively; $263,000, $21,600 and $12,000 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. The Company recognized
$450,503, $887,052 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
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) Pro Forma weighted average common and common equivalent shares
outstanding have been increased to reflect the assumed earlier issuance
of shares from the private offerings and the Acquisitions.
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 a full-range air filtration product company engaged in
designing, manufacturing and marketing high performance air filtration
products and related products, services and equipment. During the last year,
the Company has experienced significant growth in its HEPA filter business and
from the acquisition of other air filtration 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.
RESULTS OF OPERATIONS
The following table summarizes the Company's results of operations as a
percentage of net sales for the fiscal years ended December 31, 1993, December
30, 1994 and December 31, 1995, the three months ended September 30, 1995 and
1996 and the nine month periods ended September 30, 1995 and 1996.
22
<PAGE>
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 $6,000,000 of increased net sales from Airpure, a subsidiary
established in 1994.
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. The Company
expects, with the Acquisitions, that its margins will increase slightly in
1996 to between 25% and 28%. The Company is aiming to eventually reach 30% for
its gross margins. See "Business--Strategies--Increase Operating Efficiency."
Operating Expenses: 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 were $1,146,000, or $0.12 per share,
compared to a net loss of $5,000, or $0.00 per share, for 1994. Net 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 30, 1993 and December 31,
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>
SUMMARY COMBINED PRO-FORMA RESULTS OF OPERATIONS
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 31, 1994
and 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
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. See "Business--Strategies."
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. The Company expects that
pro-forma operating expenses will not change materially during the next two
quarters, expecting the normal increases in sales expenses associated with
expected increases in revenues to compensate for with savings from the
consolidation of operations of the Acquisitions. See "Business--Strategies."
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 1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 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 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.
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<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 $6,603,000 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 75 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 $37,426,000 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 and (ii) a term
loan facility in the maximum principal amount of $6,500,000. 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.
29
<PAGE>
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 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.
Net Income loss: 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 product line which includes a full range
of air filtration products. As part of the integration the Acquisitions, the
Company has adopted a strategy of increasing its market share by providing its
existing manufacturers' representatives, who typically sell a complete product
line made up of products from several manufacturers, 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 full range of air filtration
products ranging from high performance laminar flow High Efficiency
Particulate Air ("HEPA") filters and charcoal filters for semiconductor
plants, to residential furnace filters. The Company's air filtration products
are utilized by many industries, including those associated with commercial
and residential air conditioning and heating systems, semiconductor
manufacturing, ultra-pure materials, biotechnology, pharmaceuticals,
synthetics, nuclear power and nuclear materials processing. The Company's
major customers include 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 will
become subject to emissions regulations by the end of 1996 under the Clean
Air Act 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 Full Range of Products to Existing Customers. Currently, the Company
sells its products through a direct sales force and manufacturers'
representatives. Historically, the manufacturer's representatives have only
sold certain of the Company's products. Those representatives can now offer
the Company's full range of air 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 a full
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
a full range of products, management believes that many of these distributors
will elect to offer the Company's full 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 and Flanders has provided an isolator which
is currently in the process of being validated and licensed for parenteral
drug manufacturing.
Name Recognition. The Company believes that each of its product lines has
high name recognition in its target markets. The Company's representatives
have indicated that they believe their sales will be increased with
additional products associated with the Company.
Single Source Supplier. The Company provides a complete spectrum of air
filtration products. The ability to work with a single source for filters
will enable representatives to operate more efficiently, only needing to be
trained on one filtration system, maintain contacts with a single
organization and order from a central source.
Product Promotion and Innovation. The Company plans to introduce the
public to new applications it is developing for filtration products.
Representatives will be able to take advantage of the additional name
recognition and public knowledge associated with the marketing of the new
products, and see this as a competitive advantage to selling the Company's
products.
The Company is also seeking to consolidate its share of its direct
customers' business in the same fashion. For example, CSC has historically
sold high-end radiation containment filtration systems for radioactive
containment and exhaust purposes to U.S. Department of Energy nuclear
facilities. These facilities also use standard and industrial-grade filters
for air intake systems and control areas. The Company believes each of its
subsidiaries will be able to sell its direct customers additional products
from the other subsidiaries, for many of the same reasons given above:
perception of product quality, name recognition, and public knowledge of
product innovations and technical superiority.
36
<PAGE>
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 ranging from
hospital operating rooms to sub-surface mining.
Containment Environments. The Company manufactures isolated containment
environments for a variety of applications which combine HEPA and HEGA
filtration with specialized housings and self-contained fan-filter units.
These systems are customized to meet the requirements of the end user, and
have been used in applications ranging from isolating contagion in critical
care wards to the production of designer micro-organisms. These containment
environments are potentially adaptable, especially in combination with gas-
phare filtration technologies, to many other industries, including the
pharmaceutical and semiconductors industries.
"Mid-Range" Filtration Products.
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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<PAGE>
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), Dustgard(R), Preflexe(TM), AP Armaflex(R), E-Z
flow(R), E-Z flow II(R), Smilie(R), Permaire(R), Airvelope(TM),
Channel-Ceil(R), Channel-Hood(TM), Pureform(TM), Econocell(TM), Pureseal(R),
Tech-SORB(TM), Gas-PAK(TM) and Ultrasorb(TM). Although management believes
that the patents and trademarks associated with the Company's various product
lines and subsidiaries are valuable to the Company, it does not consider any
of them to be essential to its business.
The Company currently licenses some of its manufacturing products to
specialty HVAC and ASHRAE filter manufacturers who produce products under
their own name and with their own identifying labels.
BACKLOG
The Company had approximately $19,259,000 million in firm backlog, on a pro-
forma basis, at September 30, 1996, compared to $16,537,000 million at
December 31, 1995, and $14,564,000 million at December 30, 1994. Firm backlog
includes orders received and not begun and the unfinished and unbilled portion
of contracts in progress. Orders are typically not cancelable without penalty,
except for certain stable filter supply contracts to nuclear facilities
operated by the United States government. All backlog at September 30, 1996 is
expected to be shipped by the end of the first quarter of 1997.
EMPLOYEES
The Company employed 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
</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
$1,000,000 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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<PAGE>
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. S. K. Clark, Mr. W.H. Clark and
Mr. Claytor. The members of the Compensation Committee are Messrs. Claytor and
Allan. Both Mr. Claytor and Mr. W.H. Clark are non-employee directors. Mr.
Allan is the Chairman of the Board; his compensation is fixed at $71,000 per
year, and he is not eligible for bonuses.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Amerson and
S. K. Clark effective as of December 15, 1995 ("Employment Agreements"). Mr.
Amerson's employment agreement currently provides for an annual base salary of
$250,000. Mr. Clark's employment agreement currently provides for an annual
base salary of $250,000. The Employment Agreements each have an initial five
(5) year term. The Employment Agreements also provide that the executive shall
be entitled to the following termination payments: (i) 100% of his current
base salary if the employment is terminated as a result of his death or
disability, (ii) up to 200% of his current base salary, if the employment is
terminated by the Company for any reason other than death, disability or for
Cause (as defined in his Employment Agreement), or (iii) up to 250% of the
executive's gross income during the year preceding his termination if the
Employment Agreement is terminated by the executive for Good Reason (as
defined in the Employment Agreement) or by the Company for any reason other
than death, disability or Cause and the termination occurs within two years
after a Change of Control (as defined in the Employment Agreement) of the
Company has occurred.
The Company has also entered into an employment agreement with Mr. Hernandez
effective September 23, 1996. This agreement currently provides for a base
salary of $250,000 and has an initial five (5) year term. The employment
agreement also provides that the executive shall be entitled to the following
termination payments: (i) 100% of his current base salary if the employment is
terminated as a result of his death or disability, and (ii) up to 200% of his
current base salary, if the employment is terminated by the Company for any
reason other than death, Disability or for Cause (as defined in his employment
agreement).
COMPENSATION OF DIRECTORS
Directors who are Company employees receive no additional or special
remuneration for serving as directors. The Company's non-employee Directors
are paid $500 plus out-of-pocket expenses for each meeting of the Board of
Directors and receive options to purchase shares of Common Stock of the
Company pursuant to the Director Option Plan 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.
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<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.
50
<PAGE>
(6) Consists of 71,613 shares which are held in escrow as part of a post-
closing purchase price adjustment to the acquisition of Precisionaire.
These shares will be released from escrow only if Precisionaire meets
certain performance criteria during the next three years.
(7) Assumes all shares offered by the Company and the Selling Shareholders are
sold.
51
<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 NUMBER OF SHARES AFTER THIS OFFERING
----------------------- BEING REGISTERED -----------------------
NAME OF SECURITY HOLDER NUMBER PERCENT(1) 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 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 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 Mssrs. 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, or 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 176,520 outstanding options under the above-
mentioned plans. See "Management--Executive Compensation."
The Company has reserved a total of 6,500,000 shares of Common Stock for
issuance upon the exercise of stock options granted to various officers and
directors. The Company has reserved 3,150,000 of the 6,500,000 shares for
Robert R. Amerson's exercise of the following stock options: 1,150,000 shares
at an exercise price of $1.00; 1,000,000 shares at an exercise price of $2.50;
1,000,000 shares at an exercise price of $7.50. The Company has reserved
3,150,000 of the 6,500,000 shares for Steven K. Clark's exercise of the
following stock options: 1,150,000 shares at an exercise price of $1.00;
1,000,000 shares at an exercise price of $2.50; 1,000,000 shares at an
exercise price of $7.50. The Company has reserved 150,000 of the 6,500,000
shares for Thomas T. Allan's exercise of 150,000 stock options at an exercise
price of $1.00. The Company has reserved 50,000 of the 6,500,000 shares for
William M. Claytor's exercise of 50,000 stock options at an exercise price of
$1.00.
REGISTRATION RIGHTS
Holders of approximately 4,567,484 shares of Common Stock, and holders of
approximately 7,462,712 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 tradable without restriction under
the Securities Act.
As of December 3, 1996, there were stock options and warrants outstanding to
purchase an aggregate of 7,623,320 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 7,462,712 options or
warrants to purchase Common Stock, or their transferees, are entitled to
certain rights with respect to the registration of such shares under the
Securities Act. Under the terms of an agreement between the Company and such
holders, if the Company proposes to register any of its securities under the
Securities Act, either for its own account or the account of other security
holders exercising registration rights, the holders are entitled to notice of
such registration and are entitled to include shares of such Common Stock
therein; the registration rights provide, however, among other conditions, that
the underwriters of any offering have the right to limit the number of such
shares included in such registration. In addition, the shareholders benefiting
from these rights may require the Company, on not more than one occasion, to
file a registration statement under the Securities Act with respect to such
shares, on form S-3, if such form is available to the Company, subject to
certain conditions and limitations.
The Company makes no prediction as to the effect, if any, that future sales
of shares or the availability of shares for future sale will have on the
prevailing market price of the Common Stock. Sales of substantial amounts of
the Company's Common Stock in the public market or the perception that such
sales could occur could have an adverse affect on the prevailing market price
of the Common Stock.
58
<PAGE>
UNDERWRITING AND PLAN OF DISTRIBUTION
The Underwriters named below (the "Underwriters"), for whom Gilford
Securities Incorporated is acting as the Representative, have agreed, subject
to the terms and conditions contained in the Underwriting Agreement (the
"Underwriting Agreement") to purchase from the Company, and the Company has
agreed to sell to the Underwriters on a firm commitment basis, the respective
number of Shares set forth opposite their names:
<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 at the beginning
59
<PAGE>
of the second year after their issuance and sale at a price of $ [120% of
the initial public offering price per share of Common Stock] per share of
Common Stock. The Representative's Warrants contain anti-dilution provisions
providing for adjustment of the number of shares of Common Stock and exercise
price under certain circumstances. The Representative's Warrants grant to the
holders thereof and to the holders of the underlying securities certain rights
of registration of the securities underlying the Representative's Warrants.
The Underwriting Agreement provides that the Representative has a right of
first refusal for a period of three years from the date of this Prospectus
with respect to any sale of securities by the Company or any present or future
subsidiaries.
The Company has agreed that for five years from the effective date of the
Registration Statement, the Underwriter may designate one person to attend all
meetings of the Company's Board of Directors. The Company has agreed to
reimburse the Representative's designee for all out-of-pocket expenses
incurred in connection with the designee's attendance at meetings of the Board
of Directors.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a
copy of each such 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) or nine (9) 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
Unaudited Consolidated Condensed Interim Financial Statements............ F-47
Audited Consolidated Financial Report.................................... F-51
</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 the realizability of goodwill
based upon expectations of non-discounted cash flows and operating income for
each subsidiary having a material goodwill balance. Based upon its most recent
analysis, the Company believes that no material 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. 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.
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,
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.
New Bern, North Carolina McGLADREY & PULLEN, LLP
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
<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
Intangible assets............................................... 10,534,286
Property and equipment, net of accumulated depreciation and
amortization of $0 at September 30, 1996; $7,662,785 at
December 31, 1995.............................................. 20,591,815
-----------
$48,250,581
===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Notes from Flanders Corporation............................... $ 3,070,027
Current maturities of long-term debt.......................... 616,453
Accounts payable.............................................. 6,222,267
Accrued expenses.............................................. 2,922,580
-----------
Total current liabilities................................... 12,831,327
-----------
Long-term debt, less current maturities......................... 4,961,784
Deferred income taxes........................................... 4,459,610
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.................................... 25,994,100
Retained earnings............................................. --
-----------
Total stockholder's equity.................................. 25,997,860
-----------
$48,250,581
===========
</TABLE>
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. 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 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>
CHARCOAL SERVICE CORPORATION
UNAUDITED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash.......................................................... $ 20,377
Receivables:
Trade........................................................ 1,564,643
Other........................................................ 455,630
Inventories (See Note 2)...................................... 1,836,106
Deferred taxes................................................ 19,324
Other current assets.......................................... 56,336
----------
Total current assets........................................ 3,952,416
----------
Other assets.................................................... 254
Intangible assets............................................... 709,179
Property and equipment, net of accumulated depreciation and
amortization of $105,000....................................... 1,985,506
----------
$6,647,355
==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Notes from Flanders Corporation............................... $ 276,993
Current maturities of long-term debt.......................... 68,040
Accounts payable.............................................. 320,499
Accrued expenses.............................................. 211,213
----------
Total current liabilities................................... 876,745
----------
Long-term debt, less current maturities......................... 238,140
Deferred income taxes........................................... 340,000
Commitments and contingencies................................... --
Stockholders' equity
Capital stock................................................. 1,000
Additional paid-in capital.................................... 4,578,164
Retained earnings............................................. 613,306
----------
Total stockholders' equity.................................. 5,192,470
----------
$6,647,355
==========
</TABLE>
F-47
<PAGE>
CHARCOAL SERVICE CORPORATION
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ----------------------
1996 1995 1996 1995
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales.......................... $952,970 $1,301,911 $3,149,574 $3,915,988
Cost of goods sold................. 327,930 973,319 1,865,553 2,741,192
-------- ---------- ---------- ----------
Gross Profit................... 625,040 328,592 1,284,021 1,174,796
-------- ---------- ---------- ----------
Operating expenses................. 192,804 338,822 670,464 1,003,983
-------- ---------- ---------- ----------
Operating income............... 432,236 (10,230) 613,557 170,813
-------- ---------- ---------- ----------
Nonoperating income (expense):
Other income (expense)........... 10,151 44,389 89,555 106,479
Interest expense................. (11,597) -- (20,015) --
-------- ---------- ---------- ----------
(1,446) 44,389 69,540 106,479
-------- ---------- ---------- ----------
Income before income taxes..... 430,790 34,159 683,097 277,292
Income taxes....................... 164,000 30,730 260,000 105,371
-------- ---------- ---------- ----------
Net income..................... $266,790 $ 3,429 $ 423,097 $ 171,921
======== ========== ========== ==========
</TABLE>
F-48
<PAGE>
CHARCOAL SERVICE CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- --------------------
1996 1995 1996 1995
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES........ $ (269,462) $ (103,403) $(585,620) $ (4,110)
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of equipment.......... (1,977) (63,387) (1,977) (63,387)
---------- ---------- --------- ---------
NET CASH (USED) BY INVESTING
ACTIVITIES.................. (1,977) (63,387) (1,977) (63,387)
CASH FLOWS FROM FINANCING
ACTIVITIES
Net change in revolving credit
agreements.................... 275,000 164,000 275,000 --
Net change in long-term
borrowings.................... -- -- 306,180 (152,250)
---------- ---------- --------- ---------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES........ 275,000 164,000 581,180 (152,250)
---------- ---------- --------- ---------
NET INCREASE (DECREASE) IN
CASH........................ 3,561 (2,790) (6,417) (219,747)
CASH AT BEGINNING OF PERIOD...... 16,816 3,351 26,794 220,308
---------- ---------- --------- ---------
CASH AT END OF PERIOD (See
Note 4)..................... $ 20,377 $ 561 $ 20,377 $ 561
========== ========== ========= =========
CASH PAID FOR TAXES.............. $ -- $ -- $ -- $ --
========== ========== ========= =========
</TABLE>
F-49
<PAGE>
NOTE 1. NATURE OF BUSINESS AND INTERIM FINANCIAL STATEMENTS
Nature of business: Charcoal Service Corporation (the "Company"),
headquartered in Bath, North Carolina, manufactures high-efficiency charcoal
filters, specialized housings, containment environments and related services.
All of the Company's issued and outstanding stock was purchased by Flanders
Corporation ("Flanders") as of March 1, 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
March 1, 1996. Amortization expenses for the seven months ended September 30,
1996 and 1995 were $7,000 and $0, respectively.
NOTE 2. INVENTORIES
Inventories consist of the following at September 30, 1996:
<TABLE>
<CAPTION>
9/30/96
----------
<S> <C>
Work in process...................................................... $ 581,992
Raw materials........................................................ 1,254,114
----------
$1,836,106
==========
</TABLE>
NOTE 3. ACQUISITION
Effective March 1, 1996, all of the Company's outstanding common stock,
along with certain land and buildings owned by the previous stockholders' of
CSC (the "Sellers") was acquired by Flanders (the "Acquisition"). The purchase
price was $4,435,690 and 100,000 shares of Flanders' common stock, subject to
a post-closing purchase price adjustment, and was paid by the delivery of both
$4,435,690 in cash to the former shareholders of the Company (the "Sellers")
and 100,000 shares of Flanders' common stock to an escrow agent to be held in
escrow and released to the Sellers over a three year period if certain
financial 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.
In connection with the Acquisition, the Company recorded $716,179 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-50
<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-51
<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-52
<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-53
<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-54
<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-55
<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-56
<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-57
<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-58
<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-59
<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-60
<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
THE COMPANY.............................................................. 3
THE OFFERING............................................................. 5
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
SUMMARY COMBINED PRO-FORMA RESULTS OF OPERATIONS......................... 27
BUSINESS................................................................. 33
MANAGEMENT............................................................... 43
PRINCIPAL SHAREHOLDERS................................................... 50
SELLING SHAREHOLDERS..................................................... 52
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 AND PLAN OF DISTRIBUTION.................................... 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
[FLANCERS 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 expire in December, 1996.
4. In September 1996, the Registrant sold 855,445 shares of the
Registrant's Common Stock to certain accredited investors under Regulation
D of the Securities Act of 1933. The aggregate purchase price for such
shares was $7,699,005.
5. On September 18, 1996, the Registrant issued $2,500,000 aggregate
principal amount of Series A Convertible Subordinated Debentures pursuant
to Regulation D of the Securities Act of 1933 to certain unrelated
investors. As part of this transaction, the investors also acquired
warrants to purchase 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
accredited investors. 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 the transactions described in Items 4-7 above, the
Company paid $1,801,660 in Finders fees.
ITEM 16. LIST OF EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1 Underwriting Agreement
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
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
23.1 Consent of McGladrey & Pullen, LLP
23.2 Consent of Arthur Anderson, 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)
27 Financial Data Schedule
</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. 1 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 6TH 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. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS
IN THE CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
President, Chief
* Executive Officer December 6,
- ------------------------------------- 1996
ROBERT R. AMERSON
Chief Financial
/s/ Steven K. Clark Officer and Chief December 6,
- ------------------------------------- Accounting Officer 1996
STEVEN K. CLARK
Chairman of the
* Board December 6,
- ------------------------------------- 1996
THOMAS T. ALLAN
Director, Vice
* President of December 6,
- ------------------------------------- Operations 1996
GUSTAVO HERNANDEZ
Director
* December 6,
- ------------------------------------- 1996
WILLIAM M. CLAYTOR
Director
* December 6,
- ------------------------------------- 1996
WILLIAM H. CLARK
*By:____________________________
/s/ Steven K. Clark
----------------------------------
STEVEN K. CLARK
ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE
EXHIBIT NO. DESCRIPTION NO.
----------- ----------- ----
<C> <S> <C>
1 Underwriting Agreement
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
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
23.1 Consent of McGladrey & Pullen, LLP
23.2 Consent of Arthur Anderson, 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)
27 Financial Data Schedule
</TABLE>
<PAGE>
EXHIBIT 1.1
OH&S DRAFT
10/23/96
[Form of Underwriting Agreement - Subject to Additional Review]
1,600,000 Shares of Common Stock
FLANDERS CORPORATION
UNDERWRITING AGREEMENT
----------------------
New York, New York
, 1996
GILFORD SECURITIES INCORPORATED
As Representative of the
Several Underwriters listed on Schedule A hereto
850 Third Avenue
New York, New York 10022
Ladies and Gentlemen:
Flanders Corporation, a North Carolina corporation
(the "Company") confirms its agreement with Gilford Securities Incorporated
("Gilford") and each of the underwriters named in Schedule A hereto
(collectively, the "Underwriters," which term shall also include any underwriter
substituted as hereinafter provided in Section 11), for whom Gilford is acting
-------
as representative (in such capacity, Gilford shall hereinafter be referred to as
"you" or the "Representative"), with respect to the sale by the Company and the
purchase by the Underwriters, acting severally and not jointly, of the
respective numbers of shares of the Company's common stock, $.001 par value per
share ("Common Stock") set forth in Schedule A hereto. Such shares of Common
Stock are hereinafter referred to as the "Firm Shares."
Upon your request, as provided in Section 2(b) of this Agreement, the
Company shall also sell to the Underwriters, acting severally and not jointly,
up to 240,000 additional shares of Common Stock for the purpose of covering
over-allotments, if any (the "Option Shares"). The Firm Shares and the Option
Shares are sometimes hereinafter referred to as the "Shares." The Company also
proposes to issue and sell to you warrants (the "Representative's Warrants")
pursuant to the Representative's Warrant Agreement (the "Representative's
Warrant Agreement") for the purchase of an additional 160,000 shares of Common
Stock. The shares
<PAGE>
of Common Stock issuable upon exercise of the Representative's Warrants are
hereinafter referred to as the "Representative's Shares." The Firm Shares, the
Option Shares, the Representative's Warrants and the Representative's Shares
(collectively, hereinafter referred to as the "Securities") are more fully
described in the Registration Statement and the Prospectus referred to below.
1. Representations and Warranties of the Company. The Company
---------------------------------------------
represents and warrants to, and agrees with, each of the Underwriters as of the
date hereof, and as of the Closing Date (hereinafter defined) and the Option
Closing Date (hereinafter defined), if any, as follows:
(a) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and an
amendment or amendments thereto, on Form S-1 (No. 333-14655), including any
related preliminary prospectus ("Preliminary Prospectus"), for the registration
of the Firm Shares and the Option Shares under the Securities Act of 1933, as
amended (the "Act"), which registration statement and amendment or amendments
have been prepared by the Company in conformity with the requirements of the
Act, and the rules and regulations (the "Regulations") of the Commission under
the Act. The Company will promptly file a further amendment to said
registration statement in the form heretofore delivered to the Underwriters and
will not, file any other amendment thereto to which the Underwriters shall have
objected in writing after having been furnished with a copy thereof. Except as
the context may otherwise require, such registration statement, as amended, on
file with the Commission at the time the registration statement becomes
effective (including the prospectus, financial statements, schedules, exhibits
and all other documents filed as a part thereof or incorporated therein
(including, but not limited to those documents or information incorporated by
reference therein) and all information deemed to be a part thereof as of such
time pursuant to paragraph (b) of Rule 430(A) of the Regulations)), is
hereinafter called the "Registration Statement", and the form of prospectus in
the form first filed with the Commission pursuant to Rule 424(b) of the
Regulations, is hereinafter called the "Prospectus." For purposes hereof,
"Rules and Regulations" mean the rules and regulations adopted by the Commission
under either the Act or the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as applicable.
(b) Neither the Commission nor any state regulatory authority has
issued any order preventing or suspending the use of any Preliminary Prospectus,
the Registration Statement or the Prospectus or any part of any thereof and no
proceedings for a stop order suspending the effectiveness of the Registration
Statement or any of the Company's securities have been instituted or are pending
or to the Company's knowledge, threatened. Each of the Preliminary Prospectus,
Registration Statement and Prospectus at the time of filing thereof conformed
with the requirements of the Act and the Rules and Regulations, and none of the
Preliminary Prospectus, Registration Statement or Prospectus at the time of
filing thereof contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein and necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except that this representation and warranty does not apply to
statements made in reliance upon and in conformity with written information
-2-
<PAGE>
furnished to the Company with respect to the Underwriters by or on behalf of the
Underwriters expressly for use in such Preliminary Prospectus, Registration
Statement or Prospectus.
(c) When the Registration Statement becomes effective and at all times
subsequent thereto up to the Closing Date and each Option Closing Date, if any,
and during such longer period as the Prospectus may be required to be delivered
in connection with sales by the Underwriters or a dealer, the Registration
Statement and the Prospectus will contain all statements which are required to
be stated therein in accordance with the Act and the Rules and Regulations, and
will conform to the requirements of the Act and the Rules and Regulations;
neither the Registration Statement nor the Prospectus, nor any amendment or
supplement thereto, will contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading, provided, however, that this representation and warranty
-------- -------
does not apply to statements made or statements omitted in reliance upon and in
conformity with information furnished to the Company in writing by or on behalf
of any Underwriter expressly for use in the Preliminary Prospectus, Registration
Statement or Prospectus or any amendment thereof or supplement thereto.
(d) The Company owns one hundred percent (100%) of the issued and
outstanding capital stock of (i) Charcoal Service Corporation, a North Carolina
corporation ("CSC"), (ii) Air Seal Filter Housings, Inc., a Texas corporation
("Air Seal") (iii) Precisionaire, Inc., a Florida corporation ("Precisionaire")
(iv) Flanders International PLC, Ltd., a Singapore corporation ("FIP"), and (v)
Flanders Filters, Inc., a North Carolina corporation ("FFI"). FFI owns one
hundred percent (100%) of Flanders Airpure West, Inc., a North Carolina
corporation ("Airpure"), and sixty three percent (63%) of Flanders Airpure
Products Company, LLC, a North Carolina limited liability company ("Airpure
Products"). CSC, Air Seal, FIP, FFI, Airpure, Airpure Products and Precisionaire
are collectively referred to as the "Subsidiaries" and each is individually
referred to as a "Subsidiary." Each of the Company and the Subsidiaries has been
duly organized and is validly existing as a corporation in good standing under
the laws of the state of its incorporation. None of the Company nor any of the
Subsidiaries owns an interest in any corporation, partnership, trust, joint
venture or other business entity, except as set forth in this Section 1(d). Each
-------
of the Company and the Subsidiaries is duly qualified and licensed and in good
standing as a foreign corporation in each jurisdiction in which its ownership or
leasing of any properties or the character of its operations requires such
qualification or licensing, except where the failure to so qualify would not
have a material adverse effect on the condition, (financial or otherwise)
earnings, operations or business of the Company and its subsidiaries, taken as a
whole. Each of the Company and the Subsidiaries has all requisite corporate
power and authority, and each of the Company and the Subsidiaries has obtained
all material authorizations, approvals, orders, licenses, certificates,
franchises and permits of and from all governmental or regulatory officials and
bodies (including, without limitation, those having jurisdiction over
environmental or similar matters), to own or lease its properties and conduct
its business as described in the Prospectus; each of the Company and the
Subsidiaries is and has been doing business in compliance with all such
authorizations, approvals, orders, licenses, certificates, franchises and
permits and all federal, state and local laws, rules and regulations, except
where the failure to so qualify would not have a material adverse effect on the
condition, (financial or otherwise) earnings, operations or business of the
Company and its subsidiaries, taken as a whole; and neither Company nor any of
the Subsidiaries has received any notice of proceedings relating to the
revocation or modification of any such authorization, approval, order, license,
certificate, franchise, or permit which, in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would materially and adversely affect
the condition, financial or otherwise, or the earnings, position, prospects,
value, operation, properties, business or results of operations of the Company
and its subsidiaries. The disclosures in the Registration Statement concerning
the effects of federal, state and local laws, rules and regulations on the
Company's and the Subsidiaries' business as currently conducted and as
contemplated are correct in all material respects and do not omit to
-3-
<PAGE>
state a material fact necessary to make the statements contained therein not
misleading in light of the circumstances in which they were made.
(e) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus, under "Capitalization" and
"Description of Capital Stock" and will have the adjusted capitalization set
forth therein on the Closing Date and the Option Closing Date, if any, based
upon the assumptions set forth therein, and the Company is not a party to or
bound by any instrument, agreement or other arrangement providing for it to
issue any capital stock, rights, warrants, options or other securities, except
for this Agreement, the Representative's Warrant Agreement and as described in
the Prospectus. The Securities and all other securities issued or issuable by
the Company conform or, when issued and paid for, will conform, in all respects
to all statements with respect thereto contained in the Registration Statement
and the Prospectus. All issued and outstanding securities of the Company have
been duly authorized and validly issued and are fully paid and non-assessable
and the holders thereof have no rights of rescission with respect thereto, and
are not subject to personal liability by reason of being such holders; and none
of such securities were issued in violation of the preemptive rights of any
holders of any security of the Company or similar contractual rights granted by
the Company. The Securities are not and will not be subject to any preemptive
or other similar rights of any stockholder, have been duly authorized and, when
issued, paid for and delivered in accordance with the terms hereof, will be
validly issued, fully paid and non-assessable and will conform to the
description thereof contained in the Prospectus; the holders thereof will not be
subject to any liability solely as such holders; all corporate action required
to be taken for the authorization, issue and sale of the Securities has been
duly and validly taken; and the certificates representing the Securities will be
in due and proper form. Upon the issuance and delivery pursuant to the terms
hereof of the Securities to be sold by the Company hereunder, the Underwriters
or the Representative, as the case may be, will acquire good and marketable
title to such Securities free and clear of any lien, charge, claim, encumbrance,
pledge, security interest, defect or other restriction or equity of any kind
whatsoever.
(f) The financial statements, including the related notes and
schedules thereto, included in the Registration Statement, each Preliminary
Prospectus and the Prospectus fairly present the financial position, income,
changes in cash flow, changes in stockholders' equity, and the results of
operations of the Company at the respective dates and for the respective periods
to which they apply [and the pro forma financial information included in the
Registration Statement and Prospectus presents fairly on a basis consistent with
that of the audited financial statements included therein, what the Company's
pro forma capitalization would have been for the respective periods and as of
the respective dates to which they apply after giving effect to the adjustments
described therein.] Such financial statements have been prepared in conformity
with generally accepted accounting principles and the Rules and Regulations,
consistently applied throughout the periods involved. There has been no adverse
change or development involving a material prospective change in the condition,
financial or otherwise, or in the earnings, position, prospects, value,
operation, properties, business, or results of operations of the Company whether
or not arising in the ordinary course of business, since the date of the
financial statements included in the Registration Statement and the Prospectus
and the outstanding debt, the property, both tangible and intangible, and the
business of the Company conform in all material respects to the descriptions
thereof contained in the Registration
-4-
<PAGE>
Statement and the Prospectus. Financial information set forth in the Prospectus
under the headings "Summary Consolidated Financial Data," "Selected Consolidated
Financial Data," "Capitalization," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," fairly present, on the basis
stated in the Prospectus, the information set forth therein, have been derived
from or compiled on a basis consistent with that of the audited financial
statements included in the Prospectus.
(g) Each of the Company and the Subsidiaries (i) has paid all federal,
state, local, and foreign taxes for which it is liable, including, but not
limited to, withholding taxes and amounts payable under Chapters 21 through 24
of the Internal Revenue Code of 1986 (the "Code"), and has furnished all
information returns it is required to furnish pursuant to the Code, (ii) has
established adequate reserves for such taxes which are not due and payable, and
(iii) does not have any tax deficiency or claims outstanding, proposed or
assessed against it.
(h) No transfer tax, stamp duty or other similar tax is payable by or
on behalf of the Underwriters in connection with (i) the issuance by the Company
of the Securities, (ii) the purchase by the Underwriters of the Securities from
the Company and the purchase by the Representative of the Representative's
Warrants from the Company, (iii) the consummation by the Company of any of its
obligations under this Agreement or the Representative's Warrant Agreement, or
(iv) resales of the Shares in connection with the distribution contemplated
hereby.
(i) Each of the Company and the Subsidiaries maintains insurance
policies, including, but not limited to, general liability and property
insurance, which insures the Company and its employees, against such losses and
risks generally insured against by comparable businesses. Neither the Company
nor the Subsidiaries (A) has failed to give notice or present any insurance
claim with respect to any material matter, including but not limited to the
Company's and the Subsidiaries' business, property or employees, under the
insurance policy or surety bond in a due and timely manner, (B) have any
material disputes or claims against any underwriter of such insurance policies
or surety bonds or has failed to pay any premiums due and payable thereunder, or
(C) has failed to comply with all material conditions contained in such
insurance policies and surety bonds.
(j) There is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding (including, without
limitation, those having jurisdiction over environmental or similar matters),
domestic or foreign, pending or to the Company's knowledge threatened against
(or circumstances that may give rise to the same), or involving the properties
or business of the Company which (i) questions the validity of the capital
stock of the Company, this Agreement or the Representative's Warrant Agreement
or of any action taken or to be taken by the Company pursuant to or in
connection with this Agreement or the Representative's Warrant Agreement, (ii)
is required to be disclosed in the Registration Statement which is not so
disclosed (and such proceedings as are summarized in the Registration Statement
are accurately summarized in all material respects), or (iii) might materially
and adversely affect the condition, financial or otherwise, or the earnings,
position, prospects, stockholders' equity, value, operation, properties,
business or results of operations of the Company.
-5-
<PAGE>
(k) The Company has the power and authority to authorize, issue,
deliver and sell the Securities, enter into this Agreement and the
Representative's Warrant Agreement and to consummate the transactions provided
for in such agreements; and this Agreement and the Representative's Warrant
Agreement have each been duly and properly authorized, executed and delivered by
the Company. Each of this Agreement and the Representative's Warrant Agreement
constitutes a legal, valid and binding agreement of the Company enforceable
against the Company in accordance with its terms, except (i) as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or similar laws affecting
creditors' rights generally, (ii) as enforceability of any indemnification or
contribution provisions may be limited under applicable laws or the public
policies underlying such laws and (iii) that the remedies of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceedings may be brought. To the Company's knowledge, none of the Company's
issue and sale of the Securities, execution or delivery of this Agreement or the
Representative's Warrant Agreement, its performance hereunder and thereunder,
its consummation of the transactions contemplated herein and therein, or the
conduct of its business as described in the Registration Statement, the
Prospectus, and any amendments or supplements thereto, conflicts with or will
conflict with or results or will result in any material breach or violation of
any of the terms or provisions of, or constitutes or will constitute a material
default under, or result in the creation or imposition of any lien, charge,
claim, encumbrance, pledge, security interest, defect or other restriction or
equity of any kind whatsoever upon, any property or assets (tangible or
intangible) of the Company pursuant to the terms of, (i) the articles of
incorporation or by-laws of the Company, (ii) any license, contract, indenture,
mortgage, deed of trust, voting trust agreement, stockholders agreement, note,
loan or credit agreement or any other agreement or instrument to which the
Company is a party or by which it is or may be bound or to which any of its
properties or assets (tangible or intangible) is or may be subject, or any
indebtedness, or (iii) any statute, judgment, decree, order, rule or regulation
applicable to the Company of any arbitrator, court, regulatory body or
administrative agency or other governmental agency or body (including, without
limitation, those having jurisdiction over environmental or similar matters),
domestic or foreign, having jurisdiction over the Company or any of its
activities or properties.
(l) Except as described in the Prospectus, to the knowledge of the
Company, no consent, approval, authorization or order of, and no filing with,
any court, regulatory body, government agency or other body, domestic or
foreign, is required for the issuance of the Shares pursuant to the Prospectus
and the Registration Statement, the issuance of the Representative's Warrants,
the performance of this Agreement and the Representative's Warrant Agreement and
the transactions contemplated hereby and thereby, including without limitation,
any waiver of any preemptive, first refusal or other rights that any entity or
person may have for the issue and/or sale of any of the Shares, or the
Representative's Warrants, except such as have been or may be obtained under the
Act or may be required under state securities or Blue Sky laws in connection
with the Underwriters' purchase and distribution of the Shares, and the
Representative's Warrants to be sold by the Company hereunder.
(m) All executed agreements, contracts or other documents or copies of
executed agreements, contracts or other documents filed as exhibits to the
Registration Statement to which the Company is a party or by which it may be
bound or to which any of its assets,
-6-
<PAGE>
properties or business may be subject have been duly and validly authorized,
executed and delivered by the Company, and constitute the legal, valid and
binding agreements of the Company, enforceable against the Company, in
accordance with their respective terms. The descriptions in the Registration
Statement of agreements, contracts and other documents are accurate in all
material respects and fairly present the information required to be shown with
respect thereto by Form S-1, and there are no contracts or other documents which
are required by the Act to be described in the Registration Statement or filed
as exhibits to the Registration Statement which are not described or filed as
required, and the exhibits which have been filed are in all material respects
complete and correct copies of the documents of which they purport to be copies.
(n) Subsequent to the respective dates as of which information is set
forth in the Registration Statement and Prospectus, and except as may otherwise
be indicated or contemplated herein or therein, the Company has not (i) issued
any securities or incurred any liability or obligation, direct or contingent,
for borrowed money, (ii) entered into any transaction other than in the ordinary
course of business, or (iii) declared or paid any dividend or made any other
distribution on or in respect of its capital stock of any class, and there has
not been any change in the capital stock, or any material change in the debt
(long or short term) or liabilities or material adverse change in or affecting
the general affairs, management, financial operations, stockholders' equity or
results of operations of the Company.
(o) No material default exists in the due performance and observance
of any term, covenant or condition of any license, contract, indenture,
mortgage, installment sale agreement, lease, deed of trust, voting trust
agreement, stockholders agreement, partnership agreement, note, loan or credit
agreement, purchase order, or any other agreement or instrument evidencing an
obligation for borrowed money, or any other material agreement or instrument to
which the Company is a party or by which the Company may be bound or to which
the property or assets (tangible or intangible) of the Company is subject or
affected.
(p) The Company has generally enjoyed a satisfactory employer-employee
relationship with its employees and is, to the Company's knowledge, in
compliance with all federal, applicable state, local, and applicable foreign
laws and regulations respecting employment and employment practices, terms and
conditions of employment and wages and hours. There are no pending
investigations involving the Company by the U.S. Department of Labor, or any
other governmental agency responsible for the enforcement of such federal,
state, local, or foreign laws and regulations. There is no unfair labor practice
charge or complaint against the Company pending before the National Labor
Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage
pending or to the Company's knowledge threatened against or involving the
Company or any predecessor entity, and none has ever occurred. No representation
question exists respecting the employees of the Company, and no collective
bargaining agreement or modification thereof is currently being negotiated by
the Company. No grievance or arbitration proceeding is pending under any expired
or existing collective bargaining agreements of the Company. No labor dispute
with the employees of the Company exists, or to the Company's knowledge is
imminent.
(q) Except as described in the Prospectus, the Company does not
maintain, sponsor or contribute to any program or arrangement that is an
"employee pension benefit plan,"
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<PAGE>
an "employee welfare benefit plan," or a "multiemployer plan" as such terms are
defined in Sections 3(2), 3(1) and 3(37), respectively, of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA Plans").
The Company does not maintain or contribute, now or at any time previously, to a
defined benefit plan, as defined in Section 3(35) of ERISA. No ERISA Plan (or
any trust created thereunder) has engaged in a "prohibited transaction" within
the meaning of Section 406 of ERISA or Section 4975 of the Code, which could
subject the Company to any tax penalty on prohibited transactions and which has
not adequately been corrected. Each ERISA Plan is in compliance with all
reporting, disclosure and other requirements of the Code and ERISA as they
relate to any such ERISA Plan. Determination letters have been received from
the Internal Revenue Service with respect to each ERISA Plan which is intended
to comply with Code Section 401(a), stating that such ERISA Plan and the
attendant trust are qualified thereunder. The Company has never completely or
partially withdrawn from a "multiemployer plan."
(r) Neither the Company nor any of its directors, Principal
Stockholders (as such term is defined in the Prospectus), or affiliates (within
the meaning of the Rules and Regulations) of any of the foregoing has taken or
will take, directly or indirectly, any action designed to or which has
constituted or which might be expected to cause or result in, under the Exchange
Act, or otherwise, stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Securities or otherwise.
(s) Except as otherwise disclosed in the Prospectus, none of the
patents, patent applications, trademarks, service marks, service names, trade
names and copyrights, and none of the licenses and rights to the foregoing
presently owned or held by the Company are in dispute or are in any conflict
with the right of any other person or entity. The Company (i) owns or has the
right to use, free and clear of all liens, charges, claims, encumbrances,
pledges, security interests, defects or other restrictions or equities of any
kind whatsoever, all patents, patent applications, trademarks, service marks,
service names, trade names and copyrights, technology and licenses and rights
with respect to the foregoing, used in the conduct of its business as now
conducted or proposed to be conducted without infringing upon or otherwise
acting adversely to the right or claimed right of any person, corporation or
other entity under or with respect to any of the foregoing and (ii) is not
obligated or under any liability whatsoever to make any payment by way of
royalties, fees or otherwise to any owner or licensee of, or other claimant to,
any patent, patent application, trademark, service mark, service names, trade
name, copyright, know-how, technology or other intangible asset, with respect to
the use thereof or in connection with the conduct of its business or otherwise.
There is no action, suit, proceeding, inquiry, arbitration, investigation,
litigation or governmental or other proceeding, domestic or foreign, pending or
to the knowledge of the Company threatened (or circumstances that may give rise
to the same) against the Company which challenges the exclusive rights of the
Company with respect to any trademarks, trade names, service marks, service
names, copyrights, patents, patent applications or licenses or rights to the
foregoing used in the conduct of its business, or which challenge the right of
the Company to use any technology presently used or contemplated to be used in
the conduct of its business.
(t) The Company owns or possesses the right to use all trade secrets,
know-how (including all other unpatented and/or unpatentable proprietary or
confidential
-8-
<PAGE>
information, systems or procedures), inventions, technology, designs, processes,
works of authorship, computer programs and technical data and information
(collectively herein "intellectual property") that are material to the
conduct of the Company's business as described in the Prospectus, free and clear
of and without violating any right, lien, or claim of others, including without
limitation, former employers of its employees; provided, however, that the
possibility exists that other persons or entities, completely independently of
the Company, or its employees or agents, could have developed trade secrets or
items of technical information similar or identical to those of the
Company.
(u) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property stated
in the Prospectus, to be owned or leased by it free and clear of all liens,
charges, claims, encumbrances, pledges, security interests, defects, or other
restrictions or equities of any kind whatsoever, other than those referred to in
the Prospectus and liens for taxes not yet due and payable.
(v) McGladrey & Pullen, L.L.P., whose report is filed with the
Commission as a part of the Registration Statement, are independent certified
public accountants as required by the Act and the Rules and Regulations.
(w) The Company has caused to be duly executed legally binding and
enforceable agreements pursuant to which certain officers and directors of the
Company have agreed not to, directly or indirectly, offer to sell, sell, grant
any option for the sale of, assign, transfer, pledge, hypothecate, distribute or
otherwise encumber or dispose of any shares of Common Stock or securities
convertible into, exercisable or exchangeable for or evidencing any right to
purchase or subscribe for any shares of Common Stock (either pursuant to Rule
144 of the Rules and Regulations or otherwise) or dispose of any beneficial
interest therein for a period of not less than ninety (90) days following the
effective date of the Registration Statement without the prior written consent
of the Representative. The Company will cause the Transfer Agent, as defined
below, to place "stop transfer" orders on the Company's stock ledgers.
(x) Except as described in the Prospectus under "Underwriting," there
are no claims, payments, issuances, arrangements or understandings, whether oral
or written, for services in the nature of a finder's or origination fee with
respect to the sale of the Securities hereunder or any other arrangements,
agreements, understandings, payments or issuance with respect to the Company or
any of its officers, directors, stockholders, partners, employees or affiliates
that may affect the Underwriters' compensation, as determined by the National
Association of Securities Dealers, Inc. ("NASD").
(y) The Common Stock has been approved for quotation on the Nasdaq
National Market ("NNM").
(z) Neither the Company nor any of its officers, employees, agents, or
any other person acting on behalf of the Company, has, directly or indirectly,
given or agreed to
-9-
<PAGE>
give any money, gift or similar benefit (other than legal price concessions to
customers in the ordinary course of business) to any customer, supplier,
employee or agent of a customer or supplier, or official or employee of any
governmental agency (domestic or foreign) or instrumentality of any government
(domestic or foreign) or any political party or candidate for office (domestic
or foreign) or other person who was, is, or may be in a position to help or
hinder the business of the Company (or assist the Company in connection with any
actual or proposed transaction) which (a) might subject the Company, or any
other such person to any damage or penalty in any civil, criminal or
governmental litigation or proceeding (domestic or foreign), (b) if not given in
the past, might have had a materially adverse effect on the assets, business or
operations of the Company, or (c) if not continued in the future, might
adversely affect the assets, business, operations or prospects of the Company.
The Company's internal accounting controls are sufficient to cause the Company
to comply with the Foreign Corrupt Practices Act of 1977, as amended.
(aa) Except as set forth in the Prospectus, no officer, director
or Principal Stockholder (as such term is defined in the Prospectus) of the
Company, or any "affiliate" or "associate" (as these terms are defined in Rule
405 promulgated under the Rules and Regulations) of any of the foregoing persons
or entities has or has had, either directly or indirectly, (i) an interest in
any person or entity which (A) furnishes or sells services or products which are
furnished or sold or are proposed to be furnished or sold by the Company, or (B)
purchases from or sells or furnishes to the Company any goods or services, or
(ii) a beneficial interest in any contract or agreement to which the Company is
a party or by which it may be bound or affected. Except as set forth in the
Prospectus under "Certain Relationships and Related Transactions," there are no
existing agreements, arrangements, understandings or transactions, or proposed
agreements, arrangements, understandings or transactions, between or among the
Company and any officer, director, or Principal Stockholder of the Company or
any partner, affiliate or associate of any of the foregoing persons or entities.
(bb) Any certificate signed by any officer of the Company, and
delivered to the Underwriters or to Underwriters' Counsel (as defined herein)
shall be deemed a representation and warranty by the Company to the Underwriters
as to the matters covered thereby.
(cc) The minute books of the Company have been made available to
the Underwriters and contains a complete summary of all meetings and actions of
the directors, stockholders, audit committee, compensation committee and any
other committee of the Board of Directors of the Company, respectively, since
the time of its incorporation, and reflects all transactions referred to in such
minutes accurately in all material respects.
(dd) Except and to the extent described in the Prospectus, no
holders of any securities of the Company or of any options, warrants or other
convertible or exchangeable securities of the Company have the right to include
any securities issued by the Company in the Registration Statement or any
registration statement to be filed by the Company or to require the Company to
file a registration statement under the Act and no person or entity holds any
anti-dilution rights with respect to any securities of the Company.
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<PAGE>
(ee) The Company has as of the effective date of the
Registration Statement (i) entered into an employment agreement with each of Mr.
Robert R. Amerson, Mr. Steven K. Clark, and Mr. Gustazvo Hernandez in the form
filed as Exhibits 10.7, 10.5 and 10.11, respectively, to the Registration
Statement and maintains "key-man" life insurance on Robert Anderson and Steven
Clark in the amount of $2,000,000, payable to the Company.
2. Purchase, Sale and Delivery of the Securities and
-------------------------------------------------
Representative's Warrants.
- -------------------------
(a) On the basis of the representations, warranties, covenants
and agreements herein contained, but subject to the terms and conditions herein
set forth, the Company agrees to sell to each Underwriter, and each Underwriter,
severally and not jointly, agrees to purchase from the Company at a price of
$_______ [5-1/2% of the initial public offering price] per share of Common
Stock, that number of Firm Shares as set forth in Schedule A opposite the name
of such Underwriter, plus any additional number of Firm Shares which such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 11 hereof.
- -------
(b) In addition, on the basis of the representations,
warranties, covenants and agreements herein contained, but subject to the terms
and conditions herein set forth, the Company hereby grants an option to the
Underwriters, severally and not jointly, to purchase all or any part of 15%
additional shares of Common Stock at a price of $______ [2% of the initial
public offering price] per share of Common Stock. The option granted hereby will
expire 45 days after (i) the date the Registration Statement becomes effective,
if the Company has elected not to rely on Rule 430A under the Rules and
Regulations, or (ii) the date of this Agreement if the Company has elected to
rely upon Rule 430A under the Rules and Regulations, and may be exercised in
whole or in part from time to time only for the purpose of covering over-
allotments which may be made in connection with the offering and distribution of
the Firm Shares upon notice by the Representative to the Company setting forth
the number of Option Shares as to which the several Underwriters are then
exercising the option and the time and date of payment and delivery for any such
Option Shares. Any such time and date of delivery (an "Option Closing Date")
shall be determined by the Representative, but shall not be later than seven
full business days after the exercise of said option, nor in any event prior to
the Closing Date, as hereinafter defined, unless otherwise agreed upon by the
Representative and the Company. Nothing herein contained shall obligate the
Underwriters to make any over-allotments. No Option Shares shall be delivered
unless the Firm Shares shall be simultaneously delivered or shall theretofore
have been delivered as herein provided.
(c) Payment of the purchase price for, and delivery of
certificates for, the Firm Shares shall be made at the offices of Gilford
Securities Incorporated, at 850 Third Avenue, New York, New York 10022, or at
such other place as shall be agreed upon by the Representative and the Company.
Such delivery and payment shall be made at 10:00 a.m. (New York City time) on
________________, 1996 or at such other time and date as shall be agreed upon by
the Representative and the Company, but not less than three (3) nor more than
seven (7) full business days after the effective date of the Registration
Statement (such time and date of
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<PAGE>
payment and delivery being herein called "Closing Date"). In addition, in the
event that any or all of the Option Shares are purchased by the Underwriters,
payment of the purchase price for, and delivery of certificates for, such Option
Shares shall be made at the above mentioned office of the Representative or at
such other place as shall be agreed upon by the Representative and the Company
on each Option Closing Date as specified in the notice from the Representative
to the Company. Delivery of the certificates for the Firm Shares and the Option
Shares, if any, shall be made to the Underwriters against payment by the
Underwriters, severally and not jointly, of the purchase price for the Firm
Shares and the Option Shares, if any, to the order of the Company for the Firm
Shares and the Option Shares, if any, by New York Clearing House funds. In the
event such option is exercised, each of the Underwriters, acting severally and
not jointly, shall purchase that proportion of the total number of Option Shares
then being purchased which the number of Firm Shares set forth in Schedule A
hereto opposite the name of such Underwriter bears to the total number of Firm
Shares, subject in each case to such adjustments as the Representative in their
discretion shall make to eliminate any sales or purchases of fractional shares.
Certificates for the Firm Shares and the Option Shares, if any, shall be in
definitive, fully registered form, shall bear no restrictive legends and shall
be in such denominations and registered in such names as the Underwriters may
request in writing at least two (2) business days prior to the Closing Date or
the relevant Option Closing Date, as the case may be. The certificates for the
Firm Shares and the Option Shares, if any, shall be made available to the
Representative at such office or such other place as the Representative may
designate for inspection, checking and packaging no later than 9:30 a.m. on the
last business day prior to Closing Date or the relevant Option Closing Date, as
the case may be.
(d) On the Closing Date, the Company shall issue and sell to
the Representative Representative's Warrants at a purchase price of $.001 per
warrant, which warrants shall entitle the holders thereof to purchase an
aggregate of 160,000 shares of Common Stock. The Representative's Warrants shall
be exercisable for a period of four years commencing one year from the effective
date of the Registration Statement at a price equaling one hundred twenty
percent (120%) of the initial public offering price of the shares of Common
Stock. The Representative's Warrant Agreement and form of Warrant Certificate
shall be substantially in the form filed as Exhibit [4.3] to the Registration
Statement. Payment for the Representative's Warrants shall be made on the
Closing Date.
3. Public Offering of the Shares. As soon after the Registration
-----------------------------
Statement becomes effective as the Representative deems advisable, the
Underwriters shall make a public offering of the Shares (other than to residents
of or in any jurisdiction in which qualification of the Shares is required and
has not become effective) at the price and upon the other terms set forth in the
Prospectus. The Representative may from time to time increase or decrease the
public offering price after distribution of the Shares has been completed to
such extent as the Representative, in their discretion deems advisable. The
Underwriters may enter into one of more agreements as the Underwriters, in each
of their sole discretion, deem advisable with one or more broker-dealers who
shall act as dealers in connection with such public offering.
4. Covenants and Agreements of the Company. The Company covenants
---------------------------------------
and agrees with each of the Underwriters as follows:
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<PAGE>
(a) The Company shall use its best efforts to cause the
Registration Statement and any amendments thereto to become effective as
promptly as practicable and will not at any time, whether before or after the
effective date of the Registration Statement, file any amendment to the
Registration Statement or supplement to the Prospectus or file any document
under the Act or Exchange Act before termination of the offering of the Shares
by the Underwriters of which the Representative shall not previously have been
advised and furnished with a copy, or to which the Representative shall have
objected or which is not in compliance with the Act, the Exchange Act or the
Rules and Regulations.
(b) As soon as the Company is advised or obtains knowledge
thereof, the Company will advise the Representative and confirm the notice in
writing, (i) when the Registration Statement, as amended, becomes effective, if
the provisions of Rule 430A promulgated under the Act will be relied upon, when
the Prospectus has been filed in accordance with said Rule 430A and when any
post-effective amendment to the Registration Statement becomes effective, (ii)
of the issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding, suspending the effectiveness of the Registration
Statement or any order preventing or suspending the use of the Preliminary
Prospectus or the Prospectus, or any amendment or supplement thereto, or the
institution of proceedings for that purpose, (iii) of the issuance by the
Commission or by any state securities commission of any proceedings for the
suspension of the qualification of any of the Securities for offering or sale in
any jurisdiction or of the initiation, or the threatening, of any proceeding for
that purpose, (iv) of the receipt of any comments from the Commission; and (v)
of any request by the Commission for any amendment to the Registration Statement
or any amendment or supplement to the Prospectus or for additional information.
If the Commission or any state securities commission authority shall enter a
stop order or suspend such qualification at any time, the Company will make
every effort to obtain promptly the lifting of such order.
(c) The Company shall file the Prospectus (in form and substance
satisfactory to the Representative) or transmit the Prospectus by a means
reasonably calculated to result in filing with the Commission pursuant to Rule
424(b)(1) (or, if applicable and if consented to by the Representative, pursuant
to Rule 424(b)(4)) not later than the Commission's close of business on the
earlier of (i) the second business day following the execution and delivery of
this Agreement and (ii) the fifteenth business day after the effective date of
the Registration Statement.
(d) The Company will give the Representative notice of its
intention to file or prepare any amendment to the Registration Statement
(including any post-effective amendment) or any amendment or supplement to the
Prospectus (including any revised prospectus which the Company proposes for use
by the Underwriters in connection with the offering of the Securities which
differs from the corresponding prospectus on file at the Commission at the time
the Registration Statement becomes effective, whether or not such revised
prospectus is required to be filed pursuant to Rule 424(b) of the Rules and
Regulations), and will furnish the Representative with copies of any such
amendment or supplement a reasonable amount of time prior to such proposed
filing or use, as the case may be, and will not file any such prospectus to
which the Representative or Orrick, Herrington & Sutcliffe LLP ("Underwriters'
Counsel"), shall object.
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<PAGE>
(e) The Company shall endeavor in good faith, in cooperation
with the Representative, at or prior to the time the Registration Statement
becomes effective, to qualify the Securities for offering and sale under the
securities laws of such jurisdictions as the Representative may designate to
permit the continuance of sales and dealings therein for as long as may be
necessary to complete the distribution, and shall make such applications, file
such documents and furnish such information as may be required for such purpose;
provided, however, the Company shall not be required to qualify as a foreign
- -------- -------
corporation or file a general or limited consent to service of process in any
such jurisdiction. In each jurisdiction where such qualification shall be
effected, the Company will, unless the Representative agree that such action is
not at the time necessary or advisable, use all reasonable efforts to file and
make such statements or reports at such times as are or may reasonably be
required by the laws of such jurisdiction to continue such qualification.
(f) During the time when a prospectus is required to be
delivered under the Act, the Company shall use all reasonable efforts to comply
with all requirements imposed upon it by the Act and the Exchange Act, as now
and hereafter amended and by the Rules and Regulations, as from time to time in
force, so far as necessary to permit the continuance of sales of or dealings in
the Securities in accordance with the provisions hereof and the Prospectus, or
any amendments or supplements thereto. If at any time when a prospectus relating
to the Securities or the Representative's Shares is required to be delivered
under the Act, any event shall have occurred as a result of which, in the
opinion of counsel for the Company or Underwriters' Counsel, the Prospectus, as
then amended or supplemented, includes an untrue statement of a material fact or
omits to state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading, or if it is necessary at any time to amend the
Prospectus to comply with the Act, the Company will notify the Representative
promptly and prepare and file with the Commission an appropriate amendment or
supplement in accordance with Section 10 of the Act, each such amendment or
supplement to be satisfactory to Underwriters' Counsel, and the Company will
furnish to the Underwriters copies of such amendment or supplement as soon as
available and in such quantities as the Underwriters may request.
(g) As soon as practicable, but in any event not later than 45
days after the end of the 12-month period beginning on the day after the end of
the fiscal quarter of the Company during which the effective date of the
Registration Statement occurs (90 days in the event that the end of such fiscal
quarter is the end of the Company's fiscal year), the Company shall make
generally available to its security holders, in the manner specified in Rule
158(b) of the Rules and Regulations, and to the Representative, an earnings
statement which will be in the detail required by, and will otherwise comply
with, the provisions of Section 11(a) of the Act and Rule 158(a) of the Rules
and Regulations, which statement need not be audited unless required by the Act,
covering a period of at least 12 consecutive months after the effective date of
the Registration Statement.
(h) During a period of seven years after the date hereof, the
Company will furnish to its stockholders, as soon as practicable, annual reports
(including financial statements audited by independent public accountants) and
unaudited quarterly reports of earnings, and will deliver to the Representative:
- 14 -
<PAGE>
i) concurrently with furnishing such quarterly reports to its
stockholders, statements of income of the Company for each quarter in
the form furnished to the Company's stockholders and certified by the
Company's principal financial or accounting officer;
ii) concurrently with furnishing such annual reports to its
stockholders, a balance sheet of the Company as at the end of the
preceding fiscal year, together with statements of operations,
stockholders' equity, and cash flows of the Company for such fiscal
year, accompanied by a copy of the certificate thereon of independent
certified public accountants;
iii) as soon as they are available, copies of all reports
(financial or other) mailed to stockholders;
iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, the
NASD or any securities exchange;
v) every press release and every material news item or article
of interest to the financial community in respect of the Company, or
its affairs which was released or prepared by or on behalf of the
Company; and
vi) any additional information of a public nature concerning the
Company (and any future subsidiary) or its businesses which the
Representative may request.
During such seven-year period, if the Company has an active
subsidiary, the foregoing financial statements will be on a consolidated basis
to the extent that the accounts of the Company and its subsidiary are
consolidated, and will be accompanied by similar financial statements for any
significant subsidiary which is not so consolidated.
(i) The Company will maintain a Transfer Agent and, if necessary
under the jurisdiction of incorporation of the Company, a Registrar (which may
be the same entity as the Transfer Agent) for its Common Stock.
(j) The Company will furnish to the Representative or on the
Representative's order, without charge, at such place as the Representative may
designate, copies of each Preliminary Prospectus, the Registration Statement and
any pre-effective or post-effective amendments thereto (two of which copies will
be signed and will include all financial statements and exhibits), the
Prospectus, and all amendments and supplements thereto, including any prospectus
prepared after the effective date of the Registration Statement, in each case as
soon as available and in such quantities as the Representative may request.
(k) On or before the effective date of the Registration
Statement, the Company shall provide the Representative with true copies of duly
executed, legally binding and enforceable agreements pursuant to which for a
period of 90 days from the effective date of
- 15 -
<PAGE>
the Registration Statement, certain officers and directors of the Company, agree
that they will not directly or indirectly, issue, offer to sell, sell, grant an
option for the sale of, assign, transfer, pledge, hypothecate, distribute or
otherwise encumber or dispose of any shares of Common Stock or securities
convertible into, exercisable or exchangeable for or evidencing any right to
purchase or subscribe for any shares of Common Stock (either pursuant to Rule
144 of the Rules and Regulations or otherwise) or dispose of any beneficial
interest therein without the prior written consent of the Representative
(collectively, the "Lock-up Agreements"). During the 90 day period commencing
with the effective date of the Registration Statement, the Company shall not,
without the prior written consent of the Representative, sell, contract or offer
to sell, issue, transfer, assign, pledge, hypothecate, distribute, or otherwise
dispose of, directly or indirectly, any shares of Common Stock or any options,
rights or warrants with respect to any shares of Common Stock, except as set
forth in clause (s) of Section 4 hereof. On or before the Closing Date, the
-------
Company shall deliver instructions to the Transfer Agent authorizing it to place
appropriate stop transfer orders on the Company's ledgers.
(l) Neither the Company, nor any of its officers, directors,
stockholders, nor any of their respective affiliates (within the meaning of the
Rules and Regulations) will take, directly or indirectly, any action designed
to, or which might in the future reasonably be expected to cause or result in,
stabilization or manipulation of the price of any securities of the Company.
(m) The Company shall apply the net proceeds from the sale of
the Securities in the manner, and subject to the conditions, set forth under
"Use of Proceeds" in the Prospectus. Except as described in the Prospectus, no
portion of the net proceeds will be used, directly or indirectly, to acquire any
securities issued by the Company.
(n) The Company shall timely file all such reports, forms or
other documents as may be required (including, but not limited to, a Form SR as
may be required pursuant to Rule 463 under the Act) from time to time, under the
Act, the Exchange Act, and the Rules and Regulations, and all such reports,
forms and documents filed will comply as to form and substance with the
applicable requirements under the Act, the Exchange Act, and the Rules and
Regulations.
(o) The Company shall furnish to the Representative as early as
practicable prior to each of the date hereof, the Closing Date and each Option
Closing Date, if any, but no later than two (2) full business days prior
thereto, a copy of the latest available unaudited interim financial statements
of the Company (which in no event shall be as of a date more than thirty (30)
days prior to the date of the Registration Statement) which have been read by
the Company's independent public accountants, as stated in its letter to be
furnished pursuant to Section 6(i) hereof.
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(p) The Company shall, for a period of seven (7) years from the
date hereof, use its best efforts to maintain the NNM quotation of the Common
Stock to the extent outstanding.
(q) For a period of five (5) years from the Closing Date, the
Company shall furnish to the Representative at the Representative's request and
at the Company's sole expense, (i) daily consolidated transfer sheets relating
to the Common Stock (ii) the list of holders of all of the Company's securities
and (iii) a Blue Sky "Trading Survey" for secondary sales of the Company's
securities prepared by counsel to the Company.
(r) Until the completion of the distribution of the Shares, the
Company shall not without the prior written consent of the Representative and
Underwriters' Counsel, issue, directly or indirectly, any press release or other
communication or hold any press conference with respect to the Company or its
activities or the offering contemplated hereby, other than trade releases issued
in the ordinary course of the Company's business consistent with past practices
with respect to the Company's operations.
(s) For a period equal to the lesser of (i) seven (7) years from
the date hereof, and (ii) the sale to the public of the Representative's Shares,
the Company will not take any action or actions which may prevent or disqualify
the Company's use of Form S-1 for the registration under the Act of the
Representative's Shares.
(t) For a period of five (5) years after the effective date of
the Registration Statement, the Representative shall have the right to designate
one (1) individual to attend meetings of the Company's Board as an observer;
provided that the Board shall have the right to excuse such individual for any
part of any meeting, in the Board's sole direction, to protect the attorney-
client privilege. The Company shall notify the Representative of each meeting of
the Board and the Company shall send to such individual all notices and other
correspondence and communications sent by the Company to members of the Board.
Such individual shall be reimbursed for all out-of-pocket expenses incurred in
connection with his attendance of meetings of the Board.
5. Payment of Expenses.
-------------------
(a) The Company hereby agrees to pay on each of the Closing Date
and the Option Closing Date (to the extent not paid at the Closing Date) all
expenses and fees (other than fees of Underwriters' Counsel, except as provided
in (iv) below) incident to the performance of the obligations of the Company
under this Agreement and the Representative's Warrant Agreement, including,
without limitation, (i) the fees and expenses of accountants and counsel for the
Company, (ii) all costs and expenses incurred in connection with the
preparation, duplication, printing, (including mailing and handling charges)
filing, delivery and mailing
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(including the payment of postage with respect thereto) of the Registration
Statement and the Prospectus and any amendments and supplements thereto and the
printing, mailing (including the payment of postage with respect thereto) and
delivery of this Agreement, the Agreement Among Underwriters, the Selected
Dealer Agreements, and related documents, including the cost of all copies
thereof and of the Preliminary Prospectuses and of the Prospectus and any
amendments thereof or supplements thereto supplied to the Underwriters and such
dealers as the Underwriters may request, in quantities as hereinabove stated,
(iii) the printing, engraving, issuance and delivery of the Securities
including, but not limited to, (x) the purchase by the Underwriters of the
Shares and the purchase by the Representative of the Representative's Warrants
from the Company, (y) the consummation by the Company of any of its obligations
under this Agreement and the Representative's Warrant Agreement, and (z) resale
of the Shares by the Underwriters in connection with the distribution
contemplated hereby, (iv) the qualification of the Securities under state or
foreign securities or "Blue Sky" laws and determination of the status of such
securities under legal investment laws, including the costs of printing and
mailing the "Preliminary Blue Sky Memorandum," the "Supplemental Blue Sky
Memorandum" and "Legal Investments Survey," if any, and disbursements and fees
of counsel in connection therewith, (v) advertising costs and expenses,
including but not limited to, costs and expenses in connection with "Road
Shows," information meetings and presentations, bound volumes and prospectus
memorabilia and "tombstone" advertisement expenses, (vi) costs and expenses in
connection with due diligence investigations, including but not limited to the
fees of any independent counsel or consultant retained, (vii) fees and expenses
of the transfer agent and registrar, (viii) applications for assignments of a
rating of the Securities by qualified rating agencies, (ix) the fees payable to
the Commission and the NASD, and (x) the fees and expenses incurred in
connection with the quotation of the Securities on NNM and any other exchange.
(b) If this Agreement is terminated by the Underwriters in accordance
with the provisions of Section 6 or Section 12, the Company shall reimburse and
------- -------
indemnify the Representative for all of its actual out-of-pocket expenses,
including the fees and disbursements of Underwriters' Counsel, less any amounts
already paid pursuant to Section 5(c) hereof.
-------
(c) The Company further agrees that, in addition to the expenses
payable pursuant to subsection (a) of this Section 5, it will pay to the
-------
Representative on the Closing Date by certified or bank cashier's check or, at
the election of the Representative, by deduction from the proceeds of the
offering contemplated herein a non-accountable expense allowance equal to two
percent (2%) of the gross proceeds received by the Company from the sale of the
Firm Shares, $25,000 of which has been paid to date. In the event the
Representative elect to exercise the over-allotment option described in
Section 2(b) hereof, the Company agrees to pay to the Representative on the
- -------
Option Closing Date (by certified or bank cashier's check or, at the
Representative's election, by deduction from the proceeds of the Option Shares)
a non-accountable expense allowance equal to two percent (2%) of the gross
proceeds received by the Company from the sale of the Option Shares.
6. Conditions of the Underwriters' Obligations. The obligations of
-------------------------------------------
the Underwriters hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date and each Option Closing Date, if any, with respect to the
Company as if it had been made on and as of
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<PAGE>
the Closing Date or each Option Closing Date, as the case may be; the accuracy
on and as of the Closing Date or Option Closing Date, if any, of the statements
of the officers of the Company made pursuant to the provisions hereof; and the
performance by the Company on and as of the Closing Date and each Option Closing
Date, if any, of its covenants and obligations hereunder and to the following
further conditions:
(a) The Registration Statement shall have become effective not later
than 12:00 Noon, New York time, on the date of this Agreement or such later date
and time as shall be consented to in writing by the Representative, and, at
Closing Date and each Option Closing Date, if any, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or shall be pending or
contemplated by the Commission and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of Underwriters' Counsel. If the Company has elected to rely upon
Rule 430A of the Rules and Regulations, the price of the Shares and any price-
related information previously omitted from the effective Registration Statement
pursuant to such Rule 430A shall have been transmitted to the Commission for
filing pursuant to Rule 424(b) of the Rules and Regulations within the
prescribed time period, and prior to Closing Date the Company shall have
provided evidence satisfactory to the Representative of such timely filing, or a
post-effective amendment providing such information shall have been promptly
filed and declared effective in accordance with the requirements of Rule 430A of
the Rules and Regulations.
(b) The Representative shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Representative's opinion, is material, or omits to state a
fact which, in the Representative's opinion, is material and is required to be
stated therein or is necessary to make the statements therein not misleading, or
that the Prospectus, or any supplement thereto, contains an untrue statement of
fact which, in the Representative's opinion, is material, or omits to state a
fact which, in the Representative's opinion, is material and is required to be
stated therein or is necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(c) On or prior to the Closing Date, the Representative shall have
received from Underwriters' Counsel, such opinion or opinions with respect to
the organization of the Company, the validity of the Securities, the
Representative's Warrants, the Registration Statement, the Prospectus and other
related matters as the Representative may request and Underwriters' Counsel
shall have received such papers and information as they request to enable them
to pass upon such matters.
(d) At Closing Date, the Underwriters shall have received the
favorable opinion of Snell & Wilmer L.L.P., counsel to the Company, dated the
Closing Date, addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel, to the effect that:
i) the Company (A) has been duly organized and is validly
existing as a corporation in good standing under the laws of its
jurisdiction, (B) has the Corporate power and authority to own,
lease and operate its properties and conduct its business as
described in the Prospectus.
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<PAGE>
The disclosures in the Registration Statement concerning the effects
of federal, state and local laws, rules and regulations on the
Company's business as currently conducted and as contemplated are
correct in all material respects and do not omit to state a fact
necessary to make the statements contained therein not misleading in
light of the circumstances in which they were made;
ii) to the best of such counsel's knowledge, the Company does not
own an interest in any other corporation, partnership, joint venture,
trust or other business entity;
iii) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus under the caption
"Capitalization" as of the dates stated therein. The issued and
outstanding shares of capital stock of the Company has been validly
issued and are fully paid and nonassessable, and to such counsel's
knowledge, have not been issued in violation of or subject to any
preemptive right, or other right to subscribe for and purchase
securities.
The Common Stock and the Representative's Warrant conform
to the respective descriptions thereof contained in the Prospectus.
The outstanding shares of Common Stock have been, and the Shares to be
sold on the Closing Date, upon issuance (in the case of the Shares to
be sold by the Company), delivery and payment therefor in the manner
described in the Underwriting Agreement will be, duly authorized,
validly issued, fully paid and nonassessable. The shares of Common
Stock to be issued upon exercise of the Representative's Warrant have
been reserved for issuance and duly authorized and, when issued and
paid for pursuant to the terms of the Representative's Warrant, will
be validly issued fully paid and nonassessable. The Common Stock is
duly authorized for quotation on the Nasdaq National Market System.
Except as described in the Propsectus there are no preemptive or other
rights to subscribe for or to purchase, or any restriction upon the
voting or transfer of, any shares of Common Stock pursuant to the
Company's Articles of Incorporation, Bylaws, other governing documents
or any agreement or other instrument filed as an exhibit to such
counsel's Registration Statement to which the Company is a party or by
which it is bound; and, to such counsel's knowledge, neither the
filing of the Registration Statement nor the offering or sale of the
Shares as contemplated by the Agreement or the Representative's
Warrant gives rise to any rights, other than those that have been
waived or satisfied, for or relating to the registration of any shares
of Common Stock.
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<PAGE>
Upon the issuance and delivery pursuant to this Agreement and the
Representative's Warrant Agreement of the Shares and the
Representative's Warrants, respectively, to be sold by the Company,
the Underwriters and the Representative, respectively, will acquire
good and marketable title to the Shares and Representative's Warrants
free and clear of any pledge, lien, charge, claim, encumbrance,
pledge, security interest, or other restriction or equity of any kind
whatsoever.
iv) the Registration Statement is effective under the Act, and,
if applicable, filing of all pricing information has been timely made
in the appropriate form under Rule 430A, and no stop order suspending
the use of the Preliminary Prospectus, the Registration Statement or
Prospectus or any part of any thereof or suspending the effectiveness
of the Registration Statement has been issued and no proceedings for
that purpose have been instituted or are pending or, to the best of
such counsel's knowledge, threatened or contemplated under the Act;
v) each of the Preliminary Prospectus, the Registration
Statement, and the Prospectus and any amendments or supplements
thereto (other than the financial statements and other financial and
statistical data included therein, as to which no opinion need be
rendered) comply as to form in all material respects with the
requirements of the Act and the Rules and Regulations;
vi) to the best of such counsel's knowledge, (A) there are no
agreements, contracts or other documents required by the Act to be
described in the Registration Statement and the Prospectus and filed
as exhibits to the Registration Statement other than those described
in the Registration Statement (or required to be filed under the
Exchange Act if upon such filing they would be incorporated, in whole
or in part, by reference therein) and the Prospectus and filed as
exhibits thereto, and the exhibits which have been filed are correct
copies
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<PAGE>
of the documents of which they purport to be copies; (B) the
descriptions in the Registration Statement and the Prospectus and any
supplement or amendment thereto of contracts and other documents to
which the Company is a party or by which it is bound, including any
document to which the Company is a party or by which it is bound,
incorporated by reference into the Prospectus and any supplement or
amendment thereto, are accurate in all material respects and fairly
represent the information required to be shown by Form S-1; (C) there
is not pending or threatened against the Company any action,
arbitration, suit, proceeding, inquiry, investigation, litigation,
governmental or other proceeding (including, without limitation, those
having jurisdiction over environmental or similar matters), domestic
or foreign, pending or threatened against (or circumstances that may
give rise to the same), or involving the properties or business of the
Company which (x) is required to be disclosed in the Registration
Statement which is not so disclosed (and such proceedings as are
summarized in the Registration Statement are accurately summarized in
all material respects), (y) questions the validity of the capital
stock of the Company or this Agreement or the Representative's Warrant
Agreement, or of any action taken or to be taken by the Company
pursuant to or in connection with any of the foregoing; (D) no statute
or regulation or legal or governmental proceeding required to be
described in the Prospectus is not described as required; and (E)
there is no action, suit or proceeding pending, or threatened, against
or affecting the Company before any court or arbitrator or
governmental body, agency or official (or any basis thereof known to
such counsel) in which there is a reasonable possibility of an adverse
decision which may result in a material adverse change in the
condition, financial or otherwise, or the earnings, position,
prospects, stockholders' equity, value, operation, properties,
business or results of operations of the Company, which could
adversely affect the present or prospective ability of the Company to
perform its obligations under this Agreement or the Representative's
Warrant Agreement or which in any manner draws into question the
validity or enforceability of this Agreement or the Representative's
Warrant Agreement;
vii) The Company has the corporate power and authority to enter
into the Agreement, to issue the Representative's Warrant, to issue
and sell the Shares as contemplated thereby and to issue the
Representative's Warrant Stock issuable upon exercise of the
Representative's Warrant. Each of the Underwriting Agreement and the
Representative's Warrant has been duly authorized, executed and
delivered by the Company and constitutes the valid and binding
agreement of the Company and is enforceable against the Company in
accordance with its terms, except as rights to indemnity may be
limited by federal or state securities laws and except as enforcement
may be limited by bankruptcy, insolvency, reorganization or other
similar laws affecting creditors' rights generally. The performance of
the Agreement and the Representative's Warrant Agreement and the
consummation of the transactions contemplated in the Agreement and the
Representative's Warrant Agreement (other than performance of the
Company's indemnification and contribution obligations under the
Agreement or under the Representative's Warrant Agreement, concerning
which such counsel expresses no opinion) will not (a) result in any
violation of the Company's, nor any of its subsidiaries', Articles of
Incorporation or Bylaws (as currently in effect) or (b) to our
knowledge, result in a material breach or violation of any of the
terms and provisions (as currently in effect) of, or constitute a
default under, any material bond, debenture, note or other evidence of
indebtedness, or under any lease, contract, indenture, mortgage, deed
of trust, loan agreement, joint venture or other agreement or
instrument known to us to which the Company, or any of its
subsidiaries, is a party or by which its properties are bound, or any
applicable statute, rule or regulation known to us or any order, writ
or decree of any court, government or governmental agency or body
having jurisdiction over the Company or over any of its properties or
operations.
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<PAGE>
viii) except as described in the Prospectus, no consent, approval,
authorization or order of, and no filing with, any court, regulatory body,
government agency or other body (other than such as may be required under Blue
Sky laws, as to which no opinion need be rendered) is required in connection
with the issuance of the Shares pursuant to the Prospectus, the issuance of the
Representative's Warrants, and the Registration Statement, the performance of
this Agreement and the Representative's Warrant Agreement, and the transactions
contemplated hereby and thereby;
ix) the properties and business of the Company conform in all material
respects to the description thereof contained in the Registration Statement and
the Prospectus; and the Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property stated
in the Prospectus to be owned or leased by it, in each case free and clear of
all liens, charges, claims, encumbrances, pledges, security interests, defects
or other restrictions or equities or such as do not materially affect the value
of such property and do not interfer with the use made or proposed to be made
of such property by the Company other than those referred to in the Prospectus
and liens for taxes not yet due and payable;
x) to the best knowledge of such counsel, the Company is not in material
breach of, or in default under, any term or provision of any material license,
contract, indenture, mortgage, installment sale agreement, deed of trust, lease,
voting trust agreement, stockholders' agreement, partnership agreement, note,
loan or credit agreement or any other agreement or instrument evidencing an
obligation for borrowed money, or any other agreement or instrument to which the
Company is a party or by which the Company may be bound or to which the property
or assets
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<PAGE>
(tangible or intangible) of the Company is subject or affected; and the Company
is not in violation of any term or provision of its articles of incorporation
by-laws, or in violation of any franchise, license, permit, judgment, decree,
order, statute, rule or regulation except where such violation would not have a
material effect on the Company's business or operations.
xi) the statements in the Prospectus under "BUSINESS," "MANAGEMENT,"
"PRINCIPAL SHAREHOLDERS," "CERTAIN TRANSACTIONS," "DESCRIPTION OF CAPITAL
STOCK," and "SHARES ELIGIBLE FOR FUTURE SALE" have been reviewed by such
counsel, and insofar as they refer to statements of law, descriptions of
statutes, licenses, rules or regulations or legal conclusions, are correct in
all material respects;
xii) the Shares have been accepted for quotation on NNM;
xiii) the persons listed under the caption "PRINCIPAL SHAREHOLDERS" in the
Prospectus are the respective "beneficial owners" (as such phrase is defined in
regulation 13d-3 under the Exchange Act) of the securities set forth opposite
their respective names thereunder as and to the extent set forth therein;
xiv) except as described in the Prospectus, no person, corporation, trust,
partnership, association or other entity has the right to include and/or
register any securities of the Company in the Registration Statement, require
the Company to file any registration statement or, if filed, to include any
security in such registration statement;
xv) except as described in the Prospectus, there are no claims, payments,
issuances, arrangements or understandings for services in the nature of a
finder's or origination fee with respect to the sale of the Securities hereunder
or financial consulting arrangement or any other arrangements, agreements,
understandings, payments or issuances that may affect the Underwriters'
compensation, as determined by the NASD;
xvi) assuming due execution by the parties thereto other than the Company,
the Lock-up Agreements are legal, valid and binding obligations of parties
thereto, enforceable against the party and any subsequent holder of the
securities subject thereto in accordance with its terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as rights to indemnity
or contribution may be limited by applicable law); and
xvii) except as described in the Prospectus, the Company does not (A)
maintain, sponsor or contribute to any ERISA Plans, (B) maintain or contribute,
now or at any time previously, to a defined benefit plan, as defined in Section
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<PAGE>
3(35) of ERISA, and (C) has never completely or partially withdrawn
from a "multiemployer plan".
Such counsel shall state that such counsel has participated in
conferences with officers and other representatives of the Company and
representatives of the independent public accountants for the Company at which
conferences such counsel made inquiries of such officers, representatives and
accountants and discussed the contents of the Preliminary Prospectus, the
Registration Statement, the Prospectus, and related matters were discussed and,
although such counsel is not passing upon and does not assume any responsibility
for the accuracy, completeness or fairness of the statements contained in the
Preliminary Prospectus, the Registration Statement and Prospectus, on the basis
of the foregoing, no facts have come to the attention of such counsel which lead
them to believe that either the Registration Statement or any amendment thereto,
at the time such Registration Statement or amendment became effective or the
Preliminary Prospectus or Prospectus or amendment or supplement thereto as of
the date of such opinion contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading (it being understood that such
counsel need express no opinion with respect to the financial statements and
schedules and other financial and statistical data included in the Preliminary
Prospectus, the Registration Statement or Prospectus).
Such opinion shall not state that it is to be governed or qualified
by, or that it is otherwise subject to, any treatise, written policy or other
document relating to legal opinions, including, without limitation, the Legal
Opinion Accord of the ABA Section of Business Law (1991), or any comparable
State bar accord.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance satisfactory to Underwriters' Counsel) of
other counsel acceptable to Underwriters' Counsel, familiar with the applicable
laws or may assume, with permission of the Underwriters, that the laws of a
particular jurisdiction where such counsel is not admitted, are identical to the
laws of a jurisdiction to which such counsel is admitted; (B) as to matters of
fact, to the extent they deem proper, on certificates and written statements of
responsible officers of the Company, and certificates or other written
statements of officers of departments of various jurisdictions having custody of
documents respecting the corporate existence or good standing of the Company,
provided that copies of any such statements or certificates shall be delivered
to Underwriters' Counsel if requested. The opinion of such counsel for the
Company shall state that the opinion of any such other counsel is in form
satisfactory to such counsel and that the Representative and they are justified
in relying thereon. Such opinion shall also state that the Underwriters' Counsel
is entitled to rely thereon.
At each Option Closing Date, if any, the Underwriters shall have
received the favorable opinion of Snell & Wilmer L.L.P., counsel to the Company,
dated the Option Closing Date, addressed to the Underwriters and in form and
substance satisfactory to Underwriters' Counsel confirming as of Option Closing
Date the statements made by Snell & Wilmer L.L.P., in its opinion delivered on
the Closing Date.
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(e) On or prior to each of the Closing Date and the Option Closing
Date, if any, Underwriters' Counsel shall have been furnished such documents,
certificates and opinions as they may reasonably require for the purpose of
enabling them to review or pass upon the matters referred to in subsection (c)
of this Section 6, or in order to evidence the accuracy, completeness or
-------
satisfaction of any of the representations, warranties or conditions of the
Company, or herein contained.
(f) Prior to each of the Closing Date and each Option Closing Date, if
any, (i) there shall have been no material adverse change nor development
involving a prospective change in the condition, financial or otherwise,
prospects, stockholders' equity or the business activities of the Company,
whether or not in the ordinary course of business, from the latest dates as of
which such condition is set forth in the Registration Statement and Prospectus;
(ii) there shall have been no transaction, not in the ordinary course of
business, entered into by the Company, from the latest date as of which the
financial condition of the Company is set forth in the Registration Statement
and Prospectus which is materially adverse to the Company; (iii) the Company
shall not be in default under any provision of any instrument relating to any
outstanding indebtedness; (iv) the Company shall not have issued any securities
(other than the Securities); the Company shall not have declared or paid any
dividend or made any distribution in respect of its capital stock of any class;
and there has not been any change in the capital stock of the Company, or any
material change in the debt (long or short term) or liabilities or obligations
of the Company (contingent or otherwise); (v) no material amount of the assets
of the Company shall have been pledged or mortgaged, except as set forth in the
Registration Statement and Prospectus; (vi) no action, suit or proceeding, at
law or in equity, shall have been pending or threatened (or circumstances giving
rise to same) against the Company, or affecting any of its properties or
business before or by any court or federal, state or foreign commission, board
or other administrative agency wherein an unfavorable decision, ruling or
finding may adversely affect the business, operations, prospects or financial
condition or income of the Company, except as set forth in the Registration
Statement and Prospectus; and (vii) no stop order shall have been issued under
the Act and no proceedings therefor shall have been initiated, threatened or
contemplated by the Commission.
(g) At each of the Closing Date and each Option Closing Date, if any,
the Underwriters shall have received a certificate of the Company signed by the
principal executive officer and by the chief financial or chief accounting
officer of the Company, dated the Closing Date or Option Closing Date, as the
case may be, to the effect that each of such persons has carefully examined the
Registration Statement, the Prospectus and this Agreement, and that:
i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing
Date or the Option Closing Date, as the case may be, and the Company
has complied with all agreements and covenants and satisfied all
conditions contained in this Agreement on its part to be performed or
satisfied at or prior to such Closing Date or Option Closing Date, as
the case may be;
ii) No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued, and no
proceedings for that
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<PAGE>
purpose have been instituted or are pending or, to the best of each of
such person's knowledge, after due inquiry are contemplated or
threatened under the Act;
iii) The Registration Statement and the Prospectus and, if any,
each amendment and each supplement thereto, contain all statements and
information required to be included therein, and none of the
Registration Statement, the Prospectus nor any amendment or supplement
thereto includes any untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to
make the statements therein not misleading and neither the Preliminary
Prospectus or any supplement thereto included any untrue statement of
a material fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading; and
iv) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (a) the
Company has not incurred up to and including the Closing Date or the
Option Closing Date, as the case may be, other than in the ordinary
course of its business, any material liabilities or obligations,
direct or contingent; (b) the Company has not paid or declared any
dividends or other distributions on its capital stock; (c) the Company
has not entered into any transactions not in the ordinary course of
business; (d) there has not been any change in the capital stock of
the Company or any material change in the debt (long or short-term) of
the Company; (e) the Company has not sustained any material loss or
damage to its property or assets, whether or not insured; (g) there is
no litigation which is pending or to such person's knowledge
threatened (or circumstances giving rise to same) against the Company,
or any affiliated party of any of the foregoing which is required to
be set forth in an amended or supplemented Prospectus which has not
been set forth; and (h) there has occurred no event required to be set
forth in an amended or supplemented Prospectus which has not been set
forth.
References to the Registration Statement and the Prospectus in this subsection
(g) are to such documents as amended and supplemented at the date of such
certificate.
(h) By the Closing Date, the Underwriters will have received
clearance from the NASD as to the amount of compensation allowable or payable to
the Underwriters, as described in the Registration Statement.
(i) At the time this Agreement is executed, the Underwriters
shall have received a letter, dated such date, addressed to the Underwriters in
form and substance satisfactory (including the non-material nature of the
changes or decreases, if any, referred to in clause (iii) below) in all respects
to the Underwriters and Underwriters' Counsel, from McGladrey & Pullen, L.L.P.;
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<PAGE>
i) confirming that they are independent certified public
accountants with respect to the Company within the meaning of the Act
and the applicable Rules and Regulations;
ii) stating that it is their opinion that the financial
statements and supporting schedules of the Company included in the
Registration Statement comply as to form in all material respects with
the applicable accounting requirements of the Act and the Rules and
Regulations thereunder and that the Representative may rely upon the
opinion of McGladrey & Pullen, L.L.P. with respect to such financial
statements and supporting schedules included in the Registration
Statement;
iii) stating that, on the basis of a limited review which
included a reading of the latest available unaudited interim financial
statements of the Company, a reading of the latest available minutes
of the stockholders and board of directors and the various committees
of the boards of directors of the Company, consultations with officers
and other employees of the Company responsible for financial and
accounting matters and other specified procedures and inquiries,
nothing has come to their attention which would lead them to believe
that (A) the pro forma financial information contained in the
Registration Statement and Prospectus does not comply as to form in
all material respects with the applicable accounting requirements of
the Act and the Rules and Regulations or is not fairly presented in
conformity with generally accepted accounting principles applied on a
basis consistent with that of the audited financial statements of the
Company or the unaudited pro forma financial information included in
the Registration Statement, (B) the unaudited financial statements and
supporting schedules of the Company included in the Registration
Statement do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the Rules and
Regulations or are not fairly presented in conformity with generally
accepted accounting principles applied on a basis substantially
consistent with that of the audited financial statements of the
Company included in the Registration Statement, or (C) at a specified
date not more than five (5) days prior to the effective date of the
Registration Statement, there has been any change in the capital stock
of the Company, any change in the long-term debt of the Company, or
any decrease in the stockholders' equity of the Company or any
decrease in the net current assets or net assets of the Company as
compared with amounts shown in the June 30, 1996 balance sheets
included in the Registration Statement, other than as set forth in or
contemplated by the Registration Statement, or, if there was any
change or decrease, setting forth the amount of such change or
decrease, and (D) during the period from June 30, 1996 to a specified
date not more than five (5) days prior to the effective date of the
Registration Statement, there was any decrease in net revenues or net
earnings of the Company or increase in net earnings per common share
of the Company, in each case as compared with the corresponding period
beginning June 30, 1995 other than as set forth in or contemplated by
the Registration Statement, or, if there was any such decrease,
setting forth the amount of such decrease;
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<PAGE>
iv) setting forth, at a date not later than five (5) days prior
to the date of the Registration Statement, the amount of liabilities
of the Company (including a break-down of commercial paper and notes
payable to banks);
v) stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, statements
and other financial information pertaining to the Company set forth in
the Prospectus in each case to the extent that such amounts, numbers,
percentages, statements and information may be derived from the
general accounting records, including work sheets, of the Company and
excluding any questions requiring an interpretation by legal counsel,
with the results obtained from the application of specified readings,
inquiries and other appropriate procedures (which procedures do not
constitute an examination in accordance with generally accepted
auditing standards) set forth in the letter and found them to be in
agreement; and
vi) statements as to such other matters incident to the
transaction contemplated hereby as the Representative may request.
(j) At the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received from McGladrey & Pullen, L.L.P. a letter, dated
as of the Closing Date or the Option Closing Date, as the case may be, to the
effect that they reaffirm the statements made in the letter furnished pursuant
to subsection (i) of this Section hereof except that the specified date referred
----------
to shall be a date not more than five days prior to the Closing Date or the
Option Closing Date, as the case may be, and, if the Company has elected to rely
on Rule 430A of the Rules and Regulations, to the further effect that they have
carried out procedures as specified in clause (v) of subsection (i) of this
----------
Section with respect to certain amounts, percentages and financial information
as specified by the Representative and deemed to be a part of the Registration
Statement pursuant to Rule 430A(b) and have found such amounts, percentages and
financial information to be in agreement with the records specified in such
clause (v).
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<PAGE>
(k) On each of the Closing Date and Option Closing Date, if any,
there shall have been duly tendered to the Representative for the several
Underwriters' accounts the appropriate number of Shares.
(l) No order suspending the sale of the Securities in any
jurisdiction designated by the Representative pursuant to subsection (e) of
Section 4 hereof shall have been issued on either the Closing Date or the
- -------
Option Closing Date, if any, and no proceedings for that purpose shall have been
instituted or shall be contemplated.
(m) On or before the Closing Date, the Company shall have
executed and delivered to the Representative, (i) the Representative's Warrant
Agreement substantially in the form filed as Exhibit 4.2 to the Registration
Statement in final form and substance satisfactory to the Representative, and
(ii) the Representative's Warrants in such denominations and to such designees
as shall have been provided to the Company.
(n) On or before the Closing Date, the Shares shall have been
duly approved for quotation on NNM, subject to official notice of issuance.
(o) On or before the Closing Date, there shall have been
delivered to the Representative all of the Lock-up Agreements, in form and
substance satisfactory to Underwriters' Counsel.
If any condition to the Underwriters' obligations hereunder to be
fulfilled prior to or at the Closing Date or the relevant Option Closing Date,
as the case may be, is not so fulfilled, the Representative may terminate this
Agreement or, if the Representative so elect, it may waive any such conditions
which have not been fulfilled or extend the time for their fulfillment.
7. Indemnification.
---------------
(a) The Company, agrees to indemnify and hold harmless each of
the Underwriters (for purposes of this Section 7 "Underwriter" shall include the
-------
officers, directors, partners, employees, agents and counsel of the Underwriter,
including specifically each person who may be substituted for an Underwriter as
provided in Section 11 hereof), and each person, if any, who controls the
-------
Underwriter ("controlling person") within the meaning of Section 15 of the Act
or Section 20(a) of the Exchange Act, from and against any and all losses,
claims, damages, expenses or liabilities, joint or several (and actions,
proceedings, investigations, inquiries, and suits in respect thereof),
whatsoever (including but not limited to any and all costs and expenses
whatsoever reasonably incurred in investigating, preparing or defending against
such action, proceeding, investigation, inquiry or suit, commenced or
threatened, or any claim whatsoever), as such are incurred, to which the
Underwriter or such controlling person may become subject under the Act, the
Exchange Act or any other statute or at common law or otherwise or under the
laws of foreign countries, arising out of or based upon (A) any untrue
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<PAGE>
statement or alleged untrue statement of a material fact contained (i) in any
Preliminary Prospectus, the Registration Statement or the Prospectus (as from
time to time amended and supplemented); (ii) in any post-effective amendment or
amendments or any new registration statement and prospectus in which is included
securities of the Company issued or issuable upon exercise of the Securities; or
(iii) in any application or other document or written communication (in this
Section 7 collectively called "application") executed by the Company or based
upon written information furnished by the Company filed, delivered or used in
any jurisdiction in order to qualify the Securities under the securities laws
thereof or filed with the Commission, any state securities commission or agency,
NNM or any other securities exchange, (B) the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to make
the statements therein not misleading (in the case of the Prospectus, in the
light of the circumstances under which they were made) except that the Company
shall not be liable in any case to the extent, but only to the extent, that any
such loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
reliance upon and in conformity with written information furnished to the
Company through you by or on behalf of any Underwriter specifically for use in
the preparation of the Registration Statement, any Pre-Effective Prospectus, the
Effective Prospectus or the Final Prospectus or any amendment or supplement
thereto, or any Blue Sky Application, nor shall the Company be liable to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission in any Pre-Effective Prospectus that is corrected in the Final
Prospectus if the person asserting any such loss, claim, damage or liability
purchased shares but was not sent or given a copy or the Final Prospectus at or
prior to the written confirmation of the sale of such shares to such person
or (C) any breach of any representation, warranty, covenant or agreement of the
Company contained herein or in any certificate by or on behalf of the Company or
any of its officers delivered pursuant hereto unless, in the case of clause (A)
or (B) above, such statement or omission was made in reliance upon and in
conformity with written information furnished to the Company with respect to any
Underwriter by or on behalf of such Underwriter expressly for use in any
Preliminary Prospectus, the Registration Statement or any Prospectus, or any
amendment thereof or supplement thereto, or in any application, as the case may
be.
The indemnity agreement in this subsection (a) shall be in addition to
any liability which the Company may have at common law or otherwise.
(b) Each of the Underwriters agrees severally, but not jointly, to
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the Registration Statement, and each other person, if
any, who controls the Company within the meaning of the Act, to the same extent
as the foregoing indemnity from the Company to the Underwriters but only with
respect to statements or omissions, if any, made in any Preliminary Prospectus,
the Registration Statement or Prospectus or any amendment thereof or supplement
thereto or in any application made in reliance upon, and in strict conformity
with, written information furnished to the Company with respect to any
Underwriter by such Underwriter expressly for use in such Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment thereof or
supplement thereto or in any such application, provided that such written
information or omissions only pertain to disclosures in the Preliminary
Prospectus, the Registration Statement or Prospectus directly relating to the
transactions effected by the Underwriters in connection with this Offering. The
Company acknowledges that the statements with respect to the public offering of
the Securities set forth under the heading "Underwriting" and the stabilization
legend in the Prospectus have been furnished by the Underwriters expressly for
use therein and constitute the only information furnished in writing by or on
behalf of the Underwriters for inclusion in the Prospectus.
The indemnity agreement in this subsection (b) shall be in addition to
any liability which the Underwriters may have at common law or otherwise.
(c) Promptly after receipt by an indemnified party under this Section
-------
7 of notice of the commencement of any action, suit or proceeding, such
indemnified party shall, if
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<PAGE>
a claim in respect thereof is to be made against one or more indemnifying
parties under this Section 7, notify each party against whom indemnification is
-------
to be sought in writing of the commencement thereof (but the failure so to
notify an indemnifying party shall not relieve it from any liability which it
may have under this Section 7 except to the extent that it has been prejudiced
-------
in any material respect by such failure or from any liability which it may have
otherwise). In case any such action, investigation, inquiry, suit or proceeding
is brought against any indemnified party, and it notifies an indemnifying party
or parties of the commencement thereof, the indemnifying party or parties will
be entitled to participate therein, and to the extent it may elect by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party. Notwithstanding the
foregoing, the indemnified party or parties shall have the right to employ its
or their own counsel in any such case but the fees and expenses of such counsel
shall be at the expense of such indemnified party or parties unless (i) the
employment of such counsel shall have been authorized in writing by the
indemnifying parties in connection with the defense of such action at the
expense of the indemnifying party, (ii) the indemnifying parties shall not have
employed counsel reasonably satisfactory to such indemnified party to have
charge of the defense of such action within a reasonable time after notice of
commencement of the action, or (iii) such indemnified party or parties shall
have reasonably concluded that there may be defenses available to it or them
which are different from or additional to those available to one or all of the
indemnifying parties (in which case the indemnifying parties shall not have the
right to direct the defense of such action, investigation, inquiry, suit or
proceeding on behalf of the indemnified party or parties), in any of which
events such fees and expenses of one additional counsel shall be borne by the
indemnifying parties. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action, investigation, inquiry, suit or proceeding or separate but
similar or related actions, investigations, inquiries, suits or proceedings in
the same jurisdiction arising out of the same general allegations or
circumstances. Anything in this Section 7 to the contrary notwithstanding, an
-------
indemnifying party shall not be liable for any settlement of any claim or action
effected without its written consent; provided, however, that such consent was
-------- -------
not unreasonably withheld. An indemnifying party will not, without the prior
written consent of the indemnified parties, settle compromise or consent to the
entry of any judgment with respect to any pending or threatened claim, action,
investigation, inquiry, suit or proceeding in respect of which indemnification
or contribution may be sought hereunder (whether or not the indemnified parties
are actual or potential parties to such claim or action), unless such
settlement, compromise or consent (i) includes an unconditional release of each
indemnified party form all liability arising out of such claim, action, suit or
proceeding and (ii) doe snot include a statement as to or an admission of fault,
culpability or a failure to act by or on behalf of any indemnified party.
(d) In order to provide for just and equitable contribution in any
case in which (i) an indemnified party makes claim for indemnification pursuant
to this Section 7, but it is judicially determined (by the entry of a final
-------
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this Section 7 provide for indemnification in such
-------
case, or (ii) contribution under
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<PAGE>
the Act may be required on the part of any indemnified party, then each
indemnifying party shall contribute to the amount paid as a result of such
losses, claims, damages, expenses or liabilities (or actions, investigations,
inquiries, suits or proceedings in respect thereof) (A) in such proportion as is
appropriate to reflect the relative benefits received by each of the
contributing parties, on the one hand, and the party to be indemnified on the
other hand, from the offering of the Securities or (B) if the allocation
provided by clause (A) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each of the contributing
parties, on the one hand, and the party to be indemnified on the other hand in
connection with the statements or omissions that resulted in such losses,
claims, damages, expenses or liabilities, as well as any other relevant
equitable considerations. In any case where the Company is the contributing
party and the Underwriters are the indemnified party, the relative benefits
received by the Company on the one hand, and the Underwriters, on the other,
shall be deemed to be in the same proportion as the total net proceeds from the
offering of the Securities (before deducting expenses) bear to the total
underwriting discounts received by the Underwriters hereunder, in each case as
set forth in the table on the Cover Page of the Prospectus. Relative fault
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company, or by
the Underwriters, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, expenses or liabilities (or actions, investigations,
inquiries, suits or proceedings in respect thereof) referred to above in this
subdivision (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action, claim, investigation, inquiry, suit or proceeding.
Notwithstanding the provisions of this subdivision (d) the Underwriters shall
not be required to contribute any amount in excess of the underwriting discount
applicable to the Securities purchased by the Underwriters hereunder. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. For purposes of this Section 7, each person,
-------
if any, who controls the Company within the meaning of the Act, each officer of
the Company who has signed the Registration Statement, and each director of the
Company shall have the same rights to contribution as the Company, subject in
each case to this subparagraph (d). Any party entitled to contribution will,
promptly after receipt of notice of commencement of any action, suit, inquiry,
investigation or proceeding against such party in respect to which a claim for
contribution may be made against another party or parties under this
subparagraph (d), notify such party or parties from whom contribution may be
sought, but the omission so to notify such party or parties shall not relieve
the party or parties from whom contribution may be sought from any obligation it
or they may have hereunder or otherwise than under this subparagraph (d), or to
the extent that such party or parties were not adversely affected by such
omission. The contribution agreement set forth above shall be in addition to
any liabilities which any indemnifying party may have at common law or
otherwise.
8. Representations and Agreements to Survive Delivery. All
--------------------------------------------------
representations, warranties and agreements contained in this Agreement or
contained in certificates of officers of the Company submitted pursuant hereto,
shall be deemed to be representations, warranties
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<PAGE>
and agreements at the Closing Date and the Option Closing Date, as the case may
be, and such representations, warranties and agreements of the Company and the
indemnity agreements contained in Section 7 hereof, shall remain operative and
-------
in full force and effect regardless of any investigation made by or on behalf of
any Underwriter, the Company, any controlling person of any Underwriter or the
Company, and shall survive termination of this Agreement or the issuance and
delivery of the Securities to the Underwriters and the Representative, as the
case may be.
9. Effective Date.
--------------
(a) This Agreement shall become effective at 10:00 a.m., New York City
time, on the next full business day following the date hereof, or at such
earlier time after the Registration Statement becomes effective as the
Representative, in its discretion, shall release the Shares for sale to the
public; provided, however, that the provisions of Sections 5, 7 and 10 of this
-------- ------- --------
Agreement shall at all times be effective. For purposes of this Section 9, the
-------
Shares to be purchased hereunder shall be deemed to have been so released upon
the earlier of dispatch by the Representative of telegrams to securities dealers
releasing such shares for offering or the release by the Representative for
publication of the first newspaper advertisement which is subsequently published
relating to the Shares.
10. Termination.
-----------
(a) Subject to subsection (b) of this Section 10, the Representative
-------
shall have the right to terminate this Agreement, after the date hereof, (i) if
any domestic or international event or act or occurrence has materially
disrupted, or in the Representative's opinion will in the immediate future
materially adversely disrupt the financial markets; or (ii) any material adverse
change in the financial markets shall have occurred; or (iii) if trading
generally shall have been suspended or materially limited on or by, as the case
may be, any of the New York Stock Exchange, the American Stock Exchange, the
National Association of Securities Dealers, Inc., the Boston Stock Exchange, the
Chicago Board of Trade, the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange, the Commission or any other government authority having
jurisdiction; or (iv) if trading of any of the securities of the Company shall
have been suspended, or any of the securities of the Company shall have been
delisted, on any exchange or in any over-the-counter market; or (v) if the
United States shall have become involved in a war or major hostilities, or if
there shall have been an escalation in an existing war or major hostilities or a
national emergency shall have been declared in the United States; or (vi) if a
banking moratorium has been declared by a state or federal authority; or (vii)
if a moratorium in foreign exchange trading has been declared; or (viii) if the
Company shall have sustained a loss material or substantial to the Company by
fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity
or malicious act which, whether or not such loss shall have been insured, will,
in the Representative's opinion, make it inadvisable to proceed with the
delivery of the Securities; or (viii) if there shall have occurred any outbreak
or escalation of hostilities or any calamity or crisis or there shall have been
such a material adverse change in the conditions or prospects of the Company, or
such material adverse change in the general market, political or economic
conditions, in the United States or elsewhere as in
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<PAGE>
the Representative's judgment would make it inadvisable to proceed with the
offering, sale and/or delivery of the Securities.
(b) If this Agreement is terminated by the Representative in
accordance with the provisions of Section 10(a) the Company shall promptly
-------
reimburse and indemnify the Representative for all of their actual out-of-pocket
expenses, including the fees and disbursements of counsel for the Underwriters
(less amounts previously paid pursuant to Section 5(c) above). Notwithstanding
-------
any contrary provision contained in this Agreement, if this Agreement shall not
be carried out within the time specified herein, or any extension thereof
granted to the Representative, by reason of any failure on the part of the
Company to perform any undertaking or satisfy any condition of this Agreement by
it to be performed or satisfied (including, without limitation, pursuant to
Section 6 or Section 12) then, the Company shall promptly reimburse and
- ------- -------
indemnify the Representative for all of their actual out-of-pocket expenses,
including the fees and disbursements of counsel for the Underwriters (less
amounts previously paid pursuant to Section 5(c) above). In addition, the
-------
Company shall remain liable for all Blue Sky counsel fees and expenses and
filing fees. Notwithstanding any contrary provision contained in this
Agreement, any election hereunder or any termination of this Agreement
(including, without limitation, pursuant to Sections 6, 10, 11 and 12 hereof),
--------
and whether or not this Agreement is otherwise carried out, the provisions of
Section 5 and Section 7 shall not be in any way affected by such election or
- ------- -------
termination or failure to carry out the terms of this Agreement or any part
hereof.
11. Substitution of the Underwriters. If one or more of the
--------------------------------
Underwriters shall fail (otherwise than for a reason sufficient to justify the
termination of this Agreement under the provisions of Section 6, Section 10 or
------- -------
Section 12 hereof) to purchase the Securities which it or they are obligated to
- -------
purchase on such date under this Agreement (the "Defaulted Securities"), the
Representative shall have the right, within 24 hours thereafter, to make
arrangement for one or more of the non-defaulting Underwriters, or any other
underwriters, to purchase all, but not less than all, of the Defaulted
Securities in such amounts as may be agreed upon and upon the terms herein set
forth; if, however, the Representative shall not have completed such
arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of
the total number of Firm Shares to be purchased on such date, the non-
defaulting Underwriters shall be obligated to purchase the full amount
thereof in the proportions that their respective underwriting
obligations hereunder bear to the underwriting obligations of all non-
defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the
total number of Firm Shares, this Agreement shall terminate without
liability on the part of any non-defaulting Underwriters.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of any default by such Underwriter under
this Agreement.
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<PAGE>
In the event of any such default which does not result in a
termination of this Agreement, the Representative shall have the right to
postpone the Closing Date for a period not exceeding seven days in order to
effect any required changes in the Registration Statement or Prospectus or in
any other documents or arrangements.
12. Default by the Company. If the Company shall fail at the Closing
----------------------
Date or at any Option Closing Date, as applicable, to sell and deliver the
number of Shares which it is obligated to sell hereunder on such date, then this
Agreement shall terminate (or, if such default shall occur with respect to any
Option Shares to be purchased on an Option Closing Date, the Underwriters may at
the Representative's option, by notice from the Representative to the Company,
terminate the Underwriters' obligation to purchase Option Shares from the
Company on such date) without any liability on the part of any non-defaulting
party other than pursuant to Section 5, Section 7 and Section 10 hereof. No
------- ------- -------
action taken pursuant to this Section shall relieve the Company from liability,
if any, in respect of such default.
13. Notices. All notices and communications hereunder, except as
-------
herein otherwise specifically provided, shall be in writing and shall be deemed
to have been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriters shall be directed to the
Representative c/o Gilford Securities Incorporated, 850 Third Avenue, New York,
New York 10022, Attention: Ralph Worthington, IV, with a copy to Orrick,
Herrington & Sutcliffe LLP, 666 Fifth Avenue, New York, New York 10103,
Attention: Lawrence B. Fisher, Esq. Notices to the Company shall be directed
to the Company at 531 Flanders Filters Road, Washington, North Carolina 27889,
Attention: Steven K. Clark.
14. Parties. This Agreement shall inure solely to the benefit of and
-------
shall be binding upon, the Underwriters, the Company and the controlling
persons, directors and officers referred to in Section 7 hereof, and their
-------
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Agreement or any provisions herein
contained. No purchaser of Securities from any Underwriter shall be deemed to
be a successor by reason merely of such purchase.
15. Construction. This Agreement shall be governed by and construed
------------
and enforced in accordance with the laws of the State of New York without giving
effect to the choice of law or conflict of laws principles.
16. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
17. Entire Agreement; Amendments. This Agreement and the
----------------------------
Representative's Warrant Agreement constitute the entire agreement of the
parties hereto and supersede all prior written or oral agreements,
understandings and negotiations with respect to the subject matter hereof. This
Agreement may not be amended except in a writing, signed by the Representative
and the Company.
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<PAGE>
If the foregoing correctly sets forth the understanding between the
Underwriters and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.
Very truly yours,
FLANDERS CORPORATION.
By:_____________________________
Robert R. Amerson
President and Chief Executive Officer
Confirmed and accepted as of
the date first above written.
GILFORD SECURITIES INCORPORATED
For itself and as Representative
of the several Underwriters named
in Schedule A hereto.
By:______________________________
Ralph Worthington IV
Chairman
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<PAGE>
SCHEDULE A
----------
Number of Firm Shares
Name of Underwriters to be Purchased
- -------------------- --------------------
Gilford Securities Incorporated...................
----------
Total........................................ 1,600,000
==========
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<PAGE>
EXHIBIT 4.1
OH&S DRAFT
10/23/96
[FORM OF REPRESENTATIVES' WARRANT AGREEMENT]
[SUBJECT TO ADDITIONAL REVIEW]
- --------------------------------------------------------------------------------
FLANDERS CORPORATION
AND
GILFORD SECURITIES INCORPORATED
REPRESENTATIVE'S
WARRANT AGREEMENT
Dated as of ________, 1996
- --------------------------------------------------------------------------------
<PAGE>
REPRESENTATIVE'S WARRANT AGREEMENT dated as of _______, 1996 among FLANDERS
CORPORATION, a North Carolina corporation (the "Company"), and GILFORD
SECURITIES INCORPORATED (hereinafter referred to variously as the "Holder" or
the "Representative").
W I T N E S S E T H:
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WHEREAS, the Company proposes to issue to the Representative or their
designees warrants ("Warrants") to purchase up to an aggregate 160,000 shares of
common stock of the Company ("Common Stock"); and
WHEREAS, the Representative has agreed pursuant to the underwriting
agreement (the "Underwriting Agreement") dated as of the date hereof among the
Representative, as the Representative of the Several Underwriters named in
Schedule A thereto, and the Company to act as the Representative in connection
with the Company's proposed public offering of up to 1,600,000 shares of Common
Stock at a public offering price of $____ per share of Common Stock (the "Public
Offering"); and
WHEREAS, the Warrants to be issued pursuant to this Agreement will be
issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to the Representative in consideration for, and as
part of the Representative's compensation in connection with, the Representative
acting as the Representative pursuant to the Underwriting Agreement;
NOW, THEREFORE, in consideration of the premises, the payment by the
Representative to the Company of an aggregate sixteen dollars ($16.00), the
agreements herein
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set forth and other good and valuable consideration, hereby acknowledged, the
parties hereto agree as follows:
1. Grant. The Representative is hereby granted the right to purchase, at
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any time from _______, 1997 [one year from the effective date of the
registration statement], until 5:30 P.M., New York time, on ____________, 2001
[five years from the effective date of the registration statement], up to an
aggregate of 160,000 shares of Common Stock (the "Shares") at an initial
exercise price (subject to adjustment as provided in Section 8 hereof) of $____
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per share of Common Stock [120% of the initial public offering price per share]
subject to the terms and conditions of this Agreement. Except as set forth
herein, the Shares issuable upon exercise of the Warrants are in all respects
identical to the shares of Common Stock being purchased by the Underwriters for
resale to the public pursuant to the terms and provisions of the Underwriting
Agreement.
2. Warrant Certificates. The warrant certificates (the "Warrant
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Certificates") delivered and to be delivered pursuant to this Agreement shall be
in the form set forth in Exhibit A, attached hereto and made a part hereof, with
such appropriate insertions, omissions, substitutions, and other variations as
required or permitted by this Agreement.
3. Exercise of Warrant.
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(S)3.1 Method of Exercise. The Warrants initially are exercisable
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at an aggregate initial exercise price (subject to adjustment as provided in
Section 8 hereof) per share of Common Stock set forth in Section 6 hereof
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payable by certified or official bank check in New York Clearing House funds,
subject to adjustment as provided in Section 8 hereof. Upon surrender of a
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Warrant Certificate with the annexed Form of Election to Purchase duly executed,
together with payment of the Exercise Price (as hereinafter defined) for the
shares of Common
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Stock purchased at the Company's principal offices in Washington, North Carolina
(presently located at 531 Flanders Filters Road, Washington, North Carolina
27889) the registered holder of a Warrant Certificate ("Holder" or "Holder")
shall be entitled to receive a certificate or certificates for the shares of
Common Stock so purchased. The purchase rights represented by each Warrant
Certificate are exercisable at the option of the Holder thereof, in whole or in
part (but not as to fractional shares of the Common Stock underlying the
Warrants). Warrants may be exercised to purchase all or part of the shares of
Common Stock represented thereby. In the case of the purchase of less than all
the shares of Common Stock purchasable under any Warrant Certificate, the
Company shall cancel said Warrant Certificate upon the surrender thereof and
shall execute and deliver a new Warrant Certificate of like tenor for the
balance of the shares of Common Stock purchasable thereunder.
(S)3.2 Exercise by Surrender of Warrant. In addition to the
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method of payment set forth in Section 3.1 and in lieu of any cash payment
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required thereunder, the Holder(s) of the Warrants shall have the right at any
time and from time to time to exercise the Warrants in full or in part by
surrendering the Warrant Certificate in the manner specified in Section 3.1 in
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exchange for the number of Shares equal to the product of (x) the number of
Shares as to which the Warrants are being exercised multiplied by (y) a
fraction, the numerator of which is the Market Price (as defined in Section 3.3
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below) of the Shares less the Exercise Price and the denominator of which is
such Market Price. Solely for the purposes of this paragraph, Market Price
shall be calculated either (i) on the date which the form of election attached
hereto is deemed to have been sent to the Company pursuant to Section 12 hereof
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("Notice Date") or (ii) as the average of the Market Prices for each of the five
trading days preceding the Notice Date, whichever of (i) or (ii) is greater.
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(S)3.3 Definition of Market Price. As used herein, the phrase "Market
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Price" at any date shall be deemed to be the last reported sale price, or, in
case no such reported sale takes place on such day, the average of the last
reported sale prices for the last three (3) trading days, in either case as
officially reported by the principal securities exchange on which the Common
Stock is listed or admitted to trading or by the Nasdaq National Market ("NNM"),
or, if the Common Stock is not listed or admitted to trading on any national
securities exchanged or quoted by NNM, the average closing bid price as
furnished by the NASD through NNM or similar organization if NNM is no longer
reporting such information, or if the Common Stock is not quoted on NNM, as
determined in good faith by resolution of the Board of Directors of the Company,
based on the best information available to it.
4. Issuance of Certificates. Upon the exercise of the Warrants,
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the issuance of certificates for shares of Common Stock underlying such
Warrants, shall be made forthwith (and in any event within ten (10) business
days thereafter) without charge to the Holder thereof including, without
limitation, any tax which may be payable in respect of the issuance thereof, and
such certificates shall (subject to the provisions of Sections 5 and 7 hereof)
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be issued in the name of, or in such names as may be directed by, the Holder
thereof; provided, however, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the issuance and
delivery of any such certificates in a name other than that of the Holder, and
the Company shall not be required to issue or deliver such certificates unless
or until the person or persons requesting the issuance thereof shall have paid
to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
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The Warrant Certificates and the certificates representing the Shares
underlying the Warrants (and/or other securities, property or rights issuable
upon the exercise of the Warrants) shall be executed on behalf of the Company by
the manual or facsimile signature of the then Chairman or Vice Chairman of the
Board of Directors or President or Vice President of the Company. Warrant
Certificates shall be dated the date of execution by the Company upon initial
issuance, division, exchange, substitution or transfer.
5. Restriction On Transfer of Warrants. The Holder of a Warrant
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Certificate, by its acceptance thereof, covenants and agrees that the Warrants
are being acquired as an investment and not with a view to the distribution
thereof; that the Warrants may not be sold, transferred, assigned, hypothecated
or otherwise disposed of, in whole or in part, for a period of one (1) year from
the date hereof, except to officers of the Representative.
6. Exercise Price.
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(S)6.1 Initial and Adjusted Exercise Price. Except as otherwise
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provided in Section 8 hereof, the initial exercise price of each Warrant shall
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be $____ [120% of the initial public offering price] per share of Common Stock.
The adjusted exercise price shall be the price which shall result from time to
time from any and all adjustments of the initial exercise price in accordance
with the provisions of Section 8 hereof.
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(S)6.2 Exercise Price. The term "Exercise Price" herein shall mean
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the initial exercise price or the adjusted exercise price, depending upon the
context.
7. Registration Rights.
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(S)7.1 Restrictive Legend.
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Certificates representing the Shares underlying the Warrants, and any
of the other securities issuable upon exercise of the Warrants (collectively,
the "Warrant Securities") shall bear the following legend:
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended ("Act"), and
may not be offered or sold except pursuant to (i) an effective
registration statement under the Act, (ii) to the extent applicable,
Rule 144 under the Act (or any similar rule under such Act relating to
the disposition of securities), or (iii) an opinion of counsel, if
such opinion shall be reasonably satisfactory to counsel to the
issuer, that an exemption from registration under such Act is
available.
(S)7.2 Piggyback Registration. If, at any time commencing after the
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date hereof and expiring seven (7) years from the date hereof, the Company
proposes to register any of its securities under the Act (other than pursuant to
Form S-8 or a Registration relating solely to a Rule 145 transaction or a
Registration on any form that does not permit secondary sales) it will give
written notice by registered mail, at least thirty (30) days prior to the filing
of each such registration statement, to the Representative and to all other
Holder of the Warrants and/or the Warrant Securities of its intention to do so.
If the Representative or other Holder
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of the Warrants and/or Warrant Securities notify the Company within twenty (20)
business days after receipt of any such notice of its or their desire to include
any such securities in such proposed registration statement, the Company shall
afford the Representative and such Holder of the Warrants and/or Warrant
Securities the opportunity to have any such Warrant Securities registered under
such registration statement (sometimes referred to herein as the "Piggyback
Registration").
Notwithstanding the provisions of this Section 7.2, the Company shall
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have the right at any time after it shall have given written notice pursuant to
this Section 7.2 (irrespective of whether a written request for inclusion of
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any such securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof.
(S)7.3 Demand Registration.
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(a) At any time commencing after the date hereof and expiring five
(5) years from the date hereof, the Holder of the Warrants and/or Warrant
Securities representing a "Majority" (as hereinafter defined) of such securities
(assuming the exercise of all of the Warrants) shall have the right (which right
is in addition to the registration rights under Section 7.2 hereof), exercisable
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by written notice to the Company, to have the Company prepare and file with the
Securities and Exchange Commission (the "Commission"), on one occasion, a
registration statement and such other documents, including a prospectus, as may
be necessary in the opinion of both counsel for the Company and counsel for the
Representative and Holder, in order to comply with the provisions of the Act, so
as to permit a public offering and sale of their respective Warrant Securities
for nine (9) consecutive months by such Holder and any
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other Holder of the Warrants and/or Warrant Securities who notify the Company
within ten (10) days after receiving notice from the Company of such request.
(b) The Company covenants and agrees to give written notice of any
registration request under this Section 7.3 by any Holder or Holder to all other
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registered Holder of the Warrants and the Warrant Securities within ten (10)
days from the date of the receipt of any such registration request.
(c) In addition to the registration rights under Section 7.2 and
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subsection (a) of this Section 7.3, at any time commencing after the date hereof
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and expiring five (5) years thereafter, any Holder of Warrants and/or Warrant
Securities shall have the right, exercisable by written request to the Company,
to have the Company prepare and file, on one occasion, with the Commission a
registration statement so as to permit a public offering and sale for nine (9)
consecutive months by any such Holder of its Warrant Securities provided,
however, that the provisions of Section 7.4(b) hereof shall not apply to any
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such registration request and registration and all costs incident thereto shall
be at the expense of the Holder or Holder making such request.
(d) Notwithstanding anything to the contrary contained herein, if the
Company shall not have filed a registration statement for the Warrant Securities
within the time period specified in Section 7.4(a) hereof pursuant to the
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written notice specified in Section 7.3(a) of a Majority of the Holder of the
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Warrants and/or Warrant Securities, the Company shall have the option, (but not
the obligation), to repurchase (i) any and all Warrant Securities at the higher
of the Market Price per share of Common Stock on (x) the date of the notice sent
pursuant to Section 7.3(a) or (y) the expiration of the period specified in
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Section 7.4(a) and (ii) any and all
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Warrants at such Market Price less the Exercise Price of such Warrant. Such
repurchase shall be in immediately available funds and shall close within two
(2) days after the later of (i) the expiration of the period specified in
Section 7.4(a) or (ii) the delivery of the written notice of election specified
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in this Section 7.3(d).
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(S)7.4 Covenants of the Company With Respect to Registration. In
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connection with any registration under Section 7.2 or 7.3 hereof, the Company
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covenants and agrees as follows:
(a) The Company shall use its best efforts to file a registration
statement within thirty (30) days of receipt of any demand therefor, shall use
its best efforts to have any registration statements declared effective at the
earliest possible time, and shall furnish each Holder desiring to sell Warrant
Securities such number of prospectuses as shall reasonably be requested
provided that the Company shall have the right to defer the filing of a
registration statement for a period not to exceed 60 days, in the event the
Company determines that the immediate filing of such registration statement
would be detrimental to the Company and its shareholders.
(b) The Company shall pay all costs (excluding fees and expenses of
Holder(s)' counsel and any underwriting or selling commissions), fees and
expenses in connection with all registration statements filed pursuant to
Sections 7.2 and 7.3(a) hereof including, without limitation, the Company's
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legal and accounting fees, printing expenses, blue sky fees and expenses. The
Holder(s) will pay all costs, fees and expenses in connection with any
registration statement filed pursuant to Section 7.3(c). If the Company shall
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fail to comply with the provisions of Section 7.4(a), the Company shall, in
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addition to any other equitable or other relief available to the Holder(s), be
liable for any or all incidental or special damages sustained by the Holder(s)
requesting registration of their Warrant Securities.
(c) The Company will take all necessary action which may be required
in qualifying or registering the Warrant Securities included in a registration
statement for offering
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and sale under the securities or blue sky laws of such states as reasonably are
requested by the Holder(s), provided that the Company shall not be obligated to
execute or file any general consent to service of process or to qualify as a
foreign corporation to do business under the laws of any such jurisdiction.
(d) The Company shall indemnify the Holder(s) of the Warrant
Securities to be sold pursuant to any registration statement and each person, if
any, who controls such Holder within the meaning of Section 15 of the Act or
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Section 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
- -------
Act"), against all loss, claim, damage, expense or liability (including all
expenses reasonably incurred in investigating, preparing or defending against
any claim whatsoever) to which any of them may become subject under the Act, the
Exchange Act or otherwise, arising from such registration statement but only to
the same extent and with the same effect as the provisions pursuant to which the
Company has agreed to indemnify each of the Underwriters contained in Section 7
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of the Underwriting Agreement. It is agreed that the indemnity agreement
contained in this Section 7.4(d) shall not apply to amounts paid in settlement
of any such loss, claim, damage, liability, or action if such settlement is
effected without the consent of the Company (which consent has not been
unreasonably withheld).
(e) The Holder(s) of the Warrant Securities to be sold pursuant to a
registration statement, and their successors and assigns, shall severally, and
not jointly, indemnify the Company, its officers, directors legal counsel,
accountants and each person, if any, who controls the Company within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act, against all loss,
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claim, damage or expense or liability (including all expenses reasonably
incurred in investigating, preparing or defending against any claim whatsoever)
to which they may become subject under the Act, the Exchange Act or otherwise,
arising from information furnished by or on behalf of such Holder, or their
successors or assigns, for specific inclusion in such registration statement to
the same extent and with the same effect as the provisions contained
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in Section 7 of the Underwriting Agreement pursuant to which the Underwriters
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havea greed to indemnify the Company.
(f) Nothing contained in this Agreement shall be construed as
requiring the Holder(s) to exercise their Warrants prior to the initial filing
of any registration statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any securities
other than the Warrant Securities to be included in any registration statement
filed pursuant to Section 7.3 hereof, or permit any other registration statement
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to be or remain effective during the effectiveness of a registration statement
filed pursuant to Section 7.3 hereof, without the prior written consent of the
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Holder of the Warrants and Warrant Securities representing a Majority of such
securities.
(h) The Company shall furnish to each Holder participating in the
offering and to each underwriter, if any, a signed counterpart, addressed to
such Holder or underwriter, of (i) an opinion of counsel to the Company, dated
the effective date of such registration statement (and, if such registration
includes an underwritten public offering, an opinion dated the date of the
closing under the underwriting agreement), and (ii) a "cold comfort" letter
dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, a letter dated the date
of the closing under the underwriting agreement) signed by the independent
public accountants who have issued a report on the Company's financial
statements included in such registration statement, in each case covering
substantially the same matters with respect to such registration statement (and
the prospectus included therein) and, in the case of such accountants' letter,
with respect to events subsequent to the date of such
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financial statements, as are customarily covered in opinions of issuer's counsel
and in accountants' letters delivered to underwriters in underwritten public
offerings of securities.
(i) The Company shall as soon as practicable after the effective date of
the registration statement, and in any event within 15 months thereafter, make
"generally available to its security holder" (within the meaning of Rule 158
under the Act) an earnings statement (which need not be audited) complying with
Section 11(a) of the Act and covering a period of at least 12 consecutive months
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beginning after the effective date of the registration statement.
(j) The Company shall deliver promptly to each Holder participating in the
offering requesting the correspondence and memoranda described below and to the
managing underwriters, copies of all correspondence between the Commission and
the Company, its counsel or auditors and all memoranda relating to discussions
with the Commission or its staff with respect to the registration statement and
permit each Holder and underwriters to do such investigation, upon reasonable
advance notice, with respect to information contained in or omitted from the
registration statement as it deems reasonably necessary to comply with
applicable securities laws or rules of the National Association of Securities
Dealers, Inc. ("NASD"). Such investigation shall include access to books,
records and properties and opportunities to discuss the business of the Company
with its officers and independent auditors, all to such reasonable extent and at
such reasonable times and as often as any such Holder or underwriter shall
reasonably request.
(k) The Company shall enter into an underwriting agreement with the
managing underwriters selected for such underwriting by Holder holding a
Majority of the Warrant Securities requested to be included in such
underwriting, which may be the Representative. Such agreement shall be
satisfactory in form and substance to the Company, each Holder and
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such managing underwriters, and shall contain such representations, warranties
and covenants by the Company and such other terms as are customarily contained
in agreements of that type used by the managing underwriter. The Holder shall be
parties to any underwriting agreement relating to an underwritten sale of their
Warrant Securities and may, at their option, require that any or all the
representations, warranties and covenants of the Company to or for the benefit
of such underwriters shall also be made to and for the benefit of such Holder.
Such Holder shall not be required to make any representations or warranties to
or agreements with the Company or the underwriters except as they may relate to
such Holder and their intended methods of distribution.
(l) In addition to the Warrant Securities, upon the written request
therefor by any Holder(s), the Company shall include in the registration
statement any other securities of the Company held by such Holder(s) as of the
date of filing of such registration statement, including without limitation
restricted shares of Common Stock, options, warrants or any other securities
convertible into shares of Common Stock.
(m) For purposes of this Agreement, the term "Majority" in reference to
the Holder of Warrants or Warrant Securities, shall mean in excess of fifty
percent (50%) of the then outstanding Warrants or Warrant Securities that (i)
are not held by the Company, an affiliate, officer, creditor, employee or agent
thereof or any of their respective affiliates, members of their family, persons
acting as nominees or in conjunction therewith and (ii) have not been resold to
the public pursuant to a registration statement filed with the Commission under
the Act.
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8. Adjustments to Exercise Price and Number of Securities.
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(S)8.1 Subdivision and Combination. In case the Company shall at any time
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subdivide or combine the outstanding shares of Common Stock, the Exercise Price
shall forthwith be proportionately decreased in the case of subdivision or
increased in the case of combination.
(S)8.2 Stock Dividends and Distributions. In case the Company shall pay a
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dividend in, or make a distribution of, shares of Common Stock or of the
Company's capital stock convertible into Common Stock, the Exercise Price shall
forthwith be proportionately decreased. An adjustment made pursuant to this
Section 8.2 shall be made as of the record date for the subject stock dividend
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or distribution.
(S)8.3 Adjustment in Number of Securities. Upon each adjustment of the
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Exercise Price pursuant to the provisions of this Section 8, the number of
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Warrant Securities issuable upon the exercise at the adjusted exercise price of
each Warrant shall be adjusted to the nearest full amount by multiplying a
number equal to the Exercise Price in effect immediately prior to such
adjustment by the number of Warrant Securities issuable upon exercise of the
Warrants immediately prior to such adjustment and dividing the product so
obtained by the adjusted Exercise Price.
(S)8.4 Definition of Common Stock. For the purpose of this Agreement, the
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term "Common Stock" shall mean (i) the class of stock designated as Common Stock
in the Articles of Incorporation of the Company as may be amended as of the
date hereof, or (ii) any other class of stock resulting from successive changes
or reclassifications of such Common Stock consisting solely of changes in par
value, or from par value to no par value, or from no par value to par value.
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(S)8.5 Merger or Consolidation. In case of any consolidation of the
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Company with, or merger of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger which does not result
in any reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger shall execute and deliver to
the Holder a supplemental warrant agreement providing that the holder of each
Warrant then outstanding or to be outstanding shall have the right thereafter
(until the expiration of such Warrant) to receive, upon exercise of such
warrant, the kind and amount of shares of stock and other securities and
property receivable upon such consolidation or merger, by a holder of the number
of shares of Common Stock of the Company for which such warrant might have been
exercised immediately prior to such consolidation, merger, sale or transfer.
Such supplemental warrant agreement shall provide for adjustments which shall be
identical to the adjustments provided in Section 8. The above provision of this
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subsection shall similarly apply to successive consolidations or mergers.
(S)8.6 No Adjustment of Exercise Price in Certain Cases. No adjustment of
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the Exercise Price shall be made:
(a) Upon the issuance or sale of the Warrants or the shares of
Common Stock issuable upon the exercise of the Warrants;
(b) If the amount of said adjustment shall be less than two
cents (2c) per Warrant Security, provided, however, that in such case
any adjustment that would otherwise be required then to be made shall
be carried forward and shall be made at the time of and together with
the next subsequent adjustment which, together with any adjustment so
carried forward, shall amount to at least two cents (2c) per Warrant
Security.
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9. Exchange and Replacement of Warrant Certificates. Each Warrant
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Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Securities in such denominations as
shall be designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of any Warrant Certificate, and, in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
10. Elimination of Fractional Interests. The Company shall not be
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required to issue certificates representing fractions of shares of Common Stock
upon the exercise of the Warrants, nor shall it be required to issue scrip or
pay cash in lieu of fractional interests, it being the intent of the parties
that all fractional interests shall be eliminated by rounding any fraction up to
the nearest whole number of shares of Common Stock or other securities,
properties or rights.
11. Reservation and Listing of Securities. The Company shall at all times
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reserve and keep available out of its authorized shares of Common Stock, solely
for the purpose of issuance upon the exercise of the Warrants, such number of
shares of Common Stock or other securities, properties or rights as shall be
issuable upon the exercise thereof. The Company covenants and agrees that, upon
exercise of the Warrants and payment of the
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Exercise Price therefor, all shares of Common Stock and other securities
issuable upon such exercise shall be duly and validly issued, fully paid, non-
assessable and not subject to the preemptive rights of any stockholder. As long
as the Warrants shall be outstanding, the Company shall use its best efforts to
cause all shares of Common Stock issuable upon the exercise of the Warrants to
be listed (subject to official notice of issuance) on all securities exchanges
on which the Common Stock issued to the public in connection herewith may then
be listed and/or quoted on NNM.
12. Notices to Warrant Holder. Nothing contained in this Agreement shall
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be construed as conferring upon the Holder the right to vote or to consent or to
receive notice as a stockholder in respect of any meetings of stockholder for
the election of directors or any other matter, or as having any rights
whatsoever as a stockholder of the Company. If, however, at any time prior to
the expiration of the Warrants and their exercise, any of the following events
shall occur:
(a) the Company shall take a record of the holder of its shares
of Common Stock for the purpose of entitling them to receive a
dividend or distribution payable otherwise than in cash, or a cash
dividend or distribution payable otherwise than out of current or
retained earnings, as indicated by the accounting treatment of such
dividend or distribution on the books of the Company; or
(b) the Company shall offer to all the holder of its Common Stock
any additional shares of capital stock of the Company or securities
convertible into or exchangeable for shares of capital stock of the
Company, or any option, right or warrant to subscribe therefor; or
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(c) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of
all or substantially all of its property, assets and business as an
entirety shall be proposed;
then, in any one or more of said events, the Company shall give written notice
of such event at least fifteen (15) days prior to the date fixed as a record
date or the date of closing the transfer books for the determination of the
stockholder entitled to such dividend, distribution, convertible or exchangeable
securities or subscription rights, or entitled to vote on such proposed
dissolution, liquidation, winding up or sale. Such notice shall specify such
record date or the date of closing the transfer books, as the case may be.
Failure to give such notice or any defect therein shall not affect the validity
of any action taken in connection with the declaration or payment of any such
dividend, or the issuance of any convertible or exchangeable securities, or
subscription rights, options or warrants, or any proposed dissolution,
liquidation, winding up or sale.
13. Notices Generally.
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13.1 Delivery of Notices
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Any notice shall be deemed to have been duly delivered (a) when delivered
by hand, if personally delivered, (b) if sent by mail to a party whose address
is in the same country as the sender, two Business Days after being deposited in
the mail, postage prepaid, (c) if sent by facsimile transmission on a Business
Day, when receipt is acknowledged or, if sent on a day that is not a Business
Day, on the next Business Day following the day on which receipt is
acknowledged, and (d) if sent by recognized international courier, freight
prepaid, with a copy sent by telecopier, to a party whose address is not in the
same country as the sender, three Business Days after the later of (i) being
telecopied and (ii) delivery to such courier.
13.2 Addresses for Notice
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All communications (including all required or permitted notices) pursuant
to the provisions hereof shall be in writing and shall be sent:
(a) If to the registered Holder of the Warrants, to the address
of such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 3
-------
hereof or to such other address as the Company may designate by notice
to the Holder.
14. Supplements and Amendments. The Company and the Representative may
--------------------------
from time to time supplement or amend this Agreement without the approval of any
holder of
18
<PAGE>
Warrant Certificates (other than the Representative) in order to cure any
ambiguity, to correct or supplement any provision contained herein which may be
defective or inconsistent with any provisions herein, or to make any other
provisions in regard to matters or questions arising hereunder which the Company
and the Representative may deem necessary or desirable and which the Company and
the Representative deem shall not adversely affect the interests of the Holder
of Warrant Certificates.
15. Successors. All the covenants and provisions of this Agreement shall
----------
be binding upon and inure to the benefit of the Company, the Holder and their
respective successors and assigns hereunder.
16. Termination. This Agreement shall terminate at the close of business
-----------
on _______, 2001. Notwithstanding the foregoing, the indemnification provisions
of Section 7 shall survive such termination until the close of business on
-------
_______, 200__.
17. Governing Law; Submission to Jurisdiction. This Agreement and each
-----------------------------------------
Warrant Certificate issued hereunder shall be deemed to be a contract made under
the laws of the State of New York and for all purposes shall be construed in
accordance with the laws of said State without giving effect to the rules of
said State governing the conflicts of laws.
The Company, the Representative and the Holder hereby agree that any
action, proceeding or claim against it arising out of, or relating in any way
to, this Agreement shall be brought and enforced in the courts of the State of
New York or of the United States of America for the Southern District of New
York, and irrevocably submits to such jurisdiction, which jurisdiction shall be
exclusive. The Company, the Representative and the Holder hereby irrevocably
waive any objection to such exclusive jurisdiction or inconvenient forum. Any
such process or summons to be served upon any of the Company, the Representative
and the
19
<PAGE>
Holder (at the option of the party bringing such action, proceeding or claim)
may be served by transmitting a copy thereof, by registered or certified mail,
return receipt requested, postage prepaid, addressed to it at the address set
forth in Section 13 hereof. Such mailing shall be deemed personal service and
-------
shall be legal and binding upon the party so served in any action, proceeding or
claim. The Company, the Representative and the Holder agree that the prevailing
party(ies) in any such action or proceeding shall be entitled to recover from
the other party(ies) all of its/their reasonable legal costs and expenses
relating to such action or proceeding and/or incurred in connection with the
preparation therefor.
18. Entire Agreement; Modification. This Agreement (including the
------------------------------
Underwriting Agreement to the extent portions thereof are referred to herein)
contains the entire understanding between the parties hereto with respect to
the subject matter hereof and may not be modified or amended except by a
writing duly signed by the party against whom enforcement of the modification
or amendment is sought.
19. Severability. If any provision of this Agreement shall be held to
------------
be invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provision of this Agreement.
20. Captions. The caption headings of the Sections of this Agreement
--------
are for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
21. Benefits of this Agreement. Nothing in this Agreement shall be
--------------------------
construed to give to any person or corporation other than the Company and the
Representative and any other registered Holder(s) of the Warrant Certificates or
Warrant Securities any legal or equitable right, remedy or claim under this
Agreement; and this Agreement shall be for the
20
<PAGE>
sole benefit of the Company and the Representative and any other registered
Holder of Warrant Certificates or Warrant Securities.
22. Counterparts. This Agreement may be executed in any number of
------------
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
FLANDERS CORPORATION
By:
----------------------------------
Name:
Title:
Attest:
- ----------------------------
Secretary
GILFORD SECURITIES INCORPORATED
By:
----------------------------------
Name:
Title:
21
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY
SIMILAR RULE UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii)
AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO
COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS
AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME, __________, 2001
No. W- Warrants to Purchase
____ Shares of Common Stock
WARRANT CERTIFICATE
This Warrant Certificate certifies that __________, or registered assigns,
is the registered holder of _____________ Warrants to purchase initially, at any
time from __________, 1997 [one year from the effective date of the Registration
Statement] until 5:30 p.m. New York time on ___________, 2001 [five years from
the effective date of the Registration Statement] ("Expiration Date"), up to
__________ fully-paid and non-assessable shares of common stock, ("Common
Stock") of FLANDERS CORPORATION, a North Carolina corporation (the "Company"),
(one share of Common Stock referred to individually as a "Security" and
collectively as the "Securities") at the initial exercise price, subject to
adjustment in certain events (the "Exercise Price"), of $______ [120% of the
initial public offering price] per share of Common Stock upon surrender of this
Warrant Certificate and payment of the Exercise Price at an office or agency of
the Company, but subject to the conditions set forth herein and in the warrant
agreement dated as of _______, 1996 among the Company, and GILFORD SECURITIES
INCORPORATED (the "Warrant Agreement"). Payment of the Exercise Price shall be
made by certified or official bank check in New York Clearing House funds
payable to the order of the Company.
A-1
<PAGE>
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, hereby shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Company and the
holder (the words "holder" or "holder" meaning the registered holder or
registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain events
the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants; provided,
however, that the failure of the Company to issue such new Warrant Certificates
shall not in any way change, alter, or otherwise impair, the rights of the
holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax or other governmental charge
imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the Warrant
Agreement shall have the meanings assigned to them in the Warrant Agreement.
A-2
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed under its corporate seal.
Dated as of ___________, 1996
FLANDERS CORPORATION
[SEAL] By:
------------------------------------
Name:
Title:
Attest:
- -------------------------
Secretary
A-3
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.1]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:
[_] _______________________ shares of Common Stock;
and herewith tenders in payment for such securities a certified or official bank
check payable in New York Clearing House Funds to the order of Flanders
Corporation in the amount of $____, all in accordance with the terms of Section
3.1 of the Representative's Warrant Agreement dated as of _____, 1996 among
Flanders Corporation and Gilford Securities Incorporated. The undersigned
requests that a certificate for such securities be registered in the name of
____________ whose address is _____________ and that such Certificate be
delivered to __________________ whose address is _______________.
Dated:
Signature ________________________________________
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant
Certificate.)
__________________________________________________
(Insert Social Security or Other Identifying
Number of Holder)
A-4
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED ____________________________________ hereby sells,
assigns and transfers unto
- --------------------------------------------------------------------------------
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _______________ Attorney, to
transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated:__________________________ Signature:__________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant Certificate.)
____________________________________________
(Insert Social Security or Other Identifying
Number of Assignee)
A-5
<PAGE>
[LETTERHEAD OF SNELL & WILMER APPEARS HERE]
December 9, 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 21.1
FLANDERS CORPORATION
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
STATE OR OTHER
JURISDICTION OF
INCORPORATION NAMES UNDER WHICH EACH
SUBSIDIARY NAME OR ORGANIZATION SUBSIDIARY DOES BUSINESS
--------------- --------------- --------------------------------------
<S> <C> <C>
AirSeal Filters Housing,
Inc. .................. Texas AirSeal Filter Housings, Inc.
Charcoal Service Corpo-
ration................. North Carolina Charcoal Service Corporation
Precisionaire, Inc. .... Florida Precisionaire, Inc.
Flanders International
Pte, Ltd. ............. Singapore Flanders International, Pte, Ltd.
Flanders Filters,
Inc. .................. North Carolina Flanders Filters, Inc.
Subsidiaries of Flan-
ders Filters, Inc.
Flanders Airpure West,
Inc. ................ North Carolina Flanders Airpure West, Inc.
Flanders Airpure
Products Company,
LLC.................. North Carolina Flanders Airpure Products Company, LLC
</TABLE>
<PAGE>
[LETTERHEAD OF McGLADREY & PULLEN, LLP APPEARS HERE]
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 statements of Flanders
Corporation and subsidiary, and to the reference to our Firm under the caption
"Experts" in the Prospectus.
New Bern, North Carolina /s/ McGladrey & Pullen, LLP
December 4, 1996
<PAGE>
[LETTERHEAD OF M/c/GLADREY & PULLEN, LLP APPEARS HERE]
INDEPENDENT AUDITOR'S CONSENT
We consent to the inclusion in this Registration Statement of Flanders
Corporation on Form S-1 of our report, dated 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 on our audit of the
financial statements of Charcoal Services Corporation.
New Bern, North Carolina /s/ McGladrey & Pullen, LLP
December 4, 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 4, 1996
