SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
Commission File No. 0-27958
FLANDERS CORPORATION
(Exact name of registrant as specified in its charter)
North Carolina 13-3368271
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization.)
531 Flanders Filters Road, Washington, North Carolina 27889
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (919) 946-8081
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
17,951,103 shares common stock, par value $.001, as of May 13, 1997
(Title of Class)
<PAGE>
FLANDERS CORPORATION
FORM 10-Q
FOR QUARTER ENDED MARCH 31, 1997
PART I - FINANCIAL INFORMATION Page
Item 1 -
Financial Statements
Consolidated Condensed Balance Sheet for March 31,
1997 and December 31, 1996 2
Consolidated Condensed Statements of Operations for
the three months ended March 31, 1996 and 1995 4
Consolidated Condensed Statements of Shareholders'
Equity for the three months ended March 31, 1997
and the year ended December 31, 1996 5
Consolidated Condensed Statements of Cash Flows for
the three months ended March 31, 1997 and 1996 6
Notes to Consolidated Condensed Financial Statements 7
Item 2 -
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 15
Item 2 - Changes in Securities 15
Item 3 - Defaults Upon Senior Securities 15
Item 4 - Submission of Matters to a Vote of Security Holders 15
Item 5 - Other Information 15
Item 6 - Exhibits and Reports on Form 8-K 15
SIGNATURES 17
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1997 1996
- ------------------------------------------------ -------------- --------------
(unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 2,627,699 $ 2,390,411
Restricted cash (See Note 3) - 8,000,005
Short-term investments 294,590 -
Receivables:
Trade, less allowance for doubtful
accounts of $160,000 at March 31, 1997;
$346,480 at December 31, 1996 16,312,110 17,906,879
Related party 1,447,700 905,930
Other 106,804 786,811
Inventories (See Note 2) 10,822,173 9,894,707
Deferred taxes 927,091 920,520
Other current assets 1,866,178 687,524
-------------- --------------
Total current assets 34,404,345 41,492,787
Other assets 346,980 909,307
Intangible assets, net 13,755,739 14,016,691
Property and equipment, net of accumulated
depreciation and amortization of
$7,641,220 at March 31, 1997;
$6,866,817 at December 31, 1996 31,526,810 30,099,626
-------------- --------------
$ 80,033,874 $ 86,518,411
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------
Current liabilities
Current maturities of long-term debt $ 549,122 $ 4,379,973
Accounts payable 10,242,576 11,002,587
Accrued expenses and other current liabilities 5,196,878 3,540,110
-------------- --------------
Total current liabilities 15,988,576 18,922,670
Long-term debt, less current maturities 5,776,927 25,776,295
Convertible debt 3,200,000 4,000,000
Deferred income taxes 4,473,247 4,466,676
Committed capital (See Note 3) - 8,000,005
Commitments and contingencies
Stockholders' equity
Preferred stock, no par value,
10,000,000 shares authorized; none issued - -
Common stock, $.001 par value; 50,000,000
shares authorized; issued and outstanding:
17,906,103 at March 31, 1997;
15,951,548 at December 31, 1995 17,906 15,952
Additional paid-in capital 41,409,854 16,964,713
Retained earnings 9,167,364 8,372,100
-------------- --------------
Total stockholders' equity 50,595,124 25,352,765
-------------- --------------
$ 80,033,874 $ 86,518,411
============== ==============
</TABLE>
See Notes to Consolidated Condensed Financial Statements
Page 3
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months ended
March 31,
1997 1996
-------------- --------------
<S> <C> <C>
Net sales $ 27,866,841 $ 11,838,653
Cost of goods sold 20,863,277 8,959,269
-------------- --------------
Gross Profit 7,003,564 2,879,384
-------------- --------------
Operating expenses 5,742,603 1,972,326
-------------- --------------
Operating income 1,260,961 907,058
-------------- --------------
Nonoperating income (expense):
Other income (expense) 335,368 82,215
Interest expense (346,065) (62,533)
-------------- --------------
(10,697) 19,682
-------------- --------------
Income before income taxes 1,250,264 926,740
Income taxes 455,000 382,876
-------------- --------------
Net income $ 795,264 $ 543,864
============== ==============
Earnings per weighted average common
and common equivalent share
outstanding:
Primary $ 0.04 $ 0.04
============== ==============
Fully diluted $ 0.04 $ 0.04
============== ==============
Weighted average common and common
equivalent shares outstanding:
Primary 21,600,038 13,950,135
============== ==============
Fully diluted 22,636,923 14,563,796
============== ==============
</TABLE>
See Notes to Consolidated Condensed Financial Statements
Page 4
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained
Stock Capital Earnings
---------- -------------- ------------
<S> <C> <C> <C>
Balance, January 1, 1996 $ 11,434 3,418,671 4,778,312
Issuance of 3,371,204 shares of common stock
related to the Private Offerings 3,372 18,760,986 -
Less committed capital (Note 3) - (8,000,005) -
Issuance of 1,036,885 shares of common stock
related to the Acquisitions 1,037 (1,037) -
Valuation and release from escrow of 282,295
shares of common stock related to the
Acquisitions - 2,681,803 -
Issuance of 96,280 shares of common stock
upon exercise of warrants 96 240,604 -
Issuance of 13,200 shares of common stock
upon exercise of options 13 32,987 -
Income tax benefit from stock options
exercised - 37,433 -
Fair value of warrants issued with
convertible debt - 33,971 -
Receivables secured by stock related to
exercise of warrants - (240,700) -
Net income - - 3,593,788
---------- -------------- ------------
Balance, December 31, 1996 15,952 16,964,713 8,372,100
Issuance of 102,555 shares of common stock
upon conversion of convertible debt 102 799,898 -
Release of committed capital (Note 3) - 8,000,005 -
Issuance of 1,840,000 shares of common stock
related to the secondary offering 1,840 15,645,250 -
Issuance of 12,000 shares of common stock
upon exercise of warrants 12 29,988 -
Receivables secured by stock related to
exercise of warrants - (30,000) -
Net income (unaudited) - - 795,264
---------- -------------- ------------
Balance, March 31, 1997 (unaudited) $ 17,906 $ 41,409,854 $9,167,364
========== ============== ============
</TABLE>
See Notes to Consolidated Condensed Financial Statements
Page 5
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months ended
March 31,
1997 1996
-------------- --------------
<S> <C> <C>
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES $ 1,868,299 $ (964,613)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (1,740,637) (432,032)
-------------- --------------
NET CASH (USED) BY
INVESTING ACTIVITIES (1,740,637) (432,032)
CASH FLOWS FROM FINANCING ACTIVITIES
Release of restricted cash from escrow 8,000,005 -
Short-term investments 294,590 -
Net change in long-term borrowings (23,830,219) (2,468,262)
Proceeds from issuance of common stock 15,645,250 1,082,319
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 109,626 (1,385,943)
-------------- --------------
NET INCREASE (DECREASE) IN CASH 237,288 (2,782,588)
CASH AT BEGINNING OF PERIOD 2,390,411 2,973,797
-------------- --------------
CASH AT END OF PERIOD $ 2,627,699 $ 191,209
============== ==============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid for income taxes $ 449,646 $ 484,033
============== ==============
Cash payments for interest $ 198,146 $ 62,533
============== ==============
SUPPLEMENTAL DISCLOSURES OF NONCASH
FINANCING ACTIVITIES
Conversion of debentures plus accumulated
interest into common stock $ 834,798 $ -
============== ==============
Issuance of 12,000 shares of common stock
upon exercise of warrants in exchange
for receivable $ 30,000 $ -
============== ==============
</TABLE>
See Notes to Consolidated Condensed Financial Statements
Page 6
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. During the first three months of 1997, the Company acquired the
majority of the assets of Intermountain Paint and Sub-Assembly, Inc., and B B &
D Manufacturing, Inc. ("BB&D") and placed them in a newly formed, majority
owned subsidiary, Airseal West, Inc. ("Airseal West"). During 1996, the
Company 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").
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, 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 ended March 31, 1997 may not be indicative of
the results that may be expected for the year ending December 31, 1997.
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.
Primary earnings per common and common equivalent share for the three month
periods ended March 31, 1997 and 1996 were calculated as follows:
<TABLE>
<CAPTION>
Three Months ended
March 31,
1997 1996
-------------- --------------
<S> <C> <C>
Net income $ 795,264 $ 543,864
Weighted average shares outstanding 16,457,212 11,807,626
Add: exercise of weighted average
warrants and options reduced by the
number of shares purchased with
proceeds 5,142,826 2,142,509
-------------- --------------
Adjusted weighted average shares
outstanding 21,600,038 13,950,135
============== ==============
Net income per common share $ 0.04 $ 0.04
============== ==============
</TABLE>
Page 7
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Interim Financial Statements - Continued
Earnings per share - continued. Fully diluted earnings per common and common
equivalent share for the three month periods ended March 31, 1997 and 1996 were
calculated as follows:
<TABLE>
<CAPTION>
Three Months ended
March 31,
1997 1996
-------------- --------------
<S> <C> <C>
Net income $ 795,264 $ 543,864
Weighted average shares outstanding 17,494,097 11,807,626
Add: exercise of weighted average
warrants and options reduced by the
number of shares purchased with
proceeds 5,142,826 2,756,170
-------------- --------------
Adjusted weighted average shares
outstanding 22,636,923 14,563,796
============== ==============
Net income per common share $ 0.04 $ 0.04
============== ==============
</TABLE>
Note 2. Inventories
Inventories consist of the following at March 31, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
3/31/97 12/31/96
-------------- --------------
<S> <C> <C>
Finished goods $ 4,229,453 $ 3,321,713
Work in progress 1,454,521 1,490,438
Raw materials 5,183,199 5,127,556
-------------- --------------
10,867,173 9,939,707
Less allowance for obsolete raw materials 45,000 45,000
-------------- --------------
$ 10,822,173 $ 9,894,707
============== ==============
</TABLE>
Note 3. Capital Transactions
Secondary offering. On January 22, 1997, the Company completed an underwritten
public secondary offering dated January 16, 1997, of 1,600,000 shares of the
Company's common stock at $9.50 per share (the "Offering"). Net proceeds to
the Company after deducting commissions and expenses from the Offering totaling
approximately $1,670,750 amounted to $13,529,250. The Company utilized the
entire amount of the proceeds from the offering to pay down long-term and
convertible debt. On January 31, 1997, the Underwriters of the Offering
exercised their over-allotment option to purchase 240,000 shares of the
Company's common stock at $9.50 per share. Net proceeds to the Company after
deducting commissions and expenses from the over-allotment totaling
approximately $164,000 amounted to $2,116,000, which were also used to pay down
long-term debt. Net proceeds from the Offering, including the over-allotment,
were $15,645,250.
Restricted cash. On January 6, 1997, a Registration Statement under the
Securities Act of 1933 was declared effective registering certain shares
purchased by two investors through a private placement in September and October
1996. Therefore, the potential right of rescission held by those two investors
expired unrealized, and $8,000,005 of cash which had been held in escrow was
released to the Company and used to pay down long-term debt.
Page 8
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Stock Options and Warrants
The following table summarizes the activity related to the Company's stock
options and warrants for the three months ended March 31, 1997 and the year
ended December 31, 1996:
<TABLE>
<CAPTION>
Weighted Average
Exercise Price Exercise Price
Stock per Share per Share
Warrants Options Warrants Options Warrants Options
---------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1, 1996 61,280 2,500,000 $ 2.50 $ 1.00 $ 2.50 $ 1.00
Granted 109,712 5,136,520 2.50-9.63 2.50-9.50 5.29 4.61
Exercised 96,280 13,200 2.50-5.00 2.50 2.50 2.50
Canceled or expired 37,712 -
---------- ----------
Outstanding at December 31, 1996 37,000 7,623,320 2.50-9.63 2.50-9.50 7.32 3.43
Granted 170,256 - 8.14-11.40 11.20
Exercised 12,000 - 2.50 2.50
Canceled or expired - -
---------- ----------
Outstanding at March 31, 1997 195,256 7,623,320 $9.63-11.40 $1.00-9.50 $ 11.00 $ 3.43
========== ==========
Exercisable at March 31, 1997 195,256 7,623,320 $9.63-11.40 $1.00-9.50 $ 11.00 $ 3.43
========== ==========
</TABLE>
The warrants expire at various periods through January 2002. The options
expire at various times through July 2001.
Note 5. Litigation
There were no material additions to, or changes in status of, any ongoing,
threatened or pending legal proceedings during the three months ended March 31,
1997, except for the dismissal, on January 23, 1997, without prejudice, of a
subsidiary of the Company from the following asbestos related civil lawsuit in
Colorado District Court: Tibbets v. Flanders Filters, Inc., et al. A second
asbestos-related lawsuit in Colorado District Court, Champion v. Flanders
Filters, Inc., et al., was dismissed on April 2, 1997.
From time to time, the Company is 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.
Page 9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussions should be read in conjunction with the Company's
Consolidated Financial Statements and the notes thereto presented in Item 1.
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 "Outlook".
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 1996 and the first
quarter of 1997, the Company experienced significant growth from the
acquisition of other air filtration related companies. As of May 31, 1996, the
Company acquired Charcoal Service Corporation ("CSC"), and on June 15, 1996,
acquired Air Seal Filter Housings, Inc. ("Airseal"). As of September 23, 1996,
the Company acquired Precisionaire, Inc. ("Precisionaire"). The acquisitions
of CSC, Airseal and Precisionaire are sometimes referred to herein as the
"Acquisitions". As of March 7, 1997, the Company acquired the majority of the
assets of Intermountain Paint and Sub-Assembly, Inc., and B B & D
Manufacturing, Inc. ("BB&D") and placed them in a newly formed, majority owned
subsidiary, Airseal West, Inc. ("Airseal West"). The Company also established
two new subsidiaries in 1996: Airpure West, Inc. ("Airpure West") and Flanders
International, Ltd. ("FIL"). CSC specializes in the manufacture of high-end
charcoal filters and containment environments, and has a service arm. Airseal
and Airseal West produce customized mid-range housings and HVAC equipment.
Precisionaire manufactures air filters and related products for commercial and
residential air conditioning and heating systems. Airpure West manufactures
mid-range filtration products for the Western U.S. FIL is a Singapore-based
sales and marketing subsidiary marketing the Company's products to customers in
the Pacific Rim. 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, the historical results of operations do not fully
reflect the operating efficiencies and improvements that are expected to be
achieved by integrating the acquired businesses into the Company's operations.
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.
Results of Operations for Three Months Ended March 31, 1997 Compared to March
31, 1996
The following table summarizes the Company's results of operations as a
percentage of net sales for the three months ended March 31, 1997 and 1996.
<TABLE>
<CAPTION>
Three Months ended
March 31,
----------------------------------
1997 1996
---------------- ----------------
(000's omitted)
<S> <C> <C> <C> <C>
Net sales 27,867 100.0% 11,839 100.0%
Gross profit 7,004 25.1 2,879 24.3
Operating expenses 5,743 20.6 1,972 16.7
Operating income 1,261 4.5 907 7.7
Income before income taxes 1,250 4.5 927 7.8
Income taxes 455 1.6 383 3.2
Net income 795 2.9 544 4.6
</TABLE>
Page 10
<PAGE>
Net sales: Net sales for the three months ended March 31, 1997 increased by
$15,028,000, or 135%, to $27,867,000 from $11,839,000 for the three months
ended March 31, 1996. The increase was primarily due to the Acquisitions,
which contributed approximately $19,583,000 of net sales, and two new
subsidiaries, Airpure West and FIL, whose combined sales contributed
approximately $477,000 to the Company's net sales. Sales from the Company's
original subsidiaries, Flanders Filters, Inc. ("FFI") and Flanders Airpure
Products, Inc. ("Airpure") decreased $3,011,000, or 25.4%, compared to the
prior year quarter. The Company attributes this decrease to a cyclical
slowdown in capital spending for new semiconductor facilities and the deferment
of two major contracts for its laminar flow HEPA products to later periods.
See "Outlook".
Gross Profit: Gross profit for the three months ended March 31, 1997 increased
by $4,125,000, or 143%, to $7,004,000, which represented 25.1% of net sales,
from $2,879,000, which represented 24.3% of net sales, for the three months
ended March 31, 1996. The primary reasons for the increase in gross profit
margin were improvements in operating efficiency associated with focusing each
manufacturing facility on a particular type of product, which reduced direct
costs in the following areas: (i) reduced down time due to the switching lines
between products; (ii) eliminated individual lot inventory tracking at the
Company's Washington, NC facility required by regulations governing the
manufacture of nuclear and biological containment environments by moving all
containment environment manufacturing operations to CSC's plant in Bath, NC;
and (iii) reduced training and coordination time at each location by reducing
the number of certification and training hours required of employees by
producing fewer types of products at each facility. Other factors affecting
gross profit margins included lower profit margins from the newly started
subsidiaries and the Company's ongoing automation project for stock product
lines.
Operating expenses: Operating expenses for the three months ended March 31,
1997 increased by $3,771,000, or 191%, to $5,743,000, representing 20.6% of net
sales, from $1,972,000, representing 16.7% of net sales, for the three months
ended March 31, 1996. The primary reason for the overall increase in operating
expenses was the Acquisitions, which accounted for $3,456,000 of the increase.
.Operating expenses increased as a percentage of net sales compared to the
prior year quarter, because FFI's sales volume was down compared to the prior
year quarter while its operating expenses remained relatively flat.
Net income: Net income for the three months ended March 31, 1997 increased by
$251,000, or 46%, to $795,000, or $0.04 per share, from $544,000, or $0.04 per
share for the three months ended March 31, 1996. As a result of capital
raising activities, including the sale of approximately 4,711,000 shares of
common stock during the twelve months ended March 31, 1997, the Company's
average primary and fully diluted shares outstanding increased to 21,600,000
and 22,637,000 shares outstanding, respectively, for the three months ended
March 31, 1997, up from 13,950,000 and 14,564,000 shares, respectively, for the
three months ended March 31, 1996.
Liquidity and Capital Resources
Working capital was $17,621,000 at March 31, 1997, compared to $22,570,000 at
December 31, 1996. This includes cash, cash equivalents and other short-term
investments of $2,922,000 and $2,390,000 at March 31, 1997 and December 31,
1996, respectively, and committed cash of $0 and $8,000,000 at March 31, 1997
and December 31, 1996, respectively. The $8,000,000 in committed cash and
committed capital which was outstanding at December 31, 1996 was released in
January 1997, and used to pay down long-term and convertible debt (see Note 3
to "Notes to Unaudited Consolidated Financial Statements"). Working capital
does not include the unused portion of the Company's revolving credit line.
Trade receivables decreased $1,594,000, or 9.1%, to $16,312,000 at March 31,
1997 from $17,907,000 at December 31, 1996. The decrease was due to the lower
volume of sales during the three months ended March 31, 1997, compared to the
three months ended December 31, 1996.
Page 11
<PAGE>
Operations generated $1,868,000 of cash during the three months ended March 31,
1997, compared to using $965,000 for the three months ended March 31, 1996.
Investing activities consumed $1,741,000 and $432,000 of cash during the three
months ended March 31, 1997 and 1996, respectively, consisting primarily of the
purchase of equipment and other assets. Financing activities generated
$110,000 and consumed $1,386,000 of cash during the three months ended March
31, 1997 and 1996, respectively, with activities consisting primarily of
payments on long-term debt and the sale of stock (see Note 3 to "Notes to
Unaudited Consolidated Financial Statements").
The Company has arranged a credit facility with NationsBank consisting of a
working capital revolving credit facility in the maximum principal amount of
$25,000,000. As of March 31, 1997, the Company had used approximately $13,000
of the revolving credit facility.
On March 7, 1997, the Company acquired, through its majority owned subsidiary,
Airseal West, the majority of the assets of BB&D. Assets acquired included
fixed assets, inventory and the unbilled and uncompleted portion of ongoing
orders. As consideration for such assets, the Company paid $403,000 and BB&D
received forty percent of the outstanding stock of Airseal West. Airseal West
will be located in Salt Lake City, Utah, and will manufacture specialty and
standard housings for air filtration and HVAC systems, as well as integrated
custom industrial-grade HVAC systems. It will also continue other job-shop
related activities begun by BB&D.
On January 22, 1997, the Company completed an underwritten public secondary
offering dated January 16, 1997, of 1,600,000 shares of the Company's common
stock at $9.50 per share (the "Offering"). Net proceeds to the Company after
deducting commissions and expenses from the Offering totaling approximately
$1,670,750 amounted to $13,529,250. The Company utilized the entire amount of
the proceeds from the offering to pay down long-term and convertible debt. On
January 31, 1997, the Underwriters of the Offering exercised their over-
allotment option to purchase 240,000 shares of the Company's common stock at
$9.50 per share. Net proceeds to the Company after deducting commissions and
expenses from the over-allotment totaling approximately $164,000 amounted to
$2,116,000, which were also used to pay down long-term debt. Net proceeds from
the Offering, including the over-allotment, were $15,645,250.
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 result in materially adverse
conditions for the business. 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 section, and other sections of the document, contains many
"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.
Page 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.
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 Form 10-Q will in fact occur.
The Company believes the semiconductor manufacturing industry, which accounted
for approximately 20% of its business in 1996, is in a cyclical downturn, and
that the demand for new semiconductor facilities and the related demand for the
Company's laminar flow HEPA products will be less than previous quarters
through at least the second and third quarters of 1997.
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, the amount of capital
expenditures by semiconductor manufacturers, and any adverse changes in general
economic conditions in locations where the Company does business.
The Acquisitions give the Company a broader product line of air filtration
products. As part of the integration of the Acquisitions, the Company has
adopted a strategy of increasing its market share by providing its existing
manufacturers' representatives with the Company's complete product line.
Integration of the Acquisitions 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.
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 agreements with respect to future acquisitions, but
is continuing to investigate potential acquisition opportunities. 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. In addition, there can be no assurance that any future
acquisitions will be able to be integrated successfully into the Company, given
that any future acquisitions will have been operated under different management
philosophies, management teams and marketing strategies. There can be no
assurance that the Company's systems, procedures and controls will be adequate
to accommodate integration of any future acquisitions.
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 twenty
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 $500,000 to
$1,000,000.
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<PAGE>
The Company intends to continue building capacity for production of air
filtration products, and has announced plans to expand upon or build facilities
in the Mid-West and the Asia/Pacific Basin. The Company plans to relocate its
Airpure West operations to a facility in the vicinity of Las Vegas. 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.
Page 14
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
There were no material additions to, or changes in status of, any ongoing,
threatened or pending legal proceedings during the three months ended
March 31, 1997, except for the dismissal, on January 23, 1997, without
prejudice, of a subsidiary of the Company from the following asbestos
related civil lawsuit in Colorado District Court: Tibbets v. Flanders
Filters, Inc., et al. A second asbestos-related lawsuit in Colorado
District Court, Champion v. Flanders Filters, Inc., et al., was dismissed
without prejudice on April 2, 1997.
From time to time, the Company is 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.
Item 2. Changes in Securities - None.
Item 3. Defaults Upon Senior Securities - None.
Item 4. Submission of Matters to a Vote of Security Holders - None.
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
3.1 Articles of Incorporation for Flanders Corporation, filed with the
Form 8-A dated March 8, 1996, incorporated herein by reference.
3.2 Bylaws of Flanders Corporation, filed with the Form 8-A dated March
8, 1996, incorporated herein by reference.
4.1 Form of Series A Convertible Subordinated Debentures, filed with
the September 30, 1996 Form 10-Q, incorporated herein by reference.
4.2 Form of 10% Convertible Notes, filed with the September 30, 1996
Form 10-Q, incorporated herein by reference.
10.1 Stock Purchase Agreement between Flanders Corporation and the
Shareholders of Precisionaire, Inc., filed with the Form 8-K dated
December 31, 1995, incorporated herein by reference.
10.2 Employment Agreement between Elite Acquisitions, Inc., Flanders
Filters, Inc., and Steven K. Clark, filed with the December 31,
1995 Form 10-K, incorporated herein by reference.
10.3 Stock Option Agreement between Elite Acquisitions, Inc., and Steven
K. Clark, filed with the December 31, 1995 Form 10-K, incorporated
herein by reference.
10.4 Employment Agreement between Elite Acquisitions, Inc., Flanders
Filters, Inc. and Robert R. Amerson, filed with the December 31,
1995 Form 10-K, incorporated herein by reference.
Page 15
<PAGE>
10.5 Stock Option Agreement between Elite Acquisitions, Inc. and Robert
R. Amerson, filed with the December 31, 1995 Form 10-K,
incorporated herein by reference.
10.6 Stock Option Agreement between Elite Acquisitions, Inc., and Thomas
T. Allan, filed with the December 31, 1995 Form 10-K, incorporated
herein by reference.
10.7 Stock Option Agreement between Elite Acquisitions, Inc., and
William M. Claytor, filed with the December 31, 1995 Form 10-K,
incorporated herein by reference.
10.8 Employment Agreement between Flanders Corporation, Precisionaire,
Inc., and Gustavo Hernandez, filed with Form S-1 dated October 21,
1996 (Reg. No. 333-14655) and incorporated herein by reference.
10.9 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.
10.10 Amendment to Employment Agreement between Elite Acquisitions, Inc.,
Flanders Filters, Inc., and Steven K. Clark, filed with Form S-1
dated October 21, 1996 (Reg. No. 333-14655) and incorporated herein
by reference.
10.11 Amendment to Employment Agreement between Elite Acquisitions, Inc.,
Flanders Filters, Inc., and Robert R. Amerson, filed with Form S-1
dated October 21, 1996 (Reg. No. 333-14655) and incorporated herein
by reference.
10.12 Purchase and Sale Agreement between POT Realty and Precisionaire,
Inc., filed with the September 30, 1996 Form 10-Q, incorporated
herein by reference.
10.13 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.
10.14 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.
10.15 Guaranty Agreement between Flanders Corporation and American
National Bank of Texas, filed with the September 30, 1996 Form
10-Q, incorporated herein by reference.
10.16 Change in Certifying Accountant, filed with the January 29, 1996
Form 8-K, incorporated herein by reference.
27 Financial Data Schedule.
(b) Reports on Form 8-K - None
Page 16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated this 14th day of May, 1997.
FLANDERS CORPORATION
By: /s/ Steven K. Clark
------------------------------------------
Steven K. Clark
Vice President Finance/Chief Financial Officer
and Director
Page 17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED MARCH 31, 1997, INCLUDED IN THE COMPANY'S QUARTERLY REPORT ON FORM
10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,627,699
<SECURITIES> 294,590
<RECEIVABLES> 17,866,614
<ALLOWANCES> 160,000
<INVENTORY> 10,822,173
<CURRENT-ASSETS> 34,404,345
<PP&E> 39,168,030
<DEPRECIATION> 7,641,220
<TOTAL-ASSETS> 80,033,874
<CURRENT-LIABILITIES> 15,988,576
<BONDS> 0
0
0
<COMMON> 17,906
<OTHER-SE> 50,577,218
<TOTAL-LIABILITY-AND-EQUITY> 80,033,874
<SALES> 27,866,841
<TOTAL-REVENUES> 27,866,841
<CGS> 20,863,277
<TOTAL-COSTS> 20,863,277
<OTHER-EXPENSES> 5,742,603
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 346,065
<INCOME-PRETAX> 1,250,264
<INCOME-TAX> 455,000
<INCOME-CONTINUING> 795,264
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 795,264
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
