<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 15, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
FLANDERS CORPORATION
(Exact name of registrant as specified in charter)
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<C> <C> <C>
NORTH CAROLINA 3564 13-3368271
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification Number)
</TABLE>
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 executive 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:
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<C> <C>
WILLIAM C. GIBBS WILLIAM J. SCHIFINO
SNELL & WILMER L.L.P. SCHIFINO & FLEISCHER, P.A.
111 EAST BROADWAY, SUITE 900 ONE TAMPA CITY CENTER, SUITE 2700
SALT LAKE CITY, UTAH 84111 TAMPA, FLORIDA 33602
(801) 237-1900 (813) 223-1535
</TABLE>
---------------------
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 462(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. [ ]
---------------------
CALCULATION OF REGISTRATION FEE
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AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS TO BE OFFERING PRICE AGGREGATE REGISTRATION
OF SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE FEE(1)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock....................... 7,360,000 $7.00 $51,520,000 $15,613
=====================================================================================================================
</TABLE>
(1) Includes 960,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Computed in accordance with Rule 457(c) of the Securities Act of 1933 on the
basis of the closing price of the Common Stock on September 5, 1997.
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<PAGE> 2
FLANDERS CORPORATION
CROSS-REFERENCE SHEET
(SHOWING LOCATION IN PROSPECTUS OF PART I ITEMS OF FORM S-1)
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REGISTRATION STATEMENT ITEM AND HEADING LOCATION IN PROSPECTUS
- --------------------------------------- ----------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus... Facing Page; 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............ Outside Front Cover Page; Price Range of
Common Stock; Underwriting
6. Dilution................................... Not Applicable
7. Selling Shareholders....................... Outside Front Cover Page; Principal and
Selling Shareholders
8. Plan of Distribution....................... Outside Front Cover Page; Underwriting
9. Description of Securities to be
Registered............................... Description of Capital Stock
10. Interests of Named Experts and Counsel..... Not Applicable
11. Information with Respect to the
Registrant............................... Prospectus Summary; Risk Factors; Use of
Proceeds; Price Range of Common Stock;
Dividend Policy; Capitalization; Selected
Consolidated Financial Data; Selected
Unaudited Proforma Condensed Consolidated
Statement of Operations; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Management; Certain Relationships
and Related Party Transactions; Principal
and Selling Shareholders; Description of
Capital Stock; Anti-Takeover Effects of the
Company's Articles and Bylaws; Shares
Eligible for Future Sale; Consolidated
Financial Statements
</TABLE>
<PAGE> 3
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 SEPTEMBER 15, 1997
PROSPECTUS
[LOGO]
FLANDERS CORPORATION
6,400,000 SHARES OF COMMON STOCK
------------------------
Of the 6,400,000 shares of Common Stock (the "Shares") offered hereby (the
"Offering"), 6,000,000 Shares are being sold by Flanders Corporation (the
"Company" or "Flanders") and 400,000 Shares are being sold by certain
shareholders of the Company (the "Selling Shareholders"). See "Principal and
Selling Shareholders." The Company will not receive any of the proceeds from the
sale of Shares by the Selling Shareholders.
The Company's Common Stock is quoted on the Nasdaq National Market
("Nasdaq") under the symbol "FLDR." On September 5, 1997, the last reported sale
price of the Common Stock was $7.00 per share. See "Price Range of Common
Stock."
------------------------
SEE "RISK FACTORS" ON PAGE 8 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN
FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
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 STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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==============================================================================================================
UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
PRICE TO PUBLIC DISCOUNTS(1) COMPANY(2) SHAREHOLDERS
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<S> <C> <C> <C> <C>
Per Share........................ $ $ $ $
- --------------------------------------------------------------------------------------------------------------
Total(3)......................... $ $ $ $
==============================================================================================================
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(1) Does not include additional compensation to the Representatives of warrants
entitling the Representatives to purchase up to 400,000 shares of Common
Stock (the "Representative Warrants") for a period of four years commencing
one year from the date of this Prospectus at 120% of the public offering
price per share of Common Stock. Additionally, the Company and the Selling
Shareholders have agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $700,000 payable by the Company.
(3) The Company and the Selling Shareholders have granted to the Underwriters an
option (the "Over-Allotment Option") exercisable for a period of 30 days
after the date of this Prospectus to purchase up to an additional 960,000
shares of Common Stock upon the same terms and conditions set forth above,
solely to cover over-allotments, if any. The Company and the Selling
Shareholders will each provide one-half of the Over-Allotment Option. If the
Over-Allotment Option is exercised in full, the total Price to Public,
Underwriting Discounts, Proceeds to Company and Proceeds to Selling
Shareholders 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 Raymond James & Associates, Inc., St. Petersburg, Florida, on or
about , 1997.
RAYMOND JAMES & ASSOCIATES, INC. CLEARY GULL REILAND & MCDEVITT INC.
The date of this Prospectus is , 1997.
<PAGE> 4
[ARTWORK]
Six inch green square with corporate logo in upper right corner, with
"Flanders Corporation" directly underneath, surrounded by the following
photographs:
Top of square, from left to right: Photograph of workers assembling
HEPA filters in a cleanroom at the Company's Washington, North Carolina
plant. Photograph of partially disassembled air handling unit from Airseal.
Photograph of a Gas Pak activated charcoal filtration cartridge.
Middle of square, from left to right: Photograph of several different
varieties of HEPA filters manufactured by the Company. Stylized world map,
with yellow circles indicating areas where Flanders Foreign Reps are
located, with the legend "Flanders Foreign Reps," and white text with
arrows denoting each of the Company's major facilities. Photograph of
person checking an installation of the Company's cleanroom ceiling grid for
filter leaks.
Bottom of square, from left to right: Photograph of two styles of the
Company's fluid-seal ULPA filters. Photograph of the side of an Absolute
Isolation Barrier. Photograph of several of the Company's standard-grade
filtration products. Photograph of a Precisionaire truck.
The Company intends to furnish each year to its shareholders an annual
report containing financial statements audited by its certified public
accountants. The Company may, from time to time, also furnish to its
shareholders interim reports, as determined by management.
---------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ 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 TRANSACTIONS MAY BE EFFECTED ON NASDAQ, IN THE OVER-THE-COUNTER
MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
---------------
2
<PAGE> 5
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 subsidiaries, including
Flanders Filters, Inc. ("FFI"), Air Seal Filter Housings, Inc. ("Air Seal"),
Charcoal Service Corporation ("CSC"), Precisionaire, Inc. ("Precisionaire"),
Flanders Airpure Products Company, LLC ("Airpure"), Flanders International Pte,
Ltd. ("FIL") and Airseal West, Inc. ("Airseal West") are referred to as the
"Company." Except as otherwise specified, information in this Prospectus assumes
no exercise of the Underwriters' Over-Allotment Option.
THE COMPANY
The Company designs, manufactures and markets a broad range of air
filtration products, including (i) high efficiency particulate air ("HEPA")
filters, with at least 99.97% efficiency, and absolute isolation barriers
("Absolute Isolation Barriers") for the creation of synthesized atmospheres to
control manufacturing environments and for the absolute control and containment
of contaminants and toxic gases in certain manufacturing processes, (ii)
mid-range filters for individual and commercial use, which fall under
specifications categorized by efficiency ratings established by the American
Society of Heating, Refrigeration and Air Conditioning Engineers ("ASHRAE"), and
(iii) standard-grade, low cost filters with efficiency ratings below 30% sold
typically off-the-shelf for standard residential and commercial furnace and air
conditioning applications. Approximately 55% of the Company's net sales are from
products with high replacement potential. 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 also designs and manufactures its own production
equipment to allow for highly automated manufacturing of these products.
Furthermore, the Company produces glass-based filter media for many of its
products to maintain control over the quality and composition of such media. The
Company's customers include Abbott Laboratories, Home Depot, Inc., Motorola,
Inc., Merck & Co., Inc., Upjohn Co., Wal-Mart Stores, Inc., Westinghouse
Electric Corp., and several large computer chip manufacturers.
Frost & Sullivan, a leading industry analyst, estimates that the total
domestic industrial air filtration market was approximately $960 million in 1996
and is projected to be approximately $1.02 billion in 1997. In addition,
management believes the domestic market for retail and wholesale off-the-shelf
air filters and related products used in residential and commercial HVAC
applications exceeded $500 million 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 industry goals of maintaining
productivity, and present day concerns and governmental requirements related to
employee health. In this regard, ASHRAE has also recommended certain minimum
standards for ventilation and indoor air quality. The Company believes that the
air filtration industry will continue to grow in both the industrial and
residential markets, as the use of cleanrooms is becoming essential to the
production of many electronics and pharmaceutical products, and as increased
public awareness of the benefits of indoor air quality ("IAQ") will accelerate
demand for residential filters and commercial air filtration products. By using
the Company's solutions, the air within buildings and residences may be cleansed
of impurities such as second-hand smoke, allergens and other particles which
provoke asthma, hay fever and similar health conditions. Management believes
that as public awareness of the benefits of living and working in clean
environments increases, the markets for the Company's products will further
expand.
Although the Company has specialized in high-end (HEPA) and mid-range
filters, the Company has recently positioned itself to offer to its customers a
full range of air filtration products. In 1996, the Company diversified its
product line by implementing a strategy of growth by acquisition through the
purchase of three
3
<PAGE> 6
other companies: CSC, which specializes in charcoal filtration systems for the
removal of gaseous contaminants; Air Seal, 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 through
standard-grade filters. As a result of the Company's diversified product line,
the Company expects to benefit from growth in all air filtration markets.
Due primarily to the Company's acquisitions, net sales for the year ended
December 31, 1996 increased by $34,420,000 to $73,056,000 from $38,636,000 for
the year ended December 31, 1995, representing an increase of 89.1%. Pro forma
net sales were $128,221,000 for 1996, when revenues from the acquisitions for
the full year are considered. In addition, net income increased $2,448,000 to
$3,594,000 for the year ended December 31, 1996 from approximately $1,146,000
for the prior year, representing an increase of 213.6%. Net sales for the six
months ended June 30, 1997 increased by $35,009,000 to $61,250,000 from
$26,241,000 for the six months ended June 30, 1996, representing an increase of
133.4% and net income increased $1,317,000 to $2,665,000 for the six months
ended June 30, 1997 from approximately $1,348,000 for the comparable period for
the prior year, representing an increase of 97.7%.
BUSINESS STRATEGY
The Company's business strategy is designed to enhance the Company's
presence as a manufacturer and supplier of air filtration products by increasing
its market share, expanding its markets through the introduction of new products
and improving its operating efficiency.
INCREASE MARKET SHARE
The Company intends to increase its market share by (i) continued strategic
acquisitions of synergistic businesses, (ii) taking advantage of certain
cross-selling opportunities due to a newly expanded product line, and (iii)
continued expansion both domestically and internationally.
- Strategic Acquisitions. The Company is continuously seeking and
evaluating acquisition opportunities in which the acquisition candidate
has a dominant position in a defined market and whose operating efficiency
can be improved through automation. The Company focuses on acquisition
targets which complement its existing technology, broaden its product
offerings and provide it with additional manufacturing facilities and
access to related markets. In addition, the Company seeks companies which
provide vertical integration opportunities.
- Increase Sales to Existing and New Customers. The Company sells the
majority of its products through manufacturers' representatives who
historically have only sold certain of the Company's products. With the
recent expansion of the Company's product lines through acquisition, those
representatives can now purchase from the Company a full line of air
filtration products instead of buying a mix of air filtration products
from a range of manufacturers, and thereby use the Company as a "one stop"
purchasing source. The Company will also continue to emphasize the product
quality that has allowed the Company's sales to grow in several
high-technology industries in recent years in all of its product lines.
- Domestic and International Expansion. The Company has recently
established certain facilities in the western and mid-western United
States and plans to establish other facilities in strategically located
geographical locations to increase its accessibility in various markets
and decrease shipping expenses. Additionally, the Company plans to expand
capacity at several of its existing locations to take advantage of market
demand. The Company also intends to manufacture and continue to market its
products in foreign markets. In April 1996, the Company established a
sales office in Singapore, and the Company intends to begin manufacturing
operations there by the end of 1997.
4
<PAGE> 7
EXPAND MARKET WITH NEW PRODUCTS
The Company intends to develop new markets, and products for those markets,
by applying existing technology developed for high-technology niche markets to
new applications. For each new application, the Company will first endeavor to
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 promote demand for the application
in the new target market. In the pharmaceutical industry, for example, the
Company has already focused on the need for completely isolated and secure
environments in which to manufacture certain drugs and products, and has
developed and prototyped its Absolute Isolation Barriers in partnership with
several major pharmaceutical companies. In addition, Absolute Isolation Barriers
have been successfully tested in containment systems for the manipulation of
viruses and bacteria using genetic engineering techniques. The Company has also
focused on IAQ diagnosis and solutions for industrial, commercial and
residential application. The Company intends to continue to concentrate its
efforts on these and other products with high replacement potential.
IMPROVE OPERATING EFFICIENCY
The Company intends to improve operating efficiency by increasing
automation, eliminating redundancy between facilities, deleting the duplication
of selling and administrative efforts of subsidiaries, and cross-applying
technology and expertise among subsidiaries.
- Automation. In an effort to increase gross margins, the Company recently
commenced a program to automate portions of its production lines at FFI,
Precisionaire and Airpure using technology developed at Precisionaire and
FFI. Currently, approximately 20% of the Company's production lines
incorporate the new automated equipment designs. The Company plans to
implement additional automated equipment designs into various other
production lines one at a time to minimize down time.
- Eliminate Redundancy. The Company is continuing to increase the
manufacturing 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 required lot tracking between
subsidiaries.
- Centralize Overhead Functions. The Company has begun to implement plans
to centralize and eliminate duplication of efforts of its subsidiaries in
the following areas: purchasing, production planning, shipping
coordination, marketing, accounting, personnel management, risk management
and benefit plan administration.
- 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's principal executive offices are located at 531 Flanders
Filters Road, Washington, North Carolina 27889, and its telephone number is
(919) 946-8081.
5
<PAGE> 8
THE OFFERING
Common Stock Offered by the Company... 6,000,000 shares
Common Stock Offered by the Selling
Shareholders........................ 400,000 shares
Common Stock Outstanding after the
Offering(1)........................... 24,016,103 shares
Use of Proceeds....................... New facilities, expansion and
equipping of existing facilities,
automation, repayment of debt and
general corporate purposes. See "Use
of Proceeds."
Risk Factors.......................... Prospective investors of the Shares
should carefully consider the matters
set forth herein under "Risk
Factors."
Nasdaq Symbol......................... FLDR
- ---------------
(1) Excludes (i) 960,000 shares of Common Stock that the Underwriters have the
option to purchase to cover over-allotments, if any, (ii) 7,652,920 shares
of Common Stock issuable upon exercise of outstanding stock options, (iii)
2,486,800 shares of Common Stock reserved for future issuance under the
Company's Long-Term Incentive Plan and Director Option Plan, (iv) 640,000
shares of Common Stock reserved for issuance upon conversion of certain
convertible promissory notes, (v) 175,256 shares of Common Stock issuable
upon exercise of outstanding warrants, and (vi) 400,000 shares of Common
Stock issuable upon exercise of Representative Warrants. See
"Management -- Long-Term Incentive Plan," "Management -- Director Option
Plan," "Description of Capital Stock" and "Underwriting."
6
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
--------------------------------------------- -------------------------
ACTUAL PRO FORMA(1) ACTUAL
------------------------------ ------------ -------------------------
12/30/94 12/31/95 12/31/96 12/31/96 06/30/96 06/30/97
-------- -------- -------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
SELECTED HISTORICAL OPERATIONS DATA:
Net sales............................. $26,706 $38,636 $73,056 $128,221 $26,241 $61,250
Gross profit.......................... 7,861 9,682 19,459 33,058 6,468 15,944
Operating income...................... 622 2,419 5,999 9,796 1,919 4,090
Income before income taxes............ 171 1,830 5,771 8,921 2,166 4,175
Net income (loss)..................... (5) 1,146 3,594 5,677 1,348 2,665
Earnings per weighted average common
and common equivalent shares
outstanding:
Primary............................. $ -- $ 0.12 $ 0.21 $ 0.30 $ 0.09 $ 0.12
Fully diluted....................... $ -- $ 0.12 $ 0.21 $ 0.30 $ 0.08 $ 0.12
Weighted average common and common
equivalent shares outstanding:
Primary............................. 9,693 9,832 17,042 18,745 15,252 21,680
Fully diluted....................... 9,693 9,832 18,072 20,458 15,860 22,436
</TABLE>
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(1) The unaudited pro forma statement of operations includes all 1996
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.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
----------- -----------
12/30/94 12/31/95 12/31/96 06/30/97 06/30/97(1)
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
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SELECTED HISTORICAL BALANCE SHEET DATA:
Working capital..................................... $ 349 $ 4,108 $22,570 $19,977 $ 57,098
Total assets........................................ 14,414 18,529 86,518 90,804 127,925
Long-term obligations(2)............................ 1,892 1,761 42,156 13,050 11,391
Total stockholders' equity.......................... 3,953 8,208 25,353 52,665 91,445
</TABLE>
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(1) As adjusted to reflect the receipt and initial application of the estimated
net proceeds from the sale of 6,000,000 shares of Common Stock offered
hereby at an assumed offering price of $7.00 per share.
(2) Long-term obligations includes notes payable (1996 and 1997 only), current
maturities of long-term debt, long-term debt, convertible debt and committed
capital.
7
<PAGE> 10
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.
INTEGRATION OF ACQUIRED COMPANIES
Prior to their acquisition by the Company in 1996, CSC, Air Seal and
Precisionaire operated under different management philosophies, management teams
and marketing strategies. These companies' operations are currently being
integrated into the Company's and 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. See
"Business -- Business History."
MANAGEMENT OF GROWTH
With the Company's recent acquisitions, the Company's net sales increased
by approximately 173.6% from the year ended December 30, 1994 to the year ended
December 31, 1996, and approximately 133.4% from the six months ended June 30,
1996 to the same period ended June 30, 1997. There can be no assurance that the
Company will continue to expand at this rate, or at all. Additionally, the
Company plans to continue opening new facilities and has recently opened two new
facilities. If the Company continues 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. Both the Company's growth by
acquisition and 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 and growth. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
ACQUISITION STRATEGY
The Company's strategy of growth through acquisition 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.
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 to improve operations and
output. Although the Company generally has been successful in pursuing these
acquisition targets, 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 specific agreements with respect to
future acquisitions, but is continuing to investigate potential acquisition
opportunities. See "Business -- Strategies."
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."
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<PAGE> 11
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.
TECHNOLOGICAL CHANGE; NEW PRODUCT INTRODUCTION
As of December 31, 1996, approximately 30% of the Company's net sales
resulted from sales of high-end filtration products which are especially
vulnerable to new technology development. The Company's ability to remain
competitive will depend in part upon its ability to anticipate technological
changes, to develop new and enhanced filtration systems and to 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. The Company also plans to develop
new products as part of its strategy to increase the size and customer base of
the air filtration market. There can be no assurance that the Company will be
successful in developing the new products or that any product developed will be
commercially viable. See "Business."
ACQUIRING AND MAINTAINING EQUIPMENT
The Company designs, manufactures and assembles the majority of the
automatic production equipment used in its facilities. The Company also uses
other 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 Company's recent acquisitions appear to be counter cyclical, with
a greater percentage of sales occurring in the summer months. In addition,
approximately 20% of the Company's net sales in 1996 was attributable to
high-end products sold for use in the semiconductor industry. The Company
believes that new fabricated plant construction for the semiconductor
manufacturing industry is in a periodic slowdown and that sales of high-end
products will be less than previous quarters through the end of 1997. 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.
The Company recently purchased property in Momence, County of Kankakee,
Illinois ("Illinois Property") for a new mid-range manufacturing facility. In
connection with such purchase, the Company agreed to assume all risk of
environmental liability for past, present or future conditions on the Illinois
Property other than liability for environmental problems related to ground
water. The Illinois Property had certain environmental problems which required
remediation under federal and Illinois law. The seller of the
9
<PAGE> 12
Illinois Property has worked extensively with the Illinois Environmental
Protection Agency ("IEPA") with regard to the environmental matters, and the
Company has completed Phase I and Phase II environmental surveys with respect to
the property, and it appears that the environmental matters have been resolved,
except for certain monitoring procedures required by the IEPA. However,
resolution of state issues has no effect on any potential federal or common law
claims, and there can be no assurance that such claims will not be made. See
"Business -- Legal Proceedings."
PRODUCT LIABILITY
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.
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. 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 -- Competition."
DEPENDENCE ON KEY PERSONNEL
The Company's success 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 Robert R.
Amerson, its President, Steven K. Clark, its 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 R. Amerson and Steven K. Clark. See "Management."
CONTROL BY MANAGEMENT
Immediately following the completion of the Offering, the directors and
executive officers of the Company will beneficially own approximately 48% of the
outstanding Common Stock of the Company. Such shareholders may effectively
control the business and affairs of the Company. Furthermore, Robert R. Amerson
and Steven K. Clark have options to purchase an aggregate of 5,335,035 or 87% of
the shares of Common Stock of the Company beneficially owned by A. Russell
Allan, III and Thomas T. Allan (representing approximately 22% of the Company's
outstanding shares after the Offering). Additionally, management currently owns
options, which if exercised, will result in management owning an aggregate of
approximately 61% of the outstanding Common Stock of the Company prior to the
Offering. See "Principal and Selling 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, under the terms of its revolving credit line with NationsBank,
N.A. ("NationsBank"), the Company is prohibited from paying dividends without
NationsBank's prior written consent. See "Dividend Policy."
10
<PAGE> 13
VOLATILITY OF MARKET PRICE FOR COMMON STOCK
The Company believes factors such as quarterly fluctuations in results of
operations, announcements of new orders by the Company and changes in either
earnings estimates of the Company or investment recommendations by stock market
analysts may cause the market price of the Company's stock to fluctuate, perhaps
substantially. In addition, in recent years the stock market in general has
experienced extreme price fluctuations, and such extreme price fluctuations may
continue. These broad market and industry fluctuations may adversely affect the
market price of the Company's Common Stock.
EXERCISE OF OPTIONS AND WARRANTS
As of August 29, 1997, there were stock options and warrants outstanding to
purchase an aggregate of 7,828,176 shares of the Company's Common Stock ranging
in price from $1.00 to $14.725 per share. Of the 7,828,176 options and warrants
outstanding, management owns options to purchase 6,578,600 shares of the
Company's Common Stock at prices ranging from $1.00 to $7.50. For the life of
such options and warrants, 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 and warrants remain unexercised, the terms
under which the Company could obtain additional equity financing may be
adversely affected. Moreover, the holders of such options and warrants 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 and warrants. If the options
and warrants are exercised, the interests of the Company's shareholders may be
diluted proportionately.
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS AND STATE LAW
The Company's Articles of Incorporation ("Articles") 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. See "Description
of Capital Stock." 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."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 24,016,103 shares
of Common Stock outstanding, of which 14,544,402 shares are freely tradable
without restriction under the Securities Act. The remaining 9,471,701 shares are
deemed "restricted shares" under Rule 144 of the Securities Act. All of such
shares are currently eligible or will be eligible within one year for sale
pursuant to Rule 144.
Steven R. Clark and Robert R. Amerson, officers and directors, who will
beneficially own an aggregate of 13,524,773 shares of Common Stock following the
completion of this Offering, have agreed that, for a period of 180 days after
the date of this Prospectus, they will not, without the prior written consent of
Raymond James & Associates, Inc., offer, sell, offer to sell, solicit an offer
to buy, contract to sell, pledge or grant any option to purchase or otherwise
transfer or dispose (or announce any of the foregoing) of any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock, except, in the case of the Company, for the issuance of stock
options under stock option plans in existence on the date hereof or the issuance
or sale of Common Stock by the Company upon exercise of outstanding options or
warrants to purchase Common Stock.
As of August 29, 1997, there were stock options outstanding to purchase an
aggregate of 7,652,920 shares of Common Stock, of which 7,552,320 options are
currently exercisable. Additionally, 6,617,920 of the outstanding options were
registered on a Form S-8. As a result, shares of stock issued upon exercise of
such stock options will generally be available for sale in the public market. As
of August 29, 1997, there were
11
<PAGE> 14
warrants outstanding to purchase an aggregate of 175,256 shares of Common Stock,
of which 35,256 warrants are currently exercisable, and the remaining 140,000
warrants will be exercisable in January 1998. Furthermore, additional shares of
the Company's Common Stock may be issued in connection with (i) the conversion
of the Company's 10% Convertible Notes, (ii) the exercise of Representative
Warrants, and (iii) the exchange of Airseal West Common Stock.
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 effect on the prevailing market price of the
Common Stock. See "Description of Capital Stock" and "Shares Eligible for Future
Sale."
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 automation, new plant locations and
expanding its market share of the air filtration industry, (iii) the Company's
strategy to increase the size and customer base of the air filtration market,
and (iv) the Company's ability to distinguish itself from its current and future
competitors.
These forward-looking statements are based largely on the Company's current
expectations and are subject to a number of risks and uncertainties. Actual
results could differ materially from these forward-looking statements. In
addition to the other risks described elsewhere in this "Risk Factors"
discussion, important factors to consider in evaluating such forward-looking
statements include (i) the shortage of reliable market data regarding the
filtration market, (ii) changes in external competitive market factors or in the
Company's internal budgeting process which might impact trends in the Company's
results of operations, (iii) anticipated working capital or other cash
requirements, (iv) changes in the Company's business strategy or an inability to
execute its strategy due to unanticipated changes in the market, (v) product
obsolescence due to the development of new technologies, and (vi) various
competitive factors that may prevent the Company from competing successfully in
the marketplace. In light of these risks and uncertainties, many of which are
described in greater detail elsewhere in this "Risk Factors" discussion, there
can be no assurance that the events contemplated by the forward-looking
statements contained in this Prospectus will in fact occur.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 6,000,000 Shares
offered hereby, at an assumed public offering price of $7.00 per Share, are
estimated to be approximately $38,780,000 (approximately $41,938,000 if the
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 by the Selling
Shareholders. See "Principal and Selling Shareholders."
The Company's acquisition strategy has been to acquire companies with the
intent of improving the efficiency, output and capacity of each acquired company
through modernizing facilities and repairing and replacing outdated and
inefficient equipment. This strategy, combined with the Company's internal
expansion, requires continuing capital investment. Consequently, the Company
intends to use approximately $12 million of the net proceeds for new plants and
equipment, approximately $8 million to expand and equip existing facilities,
approximately $10 million of the net proceeds to automate facilities and
approximately $6 million of the net proceeds to purchase or develop and install
equipment at certain of the Company's mid-range manufacturing facilities.
Additionally, the net proceeds will be used to pay off the Company's credit line
(prime plus 1% revolving credit agreement due September 1998) with NationsBank,
which had an outstanding balance of approximately $1,659,000, bearing interest
at the rate of 9.50% per annum, as of June 30, 1997. Any funds remaining will be
used for working capital and general corporate purposes.
12
<PAGE> 15
Pending the 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.
If the Company does not use all of the net proceeds from the Offering in
the manner described above, the remaining net proceeds will be available for
working capital; however, the Company believes that it has sufficient funds
available for working capital from operations and cash on hand to continue the
operations of the Company for the foreseeable future. In addition to the net
proceeds raised in this Offering, in order for the Company to continue its
acquisition strategy, substantial additional debt or equity financing may be
needed.
PRICE RANGE OF COMMON STOCK
The following table sets forth, for the periods indicated, the high and low
closing prices of the Company's Common Stock as reported by the Nasdaq National
Market, the Nasdaq Small-Cap Market and OTC Bulletin Board. Such quotations do
not include retail mark-ups, mark-downs, or other fees or commissions. The
Company was listed on the Nasdaq National Market on November 11, 1996. Prior to
that time, the Company's Common Stock was traded on the Nasdaq Small-Cap Market
from April 8, 1996 to November 8, 1996. From February 27, 1996 through April 7,
1996, the Company=s Common Stock was listed on the OTC Bulletin Board. Prior to
February 27, 1996, there was no public market in the Company's Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
FISCAL YEAR 1996
First Quarter ended March 31, 1996.......................... $ 5.00 $2.50
Second Quarter ended June 30, 1996.......................... 10.00 5.00
Third Quarter ended September 30, 1996...................... 10.50 9.00
Fourth Quarter ended December 31, 1996...................... 10.25 8.75
FISCAL YEAR 1997
First Quarter ended March 31, 1997.......................... $12.00 $9.38
Second Quarter ended June 30, 1997.......................... 9.88 5.88
Third Quarter (through September 5, 1997)................... 8.25 6.75
</TABLE>
On September 5, 1997, the closing price for the stock was $7.00. As of
September 5, 1997, there were approximately 400 holders of record of the
Company's Common Stock; the Company estimates there are in excess of 600
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 future earnings to finance
the growth and development of 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 in light of the Company's earnings,
financial position, capital requirements and such other factors as the Board
deems relevant. Under the terms of its revolving credit line with NationsBank,
the Company cannot pay dividends without the prior written consent of
NationsBank.
13
<PAGE> 16
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at June 30, 1997, and as adjusted to reflect the use of the net proceeds
of this Offering as described under "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
------------------------
ACTUAL AS ADJUSTED(1)
------- --------------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term obligations, including notes
payable................................................... $ 594 $ 594
Long-term debt, less current portion........................ 9,256 7,597
Convertible debt............................................ 3,200 3,200
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, 18,016,103 shares issued and outstanding(1);
24,016,103 shares issued and outstanding as
adjusted(1)(2)......................................... 18 24
Additional paid-in capital................................ 41,609 80,383
Retained earnings......................................... 11,038 11,038
------- --------
Total stockholders' equity........................ 52,665 91,445
------- --------
Total capitalization.............................. $65,715 $102,836
======= ========
</TABLE>
- ---------------
(1) Excludes (i) 960,000 shares of Common Stock that the Underwriters have the
option to purchase to cover over-allotments, if any, (ii) 7,652,920 shares
of Common Stock issuable upon exercise of outstanding stock options, (iii)
2,486,800 shares of Common Stock reserved for future issuance under the
Company's Long-Term Incentive Plan and Director Option Plan, (iv) 640,000
shares of Common Stock reserved for issuance upon conversion of certain
convertible promissory notes, (v) 175,256 shares of Common Stock issuable
upon exercise of outstanding warrants, and (vi) 400,000 shares of Common
Stock issuable upon exercise of Representative Warrants. See
"Management -- Long-Term Incentive Plan," "Management -- Director Option
Plan," "Description of Capital Stock" and "Underwriting."
(2) As adjusted to reflect the receipt and initial application of the estimated
net proceeds from the sale of 6,000,000 Shares offered hereby at an assumed
offering price of $7.00 per Share.
14
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE 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 31, 1992, December 31, 1993,
December 30, 1994, December 31, 1995 and December 31, 1996 have been derived
from the audited consolidated financial statements of the Company which were
audited by McGladrey & Pullen, LLP, independent auditors. The selected
consolidated financial data for the six months ended June 30, 1996 and June 30,
1997 have been derived from the Company's unaudited financial statements, which,
in the opinion of management, reflect all adjustments which are of a normal
recurring nature necessary for a fair presentation of the results of operations
for such periods. The results of the interim period are not necessarily
indicative of the results of a full year.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
---------------------------------------------------- -------------------------
12/31/92 12/31/93 12/30/94 12/31/95 12/31/96 06/30/96 06/30/97
-------- -------- -------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED HISTORICAL OPERATIONS
DATA:
Net sales........................ $20,757 $20,569 $26,706 $38,636 $73,056 $26,241 $61,250
Cost of goods sold............... 14,682 14,065 18,845 28,953 53,597 19,774 45,306
Gross profit..................... 6,075 6,504 7,861 9,682 19,459 6,468 15,944
Operating expenses............... 5,411 6,695 7,239 7,263 13,460 4,548 11,853
Operating income................. 915 356 622 2,419 5,999 1,919 4,090
Income before income taxes....... 451 25 171 1,830 5,771 2,166 4,175
Income taxes..................... 207 15 176 685 2,178 818 1,510
Income (loss) from continuing
operations..................... 244 10 (5) 1,146 3,594 1,348 2,665
Cumulative effect of accounting
changes........................ -- 307 -- -- -- -- --
Extraordinary items.............. 89 -- -- -- -- -- --
Net Income (loss)................ $ 333 $ 317 $ (5) $ 1,146 $ 3,594 $ 1,348 $ 2,665
Earnings from continuing
operations per weighted average
common and common equivalent
shares outstanding:
Primary........................ $ 0.03 $ -- $ -- $ 0.12 $ 0.21 $ 0.09 $ 0.12
Fully diluted.................. $ 0.03 $ -- $ -- $ 0.12 $ 0.21 $ 0.08 $ 0.12
Earnings per weighted average
common and common equivalent
shares outstanding(1):
Primary........................ $ 0.03 $ 0.03 $ -- $ 0.12 $ 0.21 $ 0.09 $ 0.12
Fully diluted.................. $ 0.03 $ 0.03 $ -- $ 0.12 $ 0.21 $ 0.08 $ 0.12
Weighted average common and
common equivalent shares
outstanding:
Primary........................ 9,654 9,654 9,693 9,832 17,042 15,252 21,680
Fully diluted.................. 9,654 9,654 9,693 9,832 18,072 15,860 22,436
</TABLE>
- ---------------
(1) Supplemental Earnings Per Share. Assuming the Offering and the repayment of
debt from the proceeds thereof had occurred on January 1, 1997, net income
for the six months ended June 30, 1997, would have been approximately
$2,710,000, or $0.12 per share ($0.12 per share fully diluted), on
21,937,629 (22,692,219 fully diluted) common and common equivalent shares
outstanding. Assuming the Offering and the repayment of debt from the
proceeds thereof had occurred on January 1, 1996, net income for the twelve
months ended December 31, 1996, would have been approximately $3,683,000, or
$0.21 per share ($0.20 per share fully diluted), on 17,298,610 (18,328,950
fully diluted) common and common equivalent shares outstanding.
<TABLE>
<CAPTION>
12/31/92 12/31/93 12/30/94 12/31/95 12/31/96 06/30/97
-------- -------- -------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
SELECTED HISTORICAL BALANCE SHEET DATA:
Working capital............................. $ 788 $ 675 $ 349 $ 4,108 $22,570 $ 19,977
Total assets................................ 11,026 12,213 14,414 18,529 86,518 90,804
Long-term obligations(1).................... 2,258 1,803 1,892 1,761 42,156 13,050
Total stockholders' equity.................. 3,612 3,967 3,953 8,208 25,353 52,665
</TABLE>
- ---------------
(1) Long-term obligations includes notes payable (1996 and 1997 only), current
maturities of long-term debt, long-term debt, convertible debt and committed
capital.
15
<PAGE> 18
SELECTED UNAUDITED PRO-FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
The Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the year ended December 31, 1996 presents the combined results of the Company as
though the acquisitions of Precisionaire, CSC and Air Seal (the "Acquisitions")
had occurred at January 1, 1996, and includes 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 due to non-recurring salaries
paid to former shareholders of the acquired companies. The Unaudited Pro Forma
Condensed Consolidated Statement of Operations is presented for informational
purposes only and does not purport to represent what the results of operations
for the year ended December 31, 1996 would have been had the Acquisitions, in
fact, occurred at January 1, 1996, or project the results of operations for any
future period. The Acquisitions have been accounted for as "purchases" for
accounting and reporting purposes.
FISCAL YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRE-ACQUISITION PRO FORMA PRO
HISTORICAL ADJUSTMENTS FORMA PRO FORMA
HISTORICAL CSC & CSC & W/CSC & HISTORICAL PRECISIONAIRE TOTAL
COMPANY AIR SEAL AIR SEAL AIR SEAL PRECISIONAIRE ADJUSTMENTS PRO FORMA
---------- --------------- ----------- ---------- ------------- ------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales................... $73,056 $2,203 $ -- $75,259 $52,962 $ -- $128,221
Cost of goods sold.......... 53,597 1,681 -- 55,278 39,885 -- 95,163
------- ------ ---- ------- ------- ----- --------
Gross profit.............. 19,459 522 -- 19,981 13,077 -- 33,058
General and administrative
expenses.................. 13,460 481 (67)(1) 13,874 9,874 (486)(2) 23,262
------- ------ ---- ------- ------- ----- --------
Operating income............ 5,999 41 67 6,107 3,203 486 9,796
Nonoperating income
(expense):
Interest income........... -- 1 -- 1 -- -- 1
Other income.............. 975 7 -- 982 418 -- 1,400
Interest expense.......... (1,203) (3) -- (1,206) (212) (858)(3) (2,276)
------- ------ ---- ------- ------- ----- --------
(228) 5 -- (223) 206 (858) (875)
------- ------ ---- ------- ------- ----- --------
Income before income
taxes..................... 5,771 46 67 5,884 3,409 (372) 8,921
Income taxes................ 2,177 19 25 2,221 1,163 (140) 3,244
------- ------ ---- ------- ------- ----- --------
Net income................ $ 3,594 $ 27 $ 42 $ 3,663 $ 2,246 $(232) $ 5,677
======= ====== ==== ======= ======= ===== ========
Earnings per weighted
average common and common
equivalent shares
outstanding:
Primary................... $ 0.21 $ 0.30
======= ========
Fully diluted............. $ 0.21 $ 0.30
======= ========
Weighted average common and
common equivalent shares
outstanding:
Primary................... 17,042 1,703(4) 18,745
======= ===== ========
Fully diluted............. 18,072 2,386(4) 20,458
======= ===== ========
</TABLE>
- ---------------
(1) Consists of $21,542 and $22,396 of additional depreciation for the write-up
of fixed assets to market value of Air Seal and CSC, respectively; $9,000
and $1,877 of additional amortization of goodwill for Air Seal and CSC,
respectively; $33,315 and $43,314 of reduced rents due to property acquired
as part of the acquisition of Air Seal and CSC, respectively; and $44,718 of
non-recurring compensation paid to a shareholder of Air Seal not actively
involved in the business, whose position was contractually removed in the
purchase agreement with the intent that no replacement would be hired for
the position. Adjustments are for five months and three months of operations
prior to the acquisition of Air Seal and CSC, respectively. The Company
recognized $1,173,750 and $716,179 of goodwill with respect to the
acquisition of Air Seal and CSC, respectively. Goodwill for both
transactions is being amortized on a straight-line basis over 40 years.
16
<PAGE> 19
(2) Consists of $374,840 of additional depreciation due to write-up of fixed
assets to market value, $126,947 of additional amortization of write-up of
intangible assets to market value and goodwill from the acquisition of
Precisionaire, $273,067 of reduced rental expense to reflect the purchase of
the Terrell, Texas facility, and $714,415 of reduced compensation expense to
reflect the non-recurring salaries of previous Precisionaire shareholders,
whose positions were contractually removed in the purchase agreement with
the stated intent that no replacements would be hired. The Company
recognized $9,534,286 of goodwill with respect to the acquisition of
Precisionaire. Goodwill from the acquisition of Precisionaire is being
amortized on a straight-line basis over 40 years.
(3) Interest was calculated by assuming that the Acquisitions and the financings
had been completed, and the NationsBank credit facility had been in place at
January 1, 1996. The interest rates used were the weighted average prime
rate for NationsBank (8.5%) over the year plus 1.5% and 1.0% for the
$6,500,000 term loan and the $25,000,000 revolving credit line,
respectively; 10.0% for the 10% Convertible Notes; and 18.0% for the Series
A Convertible Subordinated Debentures.
(4) Assuming that the shares issued in the private offerings and the
Acquisitions were issued on January 1, 1996, leads to the following
increases in weighted average common and common equivalent shares
outstanding:
<TABLE>
<CAPTION>
INCREASE IN
NUMBER OF SHARES
-------------------------
TRANSACTION PRIMARY FULLY DILUTED
----------- --------- -------------
<S> <C> <C>
Private placement of 500,000 shares completed on January 24,
1996...................................................... 32,787 32,787
Purchase of CSC............................................. -0- 41,530
Private placement of 1,537,000 shares completed on June 3,
1996...................................................... 650,915 650,915
Purchase of Air Seal........................................ -0- 68,443
Purchase of Precisionaire................................... -0- 573,393
Private placement of 900,000 shares completed on September
30, 1996.................................................. 673,770 673,770
Private placement of 434,000 shares completed on October 17,
1996...................................................... 345,066 345,066
--------- ---------
1,702,538 2,385,904
========= =========
</TABLE>
17
<PAGE> 20
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," and the Company's Consolidated Financial
Statements and the notes thereto, all included elsewhere herein. The information
set forth in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations" includes forward-looking statements that involve
risks and uncertainties. Many factors could cause actual results to differ
materially from those contained in the forward-looking statements below. See
"Risk Factors -- Forward-Looking Statements and Associated Risks."
OVERVIEW
The Company is a full-range air filtration product company engaged in
designing, manufacturing and marketing high performance, mid-range and
standard-grade air filtration products and certain related products and
services. The Company focuses on those products with high replacement potential.
The Company designs and manufactures its own production equipment and also
produces glass-based media for many of its products. During 1996 and the first
quarter of 1997, the Company experienced significant growth from the acquisition
of other air filtration related companies. The Company acquired both CSC and Air
Seal as of May 31, 1996 and Precisionaire as of September 30, 1996. CSC
specializes in the manufacture of high-end charcoal filters and containment
environments, and has a service arm. Air Seal 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 Company also established two new subsidiaries in 1996: FIL and Airpure
Products West, Inc. ("Airpure West"). FIL is a Singapore-based sales and
marketing subsidiary marketing the Company's products to customers in the
Pacific Rim. In 1997, Airpure West's operations were moved to the Company's
newly opened Henderson, Nevada, manufacturing and distribution facility. As of
March 1997, the Company acquired the majority of the assets of Intermountain
Paint and Sub-Assembly, Inc. and BB&D Manufacturing, Inc. (collectively "BB&D")
and placed them in a newly formed, majority owned subsidiary, Airseal West.
Airseal West sells, manufactures and distributes specialty and standard air
filter housings and HVAC systems in the western United States. 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 expected from upgrading and integrating the acquired businesses
into the Company's operations. There can be no guarantee that the Company will
be able to achieve these objectives and gains in efficiency. The Company
believes the Acquisitions will have a positive impact on its future results of
operations.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
The following table summarizes the Company's results of operations as a
percentage of net sales for the six months ended June 30, 1997 and 1996 (dollars
in thousands).
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------------
JUNE 30, 1997 JUNE 30, 1996
--------------- ---------------
<S> <C> <C> <C> <C>
Net sales................................................... $61,250 100.0% $26,241 100.0%
Gross profit................................................ 15,944 26.0 6,468 24.6
Operating expenses.......................................... 11,853 19.4 4,548 17.3
Operating income............................................ 4,090 6.7 1,919 7.3
Income before income taxes.................................. 4,175 6.8 2,166 8.3
Income taxes................................................ 1,510 2.5 818 3.1
Net income.................................................. 2,665 4.4 1,348 5.1
</TABLE>
Net sales: Net sales for the six months ended June 30, 1997 increased by
$35,009,000, or 133.4%, to $61,250,000 from $26,241,000 for the six months ended
June 30, 1996. The increase was primarily due to the
18
<PAGE> 21
Acquisitions and establishment of new subsidiaries, which contributed
approximately $40,681,000 of net sales. Comparable sales from the Company's
business at June 30, 1997, which included the operations of FFI, CSC and Airpure
were down approximately $5,695,000, or 21.9%, compared to the prior year period.
The Company attributes this decrease to a cyclical slowdown in capital spending
for new semiconductor facilities.
Gross Profit: Gross profit for the six months ended June 30, 1997
increased by $9,476,000, or 146.5%, to $15,944,000, which represented 26.0% of
net sales, from $6,468,000, which represented 24.6% of net sales for the six
months ended June 30, 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 switching lines
between products, (ii) eliminated individual lot inventory tracking at the
Company's Washington, North Carolina 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, North
Carolina, (iii) the automation of additional production lines at several
Precisionaire facilities, and (iv) 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
newly started subsidiaries and differences in timing of orders and product mix
during the respective periods.
Operating expenses: Operating expenses for the six months ended June 30,
1997 increased by $7,305,000, or 160.6%, to $11,853,000, representing 19.4% of
net sales, from $4,548,000, representing 17.3% of net sales, for the six months
ended June 30, 1996. The primary reasons for the overall increase in operating
expenses were the Acquisitions and the establishment of new subsidiaries, which
accounted for an increase of $7,192,000 compared to the prior year period.
Operating expenses increased as a percentage of net sales compared to the prior
year period, primarily because FFI's sales volume was down compared to the prior
year period while its operating expenses remained relatively flat.
Net income: Net income for the six months ended June 30, 1997 increased by
$1,317,000, or 97.7%, to $2,665,000, or $0.12 per share, from $1,348,000, or
$0.09 per share, for the six months ended June 30, 1996.
Fiscal Year Ended December 31, 1996 Compared to Fiscal Year Ended December 31,
1995
The following table summarizes the Company's results of operations as a
percentage of net sales for the fiscal years ended December 31, 1996 and 1995
(dollars in thousands).
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------------------------
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------------------- -----------------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............................... $73,056 100.0% $128,221 100.0% $38,636 100.0% $107,984 100.0%
Gross profit............................ 19,459 26.6 33,058 25.8 9,682 25.1 26,939 24.9
Operating expenses...................... 13,460 18.4 23,262 18.1 7,263 18.8 20,438 18.9
Operating income ....................... 5,999 8.2 9,796 7.6 2,419 6.3 6,642 6.2
Income before income taxes.............. 5,771 7.9 8,921 7.0 1,830 4.7 4,501 4.2
Income taxes............................ 2,177 3.0 3,244 2.5 684 1.8 1,782 1.7
Net income.............................. 3,594 4.9 5,677 4.4 1,146 3.0 2,719 2.5
</TABLE>
To aid in the evaluation of the effect of the Acquisitions, certain pro
forma financial information has been included in the text of this discussion;
this pro forma information has been prepared by combining the historical results
of operations of the various subsidiaries as though the Acquisitions had
occurred at January 1, 1995, and includes adjustments directly attributable to
the Acquisitions, such as additional depreciation from the write-up of assets to
market value from book value, 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 account for the elimination of non-recurring
salaries paid to former shareholders of the acquired companies. These figures
are presented herein for informational purposes only, and do not purport to
represent the operations of the Company had the Acquisitions, in fact, occurred
on January 1, 1995.
19
<PAGE> 22
Net Sales: Net sales for 1996 increased by $34,420,000, or 89.1%, to
$73,056,000, from $38,636,000 for 1995. The increase in net sales was due to (i)
the Acquisitions, which contributed approximately $23,360,000 of net sales, (ii)
two new subsidiaries, Airpure West and FIL, whose combined sales accounted for
$1,570,000 of the increase, and (iii) the Company's success in attracting work
and expanding its original core business, which grew by approximately 24.6%
between 1996 and 1995 and contributed an additional $9,490,000 to net sales.
Examining the Company on a pro forma basis by adding the operating results of
the acquired companies as though the Acquisitions had been completed on January
1, 1995, combined net sales would have increased $20,237,000, or 18.7%, to
$128,221,000 for 1996, compared to $107,984,000 for 1995. This increase is due
to the success of each of the Company's subsidiaries in capturing additional
market share and increasing production.
Gross Profit: Gross profit for 1996 increased $9,777,000, or 101.0%, to
$19,459,000, which represented 26.6% of net sales, compared to $9,682,000, which
represented 25.1% for 1995. Considered on a pro forma basis by adding the
operating results of the acquired companies as though the Acquisitions had been
completed on January 1, 1995, pro forma gross profit for 1996 increased
$6,119,000, or 22.7%, to $33,058,000, which represented 25.8% of pro forma net
sales, compared to $26,939,000, which represented 24.9% of pro forma net sales
for 1995. 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 switching lines between products,
(ii) eliminated individual lot inventory tracking at the Company's Washington,
North Carolina 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, North Carolina, and
(iii) reduced training and coordination time at each location as a result of
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 low profit margins from the newly started
subsidiaries Airpure West and FIL, which averaged 9.3% of their net sales, and
the Company's ongoing automation project for stock product lines.
Operating Expenses: Operating expenses during 1996 increased $6,197,000,
or 85.3% to $13,460,000, representing 18.4% of net sales, compared to $7,263,000
for 1995, which represented 18.8% of net sales. The majority of the increase in
operating expenses was due to the Acquisitions, which accounted for $5,306,000
of the increase. Other factors increasing 1996 operating expenses compared to
1995 include increased commissions resulting from increased sales and costs
associated with the establishment of Airpure West and FIL, which averaged 41.1%
of their net sales.
Net Income: Net income for 1996 increased $2,448,000, or 213.6%, to
$3,594,000, or $0.21 per share, compared to $1,146,000, or $0.12 per share, for
1995. Considered on a pro forma basis, as though the Acquisitions had been
completed on January 1, 1995, pro forma net income for 1996 increased
$2,959,000, or 108.8%, to $5,678,000, or $0.30 per share, compared to
$2,719,000, or $0.20 per share, for 1995.
Fiscal Year Ended December 31, 1995 Compared to Fiscal Year Ended December 30,
1994
The following table summarizes the Company's results of operations as a
percentage of net sales for the fiscal years ended December 31, 1995 and
December 30, 1994 (dollars in thousands).
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------
DECEMBER 31, 1995 DECEMBER 30, 1994
------------------ ------------------
<S> <C> <C> <C> <C>
Net sales............................................... $38,636 100.0% $26,706 100.0%
Gross profit............................................ 9,682 25.1 7,861 29.4
Operating expenses...................................... 7,263 18.8 7,239 27.1
Operating income........................................ 2,419 6.3 622 2.3
Income before income taxes.............................. 1,830 4.7 171 0.6
Income taxes............................................ 684 1.8 176 0.7
Net income.............................................. 1,146 3.0 (5) --
</TABLE>
20
<PAGE> 23
Net Sales: Net sales for 1995 increased by $11,930,000, or 44.7% to
$38,636,000 compared to $26,706,000 in 1994. This increase was due primarily to
increased overall demand for the Company's products, several large contracts for
end users, building facilities for semiconductor manufacturing, and
approximately $4,500,000 of increased net sales from Airpure, a subsidiary
established in 1994.
Gross Profit: Gross profit for 1995 represented 25.1% of net sales,
compared to 29.4% 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 decrease in gross profit margin percentage and (ii) a price
increase in an essential component of the filtration media caused by resource
scarcity which 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 has also increased. Other
normal fluctuations in materials prices and product mix accounted for the
remainder of the change in gross margin percentage.
Operating Expenses: Operating expenses during 1995 increased 0.3% to
$7,263,000, representing 18.8% of net sales, compared to $7,239,000 in 1994,
which represented 27.1% of net sales. 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 "Certain Relationships and Related Party
Transactions." 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 26.5% of net sales, during 1994, income tax expense would have
increased approximately $146,000 and $58,000, respectively, and total
stockholders' equity would have decreased approximately $204,000 and $58,000,
respectively.
Net Income (Loss): Net income for 1995 was $1,146,000, or $0.12 per share,
compared to a net loss of $5,000, or $0.00 per share, for 1994. Net income was
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.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $19,977,000 at June 30, 1997. This includes cash, cash
equivalents and other short-term investments of $2,635,000.
Trade receivables increased $2,936,000, or 16.4%, to $20,843,000 at June
30, 1997 from $17,907,000 at December 31, 1996. The increase was due to the
greater volume of sales during the period ended June 30, 1997. The majority of
the Company's sales are on terms ranging from 30 to 90 days, and the typical
days outstanding for payment of the Company's invoices ranges from 65 to 90
days.
Net cash provided by operating activities was $1,613,000 for the year ended
December 31, 1996, and the Company's investing activities consumed $33,028,000.
The investing activities primarily included the Company's acquisitions of CSC,
Air Seal and Precisionaire. Net cash provided by financing activities for the
year ended December 31, 1996 aggregated $30,832,000, primarily from private
placements of the Company's Common Stock, incurrence of debt and the issuance of
convertible debentures.
Net cash provided by operating activities was $3,208,000 for the six months
ended June 30, 1997, and the Company's investing activities consumed $7,082,000.
The investing activities included (i) the Company's acquisition, through its
majority owned subsidiary, Airseal West, of the majority of the assets of BB&D
and (ii) the purchase of equipment for certain of the Company's manufacturing
facilities. Net cash provided by
21
<PAGE> 24
financing activities for the six months ended June 30, 1997, was $3,825,000,
resulting primarily from proceeds from the Company's underwritten public
offering dated January 16, 1997, of 1,840,000 shares of the Company's Common
Stock at $9.50 per share and the use of such proceeds to pay down long-term and
convertible debt. Net proceeds to the Company after deducting commissions and
expenses from the offering totaling approximately $1,884,000 amounted to
$15,596,000.
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 which bears interest at the prime rate as established by
NationsBank, plus 1% per annum and any outstanding balance is due and payable in
full on September 30, 1998. The revolving credit facility is secured by
substantially all of the Company's assets. As of June 30, 1997, the Company had
used approximately $1,659,000 of the revolving credit facility.
Continuing expansion of the Company will require substantial 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. Failure to obtain sufficient capital could materially adversely impact
the Company's acquisition strategy.
The Company recently purchased the Illinois Property for a new mid-range
manufacturing facility. The Company agreed to assume all risk of environmental
liability for past, present or future conditions on the Illinois Property except
liability related to ground water environmental problems. The Illinois Property
had certain environmental problems which required remediation under federal and
Illinois law. The seller of the Illinois Property has worked extensively with
the IEPA with regard to the environmental matters, and the Company has completed
both a Phase I and a Phase II environmental survey with respect to the property,
and it appears that the environmental matters have been resolved, except for
certain monitoring procedures required by the IEPA. However, resolution of state
issues has no effect on any potential federal or common law claims, and there
can be no assurance that such claims will not be made.
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.
Approximately 20% of the Company's net sales in 1996 were from high-end
products sold for use in the semiconductor industry. The Company believes that
new fabricated plant construction for the semiconductor manufacturing industry,
which typically occurs in large phases as new manufacturing capacity is brought
on line, is in a periodic slowdown. As such, the demand for the Company's
laminar flow HEPA products will be less than previous quarters through at least
the third and fourth quarters of 1997.
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 20% of
the Company's production 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 automation of its facilities will be approximately $10,000,000.
See "Use of Proceeds."
22
<PAGE> 25
The Company intends to continue increasing building capacity for production
of air filtration products, and has announced plans to expand upon or build
facilities in the Asia/Pacific Basin. The Company has recently relocated its
Airpure West operations to a facility in Henderson, Nevada. Additionally, the
Company has recently opened a manufacturing facility in the Chicago area. 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.
The Company intends to develop new markets and products for those 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. The Company has established the Absolute Isolation Division and
the Integrated Environmental Control Division to focus on (i) methods to
manufacture pharmaceutical and other products in synthesized atmospheres and
completely isolated and secure environments using Absolute Isolation Barriers
and (ii) IAQ diagnosis and solutions for commercial and public buildings and for
residential application. The Company believes there will be an increase in
interest in Absolute Isolation Barriers in the future because these products
prevent cross-contamination between different products and different lots of the
same product being manufactured at the same facility, as well as increase
production yields. Additionally, the Company believes there is an increase in
public concern regarding the effects of IAQ on employee productivity, as well as
an increase in interest in standards for detecting and solving IAQ problems. The
Company will continue to concentrate its efforts on these and other products
with high replacement potential.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." This
statement establishes new standards for computing and presenting earnings per
share and simplifies the standards for computing earnings per share previously
found in APB No. 15, "Earnings Per Share" and makes them comparable to
international earnings per share standards. It replaces the presentation of
primary earnings per share with a presentation of basic earnings per share. It
also requires dual presentation of basic and diluted earnings per share for all
entities with complex capital structures. Basic earnings per share excludes
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted earnings per share is computed similarly
to fully diluted earnings per share pursuant to APB 15. This statement is
effective for financial statements issued for periods ending after December 15,
1997 and does not allow early application. The Company will adopt SFAS 128 in
the fourth quarter of 1997 which will require restatement of all prior-period
earnings per share data presented. The Company believes that this standard will
not have a material adverse effect on the Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. Comprehensive income is the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from nonowner sources. This statement is effective for fiscal years beginning
after December 15, 1997. Reclassification of the Company's financial statements
for earlier periods provided for comparative purposes will be required. The
Company believes that this standard will not have a material adverse effect on
the Company's financial statements.
23
<PAGE> 26
BUSINESS
OVERVIEW
The Company designs, manufactures and markets a broad range of air
filtration products, including (i) high-end (HEPA) filters, with at least 99.97%
efficiency, and Absolute Isolation Barriers for the creation of synthesized
atmospheres to control manufacturing environments and for the absolute control
and containment of contaminants and toxic gases in certain manufacturing
processes, (ii) mid-range filters for individual and commercial use, which fall
under specifications which are categorized by efficiency ratings established by
ASHRAE, and (iii) standard-grade, low cost filters with efficiency ratings below
30% sold typically off-the-shelf for standard residential and commercial furnace
and air conditioning applications. Approximately 55% of the Company's net sales
are from products with high replacement potential. The Company's air filtration
products are utilized by many industries, including those associated with
commercial and HVAC systems, semiconductor manufacturing, ultra-pure materials,
biotechnology, pharmaceuticals, synthetics, nuclear power and nuclear materials
processing. The Company also designs and manufactures its own production
equipment to allow for highly automated manufacturing of these products.
Furthermore, the Company produces glass-based filter media for many of its
products to maintain control over the quality and composition of such media. The
Company's customers include Abbott Laboratories, Home Depot, Inc., Motorola,
Inc., Merck & Co., Inc., Upjohn Co., Wal-Mart Stores, Inc., Westinghouse
Electric Corp., and several large computer chip manufacturers.
Although the Company historically has specialized in HEPA and mid-range
filters, the Company has positioned itself to offer to its customers a full
range of air filtration products. As a result of the Acquisitions and its
operation of various subsidiaries, the Company has the ability to design,
manufacture and market high-end, mid-range and standard-grade air filtration
products and related equipment and hardware. The Company's business strategy is
designed to enhance the Company's presence as a manufacturer and supplier of air
filtration products by (i) increasing the Company's market share, (ii) expanding
the Company's market through the introduction of new products, and (iii)
improving operating efficiencies. The Company intends to increase market share
by continued strategic acquisitions of synergistic businesses, by taking
advantage of certain cross-selling opportunities due to a newly expanded product
line, and by continued expansion both domestically and internationally. The
Company intends to develop new markets, and products for those markets, by
applying existing technology developed for high-technology niche markets to new
applications. The Company intends to improve operating efficiency through
increasing automation and by eliminating redundancy between facilities, by
deleting the duplication of selling and administrative efforts of subsidiaries,
and by cross-applying technology and expertise among subsidiaries.
INDUSTRY BACKGROUND
Frost & Sullivan, a leading industry analyst, estimates that the total
domestic industrial air filtration market was approximately $960 million in 1996
and is projected to be approximately $1.02 billion in 1997. Additionally,
management believes the domestic market for retail and wholesale off-the-shelf
air filters and related products used in residential and commercial HVAC
applications exceeded $500 million 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 industry goals of maintaining
productivity and present day concerns and governmental requirements related to
employee health. 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.
Air filtration products are used in many different applications, including
the following:
Industrial. Air filtration products are used in standard industrial
settings to provide cleaner work environments; for example, auto makers use
air filtration systems 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.
24
<PAGE> 27
Semiconductor Manufacturing. 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.
Pharmaceutical. Pharmaceutical companies are increasingly using
cleanrooms to prevent cross-contamination between different products and
different lots of the same products being manufactured at the same
facility.
Biotechnology. Containment systems for the manipulation of viruses
and bacteria using genetic engineering techniques are critical to the
biotechnology industry.
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 encourage an increased awareness of the benefits of the use of
air filtration products. Some of these trends and changes are:
Indoor Air Quality and Health. The Company believes there is an
increase in public concern regarding the effects of IAQ on employee
productivity and health, as well as an increase in interest in standards
for detecting and solving IAQ problems. For example, ASHRAE has recently
recommended certain minimum standards for ventilation and indoor air
quality for commercial and industrial settings. The Company has had success
with prototype projects in luxury hotels combining air quality and flow
evaluation and diagnosis with IAQ units which incorporate HEPA filters and
certain bonded charcoal technology. The units cleanse impurities such as
second-hand smoke, allergens and particles which provoke asthma, hay fever
and similar health conditions. The Company believes these units may be used
in many different applications, including commercial office buildings,
public structures, resorts, general residences and structures that have
already been diagnosed as "sick" buildings. See "Strategies -- Expand
Market with New Products."
Synthesized Manufacturing Environments. State-of-the-art
manufacturing in the semiconductor, biotechnology and pharmaceutical
industries is increasingly being performed using processes requiring
non-standard atmospheres which must be completely separated from the
surrounding air. In particular, many new and contemplated pharmaceutical
processes involve either toxic gases, poisonous byproducts or potentially
hazardous genetically engineered microorganisms. Even process steps which
do not involve these hazards have been shown to have higher yields and
higher quality when isolated from potential cross-contaminants carried by
air currents from other processes in the manufacturing area. The Company
has recently developed, prototyped and favorably tested, in partnership
with major pharmaceutical companies, Absolute Isolation Barriers; these
products were developed and have been successfully utilized on a small
scale to contain the most sensitive process steps in pharmaceutical
production. The Company believes that the use of Absolute Isolation
Barriers or similar competing technologies to contain critical process
steps will become the norm for state-of-the-art pharmaceutical production
facilities during the next three years. The Company also believes its
Absolute Isolation Barriers, especially when coupled with gas-phase
filtration technologies, may be adaptable to processes in the semiconductor
industry.
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
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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 Resultant Liability. Electrical
utilities became subject to emissions regulations under Title 4 of the
Clean Air Act. 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 bring emissions of potentially hazardous substances into line with
regulatory standards.
STRATEGIES
The Company's business strategy is to (i) increase the Company's market
share, (ii) expand the Company's market through the introduction of new products
with high replacement potential, and (iii) improve operating efficiencies.
Increase Market Share
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) underutilized capacity, (iii) operating
efficiencies which can be improved through automation, (iv) an ability to add
new product lines to the Company's business, and (v) 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. The Company focuses on those
acquisition targets which complement the Company's existing technology, broaden
product offerings, provide additional manufacturing facilities and access
related markets. The Company also seeks acquisition targets which provide
vertical integration opportunities. 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 contingent liabilities. At the present
time, the Company has no specific agreements with respect to future
acquisitions, but is continually investigating potential acquisition prospects.
Increase Sales to Existing and New Customers. Currently, the Company sells
its products through a direct sales force and manufacturers' representatives.
Historically, the manufacturers' representatives have only sold certain of the
Company's products. With the recent expansion of the Company's product lines
through acquisition, those representatives can now purchase from the Company a
full line of air filtration products instead of buying a mix of air filtration
products from a range of manufacturers, and thereby use the Company as a "one
stop" purchasing source.
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 FIL, a wholly owned subsidiary, in
Singapore. The Company intends to begin manufacturing ASHRAE-grade filters in
the region by the end of 1997, and has already begun sales of the Company's
products which are shipped from its domestic manufacturing sites.
Establish Facilities and Expand Manufacturing Capacity Throughout the
United States. The Company has recently established a facility in the Chicago
area which will manufacture mid-range and standard-grade filters and equipment.
See "Business -- Products." The Company has also relocated its Airpure West
facility from California to Henderson, Nevada. The Company plans to establish
other facilities in strategically located geographical locations to increase its
accessibility in various markets and decrease shipping expenses. The Company
also plans to increase capacity for its mid-range and standard grade filters by
automating its production lines.
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<PAGE> 29
Continued Emphasis on Quality and Performance. The Company's continued
emphasis on product quality has allowed it to capture market share 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 has begun to develop products for emerging markets by applying
technology developed for high-technology niche markets to more generally useful
applications. The Company has established two separate divisions, the Absolute
Isolation Division and the Integrated Environmental Control Division to
concentrate on Absolute Isolation Barriers for pharmaceutical production and IAQ
diagnosis and solutions for commercial and public buildings, respectively. The
Company is also developing other applications for general commercial, industrial
and residential use. As part of the development of the market for these
applications, the Company may publish in technical publications, participate in
trade shows, or increase its program for mass marketing and consumer education.
Absolute Isolation. The Company believes that its Absolute Isolation
Barriers adopted from the Company's containment environments for the production
of genetically engineered microorganisms allow pharmaceutical manufacturers to
increase quality and obtain higher yields. Based upon response from two major
pharmaceutical manufacturers to the Company's pilot projects at their
facilities, the Company established a division focused on these products in May
1997.
Synthesized Manufacturing Environments. The Company intends to market its
Absolution Isolation Barriers, in combination with gas-phase filtration
technologies, to industries which require specialized environments, typically
involving oxygen-free or noble gas atmospheres. Several industries are already
using or are moving toward using these types of specialized environments for
their new products and processes. For example, the semiconductor industry is
considering using noble gas environments for processes to eliminate microscopic
flaws caused by oxidation and other chemical reactions with ambient air during
microcircuit production.
Integrated Environmental Control Systems. In response to concerns of IAQ
problems, the Company established a division in June 1997 focused on diagnosing,
solving and monitoring IAQ problems. These problems range from secondhand smoke
propagated through hotel ventilation systems to SBS syndrome. The Company is
currently participating in a prototype IAQ project at a major luxury hotel to
eliminate secondhand smoke and other airborne contaminants from the facility.
Increase Operating Efficiency
Automation. In an effort to increase gross margins, the Company recently
commenced a program to automate portions of its production lines at FFI,
Precisionaire and Airpure using technology developed at Precisionaire and FFI.
Currently, approximately 20% of the Company's product lines incorporate the new
automated equipment designs. The Company plans to implement additional automated
equipment designs into various other production lines one at a time to minimize
down time.
Eliminate Redundancy. The Company is continuing to increase the
manufacturing focus of its individual subsidiaries so that each subsidiary only
produces a single category of product. For example, the Company has reduced
costs by eliminating redundant part and lot tracking for its activated carbon
filter products between its FFI and CSC facilities by producing such products
exclusively at its site in Bath, North Carolina.
Centralize Overhead Functions. The Company has begun to implement plans to
centralize and eliminate duplication of efforts between its subsidiaries in the
following areas: purchasing, production planning, shipping coordination,
marketing, accounting, personnel management, risk management and benefit plan
administration.
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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.
The Company's ability to achieve these objectives is subject to various
risks and uncertainties. See "Risk Factors."
MARKETING
The Company sells its products through manufacturers' representatives,
distributors and a direct sales force. Sales to the semiconductor, biotechnology
and general industrial markets are typically made through manufacturers'
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 United States, 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 complete their product offerings. Now that the Company offers
all of these products, management believes that many of these representatives
will elect to offer the Company's line of products exclusively, and discontinue
offering other competitors' products; however, the Company currently has no such
exclusive agreements.
The Company is currently focused on expanding its business with each of
these representatives to include all of the Company's products. The Company
believes it will be successful with the majority of its current representatives
for the following reasons:
Product Quality. The Company manufacturers high performance air
filtration products. It currently offers filters of 99.999997% efficiency
on particles 0.1 microns or larger, which the Company believes is the
highest efficiency rating available anywhere. The Company has provided
eight Absolute Isolation Barriers which are currently in use for production
of cytotoxic and mutagenic drugs.
Name Recognition. The Company believes that each of its product lines
has high name recognition in its target markets. The Company's
representatives have indicated that they believe their sales will be
increased with additional products associated with the Company.
Single-Source Supplier. The Company provides a broad spectrum of air
filtration products. The ability to work with a single source for filters
will enable representatives to operate more efficiently, only needing to be
trained on one filtration system, maintain contacts with a single
organization and order from a central source.
Product Promotion and Innovation. The Company plans to introduce the
public to new applications it is developing for filtration products.
Representatives will be able to take advantage of the additional name
recognition and public knowledge associated with the marketing of the new
products; they 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 United States 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, convenience of a single-source supplier, name recognition, and public
knowledge of product innovations and technical superiority.
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<PAGE> 31
PRODUCTS
The Company's 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 HEPA filters, or absolute control of other
contaminants or toxic gases, 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. The
Company holds patents relating to certain of its HEPA filters and to certain
related proprietary particle scanning technologies used for testing such
products.
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 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 it 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 absorbers ("HEGAs") collect gaseous
contaminants through "adsorption," or collecting contaminants in a condensed
form on a surface. HEGA filters are used to control or eliminate gaseous
contaminants, odors, bacteria and toxic chemicals. HEGA products typically
contain one of several forms of activated charcoal, selected to match the types
of contaminant which need to be filtered for the particular application. HEGA
filters, in combination with ASHRAE-grade and HEPA filters, are critical to many
applications, including the production and disposal of chemical and biological
warfare agents, the removal of radioactive gases from the exhaust of nuclear
facilities and the removal of volatile organic compounds generated by many
industries including hospital operating rooms.
Synthesized Manufacturing Environments. The Company manufactures
specialized containment environments, called Absolute Isolation Barriers, for a
variety of high technology applications. These environments typically combine
stainless steel housings with HEPA filters, activated carbon filters and
self-contained fan-filter units. Depending on the application, Absolute
Isolation Barriers generate specialized environments meeting requirements for a
combination of temperature, humidity, oxygen levels, air pressure, ambient noise
and chemical make-up. They typically also include measures to protect personnel
and equipment located outside the barriers from toxic chemicals, poisonous
atmospheres or infectious organisms contained within the environment. They are
currently used in applications including pharmaceutical development, recombinant
DNA research and contagion isolation in critical care and quarantine facilities.
The Company believes they will become the norm for state-of-the-art
pharmaceutical production facilities in the near future. The Company also
believes they offer semiconductor manufacturers sizable advantages over their
current productions methods. See "Business -- Strategies."
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"Mid-Range" 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.
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% dioctylphthalate ("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%. 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.
The Company has recently adapted testing procedures and equipment developed
for the semiconductor industry, along with newly developed bonded carbon
filtration technology, to offer customized IAQ diagnosis, remediation, control
and monitoring for commercial and public buildings. The combined service and
product provided is currently being validated in prototype projects and will be
sold as Integrated Environmental Control Systems.
MANUFACTURING
The Company designs and manufactures air filters, housings, Absolute
Isolation Barriers and related equipment. Its products are manufactured at
several facilities in the United States, which range in size from 8,000 square
feet to over 200,000 square feet. Precisionaire has four separate manufacturing
facilities located in Bartow, Florida, Terrell, Texas and Auburn, Pennsylvania,
which produce medium efficiency and standard-grade filters in standard sizes.
FFI's facility in Washington, North Carolina, produces high-end HEPA products.
Management believes that FFI's ability to manufacture its own HEPA filter media
provides it with a significant competitive advantage, allowing more direct
control over quality and composition than is generally available with outside
suppliers. CSC, located in Bath, North Carolina, manufactures HEGA filters,
high-end containment environments, housings, custom filter assemblies and other
custom filtration products and systems which require extensive custom design,
production and lot tracking. For example, CSC's products are used in the
production and containment of potentially dangerous biologically engineered
microorganisms. Air Seal, located in Stafford, Texas, produces mid-range custom
filter housings. The Company's Selma, North Carolina, Momence, Illinois and
Henderson, Nevada facilities manufacture ASHRAE grade filters. In
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addition, the Company designs, manufactures and assembles the majority of its
own automation production equipment.
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 in order to reduce the overhead
associated with regulatory monitoring and compliance.
Each of the Company's manufacturing facilities utilize testing and design
strategies appropriate to the products manufactured. These range from standard
statistical process quality controls for standard-grade residential replacement
filters to individual testing and certification with patented proprietary
particle scanning technologies for each laminar-grade HEPA filter. The Company
believes that its ability to comprehensively test and certify its filters
provides it with a competitive advantage.
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, assets, financial strength and market share
which may be greater than the Company's. Major competitors include American Air
Filter International, Farr Company, HEPA Corporation, Purolator Products Air
Filtration Company, Donaldson Corporation and Clark Corporation.
PATENTS, TRADEMARKS AND LICENSES
The Company currently holds 17 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
for its Absolute Isolation Barriers.
The Company has applied for federal trademark protection for the following
marks: Precisionaire(R), E-Z flow(R), Smilie(R), Airvelope(TM), Channel-Ceil(R),
Channel-Hood(TM), Pureform(TM), Econocell(TM) and Pureseal(R). Although
management believes that the patents and trademarks associated with the
Company's various product lines and subsidiaries are valuable to the Company, it
does not consider any of them to be essential to its business.
The Company currently licenses some of its manufacturing products to
specialty HVAC and ASHRAE filter manufacturers who produce products under their
own name and with their own identifying labels.
CUSTOMERS
The Company is not dependent upon any single customer, and no single
customer accounted for net sales equal to or greater than ten percent of the
total net sales of the Company. The Company's significant customers include
Abbott Laboratories, Home Depot, Inc., Motorola, Inc., Merck & Co., Inc., Upjohn
Co., Wal-Mart Stores, Inc., Westinghouse Electric Corp., and several large
computer chip manufacturers.
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BACKLOG
The Company had approximately $17,800,000 in firm backlog on June 30, 1997,
compared to $13,872,000 at December 31, 1996, and $16,537,000 at December 31,
1995 (the figure for December 31, 1995 includes backlog from the Acquisitions at
that date). 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.
Backlog varies from week to week, based on the timing and mix of orders
received. All backlog at June 30, 1997 is expected to be shipped by the end of
the fourth quarter of 1997.
EMPLOYEES
The Company employed 1,380 full-time employees on June 30, 1997; 1,113 in
manufacturing, 47 in development and technical staff, 51 in sales and marketing,
and the remaining 169 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. Manufacturers' representatives
are not employees of the Company.
FACILITIES
The following table lists the principal facilities owned or leased by the
Company.
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
FLOOR SPACE MONTHLY TYPE OF
PRINCIPAL FACILITY LOCATION (SQ. FT.) PAYMENT HOLDING
- ------------------ -------- ----------- ----------- -------
<S> <C> <C> <C> <C>
Headquarters and manufacturing
facility(1)..................... Washington, 220,000 $13,775 Owned
North Carolina
Manufacturing, service and office
facility........................ Bath, North Carolina 44,282 N/A Owned
Plant and office facility(1)...... Selma, North Carolina 100,000 $ 9,737 Owned
Manufacturing plant(1)............ Bartow, Florida 175,000 $29,121 Owned
Warehouse......................... Lakeland, Florida 40,000 $ 6,559 Lease
Manufacturing plant............... Bartow, Florida 30,000 $10,783 Monthly Lease
Manufacturing plant(1)............ Terrell, Texas 146,256 $29,858 Owned
Manufacturing plant(1)............ Auburn, Pennsylvania 91,000 $ 7,097 Owned
Office Space...................... St. Petersburg, Florida 12,000 N/A Owned
R&D; Cafeteria.................... St. Petersburg, Florida 6,000 N/A Owned
Warehouse......................... South Holland, Illinois 33,226 $ 8,307 Lease
Manufacturing plant............... Henderson, Nevada 100,000 $26,000 Lease
Manufacturing plant............... Stafford, Texas 8,000 $ 1,800 Monthly Lease
Manufacturing plant............... Momence, Illinois 210,000 N/A Owned
Sales Office, Warehouse........... Singapore 10,000 $ 3,350 Lease
Manufacturing plant............... Salt Lake City, Utah 70,805 $21,963 Lease
Office Space; Manufacturing
Plant........................... Stafford, Texas 18,000 N/A Owned
</TABLE>
- ---------------
(1) This property is encumbered by a mortgage.
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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, North Carolina, 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
99.999997%;
- Application development, where new methods and products are developed
from existing technologies. See "Business -- Strategies -- Expand Market
with New Products."
Research and development costs, for fiscal years 1996, 1995 and 1994 were
approximately $460,000, $120,000 and $158,000, respectively. Research and
development costs were expensed 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. See "Business -- Legal Proceedings." 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.
BUSINESS HISTORY
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. FFI moved its entire plant and office from New York to Washington,
North Carolina in 1968. 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 meaning that for accounting purposes
FFI is treated as having acquired Elite and the historical financial statements
of FFI became the historical financial statements of Elite. Therefore, all
references to the historical activities of the Company refer to the historical
activities of FFI. In January 1996, Elite formed a new subsidiary under the laws
of North Carolina, and changed its domicile to North Carolina through a
reincorporation merger with and into the Company. 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.
In February 1994, the Company organized Airpure, as a 63% owned subsidiary
of FFI. Airpure manufactures and markets industrial and commercial bags, pleats
and industrial grade HEPA filters. In March 1996, the Company formed a wholly
owned subsidiary of FFI, Airpure West, to manufacture Airpure's products for the
western United States. In May 1997, Airpure West's operations were moved to the
Company's new facility in Henderson, Nevada.
In March 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. The purchase price for CSC was $4,435,690 in cash and up to
100,000 shares of the Company's Common Stock currently issued and held in escrow
to be released if certain performance criteria are met, subject to a
post-closing purchase price adjustment. The acquisition of CSC has been
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accounted for as a purchase. As of June 30, 1997, 20,000 shares have been
released from escrow to the CSC sellers.
In June 1996, pursuant to a stock purchase agreement, the Company acquired
all of the outstanding stock of Air Seal, a mid-range custom filter housing
manufacturer based in Stafford, Texas. The total cost of acquisition was
$2,150,000 and up to 150,000 shares of the Company's Common Stock currently
issued and held in escrow to be released if certain performance criteria are
met. The acquisition of Air Seal has been accounted for as a purchase. As of
June 30, 1997, no shares have been released. Also in June 1996, the Company
formed a wholly owned subsidiary in Singapore, FIL, to market and eventually
manufacture the Company's products in the Pacific Rim.
In September 1996, pursuant to a stock purchase agreement, the Company
acquired all of the outstanding stock of Precisionaire, a manufacturer of air
filter products for commercial and residential HVAC systems, headquartered in
St. Petersburg, Florida. 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 currently issued and held in escrow to be released if certain performance
criteria are met. The acquisition of Precisionaire has been accounted for as a
purchase. As of June 30, 1997, 262,295 shares were released from escrow to the
Precisionaire sellers.
In February 1997, the Company organized Airseal West, a 60% owned
subsidiary of Flanders. In March 1997, pursuant to an acquisition agreement the
Company acquired, through Airseal West, the majority of the assets of BB&D. The
acquired assets 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 40% of the outstanding stock of Airseal
West. BB&D has the right to exchange its Airseal West common stock for shares of
the Company's Common Stock based on an exchange rate to be determined by Airseal
West's pre-tax earnings for the year prior to such exchange. Airseal West
manufactures specialty and standard housings for air filtration and HVAC
systems, as well as integrated custom industrial-grade HVAC systems and other
specialty products for sale and distribution in the western United States.
LEGAL PROCEEDINGS
The Company recently purchased the Illinois Property for a new mid-range
manufacturing facility. The Company agreed to assume all risk of environmental
liability for past, present or future conditions on the Illinois Property except
for any liability related to ground water environmental problems. The Illinois
Property had certain environmental problems which required remediation under
federal and Illinois law. The seller of the Illinois Property has worked
extensively with the IEPA with regard to the environmental matters. The Company
has completed both a Phase I and a Phase II environmental survey with respect to
the property and it appears that the environmental matters have been resolved,
except for certain monitoring procedures required by the IEPA. However,
resolution of state issues has no effect on any potential federal or common law
claims, and there can be no assurance that such claims will not be made.
The Company is currently being monitored by the United States Environmental
Protection Agency ("EPA") for possible environmental contamination at one of its
main facilities. The Company has entered into an agreement with the EPA to
conduct monthly monitoring of groundwater. The Company estimates the monitoring
will last from 3-5 years, and believes the total cost will not exceed $45,000.
The Company has received a limited indemnification from Thomas T. Allan, Robert
R. Amerson and Steven K. Clark (directors, officers and shareholders of the
Company) of approximately $975,000 with respect to the claims of the EPA;
however, there can be no assurance that the amount of this indemnification will
be sufficient to cover the aggregate of liabilities asserted by the EPA. See
"Certain Relationships and Related Party Transactions."
Additionally, from time to time, the Company is a party to various legal
proceedings incidental to its business. None of these proceedings is material to
the conduct of the Company's business, operations and financial condition.
34
<PAGE> 37
MANAGEMENT
The Company's directors and executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Thomas T. Allan...... 60 Chairman of the Board
Robert R. Amerson.... 47 President, Chief Executive Officer and Director
Steven K. Clark...... 44 Vice President of Finance/Chief Financial Officer and Director
Gustavo Hernandez.... 63 Vice President of Operations and Director
Steven D. Klocke..... 37 Vice President of Engineering
Knox Oakley.......... 39 Vice President of Corporate Marketing and Sales
William H. Clark..... 54 Director
William M. Claytor... 56 Director
</TABLE>
Directors are elected annually and serve until their successor is elected
and qualified or until earlier resignation.
THOMAS T. ALLAN. Mr. Allan is Chairman of the Board of the Company, a
position he has held since 1989. Mr. Allan has been with the Company since 1964,
and is familiar with all aspects of the Company's business. Mr. Allan holds a
Bachelor of Arts degree in Journalism from the University of Pennsylvania.
ROBERT R. AMERSON. Mr. Amerson has been President and Chief Executive
Officer of the Company since 1987. Mr. Amerson is also a Director, a position he
has held since 1988. Mr. Amerson joined the Company in 1987 as Chief Financial
Officer. Mr. Amerson has a Bachelor of Science degree in Business Administration
from Atlantic Christian College.
STEVEN K. CLARK. Mr. Clark was named as Vice President and Chief Financial
Officer of the Company as of December 15, 1995, and a Director of the Company as
of December 29, 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 major customer of the Company. While Chief Financial
Officer of Daw Technologies, Mr. Clark was late in filing a Form 3 amendment and
certain Form 4s and Form 5s. He agreed to a cease and desist order with respect
to these violations. No violations other than the timeliness of filing those
reports were alleged by the SEC. Prior to this he was a senior partner of Miller
and Clark, an accounting and management services firm. Mr. Clark spent four
years with Price Waterhouse, and an additional four years with Arthur Andersen,
both accounting firms. He is a Certified Public Accountant, has Bachelor of Arts
degrees in Accounting and Political Science and a Master of Business
Administration Degree, all from the University of Utah.
GUSTAVO HERNANDEZ. Mr. Hernandez has been President of Precisionaire since
1979, and became a Director and Vice President of Operations of the Company
contemporaneously 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
South Florida.
STEVEN D. KLOCKE. Mr. Klocke has been Vice President of Engineering for
the Company since March 1997. He is responsible for all aspects of filter and
equipment design, directs the engineering staff and is directly in charge of all
product and technical literature. Mr. Klocke is a member of the Institute of
Environment Science, the primary technical standards body for this industry,
where he has chaired many of the committees which make filtration and cleanroom
standards. He has been with the Company since 1986 serving in various
engineering capacities. Mr. Klocke received a Bachelor of Science degree in
Mechanical Engineering from the University of Kentucky and a Bachelor of Arts
degree in Physics from Thomas Moore College.
KNOX OAKLEY. Mr. Oakley has been the Vice President of Corporate Marketing
and Sales of the Company since 1996 and has worked for the Company since 1994.
Mr. Oakley oversees all marketing and sales efforts of the Company. From 1989
through June 1994, Mr. Oakley was Director of North American Sales for Snyder
General Corp. (now AAF International). Mr. Oakley received his Bachelor of
Science degree in Biology from the Citadel.
35
<PAGE> 38
WILLIAM H. CLARK. Mr. Clark has been an outside Director of the Company
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 Bachelor of Arts degree and a Masters of Business
Administration degree, both from East Carolina University.
WILLIAM M. CLAYTOR. Mr. Claytor has been an outside Director of the
Company since 1990. He is a partner in the law firm of Baucom, Claytor, Benton,
Morgan, Wood & White, P.A., and has held such position since 1973. Mr. Claytor
graduated from Memphis State University School of Law in 1969 and from the
University of Missouri in 1963.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Audit Committee and a Compensation Committee.
The Audit Committee reviews the results and scope of the audit and other
services provided by the Company's independent auditors, reviews and evaluates
the Company's internal audit and control functions, and monitors transactions
between the Company and its employees, officers and directors. The Compensation
Committee administers the Company's equity incentive plans and designates
compensation levels for officers and directors of the Company.
The members of the Audit Committee are Mr. W.H. Clark and Mr. Claytor. The
members of the Compensation Committee are Mr. Claytor and Mr. 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"). The
Employment Agreements, as amended, provide for an annual base salary of $250,000
for both Mr. Amerson and Mr. Clark. The Employment Agreements each have an
initial five 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 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 certain outside directors receive options to purchase shares of Common Stock
of the Company pursuant to the Director Option Plan described below.
36
<PAGE> 39
DIRECTOR OPTION PLAN
The 1996 Director Option Plan provides for the grant of stock options to
outside directors of the Company who were elected or appointed after February 1,
1996, and who were not existing directors on the effective date of the plan.
Each such outside director who is serving as a director on January 1 of each
calendar year will automatically be granted an option to acquire up to 5,000
shares of Common Stock at an exercise price per share not less than the fair
market value per share of Common Stock on such date, assuming such outside
director had been serving for at least six months prior to the date of grant.
Payment of the exercise price for options granted under the Director Option
Plan may be made in cash, check or in shares of the Company's 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 or
disability, 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. On
July 21, 1997, the Company filed a registration statement on Form S-8
registering the shares underlying the options under the Director Option Plan,
which means that upon exercise of the options under the Director Option Plan the
holders will receive Common Stock which may be sold in compliance with Rule 144
volume limitations and the Company's insider trading policy. As of August 29,
1997, the Company has granted options to purchase 5,000 shares of Common Stock
under the Director Option Plan.
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"), performance shares, restricted
stock awards, dividend equivalents or other stock-based awards to individuals
who are officers, key employees or outside consultants of the Company. There are
1,986,800 shares of Common Stock reserved for award under the LTI Plan. On July
21, 1997, the Company filed a registration statement on Form S-8 registering the
shares underlying the options under the LTI Plan, which means that upon exercise
of the options granted under the LTI Plan (i) certain holders will receive
unrestricted stock, which may be sold at any time so long as the sale is in
compliance with the Company's insider trading policy, if applicable and (ii)
certain holders will receive Common Stock which may be sold in compliance with
Rule 144 volume limitations and the Company's insider trading policy.
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 ten years from the date of grant or, three months after the
optionee's termination of service with the Company if the termination of
employment is attributable to (i) disability, (ii) retirement, or (iii) any
other reason, or 15 months after the optionee's death. As of August 29, 1997,
the Company has granted options to purchase 332,120 shares of Common Stock under
the LTI Plan, 19,200 of which have been exercised or canceled.
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
37
<PAGE> 40
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 August 29, 1997, no
SARs have been granted under the LTI Plan.
Performance Shares. The Compensation Committee is authorized under the LTI
Plan to grant performance shares to selected employees. Performance shares are
rights granted to employees to receive cash, stock, or other property, the
payment of which is contingent upon achieving certain performance goals
established by the Compensation Committee. As of August 29, 1997, no performance
shares have been awarded 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 August 29, 1997, no restricted stock
awards have been granted under the LTI Plan.
Dividend Equivalents. The Compensation Committee may also grant dividend
equivalent rights to participants subject to such terms and conditions as may be
selected by the Compensation Committee. Dividend equivalent rights entitle the
holder to receive payments equal to dividends with respect to all or a portion
of the number of shares of stock subject to an option award or SARs, as
determined by the Committee. As of August 29, 1997, no dividend equivalents have
been awarded under the LTI Plan.
401(K) PLAN
The Company has a defined contribution 401(k) salary reduction plan
("401(k) Plan"). Company employees who are at least 21 years of age are eligible
to participate in the 401(k) Plan after six months of service. Eligible
employees become participants in the 401(k) Plan on the earlier of the first day
of the plan year or the first day of the seventh month of the plan year
coinciding with or next following the date on which the employee meets the
401(k) Plan's eligibility requirements. By electing to defer a portion of his or
her compensation, a participating employee may make pre-tax contributions to the
401(k) Plan, subject to limitations under the Internal Revenue Code of 1986, as
amended, of up to 15% of his or her total compensation. The Company may make
matching contributions to the 401(k) Plan at the discretion of its Board of
Directors, 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. Participants may alter their
contribution amounts as of January 1st, April 1st, July 1st or October 1st of
any year. 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
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 officers of the Company, to administer the Executive Officer Bonus
Plan (the "Bonus Plan") and stock option plans, and to review and approve stock
option grants to all employees including the executive officers of the Company.
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.
38
<PAGE> 41
Total cash compensation for the executive officers consists of the
following components:
- Base salary
- An executive officer bonus that is related to growth in sales and
operating earnings of the Company
Long-term incentive is realized through the granting of stock options to
executives and key employees through the LTI Plan, which was adopted by the
Board and approved by a majority of the Company's shareholders in January of
1996. The Company also has granted certain non-qualified options to its
executive officers. 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. Certain
executive officers have employment contracts with the Company. See
"Management -- 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 employee's 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, Robert R. 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.
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 exceeded $100,000 in 1996.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------- ---------------------- -------
OTHER RESTRICTED
ANNUAL STOCK LTIP
NAME AND PRINCIPAL POSITION(1) YEAR SALARY BONUS COMPENSATION(2) AWARDS OPTIONS PAYOUTS
- ------------------------------ ---- -------- ----- --------------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert R. Amerson............. 1996(3) $212,550 -- -- -- 2,000,000 --
President 1995 128,846 -- $137,077 -- 1,150,000 --
1994 100,000 -- 124,500 -- -- --
Steven K. Clark............... 1996(4) 150,192 -- -- -- 2,000,000 --
Chief Financial Officer 1995 15,000 -- -- -- 1,150,000 --
1994 -- -- -- -- -- --
</TABLE>
- ---------------
(1) Gustavo Hernandez, a Director of the Company, is the President of
Precisionaire. He commenced his employment with the Company in September
1996. Mr. Hernandez will receive an annual salary of $250,000, plus a
possible bonus, commencing in September 1996, under his Employment
Agreement. See "Management -- Employment Agreements." During 1996, Mr.
Hernandez was paid a total of $292,269 by the Company and Precisionaire and
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.
39
<PAGE> 42
(3) Robert R. Amerson's annual salary is $250,000, plus a possible bonus each
year, under his Employment Agreement, as amended. See
"Management -- Employment Agreements."
(4) Steven K. Clark commenced his employment with the Company as of December 15,
1995. Mr. Clark's annual salary is $250,000, plus a possible bonus each
year, under his Employment Agreement, as amended. See
"Management -- Employment Agreements."
Options Granted in Last Fiscal Year
The following table sets forth the aggregate number and value of stock
options granted by the Company for services rendered during 1996 to the
Company's Chief Executive Officer and to each of the Company's other executive
officers whose annual salary, bonus and other compensation exceeded $100,000.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
ASSUMED ANNUAL
% OF TOTAL RATES OF STOCK
OPTIONS PRICE APPRECIATION
GRANTED TO EXERCISE OR FOR OPTION TERM(1)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5% 10%
- ---- --------- ------------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert R. Amerson............. 1,000,000 23.6% $2.50 02/01 $ 708,397 $1,613,272
1,000,000 23.6 7.50 06/01 2,125,190 4,839,817
Steven K. Clark............... 1,000,000 23.6 2.50 02/01 708,397 1,613,272
1,000,000 23.6 7.50 06/01 2,125,190 4,839,817
</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
appreciation on the Common Stock over the term of the options.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth the aggregate number and value of stock
options 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 exceeded $100,000.
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR-END FISCAL YEAR-END
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
- ---- --------------- -------- --------------- ---------------
<S> <C> <C> <C> <C>
Robert R. Amerson......................... -- -- 3,150,000/-- $18,381,250/--
Steven K. Clark........................... -- -- 3,150,000/-- 18,381,250/--
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In November 1995, 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 potential environmental claims made by the EPA, and $525,000 due
for the settlement of the following lawsuits against the Company: Hartford
Casualty Insurance Co. v. Flanders Filters, Inc., and St. Paul Fire and Marine
Insurance Co. v. Flanders Filters, Inc. The Company 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.
Messrs. Allan, Amerson and Clark have complied with the Indemnity Agreement
whereby payments of $525,000 were made to the respective insurance companies who
are the plaintiffs in the above-described lawsuits. Messrs. Allan, Amerson and
Clark have collectively borrowed $327,039 from the Company to make payments due
under the Indemnity Agreement; the parties have paid the remainder in cash.
40
<PAGE> 43
In November 1995, Steven K. Clark and Robert R. Amerson entered into an
option to acquire 5,535,035 shares of Common Stock of the Company (representing
approximately 80% of the Common Stock of the Company owned by Thomas T. Allan
and A. Russell Allan, III) for an aggregate price of approximately $13,838,000.
As of April 1997, the Company purchased certain property located in Selma,
North Carolina from ABB Partnership for $250,000 and assumed approximately
$622,000 in debt related to the property. ABB Partnership is controlled by
Robert R. Amerson, President of the Company. The purchase was entered into on
terms believed by the Company to be fair and reasonable and generally reflective
of market conditions.
As of June 1997, the Company purchased certain property located in Auburn,
Pennsylvania from LHB Realty for $910,000. As of August 1997, the Company
purchased certain property located in Bartow, Florida from POF Realty for
$2,975,000. As of August 1997, the Company purchased certain property located in
St. Petersburg, Florida from Gustavo and Ana Hernandez for $150,000. Gustavo
Hernandez, a director of the Company, is a principal of POF Realty and LHB
Realty. These purchases 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.
At June 30, 1997, Steven K. Clark, an officer and director of the Company,
owed the Company $359,013 which he borrowed to settle claims and to make certain
payments under the Indemnity Agreement described above. To evidence the amount
owed, effective February 11, 1997, Mr. Clark issued a note to the Company in the
amount of $109,013 with interest at the variable rate of LIBOR plus 1.25% per
annum (6.9% at September 5, 1997), calculated on the basis of a 360-day year and
a 30-day month. Both the interest and principal due under the note are payable
on February 10, 1999. Mr. Clark also issued a note to the Company in the amount
of $250,000 at the same interest rate on April 25, 1997 and both the interest
and principal due under the note are payable on April 24, 1999.
At June 30, 1997, Robert R. Amerson, an officer and director of the
Company, owed the Company $359,013 which he borrowed to settle claims and to
make certain payments under the Indemnity Agreement described above. To evidence
the amount owed, effective February 11, 1997, Mr. Amerson issued a note to the
Company in the amount of $109,013 with interest at the variable rate of LIBOR
plus 1.25% per annum, calculated on the basis of a 360-day year and a 30-day
month. Both the interest and principal due under the note are payable on
February 10, 1999. Mr. Amerson also issued a note to the Company in the amount
of $250,000 at the same interest rate on April 25, 1997 and both the interest
and principal due under the note are payable on April 24, 1999.
At June 30, 1997, Thomas T. Allan, a director of the Company, owed the
Company $759,013 which he borrowed to settle claims and to make certain payments
under the Indemnity Agreement described above and for personal purposes. To
evidence the amount owed, effective July 3, 1996, Mr. Allan issued a note to the
Company in the amount of $650,000 at an interest rate of 7% per annum. Both the
interest and principal due under the note were payable on July 3, 1997, which
payment date was extended by the Company until July 3, 1999. Effective February
11, 1997, Mr. Allan also issued a note in the amount of $109,013 with interest
at the variable rate of LIBOR plus 1.25% per annum, calculated on the basis of a
360-day year and a 30-day month. Both interest and principal due under the note
are payable on February 10, 1999. On September 5, 1997, the combined principal
and interest due on Mr. Allan's notes was $819,500. On such date, Mr. Clark and
Mr. Amerson each assumed $409,750 of Mr. Allan's notes in consideration for the
exercise of 163,900 options under the option agreements described above. The
interest rate due on the assumed loans is at the variable rate of LIBOR plus
1.25% per annum, and both the principal and interest due are payable on
September 4, 1999.
The Board of Directors of the Company has adopted a policy of not entering
into additional transactions with officers or directors or their affiliates,
unless the independent directors make a specific finding that such transactions
are in the best interest of the Company and its public shareholders and that the
terms thereof are no less favorable to the Company than those that could be
obtained from unaffiliated parties.
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<PAGE> 44
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock, as of August 29, 1997, and as adjusted
to reflect the sale of the 6,400,000 Shares offered hereby, with respect to (i)
each person known by the Company to own beneficially more than 5% of the Common
Stock, (ii) each of the Company's directors, (iii) each of the executive
officers, (iv) each Selling Shareholder, and (v) all directors and executive
officers of the Company as a group. This table assumes that the Over-Allotment
Options granted to the Underwriters has not been exercised.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK SHARES OF COMMON STOCK
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO OFFERING SHARES TO BE AFTER OFFERING
------------------------- SOLD -------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT(1) IN OFFERING NUMBER PERCENT(8)
- ------------------------------------ ---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
A. Russell Allan, III(2)............ 957,844 5.32% 60,000 897,844 3.74%
531 Flanders Filters Road
Washington, NC 27889
Thomas T. Allan(2)(4)............... 5,607,367 30.87 340,000 5,267,367 21.80
531 Flanders Filters Road
Washington, NC 27889
Robert R. Amerson(2)(3)............. 8,160,759 38.56 -- 8,160,759 30.04
531 Flanders Filters Road
Washington, NC 27889
Steven K. Clark(2)(3)............... 5,364,014 25.34 -- 5,364,014 19.75
531 Flanders Filters Road
Washington, NC 27889
Gustavo Hernandez(5)................ 65,393 * -- 65,393 *
2399 26th Avenue North
St. Petersburg, FL 33734
Steven Klocke(6).................... 109,427 * -- 109,427 *
531 Flanders Filters Road
Washington, NC 27889
Knox Oakley(6)...................... 94,525 * -- 94,525 *
531 Flanders Filters Road
Washington, NC 27889
William H. Clark.................... -- * -- -- *
531 Flanders Filters Road
Washington, NC 27889
William M. Claytor(7)............... 164,172 * -- 164,172 *
531 Flanders Filters Road
Washington, NC 27889
Officers and Directors as a
Group(2)(3)(4)(5)(6)(7)........... 15,022,957 61.09% 340,000 14,682,957 48.00%
</TABLE>
- ---------------
* Represents less than 1% of the total issued and outstanding shares of Common
Stock.
(1) Applicable percentage of ownership is based on 18,016,103 shares of Common
Stock outstanding as of August 29, 1997, together with all applicable
options for unissued securities 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) Shares beneficially owned include shares subject to an original 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). Messrs. Amerson and Clark have
42
<PAGE> 45
exercised 100,000 options each under the above option agreement;
collectively 170,300 from Thomas T. Allan and 29,700 from A. Russell Allan,
III.
(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 46,791 shares which will be released from escrow only if
Precisionaire meets certain revenue targets during the next two years.
(6) Includes 16,800 shares which are subject to an option to purchase such
shares from the Company at $2.50 per share, 10,000 shares which are subject
to an option to purchase such shares from the Company at $7.50 per share,
and 10,000 shares which are subject to an option to purchase such shares
from the Company at $7.125 per share.
(7) Includes 50,000 shares which are subject to an option to purchase such
shares from the Company at $1.00 per share.
(8) Applicable percentage of ownership is based on 24,016,103 shares of Common
Stock together with all applicable options for unissued securities 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.
DESCRIPTION OF CAPITAL STOCK
The following statements are subject to the detailed provisions of the
Company's Articles and Bylaws, and are qualified in their entirety by reference
thereto.
AUTHORIZED SHARES
Under the Company's 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, par value $.001 per share. As of August
29, 1997 there are 18,016,103 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 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 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, redemption rights and terms,
liquidation preferences and sinking
43
<PAGE> 46
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.
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 41 days after issuance into shares of
the Company's Common Stock at a conversation price equal to the lower of (i) 82%
of the average closing bid price for the seven 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 notes at a price equal to 115% of the outstanding
principal amount of the notes. As of August 29, 1997, such holders have
converted $800,000 of the Convertible Notes, for an aggregate of 102,555 shares
of Common Stock.
In connection with the 10% Convertible Notes, the holders thereof 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 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. As of August 29, 1997, the
Company has issued warrants to purchase 10,256 shares of Common Stock. These
warrants are exercisable until February 2000 at exercise prices ranging between
$8.11 and $8.16.
OTHER WARRANTS
In September 1996, the Company sold $2,500,000 principal amount of Series A
Subordinated Convertible Debentures to certain unrelated investors. Such
debentures were paid in January 1997. In connection with the debentures, the
holders thereof acquired warrants to purchase 25,000 shares of Common Stock at
an exercise price of $9.63 per share. These warrants expire in September 1999.
In January 1997, the Company issued certain warrants pursuant to the
underwriting agreement relating to the Company's Form S-1 Registration Statement
which was effective January 1997. Such warrants enable the holders thereof to
purchase an aggregate of 140,000 shares of Common Stock at the initial exercise
price of $14.725 per share at any time commencing January 6, 1998 until their
expiration on January 6, 2002. The exercise price and number of shares
purchasable upon exercise of the warrants are subject to adjustment upon the
occurrence of certain events.
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, Representative Warrants to purchase
400,000 shares of Common Stock for a period of four years commencing one year
from the date of this Prospectus at 120% of the public offering price per share
of Common Stock. The exercise price and number of shares purchasable upon
exercise of the Representative Warrants are subject to adjustment upon the
occurrence of certain events. See "Underwriting."
44
<PAGE> 47
STOCK OPTIONS
The Company has reserved (i) 1,986,800 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
August 29, 1997, there were 317,920 outstanding options under the
above-mentioned plans.
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; and
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; and 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.
On July 21, 1997, the Company filed a registration statement on Form S-8
registering shares underlying options under the Company's Long-Term Incentive
Plan, Director Option Plan and certain option grants issued pursuant to certain
employment agreements (collectively, the "Plans"). A total of 8,800,000 shares
of Common Stock underlying such options have been registered on Form S-8. As of
August 29, 1997, a total of 6,637,120 options have been granted under the Plans,
19,200 of which have been either exercised or canceled. Upon exercise of the
options under the Plans, certain non-affiliates of the Company may sell the
related shares without restriction, other than any necessary compliance with the
Company's insider trading policy. Affiliates of the Company may sell the shares
obtained upon exercise of the options pursuant to Rule 144 and the Company's
insider trading policy.
REGISTRATION RIGHTS
Holders of 262,295 shares of Common Stock, and holders of 1,210,256 options
or warrants to purchase Common Stock are entitled to certain rights with respect
to 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. Certain
minority shareholders of Airseal West and various other individuals who were
sellers in Flanders= acquisition of Precisionaire and Air Seal will receive
registration rights if and when they acquire Flanders Common Stock pursuant to
the terms of their agreements with Flanders.
TRANSFER AGENT AND REGISTRAR
OTC Stock Transfer, Inc. is the transfer agent and registrar for the Common
Stock.
ANTI-TAKEOVER EFFECTS OF THE COMPANY'S ARTICLES AND BYLAWS
The Company's Articles 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
45
<PAGE> 48
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 interest 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 10% of all shares entitled to vote at the proposed special meeting.
The provisions limiting the ability of minority shareholders to call a
special meeting may have the effect of delaying consideration of a shareholder
proposal until the next annual meeting of the shareholders unless a special
meeting is called for such purpose.
Any call for a special meeting must specify the matters to be acted upon at
the meeting. Shareholders are not permitted to submit additional matters or
proposals for consideration of any special meeting.
SHAREHOLDER PROPOSALS
The Company's Bylaws establish an advance notice procedure for nominations
(other than by or at the direction of the Board) of candidates for election as
directors at, and for proposals to be brought before, an annual meeting of
shareholders of the Company. Subject to any other applicable requirements, only
such nominations may be considered and such business may be conducted at an
annual meeting as has been brought before the meeting by or at the direction of
the Board or by a shareholder who has given to the Secretary of the Company
timely written notice, in proper form, of the same.
PREFERRED STOCK AND ADDITIONAL COMMON STOCK
Under the Company's Articles, the Board has authority to provide by
resolution for issuance of shares of one or more series of preferred stock. The
Board is authorized to fix by resolution the terms and conditions of each
series. See "Description of Capital Stock -- Preferred Stock."
The Company believes that the availability of preferred stock will provide
the Company with increased flexibility to facilitate possible future financings
and acquisitions and to meet other corporate needs that might arise. The
authorized shares of preferred stock will be available for issuance without the
expense and delay of shareholder action, unless shareholder action is required
by applicable law or the rules of any stock exchange or organization on which
any class of stock of the Company may then be quoted or listed.
46
<PAGE> 49
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 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 of all voting power, (ii) one-third 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 and which is conducted pursuant to the merger provisions of North
Carolina law, which generally requires shareholder approval, is not considered a
"control share acquisition" and is therefore exempt from the provisions of the
Control Share Acquisition Act.
Under the Control Share Acquisition Act, a person or entity that acquires
control shares pursuant to a control share acquisition acquires voting rights
with respect to those shares only to the extent granted by a majority of
disinterested shareholders of each class of capital stock outstanding prior to
the acquisition. The shareholders of the corporation must consider the status of
those voting rights at the next annual or special meeting of shareholders. The
acquiror may accelerate the decision and require the corporation to hold a
special meeting of shareholders for the purpose of considering the status of
those rights if the acquiror (i) files an "acquiring person statement" with the
corporation and (ii) agrees to pay all expenses of the meeting. Unless otherwise
provided in the articles of incorporation or bylaws of a corporation,
shareholders have the right to have their shares redeemed by the corporation at
fair market value if the control shares are accorded full voting rights and the
acquiror has obtained a majority or more control shares.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 24,016,103 shares
of Common Stock outstanding (assuming no exercise of the Over-Allotment Option).
Of these shares, 14,544,402 shares (including the 6,400,000 Shares sold in this
Offering and the 4,773,519 shares of Common Stock registered in the Company's
Form S-3 filed July 3, 1997) are freely tradable without restriction under the
Securities Act. The remaining 9,471,701 shares are deemed "restricted shares"
under Rule 144 of the Securities Act; all such shares are currently eligible or
will be eligible within one year for sale pursuant to Rule 144.
Steven K. Clark and Robert R. Amerson, officers and directors, who will
beneficially own an aggregate of 13,524,773 shares of Common Stock following the
completion of this Offering have agreed that, for a period of 180 days after the
date of this Prospectus, they will not, without the prior written consent of
Raymond James & Associates, Inc., offer, sell, offer to sell, solicit an offer
to buy, contract to sell, pledge or grant any option to purchase or otherwise
transfer or dispose (or announce any of the foregoing) of any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock, except, in the case of the Company, for the issuance of stock
options under stock option plans in existence on the date hereof or the issuance
or sale of Common Stock by the Company upon exercise of outstanding warrants to
purchase Common Stock.
47
<PAGE> 50
As of August 29, 1997, there were stock options outstanding to purchase an
aggregate of 7,652,920 shares of Common Stock, of which 7,552,320 options are
currently exercisable. Additionally, 6,617,920 of the outstanding options were
registered on a Form S-8 which was effective upon filing. As of August 29, 1997,
there were warrants outstanding to purchase an aggregate of 175,256 shares of
Common Stock, of which 35,256 warrants are currently exercisable. In addition,
the Company has agreed to sell to the Representative or its designees, for
nominal consideration, the Representative Warrants to purchase certain shares of
Common Stock. See "Underwriting."
The holders of the Company's 10% Convertible Notes can convert such notes
into Common Stock at the lesser of 82% of the average closing bid price for the
immediately preceding seven trading days or $9.00. As of August 29, 1997, such
holders have converted $800,000 of the $4,000,000 principal amount of
Convertible Notes, for an aggregate of 102,555 shares of Common Stock. On the
date of such conversion, the holders received warrants to purchase 10,256 shares
of Common Stock.
Certain minority shareholders of Airseal West, a majority owned subsidiary
of the Company, have the right to exchange their Airseal West common stock for
shares of Company Common Stock based on an exchange rate to be determined by
Airseal West's pre-tax earnings for the year prior to such exchange.
Holders of approximately 262,295 shares of Common Stock, and holders of
1,210,256 options or warrants to purchase Common Stock 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 minority shareholders of Airseal West described above and
various other individuals who were sellers in Flanders' acquisition of
Precisionaire and Air Seal, will receive registration rights if and when they
acquire Company Common Stock pursuant to the terms of their agreements with the
Company. A total of 674,590 shares will become eligible for registration if
earned by the Precisionaire and Air Seal sellers.
On July 3, 1997, the Company filed a registration statement on Form S-3,
which was declared effective on September 3, 1997, registering 4,773,519 shares
of Common Stock for resale by certain selling securityholders pursuant to the
Company's obligation contained in written agreements with such selling
securityholders. The selling securityholders may sell the registered shares
without restriction and they are not restricted as to the price or prices at
which they may sell their Common Stock. Sales of the shares at less than market
prices may depress the market price of the Company's Common Stock. Moreover, the
selling securityholders are not restricted as to the number of shares which may
be sold at any one time, and it is possible that a significant number of shares
could be sold at the same time.
On July 21, 1997, the Company filed a registration statement on Form S-8
registering shares underlying options under the Plans. A total of 8,800,000
shares of Common Stock underlying such options are registered on the Form S-8
which was effective upon filing. As of August 29, 1997, a total of 6,637,120
options have been granted under the Plans, 19,200 of which have been exercised
or canceled. Upon exercise of the options under the Plans, certain
non-affiliates of the Company may sell the related shares without restriction
other than any necessary compliance with the Company's insider trading policy.
Additionally, certain affiliates of the Company may sell the shares obtained
upon exercise of the options pursuant to Rule 144 and the Company's insider
trading policy.
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.
48
<PAGE> 51
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Raymond James &
Associates, Inc. and Cleary Gull Reiland & McDevitt Inc. are acting as
Representatives, have agreed, subject to the terms and conditions contained in
the Underwriting Agreement (the "Underwriting Agreement") to purchase, and the
Company and the Selling Shareholders have 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>
Raymond James & Associates, Inc.............................
Cleary Gull Reiland & McDevitt Inc..........................
-------
Total.............................................
=======
</TABLE>
The Underwriters are committed to purchase 6,400,000 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 Representatives 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 of 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 Representatives have
informed the Company that they do 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
30 days of the date of the Offering to purchase from the Company an additional
960,000 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.
Steven R. Clark and Robert R. Amerson, 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 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 180 days
from the effective date of the Registration Statement (the "Lock-Up Period"),
without the prior written consent of Raymond James & Associates, Inc. An
appropriate legend shall be marked on the face of certificates representing all
such securities. The Company has also agreed, for a period of 180 days from the
effective date of the Registration Statement, not to issue, offer to sell, sell
or grant options to purchase securities of the Company, other than pursuant to
the LTI Plan or Director Option Plan, or except in connection with an
acquisition, without the prior written consent of Raymond James & Associates,
Inc.
In connection with the Offering, the Company has agreed to issue and sell
to the Representatives and/or their designees, at the closing of the proposed
underwriting, for nominal consideration, five year Representative Warrants to
purchase 400,000 shares of Common Stock. The Representative Warrants are
exercisable at any time during a period of four years commencing one year from
the effective date of the Registration Statement at a price of 120% of the
initial public offering price per share of Common Stock and are restricted from
sale, transfer, hypothecation for a period of twelve months from the effective
date of the Registration Statement, except to officers of the Representatives.
The Representative Warrants contain anti-dilution
49
<PAGE> 52
provisions providing for adjustment of the number of shares of Common Stock and
exercise price under certain circumstances. The Representative Warrants grant to
the holders thereof and to the holders of the underlying securities certain
rights of registration of the securities underlying the Representative Warrants.
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 "Available Information."
In connection with this Offering, certain Underwriters and selling group
members or their affiliates that currently act as market makers for the Common
Stock may engage in "passive market making" in the Common Stock on the Nasdaq
National Market in accordance with Rule 10b-6A under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Rule 10b-6A permits, upon the
satisfaction of certain conditions, Underwriters and selling group members
participating in a distribution that are also Nasdaq market makers in the
security being distributed to engage in limited market making transactions
during the period when Rule 10b-6A under the Exchange Act would otherwise
prohibit such activity. In general, under Rule 10b-6A any Underwriter or selling
group member engaged in passive market making in the Common Stock (i) may not
effect transactions in, or display bids for, the Common Stock at a price that
exceeds the highest bid for the Common Stock displayed on Nasdaq by a market
maker that is not participating in the distribution of the Common Stock, (ii)
may not have net daily purchases of the Common Stock that exceed 30% of its
average daily trading volume in the Common Stock for the two full consecutive
calendar months immediately preceding the filing date of the Registration
Statement of which this Prospectus forms a part, and (iii) must identify its
bids as bids made by a passive market maker.
EXPERTS
The consolidated financial statements and schedules of the Company 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 herein 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 being offered hereby. Schifino &
Fleischer, P.A., Tampa, Florida, has acted as counsel to the Underwriters in
connection with the Offering.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of 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 may 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
its regional offices located at 7 World Trade Center, Suite 1300, New York, New
York 10048, and Citicorp 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, 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. The Commission also maintains a web site
(http://www.sec.gov) that contains reports, proxy statements and other
information regarding registrants, such as the Company, that file electronically
with the Commission. The Company's Common Stock is traded on Nasdaq, and
information concerning the Company may be inspected and copied at the offices of
the National Association of Securities Dealers, Inc., located at 1735 K Street,
N.W., Washington, D.C. 20006.
50
<PAGE> 53
The Company has filed with the Commission 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, and the exhibits thereto, 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.
DESCRIPTION OF ARTWORK INSIDE BACK COVER
Green background with Flanders logo in upper right hand corner; upper left
hand corner, picture of media production equipment, upper left hand corner, text
of "leading the way,"; lower left hand corner, photograph of an absolute
isolation barrier; lower right hand corner, photograph of person checking an
installation of the Company's clean room ceiling grid for filter leaks; upper
right hand corner, photograph of an activated carbon filter and several carbon
compounds; center, picture of automated SAM line at Bartow, Florida facility.
51
<PAGE> 54
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Statements of Flanders Corporation
Audited Consolidated Financial Report..................... F-2
Audited Consolidated Financial Statements................. F-3
Auditors Report on the Supplemental Schedule.............. F-23
Supplemental Schedule II.................................. F-24
Unaudited Consolidated Condensed Interim Financial
Statements............................................. F-25
Financial Statements of Precisionaire, Inc.
Audited Financial Report.................................. F-32
Audited Financial Statements.............................. F-33
</TABLE>
F-1
<PAGE> 55
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 subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. 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 subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ MCGLADREY & PULLEN, LLP
--------------------------------------
McGladrey & Pullen, LLP
New Bern, North Carolina
February 7, 1997, except for the
second paragraph of Note 8 and
the first paragraph of Note 23 as to
which the date is March 10, 1997
and the second paragraph
of Note 23 as to which
the date is September 11, 1997.
F-2
<PAGE> 56
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 2,390,411 $ 2,973,797
Restricted cash (Note 2).................................. 8,000,005 --
Receivables:
Trade, less allowance for doubtful accounts: 1996
$346,480; 1995 $148,000 (Note 8)..................... 17,906,879 7,243,557
Related party (Note 17) 905,930 --
Other.................................................. 786,811 321,356
Inventories (Notes 3 and 8)............................... 9,894,707 2,321,367
Deferred taxes (Note 13).................................. 920,520 137,961
Other current assets...................................... 687,524 46,586
----------- -----------
Total current assets.............................. 41,492,787 13,044,624
----------- -----------
Other assets (Note 4)....................................... 909,307 333,542
Intangible assets (Notes 5 and 8)........................... 14,016,691 --
Property and equipment, net (Notes 6 and 8)................. 30,099,626 5,151,063
----------- -----------
$86,518,411 $18,529,229
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Note payable (Note 8)..................................... $ -- $ 3,890,425
Current maturities of long-term debt (Note 8)............. 4,379,973 454,181
Accounts payable (Note 9)................................. 11,002,587 3,425,022
Accrued expenses (Note 10)................................ 3,540,110 1,166,639
----------- -----------
Total current liabilities......................... 18,922,670 8,936,267
----------- -----------
Long-term debt, less current maturities (Note 8)............ 25,776,295 1,306,584
Convertible debt (Note 11).................................. 4,000,000 --
Deferred taxes (Note 13).................................... 4,466,676 77,961
Committed capital (Notes 2 and 12).......................... 8,000,005 --
Commitments and contingencies (Notes 8, 14, 15, 16, 18, 20
and 22)
Stockholders' equity (Notes 12, 17, 20 and 23)
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: 1996 15,951,548;
1995 11,433,979........................................ 15,952 11,434
Additional paid-in capital................................ 16,964,713 3,418,671
Retained earnings......................................... 8,372,100 4,778,312
----------- -----------
25,352,765 8,208,417
----------- -----------
$86,518,411 $18,529,229
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE> 57
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, DECEMBER 31, 1995 AND DECEMBER 30, 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net sales............................................... $73,056,197 $38,635,810 $26,706,404
Cost of goods sold (Notes 15, 16, 17 and 18)............ 53,597,621 28,953,729 18,845,385
----------- ----------- -----------
Gross profit....................................... 19,458,576 9,682,081 7,861,019
----------- ----------- -----------
Operating expenses (Notes 15, 16, 17 and 18)............ 13,459,721 7,262,668 7,238,609
----------- ----------- -----------
Operating income................................... 5,998,855 2,419,413 622,410
----------- ----------- -----------
Nonoperating income (expense):
Other income.......................................... 975,750 43,852 26,371
Interest expense...................................... (1,203,226) (633,029) (477,822)
----------- ----------- -----------
(227,476) (589,177) (451,451)
----------- ----------- -----------
Income before income taxes......................... 5,771,379 1,830,236 170,959
Income taxes (Note 13).................................. 2,177,591 684,582 176,402
----------- ----------- -----------
Net income (loss).................................. $ 3,593,788 $ 1,145,654 $ (5,443)
=========== =========== ===========
Earnings per weighted average common and common
equivalent share outstanding (Note 21)
Primary............................................... $ 0.21 $ 0.12 $ --
=========== =========== ===========
Fully diluted......................................... $ 0.21 $ 0.12 $ --
=========== =========== ===========
Weighted average common and common equivalent shares
outstanding:
Primary............................................... 17,041,931 9,831,996 9,693,478
=========== =========== ===========
Fully diluted......................................... 18,072,271 9,831,996 9,693,478
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE> 58
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, DECEMBER 31, 1995 AND DECEMBER 30, 1994
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
------- ------------ ----------
<S> <C> <C> <C>
Balance, January 1, 1994................................... $ 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................... 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 3,371,204 shares of common stock related to
the Private Offerings................................. 3,372 18,760,986 --
Less committed capital (Note 2).......................... -- (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
------- ------------ ----------
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE> 59
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, DECEMBER 31, 1995 AND DECEMBER 30, 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).................................... $ 3,593,788 $ 1,145,654 $ (5,443)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization..................... 1,485,740 636,178 631,476
Stock compensation................................ -- -- 12,500
Provision for doubtful accounts................... (120,423) 108,000 (25,500)
Allowance for obsolete inventory.................. (115,000) (45,000) (69,134)
(Gain) loss on sale of property and equipment..... (54,002) -- 18,091
(Gain) loss on disposition of cash value of life
insurance....................................... (24,600) -- --
Realized gain on sale of marketable securities.... 12,123 -- (32,941)
Deferred income taxes............................. (113,520) 160,000 70,000
Indemnification of claim by stockholders.......... -- 375,000 --
Change in assets and liabilities:
Receivables..................................... (871,440) (1,937,752) (1,730,577)
Inventories..................................... (504,576) 790,947 (1,209,802)
Other current assets............................ (520,092) 77,763 (95,573)
Accounts payable................................ (997,168) (339,999) 1,443,504
Accrued expenses................................ 302,682 158,591 (511,765)
Income tax payable.............................. (460,334) 481,157 (65,307)
------------ ----------- -----------
Net cash provided by (used in) operating
activities................................. 1,613,178 1,610,539 (1,570,471)
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash acquired................... (31,971,448) -- --
Purchase of equipment................................ (2,501,308) (611,713) (1,052,669)
Proceeds from sale of marketable equity securities... 823,396 -- 580,918
Proceeds from sale of property and equipment......... 226,234 -- 82,620
Proceeds from disposition of cash value of life
insurance......................................... 884,895 -- --
Disbursements on notes receivables, stockholders..... (905,930) -- --
Proceeds from repayment of notes receivable,
stockholders...................................... 458,428 -- --
Disbursements on trademarks and trade names.......... (17,246) -- --
Disbursement on deferred debt expense................ -- -- (9,600)
Purchase of real estate held for sale................ -- -- (60,486)
Increase in cash value of life insurance............. (25,272) (52,524) --
------------ ----------- -----------
Net cash used in investing activities........ (33,028,251) (664,237) (459,217)
------------ ----------- -----------
</TABLE>
--continued--
See Notes to Consolidated Financial Statements
F-6
<PAGE> 60
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, DECEMBER 31, 1995 AND DECEMBER 30, 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on revolving credit agreement............. (58,637,083) (38,562,227) (27,064,360)
Proceeds from revolving credit agreement........... 67,618,777 38,329,791 28,369,813
Proceeds from long-term borrowings................. 9,340,200 -- 526,932
Principal payments on long-term borrowings......... (2,782,871) (481,147) (437,786)
Proceeds from issuance of common stock, net of
committed capital............................... 11,894,353 2,596,024 9,289
Disbursement of loan origination fees.............. (634,689) -- --
Purchase of common stock for retirement............ -- (11,638) (30,409)
Proceeds from exercise of options and warrants..... 33,000 -- --
Proceeds from issuance of convertible debt......... 4,000,000 -- --
------------ ------------ ------------
Net cash provided by financing activities....... 30,831,687 1,870,803 1,373,479
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents................................... (583,386) 2,817,105 (656,209)
CASH AND CASH EQUIVALENTS
Beginning.......................................... 2,973,797 156,692 812,901
------------ ------------ ------------
Ending............................................. $ 2,390,411 $ 2,973,797 $ 156,692
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest........................................ $ 732,976 $ 667,117 $ 446,019
============ ============ ============
Income taxes.................................... $ 2,293,555 $ 43,425 $ 188,934
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES
Fair value of warrants issued with convertible
debt.......................................... $ 33,971 $ -- $ --
============ ============ ============
Issuance of common stock as compensation........ $ -- $ -- $ 12,500
============ ============ ============
Valuation and release from escrow of 282,295
shares of common stock related to the
Acquisitions.................................. $ 2,681,803 $ -- $ --
============ ============ ============
Commissions payable on gross proceeds from
issuance of common stock...................... $ 1,130,000 $ -- $ --
============ ============ ============
Issuance of 96,280 shares of common stock upon
exercise of warrants in exchange for
receivable.................................... $ 240,700 $ -- $ --
============ ============ ============
Capital lease obligation incurred for use of
property and equipment........................ $ 284,250 $ 350,000 $ --
============ ============ ============
Indemnification of claims by Officers and
Directors (Note 17)............................. $ -- $ 525,000 $ --
============ ============ ============
ACQUISITION OF COMPANIES (Note 14)
Working capital acquired, net of cash and cash
equivalents of $468,204....................... $ 4,677,588 $ -- $ --
Fair value of other assets, acquired,
principally property and equipment............ 25,152,612 -- --
Goodwill........................................ 10,823,053 -- --
Long-term debt assumed.......................... (8,681,805) -- --
------------
$ 31,971,448 $ -- $ --
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-7
<PAGE> 61
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business: Flanders Corporation (the "Company") primarily
designs, manufactures and markets a broad range of air filtration products
ranging from high performance laminar flow High Efficiency Particulate Air
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), semiconductors, ultra-pure materials processing, biotechnology,
pharmaceuticals, synthetics, nuclear power and nuclear materials processing. The
Company also provides installation supervision, filter testing, and
certification services for installed systems. The Company sells its products
primarily to cleanroom contractors, industrial users, heating, ventilation and
air-conditioning wholesalers and retailers in North America, based on credit
terms established for individual customers.
Principles of consolidation: The consolidated financial statements include
the accounts of the Company and its subsidiaries, all of which are wholly owned.
One of the Company's subsidiaries has a subsidiary which was 63.0 percent owned
for the years ended December 31, 1996 and 1995. 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.
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. At each balance sheet date, the Company evaluates goodwill for
impairment by comparing expectations of non-discounted future cash flows
excluding interest costs with the carrying value of goodwill for each subsidiary
having a material goodwill balance. Based upon its most recent analysis, the
Company believes that no impairment of goodwill exists at December 31, 1996.
Trademarks and trade names: Trademarks and trade names are being amortized
on a straight line basis over 17 years. At each balance sheet date, the Company
evaluates the value of trademarks and tradenames for impairment by comparing
expectations of non-discounted future cash flows excluding interest costs with
the carrying value of trademarks and trade names for each trademark or trade
name having a material unamortized balance. Based upon its most recent analysis,
the Company believes that no impairment of trademarks and trade names exists at
December 31, 1996.
Property and equipment: Property and equipment are stated at cost.
Depreciation is computed by the straight-line method over estimated useful
lives. Amortization of capital leases is included in depreciation expense. The
carrying amount of all long-lived assets is evaluated periodically to determine
if adjustment to the depreciation and amortization period or to the unamortized
balance is warranted. Based upon its most recent analysis, the Company believes
that no impairment of property and equipment exists at December 31, 1996.
Revenue recognition: All sales are recognized when shipments are made to
customers.
F-8
<PAGE> 62
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, and a wholly owned subsidiary, which sells to
customers in the Far East. Sales through foreign distributors and its wholly
owned subsidiary total 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 $30,000 to $80,000
per occurrence, depending on the subsidiary. Expenses related to health claims
are accrued during the period when the Company is notified of a claim or
probable claim under the policy, including incurred but not reported claims, and
adjusted when the actual claim is submitted.
Income taxes: Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation 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.
Research and development: Research and development expenses and ongoing
costs associated with improving existing products and manufacturing processes
are expensed in the period incurred. Costs associated with research and
development amounted to approximately $460,000, $120,000 and $158,000 for the
years ended December 31, 1996, December 31, 1995 and December 30, 1994,
respectively.
Reclassifications: Certain account balances for the years ended December
31, 1995 and December 30, 1994 have been reclassified with no effect on net
income (loss) or retained earnings to be consistent with the classification
adopted for the year ended December 31, 1996.
NOTE 2. RESTRICTED CASH AND COMMITTED CAPITAL
At December 31, 1996, $8,000,005 of cash which was raised through a private
placement in September and October of 1996 was held in escrow and was subject to
a potential right of rescission in favor of two investors if a Registration
Statement under the Securities Act of 1933 registering certain shares held by
the two investors was not declared effective by January 15, 1997. This amount is
reflected on the balance sheet at December 31, 1996 as "Restricted cash" and
"Committed capital." The $8,000,005 was reclassified to "Cash" and "Additional
paid-in capital" on January 6, 1997, the date such registration was declared
effective.
NOTE 3. INVENTORIES
Inventories consists of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Finished goods.............................................. $3,321,713 $ 198,607
Work in progress............................................ 1,490,438 879,987
Raw materials............................................... 5,127,556 1,302,773
---------- ----------
9,939,707 2,381,367
Less allowance for obsolete raw materials................... 45,000 60,000
---------- ----------
$9,894,707 $2,321,367
========== ==========
</TABLE>
F-9
<PAGE> 63
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. OTHER ASSETS
Other assets consist of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Real estate held for sale................................... $266,486 $266,486
Cash value of officers' life insurance...................... 77,796 52,524
Deferred expenses, net of accumulated amortization of
$104,962 for 1996 and $17,814 for 1995.................... 565,025 14,532
-------- --------
$909,307 $333,542
======== ========
</TABLE>
NOTE 5. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Goodwill, net of accumulated amortization of $85,901........ $13,012,439 $ --
Trademarks and trade names, net of accumulated amortization
of $17,098................................................ 1,004,252 --
----------- -----------
$14,016,691 $ --
=========== ===========
</TABLE>
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
ESTIMATED
1996 1995 USEFUL LIVES
----------- ---------- ------------
<S> <C> <C> <C>
Land............................................. $ 638,465 $ 125,595
Buildings, including assets acquired under
capital lease: 1996 $2,974,000; 1995 $0........ 15,049,245 5,534,094 15-30 years
Machinery and equipment, including assets
acquired under capital lease: 1996 $779,321;
1995 $20,906................................... 16,640,939 3,637,497 10 years
Office equipment............................... 2,718,124 1,106,730 5 years
Vehicles....................................... 557,988 201,065 5 years
Construction in progress....................... 1,361,682 136,759
----------- ----------
36,966,443 10,741,740
Less accumulated depreciation, including
amortization applicable to assets acquired
under capital lease: 1996 $129,152; 1995
$20,906..................................... 6,866,817 5,590,677
----------- ----------
$30,099,626 $5,151,063
=========== ==========
</TABLE>
Total depreciation expense charged to operations totaled $1,382,741,
$633,226 and $628,524 for the years ended December 31, 1996, December 31, 1995
and December 30, 1994, respectively.
NOTE 7. NOTE 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 lesser of defined borrowing bases and $5,000,000 and $1,500,000,
respectively, at December 31, 1995. The weighted average interest rate at
December 31, 1995 was 9.3 percent. The lender's prime rate at December 31, 1995
was 8.50 percent.
F-10
<PAGE> 64
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. 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, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
18% subordinated debentures, interest and principal due and
payable on the earlier of September 17, 1999 or the
release of $4,000,005 of cash to the Company which was
held in escrow at December 31, 1996 pending the
effectiveness of a registration statement of the Company
on or before January 15, 1997. The registration statement
was declared effective on January 6, 1997. See Notes 2 and
23........................................................ $ 2,500,000 $ --
Prime plus 1.0 percent revolving credit agreement with a
bank due September 1998, collateralized by a first
security interest on receivables, inventory, substantially
all machinery and equipment, securities and general
intangibles.(A)........................................... 15,942,145 --
Prime plus 1.5 percent note payable to a bank due in
quarterly payments of $641,700 plus interest due September
1998, collateralized by a first security interest on
receivables, inventory, substantially all machinery and
equipment, securities, common stock of subsidiaries and
general intangibles. This note is subject to mandatory
prepayment provisions as provided in the loan
document.(A).............................................. 4,869,130 --
Prime plus 0.25% notes payable to a mortgage company due in
monthly payments of $23,110 including interest through
January 2006, at which time all unpaid principal is due,
collateralized by a deed of trust on land and buildings
with a carrying value of $3,777,408....................... 2,154,497 --
10.125 percent note payable to a mortgage company, due in
monthly payments of $13,775, including interest through
July 2004, collateralized by a first deed of trust on real
property with a carrying value of $1,106,805 and a second
security interest in certain machinery and equipment...... 864,953 938,576
Note payable to a bank with interest at the One Month London
Interbank Offered Rate (LIBOR) plus 2.67%, due in monthly
payments of $5,670 plus interest through March 2001,
collateralized by equipment with a carrying value of
$316,983.................................................. 289,170 --
7.058 percent fixed rate capital lease obligation, due in
monthly payments of $34,429, including interest through
September 2006, collateralized by land and buildings with
a carrying value of $2,924,433............................ 2,906,202 --
</TABLE>
F-11
<PAGE> 65
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Various contracts payable including capital lease
obligations; interest rates from 5.9 percent to 10.25
percent and 7 percent to 10 percent at December 31, 1996
and 1995, respectively, collateralized by certain
equipment; due in monthly payments of approximately
$24,000 including interest at December 31, 1996 and
monthly and quarterly payments of approximately $2,000 and
$2,665, respectively, including interest at December 31,
1995 and expiring at various times through September
2001...................................................... 630,170 822,189
----------- ----------
30,156,268 1,760,765
Less current maturities..................................... 4,379,973 454,181
----------- ----------
$25,776,295 $1,306,584
=========== ==========
</TABLE>
- ---------------
(A) The lender's prime rate at December 31, 1996 was 8.25 percent. The revolving
credit agreement provides for maximum borrowings based on the lesser of
defined borrowing bases and $25,000,000 at December 31, 1996. The term loan
agreement with the same bank provides for maximum borrowings of $6,500,000.
The weighted average interest rate at December 31, 1996 was 9.4 percent. The
agreements expire in September 1998. Both notes are collateralized by a
first security interest on receivables, inventory, substantially all
machinery and equipment, securities, general intangibles and common stock of
the subsidiaries. Balances due on the revolving loan agreement and the term
loan agreement have been classified as long-term debt according to the
provisions of Statement of Financial Accounting Standards No. 6,
Classification of Short-Term Obligations Expected to be Refinanced, since
subsequent to December 31, 1996, the Company completed an underwritten
public offering for the purpose of repaying the debt on these loan
agreements (Note 23). In connection with the revolving and term loan
agreements, the Company has agreed to certain restrictive covenants which
include, among other things, the lender's approval to pay dividends and
maintenance of certain financial ratios at December 31, 1996, including
tangible net worth of $20,290,000, debt to worth ratio of not more than 2.5
to 1.0, and various net worth covenants for the individual subsidiaries.
The Company was in violation of certain covenants with its lenders as of
December 31, 1996; however, these violations have been waived by the lenders
through January 1, 1998.
Aggregate maturities required on long-term debt as of December 31, 1996 are
due in future years as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDING
- -------------------
<S> <C>
1997................................................... $ 4,379,973
1998................................................... 20,306,761
1999................................................... 637,460
2000................................................... 649,116
2001................................................... 565,988
Later years............................................ 3,616,970
-----------
$30,156,268
===========
</TABLE>
F-12
<PAGE> 66
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a schedule of future minimum lease payments under the
capital leases together with the present value of the net minimum lease payments
as of December 31, 1996:
<TABLE>
<CAPTION>
FISCAL YEARS ENDING
-------------------
<S> <C>
1997........................................................ $ 747,076
1998........................................................ 538,790
1999........................................................ 534,306
2000........................................................ 498,030
2001........................................................ 438,811
Later years................................................. 1,964,581
----------
Total minimum lease payments................................ 4,721,594
Less amounts representing interest.......................... 1,206,747
----------
$3,514,847
==========
</TABLE>
NOTE 9. ACCOUNTS PAYABLE
Accounts payable consist of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Accounts payable, trade.................................... $ 8,655,757 $2,940,716
Commissions payable........................................ 2,007,761 460,092
Customer deposits.......................................... 339,069 24,214
----------- ----------
$11,002,587 $3,425,022
=========== ==========
</TABLE>
NOTE 10. ACCRUED EXPENSES
Accrued expenses consists of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Payroll (Note 15).......................................... $ 966,465 $ 277,911
Insurance, including workers compensation.................. 1,118,711 --
Management fees, related party (Note 17)................... -- 50,000
Sales and use taxes........................................ 98,307 92,940
Interest................................................... 502,134 31,884
Income taxes payable (Note 13)............................. 478,713 481,157
Other...................................................... 375,781 232,747
----------- ----------
$ 3,540,110 $1,166,639
=========== ==========
</TABLE>
NOTE 11. CONVERTIBLE NOTES
In September 1996, the Company issued $4,000,000 of 10% Convertible Notes
pursuant to Regulation S to certain unrelated offshore investors. The notes are
payable on September 20, 1999 and 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; provide 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. If the average
closing bid price of the 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
F-13
<PAGE> 67
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the notes. As of December 31, 1996, no notes had 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.
NOTE 12. STOCKHOLDERS' EQUITY
During the year ended December 31, 1996, the Company raised $18,764,358
through the sale of 3,371,204 shares of common stock in three private placements
to accredited investors. Net proceeds, after commissions and expenses, for each
offering consisted of: (i) $10,352,131 from an offering of 1,333,889 shares of
its common stock at $9.00 per share completed in October 1996 (the "October
Offering"); (ii) $7,339,573 from an offering of 1,537,315 shares of its common
stock at $5.00 per share, completed in June 1996; and (iii) $1,072,654 from an
offering of 500,000 shares of its common stock at $2.50 per share completed in
January 1996. At December 31, 1996, $8,000,005 of the funds raised in the
October Offering was subject to certain potential rights of rescission in favor
of two investors, such that if a Registration Statement under the Securities Act
of 1933 registering certain shares held by the two investors was not declared
effective by January 15, 1997, the investors would have had the right to return
their shares to the Company for the original price of the shares; such a
Registration Statement was declared effective on January 6, 1997, and hence
these potential rights of rescission were never realized.
On December 29, 1995, the Company completed a private placement offering 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 $319,896 amounted to $2,430,104.
The President and Vice President/Chief Financial Officer of the Company
have options to purchase 3,321,021 and 2,214,014 shares, 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 December 15, 1997.
NOTE 13. INCOME TAX MATTERS
The components of income tax expense for the years ended December 31, 1996,
December 31, 1995 and December 30, 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- -------- --------
<S> <C> <C> <C>
Current:
Federal......................................... $1,750,374 $419,492 $106,402
State........................................... 540,737 105,090 --
---------- -------- --------
2,291,111 524,582 106,402
---------- -------- --------
Deferred:
Federal......................................... (42,509) 130,000 40,000
State........................................... (71,011) 30,000 30,000
---------- -------- --------
(113,520) 160,000 70,000
---------- -------- --------
$2,177,591 $684,582 $176,402
========== ======== ========
</TABLE>
F-14
<PAGE> 68
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The income tax provision differs from the amount of income tax determined
by applying the U.S. federal income tax rate of 34% to pretax income for years
ended December 31, 1996, December 31, 1995 and December 30, 1994 due to the
following:
<TABLE>
<CAPTION>
1996 1995 1994
---------- -------- --------
<S> <C> <C> <C>
Computed "expected" tax expense................... $1,962,269 $622,280 $ 58,126
Increase (decrease) in income taxes resulting
from:
Nondeductible expenses.......................... 33,158 50,980 140,037
State income taxes net of federal tax benefit... 152,460 89,159 19,818
Change in valuation allowance................... 22,822 (32,490) (23,680)
Exercise of stock options....................... (37,433) -- --
Benefit of income taxed at lower rates.......... -- -- (7,309)
Tax credits..................................... (10,914) (45,347) (10,590)
Other........................................... 55,229 -- --
---------- -------- --------
$2,177,591 $684,582 $176,402
========== ======== ========
</TABLE>
Net deferred tax assets and liabilities consist of the following components
as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------- --------
<S> <C> <C>
Deferred tax assets:
Accounts receivable allowance........................... $ 48,064 $ 46,150
Inventory allowances.................................... 284,930 107,786
Accrued expenses........................................ 541,314 --
Loss carryforwards...................................... 85,009 --
----------- --------
959,317 153,936
Less valuation allowance................................ 38,797 15,975
----------- --------
920,520 137,961
Deferred tax liabilities:
Property and equipment.................................. 4,466,676 77,961
$(3,546,156) $ 60,000
=========== ========
</TABLE>
The components giving rise to the net deferred tax assets and liabilities
described above have been included in the accompanying consolidated balance
sheets at December 31, 1996 and 1995 as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Current assets.............................................. $ 920,520 $ 137,961
Noncurrent liabilities...................................... (4,466,676) (77,961)
----------- -----------
$(3,546,156) $ 60,000
=========== ===========
</TABLE>
NOTE 14. MERGERS AND ACQUISITIONS
On January 22, 1996, Elite Acquisitions, Inc. stockholders approved a
change of domicile reincorporation merger with Flanders Corporation, a newly
formed wholly-owned North Carolina 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
F-15
<PAGE> 69
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Service Corporation ("CSC"), a competing carbon
filter and containment manufacturer, as well as the land and building on which
CSC operates that was owned by the stockholders of CSC. The total cost of
acquisition, net of cash acquired, was approximately $4,497,000, and up to
100,000 shares of the Company's common stock, which are being held in escrow
pending the evaluation of certain future performance criteria. 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 of the Company's common stock which were
completed in June 1996. The effective date of the acquisition is March 1, 1996,
and the Company's financial statements include the operating activities and
assets of CSC from that date. As of December 31, 1996, 20,000 CSC escrow shares
with a market value of $190,000 were released from escrow to the CSC sellers.
On June 15, 1996, the Company completed the acquisition of all the
outstanding stock of Air Seal Filter Housings, Inc. ("Airseal"), as well as the
land and building on which Airseal operates that was owned by the stockholders
of Airseal. The total cost of acquisition, net of cash acquired, was
approximately $2,270,000 and up to 150,000 shares of the Company's common stock,
which are being held in escrow pending the evaluation of certain future
performance criteria. 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 a private placement of
the Company's common stock completed in June 1996. The effective date of the
acquisition was May 31, 1996, and the Company's financial statements include the
operating activities and assets of Airseal from that date.
On September 23, 1996, the Company acquired all the outstanding stock of
Precisionaire, Inc. ("Precisionaire"), a manufacturer of precision air filters,
containment systems and filtration equipment, as well as a tract of land and a
building on which Precisionaire operates that was owned effectively by the
majority stockholders of Precisionaire. The total cost of acquisition, net of
cash acquired, was approximately $25,205,000 with a post closing valuation
allowance of up to 786,885 shares of the Company's common stock, which are held
in escrow, to be released only if certain performance criteria are met. Upon
achieving certain performance criteria, the common stock will be released from
escrow, valued at the market price on the date of release and 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, subordinated debentures and convertible debt, closed on October 16, 1996,
a credit facility provided by NationsBank consisting of (1) a revolving credit
facility in the maximum principal amount of $25,000,000 and (2) a term loan
facility in the maximum principal amount of $6,500,000, and the assumption of
approximately $2,200,000 of debt associated with a mortgage on the purchased
land and building. The effective date of the acquisition for financial statement
purposes was September 30, 1996, and the Company's financial statements include
the operating activities and assets of Precisionaire from that date. As of
December 31, 1996, 262,295 Precisionaire escrow shares with a market value of
$2,491,803 were released from escrow to the Precisionaire sellers.
F-16
<PAGE> 70
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized below are the unaudited pro forma results of operations of the
Company as though Precisionaire, CSC and Airseal had been acquired at the
beginning of the fiscal years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Revenues.................................................... $128,221,517 $107,983,759
============ ============
Net income.................................................. $ 5,678,195 $ 2,718,764
============ ============
Net income per common share, primary........................ $ 0.3 $ 0.20
============ ============
Net income per common share, fully diluted.................. $ 0.3 $ 0.18
============ ============
</TABLE>
NOTE 15. EMPLOYMENT AGREEMENTS AND DISCRETIONARY BONUSES
The Company has employment agreements with its President and Chief
Executive Officer, its Vice President Finance/Chief Financial Officer, and its
Vice President Operations, which expire on various dates from December 2000
through September 2001. 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
approximately $296,000, $50,000 and $30,000 for the years ended December 31,
1996, December 31, 1995 and December 30, 1994, 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.
NOTE 16. EMPLOYEE BENEFIT PLANS
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: One for each of
Flanders Filters, Inc. ("FFI"), CSC, Airpure and Precisionaire (collectively,
the "401(k) Plans"). The Company is in the process of combining the 401(k) Plans
into a single plan. The 401(k) Plans allow employees to defer up to the lesser
of a plan defined limit ranging from 12 percent to 20 percent of their salary,
depending on which of the 401(k) plan the employees participate, 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 approximately $44,000, $18,000 and $33,000 to the 401(k)
Plans for the years ended December 31, 1996, December 31, 1995 and December 30,
1994, respectively.
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 for several subsidiaries. The Company also maintains a stop loss policy
which covers 100 percent of liability from $30,000 to $1,000,000. A separate
subsidiary maintains a stop loss policy which covers 100 percent of liability
over $80,000 per occurrence. The employer's portion of claims charged to
operations for the years ended December 31, 1996, December 31, 1995 and December
30, 1994 totaled approximately $222,000, $314,000 and $251,000, respectively.
During the year ended December 31, 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
F-17
<PAGE> 71
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
under the LTI Plan. During the year ended December 31, 1996, the Company awarded
options to purchase 236,520 shares of common stock under the LTI Plan. See Note
20.
During the year ended December 31, 1996, the Company also awarded options
to purchase a total of 4,000,000 shares of its common stock to two of its
officers and directors and options to purchase a total of 900,000 shares of its
common stock to consultants to the Company. See Note 20
As permitted under generally accepted accounting principles, grants under
the LTI Plan and other grants of options made during the year are accounted for
following APB Opinion No. 25 and related interpretations. Accordingly, no
compensation cost has been recognized for grants under the LTI Plan, since all
options granted had an exercise price at or above the market price of the
Company's common stock on the date of grant. Had compensation cost for the LTI
Plan been determined based on the grant date fair values of awards using the
Black-Scholes option pricing model (the method described in FASB Statement No.
123), reported net income and earnings per common share would have been reduced
to the pro forma amounts shown below for the years ended December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Net income:
As reported............................................... $3,593,788 $1,145,654
Pro forma................................................. $ 765,682 $ 843,243
Primary earnings per share:
As reported............................................... $ 0.21 $ 0.12
Pro forma................................................. $ 0.04 $ 0.09
Fully diluted earnings per share:
As reported............................................... $ 0.21 $ 0.12
Pro forma................................................. $ 0.04 $ 0.09
Weighted average fair value per option of options granted
during the year........................................... $ 0.89 $ 0.20
</TABLE>
In determining the pro forma amounts above, the value of each grant is
estimated at the grant date using the Black-Scholes option pricing method
prescribed in FASB Statement No. 123, with the following assumptions: Dividend
rate of 0%; risk-free interest rates based upon the zero-coupon rate on the date
of grant for the expected life of the option; and expected price volatility
based upon the trading history of a comparable public company during the period
ended on the date of grant. The weighted average for options granted in 1996
were as follows: Dividend rate of 0%; average risk-free interest rate of 5.46%;
average expected lives of 2.4 years; and average expected price volatility of
20.0%.
NOTE 17. RELATED PARTY TRANSACTIONS AND BALANCES
Three of the officers and directors of the Company entered into an
Indemnity Agreement with FFI whereby the officers and directors will
collectively deposit up to $1,500,000 into an escrow fund to indemnify FFI for
the payment of a $525,000 judgment arising from the lawsuits against FFI by
Hartford Casualty Insurance Co. v. Flanders Filters, Inc., case no.
92-CVS-07766; and St. Paul Fire and Marine Insurance Co. v. Flanders Filters,
Inc., case no. 93-CVS-2798, and potential environmental issues at FFI's facility
in Washington, North Carolina (See also Note 22). 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. The indemnification has been recorded as a
contribution to capital for all known amounts, during the period at which the
amount of the claims became known. The officers and directors have complied with
the Agreement whereby payments of $525,000 were made to the respective insurance
companies. Expenses related to the Insurance Companies' claims totaled $0,
$375,000 and $150,000 for the years ended December 31, 1996, December 31, 1995
and December 30, 1994, respectively.
F-18
<PAGE> 72
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ABB Partnership, as landlord, and Flanders Airpure Products, a subsidiary
of FFI, as tenant, entered into a Lease Agreement, dated July 31, 1995. ABB
Partnership is controlled by the president of the Company. The lease, which is a
month to month lease of $10,938 per month, was entered into on terms believed by
Airpure to be fair and reasonable and generally reflective of market conditions.
The expense for this lease for the years ended December 31, 1996 and 1995
amounted to $84,375 and $6,250, respectively.
LBH Realty, as landlord, and Precisionaire, as tenant, entered into a
year-to-year Lease Agreement. A Director of the Company is the managing partner
of LBH Realty. The year-to-year lease was entered into on terms believed by the
Company to be fair and reasonable and generally reflective of market conditions.
The expense for this lease for the year ended December 31, 1996 amounted to
approximately $49,000.
Transactions with Flanders Equity Corporation, a company affiliated through
common ownership, consisted of $0, $532,000 and $420,000 during the years ended
December 31, 1996, December 31, 1995 and December 30, 1994, respectively,
recorded as management fees expense. Liabilities at December 31, 1996 and 1995
included amounts owed to Flanders Equity Corporation of $0 and $50,000,
respectively, included on the balance sheet as accrued management fees (See
Note 10).
At December 31, 1996, the Company had notes receivable of $905,930 due from
various directors, officers and employees with interest thereon varying between
7% and 8.5%, maturing in 1997.
NOTE 18. LEASE COMMITMENTS AND TOTAL RENTAL EXPENSE
Certain equipment and buildings are leased under agreements expiring
between 1997 and 2001. The following is a schedule for the total rental
commitments under these leases as of December 31, 1996:
<TABLE>
<CAPTION>
FISCAL YEARS ENDING
- -------------------
<S> <C>
1997................................................... $209,162
1998................................................... 156,789
1999................................................... 128,867
2000................................................... 92,246
2001................................................... 62,168
--------
$649,232
========
</TABLE>
The total rental expense charged to operations totaled approximately
$465,000, $148,000 and $208,000 for the years ended December 31, 1996, December
31, 1995 and December 30, 1994, respectively.
NOTE 19. 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 at December
31, 1996 and 1995 because of the short maturity of those instruments.
Notes receivable, related party: Based on the investing rates currently
available to the Company from financial institutions with similar maturities,
the fair value of notes receivable, related party, approximates the carrying
value.
Notes payable, long-term debt and convertible 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 at December 31, 1996 and 1995.
F-19
<PAGE> 73
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 20. STOCK OPTIONS AND WARRANTS
During the year ended December 31, 1996, the Company granted options to
purchase 236,520 shares of common stock under its LTI Plan, with exercise prices
ranging from $2.50 per share to $9.50 per share. The Company also issued 900,000
shares to consultants with exercise prices ranging from $2.50 per share to $3.50
per share, and 4,000,000 shares to officers and directors with exercise prices
ranging from $2.50 per share to $7.50 per share. All options granted during the
year ended December 31, 1996 were fixed price options, and were exercisable at
December 31, 1996.
The following table summarizes the activity related to the Company's stock
options and warrants for the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE EXERCISE PRICE
-------------------- PER SHARE PER SHARE
STOCK ---------------------------- ------------------
WARRANTS OPTIONS WARRANTS OPTIONS WARRANTS OPTIONS
-------- --------- ------------- ------------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January
1, 1995.............. -- --
Granted.............. 61,280 2,500,000 $2.50 $1.00 $2.50 $1.00
Exercised............ -- --
Canceled or
expired........... -- --
------ ---------
Outstanding at December
31, 1995............. 61,280 2,500,000 $2.50 $1.00 $2.50 $1.00
Granted.............. 97,712 5,136,520 $2.50 - $9.63 $2.50 - $9.50 $5.29 $4.61
Exercised............ 96,280 13,200 $2.50 $2.50 $2.50 $2.50
Canceled or
expired........... 37,712 --
------ ---------
Outstanding at December
31, 1996............. 25,000 7,623,320 $9.63 $1.00 - $9.50 $9.63 $3.43
====== =========
Exercisable at December
31, 1996............. 25,000 7,623,320 $9.63 $1.00 - $9.50 $9.63 $3.43
====== =========
</TABLE>
The warrants and options expire at various dates ranging from December 1998
to February 2006. A further summary of information related to fixed options
outstanding at December 31, 1996 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
- --------------- ----------- ---------------- ----------------
<C> <C> <C> <C>
$1.00 2,500,000 3.88 Years $1.00
2.50 2,806,320 3.35 2.50
3.50 200,000 2.00 3.50
6.94 to 7.50 2,077,000 4.42 7.49
9.50 40,000 4.50 9.50
</TABLE>
NOTE 21. EARNINGS PER 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 20 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
F-20
<PAGE> 74
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 years ended
December 31, 1996, December 31, 1995 and December 30, 1994 were calculated as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- -----------
<S> <C> <C> <C>
Net income (loss)................................ $ 3,593,788 $1,145,654 $ (5,443)
----------- ---------- -----------
Weighted average shares outstanding.............. 13,171,439 9,831,996 9,693,478
Add: weighted average shares related to
exercisable warrants and options reduced by
the shares that could be purchased with the
proceeds.................................... 3,870,492 -- --
----------- ---------- -----------
Adjusted weighted average shares outstanding..... 17,041,931 9,831,996 9,693,478
=========== ========== ===========
Net income per common share...................... $ 0.21 $ 0.12 $ --
=========== ========== ===========
</TABLE>
Fully diluted earnings per common and common equivalent share for the years
ended December 31, 1996, December 31, 1995 and December 30, 1994 were calculated
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- -----------
<S> <C> <C> <C>
Net income (loss)................................ $ 3,593,788 $1,145,654 $ (5,443)
Interest on convertible debt, net of taxes....... 148,110 -- --
----------- ---------- -----------
$ 3,741,898 $1,145,654 $ (5,443)
=========== ========== ===========
Weighted average shares outstanding.............. 13,762,092 9,831,996 9,693,478
Add: weighted average shares related to
exercisable warrants and options reduced by
the shares that could be purchased with the
proceeds.................................... 4,310,179 -- --
----------- ---------- -----------
Adjusted weighted average shares outstanding..... 18,072,271 9,831,996 9,693,478
=========== ========== ===========
Net income per common share...................... $ 0.21 $ 0.12 $ --
=========== ========== ===========
</TABLE>
NOTE 22. LITIGATION
The Company is currently being monitored by the United States Environmental
Protection Agency ("EPA") for possible environmental contamination at one of its
main facilities. The Company has entered into an agreement with the EPA to
conduct monthly monitoring of groundwater. The Company estimates the monitoring
will last from 3-5 years, with total cost not to exceed $45,000. The Company has
received a limited indemnification from certain directors, officers and
shareholders of the Company of approximately $975,000 with respect to the claims
by the EPA; however, there can be no assurance that the amount of this
indemnification will be sufficient to cover the aggregate of liabilities
asserted by the EPA (See also Note 17).
Additionally,from time to time, the Company is also a party to various
legal proceedings incidental to its business. Management believes none of these
proceedings are material to the conduct of the Company's business, operations or
financial condition.
NOTE 23. SUBSEQUENT EVENTS
On March 7, 1997, the Company completed the purchase of the majority of the
assets of BB&D Manufacturing, Inc., and Intermountain Painting and Subassembly,
Inc. Assets acquired included fixed assets, inventory and backlog. The assets
were placed in a newly formed subsidiary, Airseal West, Inc. ("Airseal
F-21
<PAGE> 75
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
West"), located in Salt Lake City, Utah. Airseal West will manufacture specialty
and standard housings for air filtration and HVAC systems, as well as integrated
custom industrial-grade HVAC systems.
During the third quarter of 1997, the Company purchased certain plant and
office facilities by utilizing their line of credit or entering into mortgages
with various financial institutions. The purchase price of the facilities was
approximately $5,885,000, and the amount of the debt incurred was approximately
$5,879,000; $1,851,000 drawn on the line of credit and $4,028,000 financed with
the property as collateral.
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
$1,720,000 amounted to $13,480,000. The Company utilized the entire amount of
the proceeds from the offering to repay long-term and convertible debt. On
January 31, 1997, the Underwriter of the 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. Net
proceeds from the Offering, including the over-allotment, were $15,596,000.
The following unaudited pro forma balance sheet sets forth the balance
sheet of the Company as of December 31, 1996, adjusted to reflect the receipt
and initial application of the proceeds of both the Offering and the
over-allotment option:
UNAUDITED SUMMARY PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
Current assets.............................................. 33,892,787
Other assets................................................ 909,307
Intangible assets........................................... 14,016,691
Property and equipment, net................................. 30,099,626
-----------
$78,918,411
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities......................................... 18,522,670
Long-term debt, less current maturities..................... 2,980,261
Convertible debt............................................ 4,000,000
Deferred income taxes....................................... 4,466,676
Commitments and contingencies............................... --
Stockholders' equity........................................ 48,948,804
-----------
$78,918,411
===========
</TABLE>
F-22
<PAGE> 76
INDEPENDENT AUDITOR'S REPORT ON THE SUPPLEMENTAL SCHEDULE
To the Board of Directors
Flanders Corporation
Washington, North Carolina
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The consolidated
Supplemental Schedule II is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audits of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic consolidated financial statements taken as a whole.
McGladrey & Pullen, LLP
New Bern, North Carolina
February 7, 1997
F-23
<PAGE> 77
FLANDERS CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, DECEMBER 31, 1995 AND DECEMBER 30, 1994
<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, 1996
Allowance for doubtful
accounts...................... $148,000 $ -- $318,903(1) $(120,423)(1)(2) $346,480
Allowance for inventory value.... 60,000 -- 100,000(2) (115,000)(2) 45,000
Valuation allowance for deferred
tax assets.................... 15,975 38,797 3,404(3) (19,379)(2) 38,797
-------- -------- -------- --------- --------
Total.................... $223,975 $ 38,797 $422,307 $(254,802) $430,277
======== ======== ======== ========= ========
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)(2) 60,000
Valuation allowance for deferred
tax assets.................... 48,465 -- -- (32,490)(2) 15,975
-------- -------- -------- --------- --------
Total.................... $193,465 $121,799 $ -- $ (91,289) $223,975
======== ======== ======== ========= ========
For the year ended Dec. 31, 1994
Allowance for doubtful
accounts...................... $ 65,500 $ -- $ -- $ (25,500)(1)(2) $ 40,000
Allowance for inventory value.... 174,134 -- -- (69,134)(2) 105,000
Valuation allowance for deferred
tax assets.................... 72,145 -- -- (23,680)(2) 48,465
-------- -------- -------- --------- --------
Total.................... $311,779 $ -- $ -- $(118,314) $193,465
======== ======== ======== ========= ========
</TABLE>
- ---------------
(1) Uncollected receivables written-off, net of recoveries.
(2) Reduction in valuation allowance.
(3) Increase due to acquisition of subsidiaries.
F-24
<PAGE> 78
FLANDERS CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30,
1997
-----------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 2,340,535
Short-term investments.................................... 294,409
Receivables:
Trade, less allowance for doubtful accounts of $346,480
at June 30, 1997...................................... 20,843,497
Related party.......................................... 1,812,039
Other.................................................. 405,729
Inventories (See Note 2).................................. 13,541,869
Deferred taxes............................................ 962,000
Other current assets...................................... 1,090,305
-----------
Total current assets.............................. 41,290,383
-----------
Other assets................................................ 443,373
Intangible assets, net...................................... 13,721,111
Property and equipment, net of accumulated depreciation and
amortization of $8,296,519 at June 30, 1997............... 35,349,324
-----------
$90,804,191
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt...................... $ 593,724
Accounts payable.......................................... 13,916,799
Accrued expenses and other current liabilities............ 6,802,947
-----------
Total current liabilities......................... 21,313,470
-----------
Long-term debt, less current maturities..................... 9,255,864
Convertible debt............................................ 3,200,000
Deferred income taxes....................................... 4,370,000
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: 18,016,103 at June
30, 1997............................................... 18,016
Additional paid-in capital................................ 41,609,338
Retained earnings......................................... 11,037,503
-----------
Total stockholders' equity........................ 52,664,857
-----------
$90,804,191
===========
</TABLE>
See Notes to Consolidated Condensed Financial Statements
F-25
<PAGE> 79
FLANDERS CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net sales................................................... $61,250,037 $26,241,260
Cost of goods sold.......................................... 45,306,412 19,773,754
----------- -----------
Gross Profit...................................... 15,943,625 6,467,506
----------- -----------
Operating expenses.......................................... 11,853,390 4,548,468
Operating income.................................. 4,090,235 1,919,038
----------- -----------
Nonoperating income (expense):
Other income (expense).................................... 535,862 392,375
Interest expense.......................................... (450,693) (145,568)
----------- -----------
85,169 246,807
----------- -----------
Income before income taxes........................ 4,175,404 2,165,845
Income taxes................................................ 1,510,000 817,876
----------- -----------
Net income........................................ $ 2,665,404 $ 1,347,969
----------- -----------
Earnings per weighted average common and common equivalent
share outstanding:
Primary................................................... $ 0.12 $ 0.09
=========== ===========
Fully diluted............................................. $ 0.12 $ 0.08
=========== ===========
Weighted average common and common equivalent shares
outstanding:
Primary................................................... 21,680,950 15,252,025
=========== ===========
Fully diluted............................................. 22,435,540 15,860,484
=========== ===========
</TABLE>
See Notes to Consolidated Condensed Financial Statements
F-26
<PAGE> 80
FLANDERS CORPORATION AND SUBSIDIARY
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
------- ----------- -----------
<S> <C> <C> <C>
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........................ 102 817,174 --
Release of committed capital (Note 3).................... -- 8,000,005 --
Issuance of 1,897,000 shares of common stock............. 1,897 15,857,511 --
Issuance of 65,000 shares of common stock upon exercise
of options............................................ 65 162,435 --
Receivables secured by stock related to exercise of
warrants.............................................. -- (192,500) --
Net income (unaudited)................................... -- -- 2,665,404
------- ----------- -----------
Balance, June 30, 1997..................................... $18,016 $41,609,338 $11,037,504
======= =========== ===========
</TABLE>
See Notes to Consolidated Condensed Financial Statements
F-27
<PAGE> 81
FLANDERS CORPORATION AND SUBSIDIARY
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
1997 1996
--------------- --------------
<S> <C> <C>
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES............ $ 3,207,937 $(2,148,729)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of assets from BB&D & IP...................... (403,000) --
Acquisitions, net of cash received........................ -- (6,707,955)
Purchase of equipment..................................... (6,679,400) (719,279)
------------ -----------
NET CASH (USED) BY INVESTING ACTIVITIES..................... (7,082,400) (7,427,234)
CASH FLOWS FROM FINANCING ACTIVITIES
Release of restricted cash from escrow.................... 8,000,005 --
Short-term investments.................................... 294,409 --
Net change in long-term borrowings........................ (20,351,282) (1,413,708)
Proceeds from issuance of common stock.................... 15,881,455 8,421,892
------------ -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES............ 3,824,587 7,008,184
------------ -----------
NET INCREASE (DECREASE) IN CASH............................. (49,876) (2,567,779)
CASH AT BEGINNING OF PERIOD................................. 2,390,411 2,973,797
------------ -----------
CASH AT END OF PERIOD....................................... $ 2,340,535 $ 406,018
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for income taxes................................ $ 2,055,000 $ 754,033
============ ===========
Cash payments for interest................................ $ 952,827 $ 145,568
============ ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES
Conversion of debentures plus accumulated interest into
common stock........................................... $ 834,798 $ --
============ ===========
</TABLE>
See Notes to Consolidated Condensed Financial Statements
F-28
<PAGE> 82
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND INTERIM FINANCIAL STATEMENTS
Nature of business: Flanders Corporation (the "Company") is a leading
supplier of a broad range of air filtration products, including (i) high
efficiency particulate air ("HEPA") filters, typically with at least 99.97%
efficiency and absolute isolation barriers ("Absolute Isolation Barriers") for
the absolute control and containment of contaminants and toxic gases in certain
manufacturing processes, (ii) filters for individual and commercial use, which
fall under specifications which are categorized by efficiency ratings
established by the American Society of Heating, Refrigeration and Air
Conditioning Engineers ("ASHRAE"), and (iii) low cost filters with efficiency
ratings below 30% sold typically off-the-shelf for standard residential and
commercial furnace and air conditioning applications. 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 also designs and manufactures its
own production equipment to allow for highly automated manufacturing of these
products. Furthermore, the Company produces glass-based fiber media for many of
its products to maintain control over the quality and composition of such media.
The Company is positioning itself to offer to its customers a full range of
air filtration products. 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. As a result, in 1996, the
Company expanded its product line through the purchase of three other companies:
Charcoal Service Corporation ("CSC"), which specializes in charcoal filtration
systems for the removal of gaseous contaminants, Air Seal Filter Housings, Inc.
("Air Seal"), which specializes in filter housings and customized industrial
HVAC equipment, and Precisionaire, Inc. ("Precisionaire"), which specializes in
the manufacture and sale of filter products ranging from mid-range ASHRAE grade
filters through low cost residential furnace filters. Additionally, during the
first six months of 1997, the Company acquired the majority of the assets of
Intermountain Paint and Sub-Assembly, Inc., and B B & D Manufacturing, Inc.
(collectively "BB&D") and placed them in a newly formed, majority owned
subsidiary, Airseal West, Inc. ("Airseal West").
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 six month period ended June 30, 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.
F-29
<PAGE> 83
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
Primary earnings per common and common equivalent share for the six month
periods ended June 30, 1997 and 1996 were calculated as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net income.............................................. $ 2,665,404 $ 1,347,969
Weighted average shares outstanding..................... 16,958,023 12,517,226
Add: exercise of weighted average warrants and options
reduced by the number of shares purchased with
proceeds........................................... 4,722,927 2,734,799
----------- -----------
Adjusted weighted average shares outstanding............ 21,680,950 15,252,025
=========== ===========
Net income per common share............................. $ 0.12 $ 0.09
----------- -----------
</TABLE>
Fully diluted earnings per common and common equivalent share for the six
month periods ended June 30, 1997 and 1996 were calculated as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net income.............................................. $ 2,665,404 $ 1,347,969
Weighted average shares outstanding..................... 17,712,613 12,547,446
Add: exercise of weighted average warrants and options
reduced by the number of shares purchased with
proceeds........................................... 4,722,927 3,313,038
----------- -----------
Adjusted weighted average shares outstanding............ 22,435,540 15,860,484
=========== ===========
Net income per common share............................. $ 0.12 $ 0.08
----------- -----------
</TABLE>
NOTE 2. INVENTORIES
Inventories consist of the following at June 30, 1997:
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------
<S> <C>
Finished goods.............................................. $ 4,070,188
Work in progress............................................ 952,313
Raw materials............................................... 8,564,368
-----------
13,586,869
Less allowance for obsolete raw materials................... 45,000
-----------
$13,541,869
===========
</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 $1,720,000 amounted to $13,480,000. 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 $15,596,000.
F-30
<PAGE> 84
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
Restricted cash. On January 6, 1997, a Registration Statement under the
Securities Act of 1933 was declared effective registering certain shares,
including those shares purchased by two investors through a private placement in
September and October 1996. Due to the effectiveness of the Registration
Statement, the potential right of rescission held by those two investors
expired, 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.
NOTE 4. STOCK OPTIONS AND WARRANTS
The following table summarizes the activity related to the Company's stock
options and warrants for the six months ended June 30, 1997:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE EXERCISE PRICE
PER SHARE PER SHARE
STOCK ------------------------ ------------------
WARRANTS OPTIONS WARRANTS OPTIONS WARRANTS OPTIONS
-------- --------- ----------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at December 31, 1996... 25,000 7,623,320 9.63 1.00-9.50 9.63 3.43
Granted....................... 150,256 95,100 8.11-14.73 7.13 14.28 7.13
Exercised..................... -- 65,000 2.50 2.50
Canceled or expired........... -- --
------- --------- ----------- ---------- ------ -----
Outstanding at June 30, 1997....... 175,256 7,653,420 $8.11-14.73 $1.00-9.50 $13.61 $3.48
------- --------- ----------- ---------- ------ -----
Exercisable at June 30, 1997....... 35,256 7,558,320 $ 8.11-9.63 $1.00-9.50 $ 9.19 $3.43
------- --------- ----------- ---------- ------ -----
</TABLE>
The warrants expire at various periods through January 2002. The options
expire at various times through February 2006.
NOTE 5. LITIGATION
The Company recently purchased property in Momence, County of Kankakee,
Illinois ("Illinois Property") for a new mid-range manufacturing facility. In
connection with such purchase, the Company agreed to assume all risk of
environmental liability for past, present or future conditions on the Illinois
Property except for any liability related to ground water environmental
problems. The Illinois Property had certain environmental problems which
required remediation under federal and Illinois law. The seller of the Illinois
Property has worked extensively with the Illinois Environmental Protection
Agency ("IEPA") with regard to the environmental matters, and the Company has
completed Phase I and Phase II environmental surveys with respect to the
property and it appears that the environmental matters have been resolved,
except for certain monitoring procedures required by the IEPA. However,
resolution of state issues has no effect on any potential federal or common law
claims, and there can be no assurance that such claims will not be made. There
were no material additions to, or changes in status of, any ongoing, threatened
or pending legal proceedings during the three months ended June 30, 1997, other
than the liabilities assumed in connection with the purchase of the Illinois
Property.
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.
F-31
<PAGE> 85
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-32
<PAGE> 86
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 assets (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
STOCK REPURCHASE OBLIGATION (Note 5)........................ 2,264,760 571,594
----------- -----------
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......................................... 4,364,900 4,395,955
----------- -----------
Total stockholders' equity........................ 4,645,080 4,676,135
----------- -----------
$17,485,010 $16,479,708
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-33
<PAGE> 87
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) -- --
ACCRETION OF STOCK REPURCHASE OBLIGATION (Note 5)....... (1,693,166) (272,677) 3,246,478
RETAINED EARNINGS, beginning of year.................... 4,395,955 4,020,181 (128,645)
----------- ----------- -----------
RETAINED EARNINGS, end of year.......................... $ 4,364,900 $ 4,395,955 $ 4,020,181
=========== =========== ===========
NET INCOME PER SHARE.................................... $ 44.67 $ 17.25 $ 24.00
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-34
<PAGE> 88
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
========== =========== ===========
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 $ -- $ --
Accretion of Stock Repurchase Obligation............... $1,693,166 $ 272,677 $(3,246,478)
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-35
<PAGE> 89
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-36
<PAGE> 90
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-37
<PAGE> 91
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>
4. LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <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 --
</TABLE>
F-38
<PAGE> 92
PRECISIONAIRE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C> <C>
(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>
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
F-39
<PAGE> 93
PRECISIONAIRE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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-
F-40
<PAGE> 94
PRECISIONAIRE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
The stock repurchase obligation reflected in the accompanying balance
sheets is the difference between the calculated value of stock to be repurchased
by the Company and the face value of the insurance policies on the lives of the
stockholders.
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-41
<PAGE> 95
======================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE
AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY 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 HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
[Table of Contents will generate here]
INDEX TO FINANCIAL STATEMENTS......... F-1
</TABLE>
======================================================
======================================================
6,400,000 SHARES
[LOGO]
FLANDERS CORPORATION
COMMON STOCK
------------------------
PROSPECTUS
------------------------
RAYMOND JAMES &
ASSOCIATES, INC.
CLEARY GULL REILAND
& MCDEVITT INC.
, 1997
======================================================
<PAGE> 96
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission initial registration
fee....................................................... $ 15,613
Legal fees and expenses..................................... 450,000*
NASD filing fee............................................. 5,652
Nasdaq additional listing fee............................... 17,500*
Accounting fees and expenses................................ 100,000*
Transfer agent fees......................................... 15,000*
Printing and engraving expenses............................. 50,000*
Miscellaneous............................................... 46,235
--------
Total............................................. $700,000
========
</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, before a company can 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 interest of the company and,
in all other cases, was at least not opposed to the company's best interest,
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 interest 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 the Company 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 interest of the Company. No
indemnification shall be made in respect of any claim or matter as to which such
person has been adjudged to be liable for negligence or misconduct in the
performance of his duty to the Company unless and only to the extent that the
court in which the action is brought determines that in view of all
circumstances such person is fairly and reasonably entitled to indemnification
for expenses which the court deems proper.
II-1
<PAGE> 97
The Company's Bylaws also provide that an authorized representative of the
Company who neither was nor 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 29, 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 $2,429,004. 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 expired 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 $1,102,749 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 expired on July 24, 1996. The warrants
were exercised in full.
3. On June 3, 1996, the Company completed a private offering under
Regulation D of 1,537,315 shares of its common stock to accredited
investors at $5.00 per share. The Company received $7,339,573 in net
proceeds from the offering. In connection with this offering, the Company
paid $188,560 in commissions to ACAP Financial and granted 37,712 stock
warrants at $5.00 per share, which expired December 3, 1996.
4. In September 1996, the Registrant sold 855,445 shares of the
Registrant's Common Stock to certain accredited investors under Regulation
D of the Securities Act of 1933. The aggregate purchase price for such
shares was $7,699,005. In connection with this offering, the Company paid a
total of $679,900 in commissions to EGS Securities and Kelcop Financial
Inc.
5. On September 18, 1996, the Registrant issued $2,500,000 aggregate
principal amount of Series A Convertible Subordinated Debentures pursuant
to Regulation D of the Securities Act of 1933 to certain unrelated
investors. As part of this transaction, the investors also acquired
warrants to purchase 25,000 shares of the Registrant's Common Stock at an
exercise price of $9.63 per share. Net proceeds to the Company were
$2,500,000.
6. On September 19, 1996, the Registrant issued an aggregate
$4,000,000 principal amount 10% Convertible Notes pursuant to Regulation S
of the Securities Act of 1933 to certain unrelated offshore investors. Such
notes are convertible at any time commencing 41 days after issuance into
shares of the Registrant's Common Stock at a conversion price equal to the
lower of (i) 82% of the average closing bid price for the seven (7) trading
days immediately preceding the conversion date, or (ii) $9.00; provided,
that in no event shall the conversion price be less than $5.00; provided
further, that in no event shall the holder of the 10% Convertible Notes be
entitled to convert any portion of such notes if such action would result
in beneficial ownership by a holder and its affiliates of more than 4.9% of
the outstanding shares of Common Stock of the Company. If the average
closing bid price of the Company's Common Stock over any continuous seven
trading day period is less than $7.38 per share, the Company may redeem the
convertible notes at a price equal to 115% of the outstanding principal
amount of the notes. As part of this transaction, the investors also shall
acquire, on the date of the conversion of such notes into Common
II-2
<PAGE> 98
Stock, the right to receive warrants equal to 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. On October 11, 1996, the Company raised an additional $4,306,000
from a private placement of 478,444 shares of stock at $9.00 per share to
certain accredited investors and pursuant to Rule 506 of Regulation D
adopted under Section 4(2) of the Securities Act of 1933. Net proceeds from
the Offering after commissions of $400,000, were $3,906,000. Combined with
the September Offering, total net proceeds from September and October were
$17,122,605. In connection with this offering, the Company paid $400,000 to
Gilford Securities.
8. On May 15, 1997, the Company completed a private offering under
Regulation D of 45,000 shares of common stock at $5.75 per share to
accredited investors. Net proceeds to the Company after expenses from the
offering were $233,360. Placement fees totaling $25,390 were paid to ACAP
Financial.
ITEM 16. LIST OF EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
<C> <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-A
dated March 8, 1996, incorporated herein by reference.
4.1(a) -- Warrant Agreement with Gilford Securities Incorporated,
previously with Form S-1, filed October 21, 1996 (Reg. No.
333-14655 and incorporated herein by reference).
4.1(b) -- Form of Warrant Agreement with Raymond James & Associates,
Inc. and Cleary Gull Reiland & McDevitt Inc.
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 Air Seal 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 -- Indemnification Agreement between Flanders Corporation,
Steven K. Clark, Robert R. Amerson and Thomas Allan, filed
with the December 31, 1995 Form 10-K, incorporated herein by
reference.
10.6 -- Guaranty Agreement between Flanders Corporation and American
National Bank of Texas, filed with the September 30, 1996
Form 10-Q, incorporated herein by reference.
</TABLE>
II-3
<PAGE> 99
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
<C> <C> <S>
</TABLE>
10.7 -- Financing and Security Agreement by and among Flanders
Corporation and NationsBank, N.A., dated September 19, 1996,
filed with the Form 8-K dated September 23, 1996,
incorporated herein by reference.
10.8 -- Promissory Note from Precisionaire, Inc. to SunTrust Bank,
Tampa Bay, in the amount of $2,134,524 dated August 28,
1997.
10.9 -- Assumption Agreement between POF Realty, Precisionaire,
Inc., Polk County Industrial Development Authority and
SunTrust Bank, dated August 1, 1997.
10.10 -- Mortgage Deed and Security Agreement between Precisionaire,
Inc. and Sun Trust Bank, Tampa Bay dated August 28, 1997.
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 Andersen & Co., LLP.
23.3 -- Consent of Snell & Wilmer (included in Opinion filed as
Exhibit No. 5.1).
24 -- Power of Attorney (included on signature page of
Registration Statement).
99.1 -- Flanders Corporation Long-Term Incentive Plan, filed with
the December 31, 1995 Form 10-K, incorporated herein by
reference.
99.2 -- Flanders Corporation 1996 Director Option Plan, filed with
the December 31, 1995 Form 10-K, incorporated herein by
reference.
99.3 -- 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.
99.4 -- Amendment to Employment Agreement between Elite
Acquisitions, Inc., Flanders Filters, Inc. and Steven K.
Clark, filed with Form S-1, filed October 21, 1996 (Reg. No.
333-14655), incorporated herein by reference.
99.5 -- 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.
99.6 -- Amendment to Employment Agreement between Elite
Acquisitions, Inc., Flanders Filters, Inc. and Robert R.
Amerson, filed with Form S-1, filed October 21, 1996 (Reg.
No. 333-14655), incorporated herein by reference.
99.7 -- 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.
99.8 -- Stock Option Agreement between Elite Acquisitions, Inc. and
Steven K. Clark, filed with the Form 10-K dated December 31,
1995, incorporated herein by reference.
99.9 -- Stock Option Agreement between Flanders Corporation and
Steven K. Clark dated February 22, 1996, filed with Form S-8
on July 21, 1997, incorporated herein by reference.
99.10 -- Stock Option Agreement between Flanders Corporation and
Robert R. Amerson dated February 22, 1996, filed with Form
S-8 on July 21, 1997, incorporated herein by reference.
99.11 -- Stock Option Agreement between Flanders Corporation and
Steven K. Clark dated June 3, 1996, filed with Form S-8 on
July 21, 1997, incorporated herein by reference.
99.12 -- Stock Option Agreement between Flanders Corporation and
Robert R. Amerson dated June 3, 1996, filed with Form S-8 on
July 21, 1997, incorporated herein by reference.
99.13 -- 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.
II-4
<PAGE> 100
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
<C> <C> <S>
99.14 -- 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.
99.15 -- 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.
</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:
(a) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(b) 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 this Registration Statement;
(c) To include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or
any material change to such information in this Registration Statement.
Provided, however, that paragraphs (1)(a) and (1)(b) above do not apply
if the registration statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the
Registrant pursuant to Section 13 or Section 15(d) of the Exchange Act
that are incorporated by reference in this Registration Statement.
2. That, for the purpose of determining any liability under the
Securities Act, 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.
4. For purposes of determining any liability under the Securities Act,
each filing of the Registrant's annual report pursuant to Section 13(a) or
15(d) of the Exchange Act (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Exchange Act) that is incorporated by reference in the Registration
Statement 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.
5. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers, and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant 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 whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-5
<PAGE> 101
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Washington, State of
North Carolina, on the 9th day of September, 1997.
FLANDERS CORPORATION
By: /s/ ROBERT R. AMERSON
------------------------------------
Robert R. Amerson
President, Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Steven K. Clark, his attorney-in-fact, to sign
any documents to this Registration Statement (including post-effective
amendments), and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Commission, hereby ratifying and
confirming all the said attorney-in-fact may lawfully do or cause to be done by
virtue hereof.
Pursuant to the Requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ROBERT R. AMERSON President, Chief Executive September 9, 1997
- --------------------------------------------------- Officer, Director
Robert R. Amerson
/s/ STEVEN K. CLARK Chief Financial Officer, Chief September 9, 1997
- --------------------------------------------------- Accounting Officer and
Steven K. Clark Director
/s/ THOMAS T. ALLAN Chairman of the Board September 9, 1997
- ---------------------------------------------------
Thomas T. Allan
/s/ GUSTAVO HERNANDEZ Director September 9, 1997
- ---------------------------------------------------
Gustavo Hernandez
/s/ WILLIAM M. CLAYTOR Director September 9, 1997
- ---------------------------------------------------
William M. Claytor
/s/ WILLIAM H. CLARK Director September 9, 1997
- ---------------------------------------------------
William H. Clark
</TABLE>
II-6
<PAGE> 102
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <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-A
dated March 8, 1996, incorporated herein by reference.
4.1(a) -- Warrant Agreement with Gilford Securities Incorporated,
previously with Form S-1, filed October 21, 1996 (Reg. No.
333-14655 and incorporated herein by reference).
4.1(b) -- Form of Warrant Agreement with Raymond James & Associates,
Inc. and Cleary Gull Reiland & McDevitt Inc.
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 Air Seal 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 -- Indemnification Agreement between Flanders Corporation,
Steven K. Clark, Robert R. Amerson and Thomas Allan, filed
with the December 31, 1995 Form 10-K, incorporated herein by
reference.
10.6 -- Guaranty Agreement between Flanders Corporation and American
National Bank of Texas, filed with the September 30, 1996
Form 10-Q, incorporated herein by reference.
10.7 -- Financing and Security Agreement by and among Flanders
Corporation and NationsBank, N.A., dated September 19, 1996,
filed with the Form 8-K dated September 23, 1996,
incorporated herein by reference.
10.8 -- Promissory Note from Precisionaire, Inc. to SunTrust Bank,
Tampa Bay, in the amount of $2,134,524 dated August 28,
1997.
10.9 -- Assumption Agreement between POF Realty, Precisionaire,
Inc., Polk County Industrial Development Authority and
SunTrust Bank, dated August 1, 1997.
10.10 -- Mortgage Deed and Security Agreement between Precisionaire,
Inc. and Sun Trust Bank, Tampa Bay dated August 28, 1997.
16 -- Change in Certifying Accountant, filed with Form 8-K dated
January 29, 1996, incorporated herein by reference.
21.1 -- Subsidiaries of the registrant.
</TABLE>
<PAGE> 103
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <C> <S>
</TABLE>
23.1 -- Consent of McGladrey & Pullen, LLP.
23.2 -- Consent of Arthur Andersen & Co., LLP.
23.3 -- Consent of Snell & Wilmer (included in Opinion filed as
Exhibit No. 5.1).
24 -- Power of Attorney. (included on Signature page of
Registration Statement).
99.1 -- Flanders Corporation Long-Term Incentive Plan, filed with
the December 31, 1995 Form 10-K, incorporated herein by
reference.
99.2 -- Flanders Corporation 1996 Director Option Plan, filed with
the December 31, 1995 Form 10-K, incorporated herein by
reference.
99.3 -- 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.
99.4 -- Amendment to Employment Agreement between Elite
Acquisitions, Inc., Flanders Filters, Inc. and Steven K.
Clark, filed with Form S-1, filed October 21, 1996 (Reg. No.
333-14655), incorporated herein by reference.
99.5 -- 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.
99.6 -- Amendment to Employment Agreement between Elite
Acquisitions, Inc., Flanders Filters, Inc. and Robert R.
Amerson, filed with Form S-1, filed October 21, 1996 (Reg.
No. 333-14655), incorporated herein by reference.
99.7 -- 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.
99.8 -- Stock Option Agreement between Elite Acquisitions, Inc. and
Steven K. Clark, filed with the Form 10-K dated December 31,
1995, incorporated herein by reference.
99.9 -- Stock Option Agreement between Flanders Corporation and
Steven K. Clark dated February 22, 1996, filed with Form S-8
on July 21, 1997, incorporated herein by reference.
99.10 -- Stock Option Agreement between Flanders Corporation and
Robert R. Amerson dated February 22, 1996, filed with Form
S-8 on July 21, 1997, incorporated herein by reference.
99.11 -- Stock Option Agreement between Flanders Corporation and
Steven K. Clark dated June 3, 1996, filed with Form S-8 on
July 21, 1997, incorporated herein by reference.
99.12 -- Stock Option Agreement between Flanders Corporation and
Robert R. Amerson dated June 3, 1996, filed with Form S-8 on
July 21, 1997, incorporated herein by reference.
<PAGE> 1
EXHIBIT 1
______________ SHARES
FLANDERS CORPORATION
COMMON STOCK
UNDERWRITING AGREEMENT
September ___, 1997
RAYMOND JAMES & ASSOCIATES, INC.
CLEARY GULL REILAND & MCDEVITT INC.
as representatives of the several
underwriters (the "Representatives")
c/o Raymond James & Associates, Inc.
880 Carillon Parkway
St. Petersburg, FL 33733-2749
Dear Sirs:
Subject to the terms and conditions stated herein, (i) Flanders
Corporation, a North Carolina corporation (the "Company"), proposes to issue
and sell to the Underwriters named in Schedule I (the "Underwriters") an
aggregate of ___________ shares (the "Company Firm Shares") of the Company's
authorized common stock, par value $.001 per share ("Common Stock"), and (ii)
certain shareholders of the Company named in Schedule II hereto (the "Selling
Shareholders") propose to sell to the Underwriters an aggregate of ____________
additional shares of Common Stock in the respective amounts set forth opposite
their names in Schedule II hereto ("Shareholder Firm Shares") and together with
the Company Firm Shares the "Firm Shares". Furthermore, at the election of the
Underwriters and subject to the terms and conditions stated herein, the Company
and Selling Shareholders propose to sell to the Underwriters an aggregate of
960,000 additional shares of Common Stock (the "Optional Shares"). The Company
and the Selling Shareholders will each provide one-half of the Optional Shares.
The Firm Shares and the Optional Shares that the Underwriters elect to purchase
pursuant to Section 2 hereof are collectively called the "Shares." All shares
of common stock of the Company, including the Shares, are hereinafter referred
to as "Common Stock."
The Company also proposes to issue and sell to you warrants (the
"Representatives' Warrants") pursuant to the Representatives' Warrant Agreement
("Representatives' Warrant Agreement") for the purchase of an additional
400,000 shares of Common Stock. The shares of Common Stock issuable upon
exercise of the Representatives' Warrants are hereinafter referred to as the
"Representatives' Warrant Shares."
1. Representations and Warranties of the Company.
a. The Company represents and warrants to and agrees with each
Underwriter that:
(i) A registration statement on Form S-1 (File No. _____)
with respect to the Shares, including a preliminary form of
prospectus, has been prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as
amended (the "Act"), and the applicable Rules and Regulations
(the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") under the Act and has been
filed with the Commission, and such amendments to such
registration statement as may have been required prior to the
date hereof have been filed with the Commission, and such
<PAGE> 2
amendments have been similarly prepared. Copies of such
registration statement and amendment or amendments and of
each related prospectus have been delivered to you. Such
registration statement, including the prospectus, Part II,
and all financial schedules and exhibits and all other
documents filed as a part thereof or incorporated by
reference and all information deemed to be a part thereof as
of such time of effectiveness, including if applicable any
subsequent prospectus filed pursuant to paragraph (b) of Rule
430(A) of the Rules and Regulations, is herein referred to as
the "Registration Statement," and the prospectus included as
part of the Registration Statement on file with the
Commission that discloses, if applicable, all the information
that was omitted from the prospectus on the effective date
pursuant to Rule 430A of the Rules and Regulations or any
subsequent Prospectus filed with the Commission pursuant to
Rule 424(b) of the Rules and Regulations by the Company with
your consent after the effective date of the Registration
Statement, is herein referred to as the "Final Prospectus."
In the event a prospectus is not filed pursuant to Rule 430A
and Rule 424(b) then, the prospectus included as part of the
Registration Statement on the date when the Registration
Statement became effective is deemed to be the Final
Prospectus. Any prospectus included in the Registration
Statement of the Company and in any amendments thereto prior
to the effective date of the Registration Statement is
referred to herein as a "Preliminary Prospectus."
(ii) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus, and each
Preliminary Prospectus, at the time of filing thereof,
conformed in all material respects to the requirements of the
Act and the Rules and Regulations; when the Registration
Statement becomes effective and at all times subsequent
thereto up to and at the Closing Date (hereinafter defined)
and any later date on which Option Shares are to be
purchased, (i) the Registration Statement and any
post-effective amendment thereto, the Final Prospectus and
amendments or supplements thereto, in all material respects
conformed and will conform to the requirements of the Act and
the Rules and Regulations, and (ii) neither the Registration
Statement nor the Final Prospectus, nor any amendment or
supplement thereto, included or will include any untrue
statement of a material fact or omitted or will 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 none of the representations and warranties contained in
this subparagraph shall apply to information contained in or
omitted from the Registration Statement, the Preliminary
Prospectus or the Final Prospectus or any such amendment or
supplement in reliance upon, and in conformity with, written
information furnished to the Company by any Underwriter,
directly or through you, specifically for inclusion therein.
(iii) Each of the Company's subsidiaries and the percentage
of outstanding shares of capital stock of each of its
subsidiaries owned by the Company are listed on Schedule III
hereto. Each of the Company and its subsidiaries have been
duly incorporated and is validly existing as a corporation in
good standing under the laws of its jurisdiction or
organization, with the power and authority (corporate and
other) to own, lease and operate its properties and conduct
its business as described in the Final Prospectus and each is
duly qualified to do business as a foreign corporation in
good standing in all other jurisdictions, if any, where the
ownership or leasing of properties or the conduct of its
business requires such qualification; each of the Company and
its subsidiaries now hold, and at the Closing Date and any
later date on which Option Shares are to be purchased will
hold, all licenses, certificates, permits and approvals from
state, Federal and other regulatory authorities that are
required for the
2
<PAGE> 3
Company to lawfully own, lease and operate its properties and
conduct its business as described in the Final Prospectus or
that are material to the Company's business operations,
properties, assets rights, condition (financial or otherwise)
or prospects, and all such licenses, certificates, permits
and approvals are valid and in full force and effect; each of
the Company and its subsidiaries are conducting its business
in compliance with all laws, rules and regulations of each
jurisdiction in which it conducts its business; neither the
Company nor its subsidiaries are in violation of its charter
or By-laws or, is in default in the performance or observance
of any obligation, agreement, covenant or condition contained
in any bond, debenture, note or other evidence of
indebtedness or in any contract, indenture, mortgage, loan
agreement, joint venture or other agreement or instrument to
which the Company or any of its subsidiaries are a party or
by which they or any of their properties are bound or in
violation of any law, order, rule, regulation, writ,
injunction or decree of any government, governmental
instrumentality or court, domestic or foreign, which defaults
or violations, singly or in the aggregate, would have a
material adverse effect on the business, properties, assets,
rights, operations, condition (financial or otherwise) or
prospects of the Company and its subsidiaries taken as a
whole. The Company does not own or control, directly or
indirectly any corporation, association or other entity other
than its subsidiaries.
(iv) This Agreement has been duly authorized, executed and
delivered by the Company and is a valid and binding agreement
on the part of the Company, enforceable in accordance with
its terms; the performance of this Agreement and the
consummation of the transactions herein contemplated will not
result in a breach or violation of any of the terms and
provisions of, or constitute a default under, (i) any
indenture, mortgage, deed of trust, loan agreement, bond,
debenture, note agreement or other evidence of indebtedness,
or any lease, contract or other agreement or instrument to
which the Company is a party or by which its properties or
its subsidiaries' properties are bound, (ii) the Company's
charter or By-laws, or (iii) any applicable statute, rule or
regulation, or any order of any court or governmental agency
or body having jurisdiction over the Company or its
subsidiaries or over their properties, which defaults or
violations, singly or in the aggregate, would have a material
adverse effect on the business, properties, assets, rights,
operations, condition (financial or otherwise) or prospects
of the Company and its subsidiaries taken as a whole; and no
consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation
by the Company of the transactions on its part herein
contemplated, except such as may have been obtained by the
Closing Date (as hereinafter defined) or such as may be
required under the Act or under state or other securities or
Blue Sky laws.
(v) The Company has all requisite corporate power and
authority to execute, deliver and perform under the terms and
conditions of the Representatives' Warrant Agreement. All
necessary corporate proceedings of the Company have been duly
taken to authorize the execution, delivery and performance by
the Company of the Representatives' Warrant Agreement. The
Representatives' Warrant has been duly authorized by the
Company and, when executed and delivered by the Company, will
be a legal, valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms.
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<PAGE> 4
(vi) Other than as disclosed in the Final Prospectus,
there is no pending or, to the Company's knowledge,
threatened action, suit, claim or proceeding against Company
or its subsidiaries or any of their officers or any of their
properties, assets or rights before any court or governmental
agency or body or otherwise which might result in any
material adverse change in the business, properties, assets,
rights operations, condition (financial or otherwise) or
prospects of the Company and its subsidiaries taken as a
whole, or prevent consummation of the transactions
contemplated hereby.
(vii) There are no contracts or documents of the Company or
its subsidiaries that would be required to be described in
the Final Prospectus or to be filed as exhibits to the
Registration Statement by the Act or by the Rules and
Regulations that have not been accurately described in all
material respects in the Final Prospectus or filed as
exhibits to the Registration Statement.
(viii) The authorized, issued and outstanding capital stock
of the Company is as set forth in the Final Prospectus under
the caption "Capitalization" as of the date stated therein;
all outstanding shares of capital stock of the Company have
been duly authorized and validly issued and are fully paid
and nonassessable and were not issued in violation of any
preemptive right or other rights to purchase such shares, and
the capital stock of the Company conforms in all material
respects to the statements in relation thereto contained in
the Final Prospectus (and such statements correctly state the
substance of the instruments defining the capitalization of
the Company); and the Company Shares have been duly
authorized for issuance and sale to the Underwriters pursuant
to this Agreement and, when issued and delivered by the
Company against payment therefor in accordance with the terms
of this Agreement, will be duly and validly issued and fully
paid and nonassessable and no person has preemptive or other
rights to purchase any of the Shares. No further approval or
authorization of any stockholder, the Board of Directors or
others is required for the issuance and sale of the Company
Shares to the several Underwriters, except as may be required
under the Act or under state or other securities or Blue Sky
laws.
(ix) The Representatives' Warrant Shares are validly
authorized and reserved for issuance and, when issued, paid
for and delivered upon exercise of the Representatives'
Warrant, in accordance with the provisions of the
Representatives' Warrant, will be validly issued, fully paid
and non-assessable and will not be issued in violation of any
preemptive rights of shareholders; and the holders of the
Representatives' Warrant Shares will receive good title to
them, free and clear of all Encumbrances.
(x) The Representatives' Warrant conforms to all
statements relating thereto contained in the Registration
Statement and the Prospectus.
(xi) McGladrey & Pullen, LLP, which has examined the
consolidated financial statements of the Company as of
December 31, 1996, December 31, 1995 and December 30, 1994,
and for each of years in the three-year period ended December
31, 1996, together with the related schedules and notes (the
"Audited Financial Statements") and whose report appears as
part of the Final Prospectus, are independent accountants
within the meaning of the Act and the Rules and Regulations.
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<PAGE> 5
(xii) The Audited Financial Statements and the six-month
unaudited financial information forming part of the
Registration Statement or Final Prospectus (collectively, the
"Financial Statements"), fairly present the consolidated
financial position, results of operations and cash flow of
the Company at the respective dates and for the respective
periods to which they apply; and the Audited Financial
Statements and the unaudited financial information filed with
the Commission as part of the Registration Statement and
included as part of the Final Prospectus have been prepared
in accordance with generally accepted accounting principles
consistently applied throughout the periods shown.
(xiii) Subsequent to the latest date of the Financial
Statements there has not been (i) any material adverse change
in the business, properties, assets, rights, operations,
condition (financial or otherwise) or prospects of the
Company and its subsidiaries taken as a whole, (ii) any
transaction that is material to the Company and its
subsidiaries taken as a whole, except transactions in the
ordinary course of business, (iii) any obligation that is
material to the Company and its subsidiaries taken as a
whole, direct or contingent, incurred by the Company or its
subsidiaries, except obligations incurred in the ordinary
course of business, (iv) any change that is material to the
Company and its subsidiaries taken as a whole in the capital
stock or outstanding indebtedness of the Company (other than
indebtedness incurred in connection with the purchase of
property by the Company's subsidiary, Precisionaire, Inc.),
or (v) any dividend or distribution of any kind declared,
paid or made on the capital stock of the Company.
(xiv) The Company or its subsidiaries have good and
marketable title to all properties and assets described in
the Final Prospectus as owned by it, free and clear of any
liens, charges, encumbrances or restrictions other than as
set forth in the Final Prospectus, such as are not material
to the business, properties, assets, rights, operations,
condition (financial or otherwise) or prospects of the
Company and its subsidiaries taken as a whole; the agreements
to which the Company is a party described in the Final
Prospectus are valid and enforceable in accordance with their
terms by the Company, except as enforcement may be limited by
applicable bankruptcy, insolvency and other similar laws
affecting creditors' rights and rules of law governing
specific performance, injunctive relief and other equitable
remedies and, to its knowledge, the other contracting party
or parties thereto are not in breach or default under any of
such agreements, except for such breaches or defaults which
would not singly or in the aggregate, have a material adverse
effect on the business, properties, assets, rights,
operations, condition (financial or otherwise) or prospects
of the Company and its subsidiaries taken as a whole; and the
Company has valid and enforceable leases for the properties
described in the Final Prospectus as leased by it, except as
enforcement may be limited by applicable bankruptcy,
insolvency and other similar laws affecting creditors' rights
and rules of law governing specific performance, injunctive
relief and other equitable remedies.
(xv) The Company has filed all necessary federal, state
local and foreign tax returns and has paid all taxes as due,
and, to the Company's best knowledge, there is no tax
deficiency that has been or might be asserted against the
Company that would materially and adversely affect its
business, properties, assets, rights, operations, condition
(financial or otherwise) or prospects; all tax liabilities
are adequately provided for on the books of the Company.
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<PAGE> 6
(xvi) The Company maintains insurance of the types and in
the amounts required by law and reasonably necessary to
operate its business including, but not limited to, insurance
covering real and personal property owned or leased by the
Company against theft, damage, destruction, acts of
vandalism, general and product liability and all other risks
customarily insured against, all of which insurance is in
full force and effect.
(xvii) The Company and each of the Subsidiaries has
generally enjoyed a satisfactory employer-employee
relationship with its employees and is in material compliance
with all federal, state, local, and 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 or any of
the Subsidiaries 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 or any of the Subsidiaries 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 of the Subsidiaries or any predecessor entity,
and none has ever occurred. No representation question exists
respecting the employees of the Company or any of the
Subsidiaries, and no collective bargaining agreement or
modification thereof is currently being negotiated by the
Company or any of the Subsidiaries. No grievance or
arbitration proceedings is pending under any expired or
existing collective bargaining agreements of the Company or
any of the Subsidiaries. No labor dispute with the employees
of the Company or any of the Subsidiaries exists, or is
imminent.
(xviii) The Company is familiar with the Investment Company
Act of 1940, as amended (the "1940 Act"), and the rules and
regulations thereunder, and has in the past conducted, and
intends in the future to continue to conduct, its affairs in
such a manner as to ensure that it will not become an
"investment company" within the meaning of the 1940 Act and
such rules and regulations.
(xix) Except as disclosed in the Final Prospectus, neither
the Company nor any of the Subsidiaries maintains, sponsors
or contributes to any program or arrangement that is an
"employee pension benefit plan," 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"). Neither the Company nor any of the
subsidiaries maintains or contributes, 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 of 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. The Company has
never completely or partially withdrawn from a "multiemployer
plan."
(xx) Neither the Company nor any of its employees,
directors, stockholders, partners, or affiliates (within the
meaning of the Rules and Regulations) of any of the foregoing
has taken or will take, directly ro indirectly, any action
designed to or which has constituted or which
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<PAGE> 7
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 Shares or otherwise.
(xxi) Except as disclosed in the Final 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 or any of the Subsidiaries are in dispute or,
to the Company's knowledge, are in any conflict with the
right of any other person or entity. Except as disclosed in
the Prospectus, the Company and each of the Subsidiaries (i)
owns or has the right to use, free and clear of all liens,
charges, claims, encumbrances, pledges, security interests,
or to the Company's knowledge, 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 with respect to the foregoing,
without, to the Company's knowledge, 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 or
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 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 Company's knowledge threatened (or
circumstances that may give rise to the same) against the
Company or any of the Subsidiaries which challenges the
exclusive rights of the Company or any of the Subsidiaries
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 or
any of the Subsidiaries to use any technology presently used
or contemplated to be used in the conduct of its business.
(xxii) The Company and each of the Subsidiaries owns and has
the unrestricted right to use all trade secrets, know-how
(including all other unpatented and/or unpatentable
proprietary or confidential 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 development, manufacture, operation
and sale of all products and services sold or proposed to be
sold by the Company or any of the Subsidiaries, 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. Neither the Company nor
any of the Subsidiaries is aware of any such development of
similar or identical trade secrets or technical information
by others.
(xxiii) Except as disclosed in the Final Prospectus, there
are no outstanding (i) securities or obligations of the
Company convertible into or exchangeable for any capital
stock of the Company, (ii) warrants, rights or options to
subscribe for or purchase from the Company any
7
<PAGE> 8
such capital stock or any such convertible or exchangeable
securities or obligations, or (iii) obligations of the
Company to issue any shares of capital stock, any such
convertible or exchangeable securities or obligations, or any
such warrants, rights or options.
(xxiv) 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.
(xxv) All offers and sales of the Company's capital stock
prior to the date hereof were at all relevant times duly
registered under the Act or exempt from the registration
requirements of the Act and were duly registered or the
subject of an available exemption from the registration
requirements of the applicable state securities or blue sky
laws, and the Company has taken all actions reasonably
necessary for it to assure that such exemptions from
registration would continue to be operative during all
applicable periods of time required by law.
(xxvi) The Company has obtained for the benefit of the
Company and the Underwriters from Steven K. Clark and Robert
R. Amerson a written agreement (a "Lockup Letter") that for a
period of 180 days from the date of the Prospectus, they will
not, without the prior written consent of Raymond James &
Associates, Inc., on behalf of the Underwriters, offer,
pledge, sell, contract to sell, grant any option for the sale
of, or otherwise dispose of (or announce any offer, pledge,
sale, grant of an option to purchase or other disposition),
directly or indirectly, any shares of Common Stock or
securities convertible into, or exercisable or exchangeable
for, shares of Common Stock.
(xxvii) Neither the Company nor any of its subsidiaries, nor,
to the knowledge of the Company or any of its subsidiaries,
any director, officer, agent, employee, Affiliate or other
person associated with or acting on behalf of the Company or
any of its subsidiaries has, directly or indirectly, used any
corporate funds for unlawful contributions, gifts,
entertainment or other unlawful expenses relating to
political activity, or established or maintained any unlawful
or unrecorded funds in violation of Section 30A of the
Securities Exchange Act of 1934, as amended (the "Exchange
Act"); made any unlawful payment to foreign or domestic
government officials or employees or to foreign or domestic
political parties or campaigns from corporate funds; violated
any provision of the Foreign Corrupt Practices Act of 1977,
as amended; or made any bribe, rebate, payoff, influence
payment, kickback or other payment unlawful under the laws of
the United States or any foreign jurisdiction.
(xxviii) The minute books of the Company and each of the
Subsidiaries have been made available to the Underwriters and
contain 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 and each of the Subsidiaries, respectively,
since the time of its incorporation, and reflects all
transactions referred to in such minutes accurately in all
material respects.
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<PAGE> 9
(xxix) The Company and each of its subsidiaries makes and
keeps accurate books and records reflecting its assets and
maintains internal accounting controls that provide
reasonable assurance that (i) transactions are executed in
accordance with management's authorization, (ii) transactions
are recorded as necessary to permit preparation of the
Company's financial statements in accordance with generally
accepted accounting principles and to maintain accountability
for the assets of the Company, (iii) access to the assets of
the Company is permitted only in accordance with management's
authorization, and (iv) the recorded accountability for
assets of the Company is compared with existing assets at
reasonable intervals and appropriate action is taken with
respect to any differences.
(xxx) The Shares have been duly included for trading,
subject to notice of issuance on the Nasdaq National Market;
(xxxi) Except as disclosed in the Final Prospectus, the
Company and its subsidiaries (i) are in compliance with any
and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and
safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("Environmental Laws"),
(ii) have received all permits, licenses or other approvals
required of them under applicable Environmental Laws to
conduct their respective businesses and (iii) are in
compliance with all terms and conditions of any such permit,
license or approval, except where such noncompliance with
Environmental Laws, failure to receive required permits,
licenses or other approvals would not, singly or in the
aggregate, have a material adverse effect on the Company and
its subsidiaries, taken as a whole.
(xxxii) Except as disclosed in the Final Prospectus, there
are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating
expenditures required for clean-up, closure of properties or
compliance with Environmental Laws or any permit, license or
approval, any related constraints on operating activities and
any potential liabilities to third parties) which would,
singly or in the aggregate, have a material adverse effect on
the Company and its subsidiaries, taken as a whole.
b. Each Selling Shareholder, severally and not jointly,
represents and warrants to, and agrees with, each Underwriter that:
(i) Such Selling Shareholder has full right, power and
authority to enter into this Agreement, the Power of Attorney
and the Custody Agreement in the forms heretofore furnished
to you (the "Power of Attorney and the Custody Agreement")
and on the date hereof such Selling Shareholder has and, at
the time of delivery of the Shareholder Firm Shares to the
Underwriters hereunder, such Selling Shareholder will have
full right, power and authority to sell and deliver the
Shareholder Firm Shares to be sold by such Selling
Shareholder to the Underwriters, and at the date hereof such
Selling Shareholder is, and at the time of delivery of the
Shareholder Firm Shares to the Underwriters such Selling
Shareholder will be, the lawful owner of and has and will
have marketable title to the Shareholder Firm Shares to be
sold by such Selling Shareholder free and clear of any
claims, liens, encumbrances or security interests. Further,
delivery of the Firm Shares to be sold by such Selling
Shareholder pursuant to this Agreement will pass title to
such shares free and clear of any security interests, claims,
liens, equities and other encumbrances.
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<PAGE> 10
(ii) The performance of this Agreement, the Power of Attorney
and the Custody Agreement, and the consummation of the
transactions herein and therein contemplated, will not
conflict with or result in a breach of, or default under, any
agreement, indenture or other instrument to which such
Selling Shareholder is a party or by which such Selling
Shareholder is bound, or any law, rule, administrative
regulation or court decree. This Agreement, the Power of
Attorney and the Custody Agreement have been validly
authorized, executed and delivered by such Selling
Shareholder and each constitutes a legal, valid and binding
obligation of such Selling Shareholder enforceable against
such Selling Shareholder in accordance with its terms.
(iii) no consent, approval, authorization, order or
declaration of or from, or registration, qualification or
filing with, any court or governmental agency or body is
required for the sale of the Shares to be sold by such
Selling Shareholder or the consummation of the transactions
contemplated by this Agreement, the Power of Attorney or the
Custody Agreement, except the registration of Shares under
the Act (which, if the Registration Statement is not
effective as of the time of execution hereof, shall be
obtained as provided in this Agreement) and such as may be
required under state securities or blue sky laws in
connection with the offer, sale and distribution of such
Shares by the Underwriters.
(iv) When the Registration Statement becomes effective and at
all times subsequent thereto, the Registration Statement, any
post-effective amendment thereto and the Final Prospectuses
as amended and supplemented, did not and will not contain any
untrue statement of a material fact regarding such Selling
Shareholder or omit to state a material fact regarding such
Selling Shareholder required to be stated therein or
necessary in order to make the statements therein not
misleading, and such Selling Shareholder is, and shall be,
unaware of any untrue statement of a material fact in such
documents or the omission from such documents of any material
fact required to be stated therein or necessary to make the
statements therein not misleading.
(v) Certificates in negotiable form representing all of the
Firm Shares to be sold by such Selling Shareholder have been
placed in custody under the Power of Attorney and the Custody
Agreement duly executed and delivered by such Selling
Shareholder to and appointing ______, as custodian (the
"Custodian"), with authority to deliver and receive payment
for the Firm Shares to be sold by such Selling Shareholder
hereunder, and appointing __________ and _________________ or
either of them, as such Selling Shareholders'
attorney-in-fact (the "Attorney-in-Fact") with authority to
execute and delivery this Agreement and any other documents
necessary or desirable in connection with the transactions
contemplated hereby on behalf of such Selling Shareholder,
and otherwise to act on behalf of such Selling Shareholder
and take all actions that may be necessary or desirable in
connection with the transactions contemplated by this
Agreement, the Power of Attorney and the Custody Agreement.
(vi) The Firm Shares represented by the certificates held in
custody for such Selling Shareholder under the Power of
Attorney and the Custody Agreement are subject to the
interests of the Underwriters hereunder, and the arrangements
made by such Selling Shareholder for such custody, as well as
the appointment by such Selling Shareholder of the
Attorney-in-Fact, are, to that extent, irrevocable. Each
Selling Shareholder specifically agrees that the obligations
of the Selling Shareholders hereunder shall not be terminated
by operation
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<PAGE> 11
of law, whether by the death or incapacity of any individual
Selling Shareholder or by the occurrence of any other event.
If any Selling Shareholder should die or become
incapacitated, or if any other similar event should occur
before the delivery of the Firm Shares and Option Shares
hereunder, certificates representing such Shares shall be
delivered by or on behalf of such Selling Shareholder in
accordance with the terms and conditions of this Agreement
and of the Power of Attorney and the Custody Agreement, and
the actions taken by the Attorney- in-Fact pursuant to the
Power of Attorney and the Custody Agreement shall be as valid
as if such death, incapacity or other event had not occurred,
whether or not the Custodian or the Attorney-in-Fact shall
have received notice of such death, incapacity or other
event.
2. Purchase and Sale of Shares. Subject to the terms and conditions
herein set forth, (i) the Company agrees to sell to each of the Underwriters,
and each of the Underwriters agrees, severally and not jointly, to purchase
from the Company, at a purchase price of $_______ per share, the number of the
Company Firm Shares set forth opposite the name of each Underwriter on Schedule
I, (ii) the Selling Shareholders severally and not jointly, agree to sell to the
Underwriters, and each of the Underwriters agrees, severally and not jointly,
to purchase from the Selling Shareholders, at the purchase price per share set
forth in clause (i) of this Section 2, the number of Shareholder Firm Shares
set forth opposite the names of each Underwriter on Schedule I hereto.
The Company and the Selling Shareholders hereby grant to the
Underwriters the right to purchase at their election in whole or in part up to
960,000 Optional Shares at the purchase price per share set forth in clause (i)
in the paragraph above for the sole purpose of covering over-allotments in the
sale of Firm Shares. If the option granted hereby is exercised in part, then
the respective number of Optional Shares to be purchased by each of the
Underwriters shall be determined by multiplying the total number of Optional
Shares as to which such election shall have been exercised by the Underwriters
by a fraction, the numerator of which is the maximum number of Optional Shares
such Underwriter is entitled to purchase as set forth opposite the name of such
Underwriter in Schedule I hereto and the denominator of which is the maximum
number of Optional Shares that all Underwriters are entitled to purchase
hereunder (with the resulting number to be adjusted by the Underwriters so as
to eliminate fractional shares). Any such election to purchase Optional Shares
may be exercised by written notice from the Underwriters to the Company, given
within a period of 30 calendar days after the date of this Agreement and
setting forth the aggregate number of Optional Shares to be purchased and the
date on which such Optional Shares are to be delivered, as determined by the
Underwriters but in no event earlier than the First Time of Delivery or, unless
the Underwriters and the Company otherwise agree, to furnish or cause to be
furnished to the Underwriters the certificates, letters and opinions, and to
satisfy all conditions, set forth in Section 6 hereof at the Subsequent Time of
Delivery.
After the Registration Statement becomes effective, the several
Underwriters intend to offer the Shares to the public as set forth in the
Prospectus.
3. Delivery of Shares; Closing.
a. Certificates in definitive form for the Shares to be purchased by
each Underwriter hereunder, and in such denominations and registered
in such names as Raymond James & Associates, Inc. may request upon at
least 48 hours prior notice to the Company, shall be delivered by or
on behalf of the Company and the Selling Shareholders to the
Underwriters for the account of such Underwriter, against payment by
such Underwriter on its behalf as provided herein. Payment shall be
made (i) with respect to the purchase price for the Company Firm
Shares and any Optional Shares purchased from
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<PAGE> 12
the Company, if any Optional Shares are purchased hereunder, to the
Company, by wire transfer or official bank check or checks payable to
the order of the Company, in next day available funds against delivery
of the certificates for the Company Firm Shares or Optional Shares
purchased from the Company, as the case may be, and (ii)with respect
to the purchase price for Shareholder Firm Shares to the Custodian by
wire transfer or official bank check or checks payable to the order of
the Custodian, in next day available funds against delivery of the
certificates for the Shareholder Firm Shares purchased from Selling
Shareholders. The closing of the sale and purchase of the Shares shall
be held at the offices of Raymond James & Associates, Inc., 880
Carillon Parkway, St. Petersburg, Florida 33716 (the "Representative's
Office"), or at such location in Tampa, Florida as the Representatives
may designate, except that physical delivery of certificates for the
Shares shall be made at the direction of the Underwriters either at
the Representative's Office or at the office of Firstar Trust Company,
___________________ (the "Firstar Office"), or shall be made to The
Depository Trust Company ("DTC"), 55 Water Street, New York, New York
10041, for the account of the Underwriters or for such other accounts
as the Underwriters shall specify to DTC. The time and date of such
delivery and payment shall be, with respect to the Firm Shares, at
10:00 a.m., Eastern time, on the third full business day after this
Agreement is executed or at such other time and date as the
Underwriters and the Company and the Attorneys-in-Fact, on behalf of
the Selling Shareholders, may agree upon in writing , and, with
respect to the Optional Shares, 10:00 a.m., Eastern time, on the date
specified by the Underwriters in the written notice given by the
Underwriters of the Underwriters' election to purchase all or part of
such Optional Shares, or at such other time and date as the
Underwriters, the Company and the Attorney-in-Fact, on behalf of the
Selling Shareholders, may agree upon in writing. Such time and date
for delivery of the Firm Shares is herein called the "First Time of
Delivery," and such time and date for delivery of any Optional Shares,
if not the First Time of Delivery, is herein called a "Subsequent Time
of Delivery," and each such time and date for delivery of any Optional
Shares, if not the First Time of Delivery, is herein called a
"Subsequent Time of Delivery," and each such time and date for
delivery is herein called a "Time of Delivery." The Company will make
certificates for the Shares available for checking and packaging at
least 24 hours prior to each Time of Delivery at the Firstar Office or
the office of DTC in New York, New York or at such other location in
New York, New York specified by the Underwriters in writing at least
48 hours prior to such Time of Delivery.
b. On the Closing Date, at the time of the delivery and payment
for the Firm Shares, the Company shall issue, sell and deliver to you,
for an aggregate purchase price of $_____, the Representatives'
Warrant, substantially in the form filed as an exhibit to the
Registration Statement. The Representatives' Warrant will be
exercisable at an initial exercise price of $_______ per Share at any
time and from time to time, in whole or in part, during a five-year
period commencing one year following the effective Date. The Company
has granted you certain registration rights with respect to the
Representatives' Warrant and the securities issuable upon exercise
thereof, as set forth in said Representatives' Warrant.
4. Covenants.
a. The Company covenants and agrees with the several
Underwriters that:
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(i) The Company will use its best efforts to cause the
Registration Statement and any amendment thereto, if not
effective at the time and date that this Agreement is
executed and delivered by the parties hereto, to become
effective. If the Registration Statement has become or
becomes effective pursuant to Rule 430A of the Rules and
Regulations, or the filing of the Final Prospectus is
otherwise required under Rule 424(b) of the Rules and
Regulations, the Company will file the Final Prospectus,
properly completed, pursuant to the applicable paragraph of
Rule 424(b) of the Rules and Regulations within the time
period prescribed and will provide evidence satisfactory to
you of such timely filing; the Company will notify you,
promptly after it shall receive notice thereof, of the time
when the Registration Statement or any post-effective
amendment to the Registration Statement has become effective
or any amendment or supplement to the Final Prospectus has
been filed.
(ii) The Company will notify you promptly of any request by
the Commission to amend or supplement the Registration
Statement or Final Prospectus or for additional information;
promptly upon your request, the Company will prepare and file
with the Commission amendments or supplements to the
Registration Statement or Final Prospectus which, in the
reasonable opinion of, Schifino & Fleischer, P.A., counsel
for the several Underwriters, may be necessary or advisable
in connection with the distribution of Shares by the
Underwriters; the Company will fully and completely comply
with the provisions of Rule 430A of the Rules and Regulations
with respect to information omitted from the Registration
Statement in reliance upon such Rule; the Company will
promptly prepare and file with the Commission, and promptly
notify you of the filing of, any amendment or supplement to
the Registration Statement or Final Prospectus that may be
necessary to correct any statements or omissions if, at any
time a prospectus relating to the Shares is required to be
delivered under the Act, any event shall have occurred as a
result of which the Final Prospectus would include an untrue
statement of a material fact or omit to state any material
fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading;
in case any Underwriter is required to deliver a prospectus
within the nine-month period referred to in Section 10(a)(3)
of the Act in connection with the sale of the Shares, the
Company will prepare promptly upon request of such
Underwriters, at the expense of the Company, such amendment
or amendments to the Registration Statement and the Final
Prospectus as may be necessary to permit compliance with the
requirements of Section 10(a)(3) of the Act, and it will file
no amendment or supplement to the Registration Statement or
the Final Prospectus that shall not previously have been
submitted to you a reaonsable time prior to the proposed
filing thereof or to which you shall reasonably object in
writing, subject, however, to compliance with the Act and the
Rules and Regulations thereunder and the provisions of this
Agreement.
(iii) The Company will advise you, promptly after it shall
receive notice or obtain knowledge thereof, of the issuance
of any stop order by the Commission suspending the
effectiveness of the Registrations Statement or of the
initiation or threat of any proceeding for that purpose; and
the Company shall promptly use its best efforts to prevent
the issuance of any stop order or to obtain its withdrawal at
the earliest possible moment if such a stop order should be
issued.
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<PAGE> 14
(iv) The Company will use its best efforts to qualify the
Shares for offering and sale under the securities laws of
such jurisdictions as you may designate and to continue such
qualifications in effect for so long as may be required for
purposes of the distribution of the Shares, except that the
Company shall not be required in connection therewith or as a
condition thereof to qualify as a foreign corporation or to
execute a general consent to service of process in any
jurisdiction or to make any undertaking with respect to the
conduct of its business. In each jurisdiction in which the
shares have qualified as above provided, the Company will
make and file such statements and reports in each year as are
or may be reasonable required by the laws of such
jurisdiction.
(v) The Company will furnish to you, as soon as available,
copies of the Registration Statement (three of which will be
signed and will include all exhibits), each Preliminary
Prospectus or the Final Prospectus and any amendments or
supplements to such documents, including any prospectus
prepared to permit compliance with Section 10(a)(3) of the
Act, all in such quantities as you may from time to time
reasonably request.
(vi) The Company will make generally available to its
security holders as soon as practicable, but in any event not
later than the 45th day following the end of the fiscal
quarter first occurring after the first anniversary of the
"effective date of the Registration Statement" (as defined in
Rule 158(c) of the Rules and Regulations), an earnings
statement (which will be in reasonable detail but need not be
audited) complying with the provisions of Section 11(a) of
the Act and covering a twelve-month period beginning after
the effective date of the Registration Statement.
(vii) During a period of five years after the date hereof,
the Company will furnish to its stockholders, as soon as
practicable after the end of each respective period, annual
reports (including financial statements audited by
independent public accountants) and unaudited quarterly
reports of operations for each of the first three quarters of
the fiscal year, and will furnish to you and the other
several Underwriters hereunder, upon request, (i)
concurrently with furnishing such reports to its
stockholders, statements of operations of the Company for
each of the first three quarters in the form furnished by the
Company's stockholders; (ii) concurrently with furnishing to
its stockholders, a balance sheet of the Company as of the
end of such fiscal year, together with statements of
operations, of stockholders' equity and of cash flow of the
Company for such fiscal year, accompanied by a copy of the
certificate or report thereon of independent public
accountants; (iii) as soon as they are available, copies of
all reports (financial or other) mailed to security holders;
(iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the
Commission, any securities exchange or the National
Association of Securities Dealers, Inc. ("NASD"); (v) every
material press release in respect of the Company or its
affairs which was released or prepared by the Company; and
(vi) any additional information of a public nature concerning
the Company or its business that you may reasonably request.
During such five-year period, if the Company shall have
active subsidiaries, the foregoing financial statements shall
be on a consolidated basis to the extent that the accounts of
the Company and its subsidiaries are consolidated, and shall
be accompanied by similar financial statements for any
significant subsidiaries that is not so consolidated.
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<PAGE> 15
(viii) The Company shall not, during the 180 days following
the date on which the Shares are first released by you for
sale to the public, except with the prior written consent of
Raymond James & Associates, Inc., offer for sale, sell,
distribute or otherwise dispose of any shares of Common
Stock, or sell or grant options, rights or warrants with
respect to any shares of Common Stock (other than the grant
of options pursuant to option plans existing on the date
hereof or the issuance Common Stock upon exercise of
outstanding options or Warrants), or any securities
convertible or exchangeable into Common Stock, except for
securities issued in connection with an acquisition.
(ix) The Company will apply the net proceeds from the sale
of the Shares being sold by it in the manner set forth under
the caption "Use of Proceeds" in the Final Prospectus.
b. The Selling Shareholders covenant and agree with the several
Underwriters that:
(i) Such Selling Shareholder will not (i) take, directly or
indirectly, prior to the termination of the underwriting
syndicate contemplated by this Agreement, any action designed
to cause or to result in, or that might reasonably be
expected to constitute, the stabilization or manipulation of
the price of any security of the Company to facilitate the
sale or resale of any of the Shares, (ii) sell, bid for,
purchase or pay anyone any compensation for soliciting
purchases of, the Shares or (iii) pay to or agree to pay any
person any compensation for soliciting another to purchase
any other securities of the Company.
(ii) In order to document the Underwriters' compliance with
the reporting and withholding provisions of the Internal
Revenue Code of 1986, as amended, with respect to the
transactions herein contemplated, each of the Selling
Shareholders agrees to deliver to the Underwriters prior to
or at the First Time of Delivery a properly completed and
executed United States Treasury Department Form W-9 (or other
applicable form or statement specified by Treasury Department
regulations in lieu thereof).
5. Expenses.
a. The Company will pay and bear all costs and expenses in connection
with (i) the preparation, printing and filing of the Registration
Statement (including financial statements and exhibits), Preliminary
Prospectuses, Final Prospectus and any amendments or supplements
thereto; (ii) the printing of this Agreement, the Blue Sky Memoranda
and any instruments related to any of the foregoing, issuance and
delivery of the Shares hereunder to the several Underwriters,
including taxes and the cost of all stock certificates representing
the Shares; fees and charges of the Transfer Agent; fees and
disbursements of counsel for the Company and Selling Shareholders;
(iii) all fees and other charges of the Company's independent public
accountants; (iv) the cost of furnishing to the several Underwriters
copies of the Registration Statement (including appropriate exhibits),
Preliminary Prospectuses, Final Prospectus and any amendments or
supplements to any of the foregoing; (v) NASD filing fees and the cost
of qualifying the Shares under the laws of the jurisdictions as you
may reasonably designate (including filing fees and fees and
disbursements of Underwriters' Counsel in connection with such Blue
Sky qualifications); (vi) the costs and expenses of the Company
relating to investor presentations on any "road show" undertaken in
connection with marketing the offering of the Shares, including,
without limitation, travel and lodging expenses of the Representatives
and officers of the Company and costs of any aircraft chartered in
connection with the road show; and (vii)
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<PAGE> 16
other expenses directly incurred by the Company in connection with the
performance of its obligations hereunder.
b. If the transactions contemplated hereby are not consummated by
reason of any refusal or inability on the part of the Company or
Selling Shareholders, to perform any agreement on their respective
parts to be performed hereunder or to fulfill any condition of the
Underwriters' obligations hereunder, of if the Company shall terminate
the Agreement under Section 10(a) hereof, the Company will reimburse
the several Underwriters for all out-of-pocket expenses (including any
and all fees and disbursements of Underwriters' Counsel) up to $50,000
incurred by the Underwriters in preparing to market or marketing the
Shares.
6. Conditions of Underwriters' Obligations
The obligations of the several Underwriters to purchase and pay for
the Shares as provided herein, shall be subject to the accuracy, as of the date
hereof and the Closing Date and any later date on which Option Shares are to be
purchased, as the case may be, of the representations and warranties of the
Company and Selling Shareholders herein, to the performance by the Company of
its obligations hereunder and to the following additional conditions:
a. The Registration Statement shall have become effective; if the
filing of the Final Prospectus, or any supplement thereto, is required
pursuant to Rule 424(b) of the Rules and Regulations, the Final
Prospectus shall have been filed in the manner and within the time
period required by Rule 424(b) of the Rules and Regulations; and no
stop order suspending the effectiveness thereof shall have been issued
and no proceeding for that purpose shall have been initiated or, to
the knowledge of the Company or any Underwriter, threatened by the
Commission, and any request of the Commission for additional
information (to be included in the Registration Statement or the Final
Prospectus or otherwise) shall have been complied with to the
satisfaction of Underwriters' Counsel.
b. All corporate proceedings and other legal matters in connection
with this Agreement, the form of Registration Statement, all
Preliminary Prospectuses, the Final Prospectus, and the registration,
authorization, issue, sale and delivery of the Shares shall have been
satisfactory to Underwriters' Counsel and such counsel shall have been
furnished with such papers and information as they may reasonably have
requested to enable them to pass upon the matters referred to in this
subsection.
c. You shall have received on the Closing Date and any later date on
which Option Shares are purchased, as the case may be, the following
opinions of opinions, certificates and letters, dated the Closing Date
or such later date, addressed to the Underwriters and with reproduced
copies or signed counterparts thereof for each of the Underwriters:
(i) the opinion of Snell & Wilmer, counsel for the Company to
the effect that:
(a) Each of the Company and its subsidiaries
have been duly incorporated and is validly existing
as a corporation in good standing under the laws of
its jurisdiction of organization;
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<PAGE> 17
(b) Each of the Company and its subsidiaries have
the power and authority (corporate and other) to
own, lease and operate its properties and conduct
its business as described in the Final Prospectus
and each of the Company and its subsidiaries are
duly qualified to do business as a foreign
corporation in good standing in all jurisdictions,
if any, where the ownership or leasing of properties
or the conduct of its business requires such
qualification, except where a failure to qualify
would not have a material adverse effect upon the
condition, financial or otherwise, of the Company
and the subsidiaries taken as a whole.
(c) The authorized, issued and outstanding capital
stock of the Company is as set forth in the Final
Prospectus under the caption "Capitalization" as of
the date stated therein; and the issued and
outstanding shares of capital stock of the Company
have been duly and validly authorized and issued,
are fully-paid and nonassessable, and were not
issued in violation of any preemptive right or, to
such counsel's knowledge, other rights to purchase
such shares;
(d) The Shares are validly authorized. The Shares,
when issued, paid for and delivered in accordance
with the provisions of this Agreement, will be
validly issued, fully paid and nonassessable,
without any personal liability attaching to the
ownership thereof, and will not be issued in
violation of any preemptive rights to shareholders;
(e) The Representatives' Warrant has been duly
authorized by the Company and, when executed, issued
and delivered by the Company and paid for by you in
accordance with the provisions of this Agreement,
will be a legal, valid and binding obligation of the
Company, enforceable against the Company in
accordance with their respective terms, except as
may be limited by applicable bankruptcy, insolvency,
registration and other laws affecting the
enforceability of creditors' rights generally and
the application of equitable principles affecting
the availability of remedies in the nature of
specific enforcement.
(f) The Representatives' Warrant Shares are validly
authorized and when issued, paid for and delivered
upon exercise of the Representatives' Warrant in
accordance with the provisions of the
Representatives' Warrant, will be validly
authorized, validly issued, fully paid, and
nonassessable, with no personal liability attaching
to the ownership thereof, and will not have been
issued in violation of any preemptive rights of
shareholders, and the holders of the
Representatives' Warrant Shares will receive good
title to them, free and clear of all Encumbrances.
(g) All of the issued shares of capital stock of
each subsidiary of the Company have been duly and
validly authorized and issued, are fully paid and
nonassessable. The Company owns one hundred percent
(100%) of the issued and outstanding capital stock
of (i) Charcoal Service Corporation, a North
Carolina corporation , (ii) Air Seal Filter
Housings, Inc., a Texas corporation, (iii)
Precisionaire, Inc., a Florida corporation, (iv)
Flanders International PLC, Ltd., a Singapore
corporation, (v) 98.86% of Flanders Filters, Inc., a
North Carolina corporation and (vi) 60% of Air Seal
West, Inc., a Utah corporation. FFI owns one hundred
percent (100%) of
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<PAGE> 18
Flanders Airpure West, Inc., a North Carolina
corporation, and sixty three percent (63%) of
Flanders Airpure Products Company, LLC, a North
Carolina limited liability company. Such shares are
owned free and clear of all liens, encumbrances,
equities or claims except for a lien in favor of
Nations Bank, N.A.;
(h) This Agreement has been duly authorized by all
necessary corporate action on the part of the
Company and duly executed and delivered by the
Company and, assuming due authorization, execution
and delivery by you, is a valid and binding
agreement of the Company enforceable against the
Company in accordance with its terms, except insofar
as the enforceability of indemnification and
contribution provisions may be limited by applicable
law or equitable principles, and except as
enforceability may be limited by bankruptcy,
reorganization, moratorium or similar laws affecting
the enforceability of creditors' rights generally
and rules of law governing performance, injunctive
relief and other equitable remedies;
(i) The Registration Statement has become effective
under the Act and, to counsel's knowledge, no stop
order suspending the effectiveness of the
Registration Statement has been issued and no
proceedings for that purpose have been instituted
and are pending or contemplated under the Act; any
required filing of the Final Prospectus and any
supplement thereto pursuant to Rule 424(b) of the
Rules and Regulations have been made in the manner
and within the time period required by such Rule
424(b);
(j) The Registration Statement and the Final
Prospectus, and each amendment or supplement thereto
(other than the financial statements, financial data
and supplemental schedules included therein, as to
which such counsel need express no opinion),
complies as to form in all material respects with
the requirements of the Act and the applicable Rules
and Regulations;
(k) The terms and provisions of the capital stock of
the Company conform in all material respects to the
description thereof contained in the Registration
Statement and the Final Prospectus, and the
information in the Final Prospectus under the
caption "Description of Capital Stock," and the form
of certificate evidencing the Common Stock complies
with North Carolina law;
(l) The performance of this Agreement and the
consummation of the transactions herein contemplated
will not result in a breach or violation of any of
the terms and provisions, or constitute a default
under, any indenture, mortgage, deed of trust, loan
agreement, bond, debenture, note agreement or other
evidence of indebtedness, or any lease, contract or
other agreement or instrument known to such counsel
after due inquiry to which the Company is a party or
by which its properties are bound and which breach
or violation would have a material adverse effect
upon the condition, financial or otherwise, of the
Company; the Company's Certificate of Incorporation
or By-laws; or, any statute, rule or regulation or,
to such counsel's knowledge after due inquiry, any
order, writ or decree of any court or governmental
agency or body having jurisdiction over the Company
or over any of its properties or operations;
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<PAGE> 19
(m) No authorization, approval or consent of any
governmental authority or agency is necessary in
connection with the consummation of the transactions
herein contemplated except such as have been
obtained under the Act or such as may be required
under state or other securities or Blue Sky laws in
connection with the purchase and distribution of the
Shares by the Underwriters;
(n) To such counsel's knowledge after due inquiry,
there are no legal or governmental proceedings
pending or threatened of a character that are
required to be disclosed in the Registration
Statement, by the Act or the applicable Rules and
Regulations;
(o) To such counsel's knowledge after due inquiry,
the Company is not presently in breach of, or in
default under any indenture, mortgage, deed of
trust, loan agreement, bond, debenture, note
agreement or other evidence of indebtedness or any
other agreement or instrument which would have a
material adverse effect on the Company's financial
condition of which such counsel has knowledge after
due inquiry to which the Company is a party or by
which any of its properties is bound;
(p) To such counsel's knowledge after due inquiry,
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;
(q) The Company is not, after receiving the proceeds
from the sale of the Company Shares, an "investment
company" within the meaning of the 1940 Act.
(r) The statements in the Prospectus under
"BUSINESS," "MANAGEMENT," "PRINCIPAL SHAREHOLDERS,"
"CERTAIN RELATIONSHIPS AND RELATED PARTY
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;
(s) Based upon the description of the Company's
business in the Final Prospectus, each of the
Company and its subsidiaries hold all licenses,
certificates, permits and approvals from all state,
Federal and other regulatory authorities that are
required for the Company to lawfully own, lease and
operate its properties and conduct its business as
described in the Final Prospectus, and each of the
Company and its subsidiaries are conducting its
business in compliance with all of the laws, rules
and regulations of each jurisdiction in which it
conducts its business.
(t) To the best of such counsel's knowledge, there
are no agreements, contracts or other documents
required by the Act to be described in the
Registration Statement and the Final Prospectus and
filed as exhibits to the Registration Statement
other than those described in the Registration
Statement (or required to be filed under the
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Exchange Act if upon such filing they would be
incorporated, in whole or in part, by reference
therein) and the Final Prospectus and the exhibits
which have been filed are correct copies of the
documents of which they purport to be copies.
(u) Except as described in the Final Prospectus, to
the best of such counsel's knowledge, the Company
does not (i) maintain, sponsor or contribute to any
ERISA Plans, (ii) maintain or contribute, now or at
any time previously, to a defined benefit plan, as
defined in Section 3(35) of ERISA, and (iii) has
never completely or partially withdrawn from a
"multiemployer plan."
In addition, such counsel shall state that although such counsel has
not verified the accuracy or completeness of the statements contained in the
Registration Statement or the Final Prospectus, nothing has come to the
attention of such counsel that caused such counsel to believe that, at the time
the Registration Statement became effective, the Registration Statement (except
as to financial statements, financial data and supporting schedules contained
therein, as to which such counsel need express no 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, or
at the Closing Date or any later date on which the Option Shares are to be
purchased, as the case may be, the Registration Statement or the Final
Prospectus (except as aforesaid) 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, in light of the circumstances under
which they were made, not misleading.
In rendering such opinion, such counsel may rely (i) 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; (ii) 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
Representatives and they are justified in relying thereon. Such opinion shall
also state that the Underwriters' Counsel is entitled to rely thereon.
(ii) The counsel for the Selling Shareholders shall have
furnished to you their written opinion with respect to the Selling
Shareholders for whom they are acting as counsel, dated the Closing
Date, in form substance satisfactory to you, to the effect that:
(a) This Agreement has been duly executed and
delivered by each Selling Shareholder.
(b) A Power of Attorney and Custody Agreement have
been duly authorized, executed and delivered by or
on behalf of the Selling Shareholders.
(c) The performance of this Agreement, the Power of
Attorney and the Custody Agreement and the
consummation of the transactions herein contemplated
will not result in a breach or violation of any of
the terms and provisions, or constitute a
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default under, any indenture mortgage, deed of
trust, loan agreement, bond, debenture, note
agreement or other evidence of indebtedness, or any
lease, contract or other agreement or instrument
known to such counsel to which each Selling
Shareholder is a party or by which its properties
are bound or to such counsels knowledge, any order,
writ or decree of any court or governmental agency
or body having jurisdiction over each Selling
Shareholder or over any of his properties;
(d) The Underwriters are acquiring the Shareholder
Firm Shares free of any adverse claim (except for
any restrictions on transfer that may be imposed by
law pursuant to federal or state securities laws and
except for claims created by or through the
Underwriters). The Selling Shareholders have the
full right, power and authority to sell, assign,
transfer and deliver the Shareholder Firm Shares.
In rendering these opinions, such counsel may rely upon a
certificate of Selling Shareholders as to matters of fact. The
opinions rendered by such counsel may contain normal assumptions,
qualifications and limitations with respect to the matters set forth
therein.
(iii) You shall have received from Underwriters' Counsel an
opinion or opinions, dated the Closing Date, in form and
substances satisfactory to you, with respect to the
sufficiency of all such corporate proceedings and other legal
matters relating to this Agreement and the transactions
contemplated hereby as you may reasonably require, and the
Company shall have furnished to such counsel such documents
as it may have requested for the purpose of enabling it to
pass upon such matters.
(iv) 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 (c)
below) in all respects to the Underwriters and the
Underwriters' Counsel, from McGladrey & Pullen, LLP;
(a) 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;
(b) 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
Representatives may rely upon the opinion of
McGladrey & Pullen, LLP with respect to such
financial statements and supporting schedules
included in the Registration Statement;
(c) 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
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would lead them to believe that (i) 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, (ii)
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 (iii) 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, 1997 balance sheet 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 (iv) during
the period from June 30, 1997 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, 1996 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;
(d) 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 breakdown of commercial paper and notes
payable to banks);
(e) 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
(f) statements as to such other matters incident
to the transaction contemplated hereby as the
Representative may request.
(v) 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
22
<PAGE> 23
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).
(vi) You shall have received on the Closing Date and on
any later date on which Option Shares are purchased, as the
case may be, a certificate of the Company, dated the Closing
Date or such later date, signed by the President and Chief
Financial Officer of the Company, to the effect that, and you
shall be satisfied that:
(a) 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 any later
date on which Option Shares are to be purchased; and
the Company has complied with all the agreements and
satisfied all the conditions on its part to be
performed or satisfied at or prior to the Closing
Date or any later date on which Option Shares are to
be purchased;
(b) To the best of their knowledge, no stop order
suspending the effectiveness of the Registration
Statement has been issued, and no proceedings for
that purpose have been instituted or are pending or
threatened under the Act;
(c) When the Registration Statement became effective
and at all times subsequent thereto up to the
delivery of such certificate, the Registration
Statement and the Final Prospectus and any
amendments or supplements thereto contained all
statements and information required to be included
therein or necessary to make the statements therein
in light of the circumstances under which they were
made, not misleading and neither the Registration
Statement nor the Final Prospectus nor any amendment
or 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 statement therein not misleading and, since
the effective date of the Registration Statement,
there has occurred no event required to be set forth
in an amended or supplemented Prospectus that has
not been so set forth;
(d) Subsequent to the respective dates as of which
information is given in the Registration Statement
and the Final Prospectus, and except as contemplated
in the Final Prospectus, the Company has not
incurred any direct or contingent liabilities or
obligations material to the Company not in the
ordinary course of business, or entered into any
transactions material to the Company not in the
ordinary course of business, and there has not been
any change in the capital stock or outstanding
indebtedness of the Company material to, or any
material adverse change in, the business,
properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company
and its subsidiaries taken as a whole; and
23
<PAGE> 24
(e) Subsequent to the respective dates as of which
information is given in the Registration Statement
and the Final Prospectus, the Company has not
sustained any material loss of or damages to its
properties, whether or not insured.
(vii) You shall have received on the Closing Date and on any
later date on which Option Shares are purchased, as the case
may be, a certificate, dated the Closing Date or such later
date, signed by or on behalf of each Selling Shareholder, to
the effect that the representations and warranties of such
Selling Shareholder in this Agreement are materially correct
on and as of the date of this Agreement and on and as of such
date, as if made on and as of such date, and that such
Selling Shareholder complied with all of the agreements and
satisfied all the conditions on its part to be performed or
satisfied at or prior to such date.
(viii) The Company shall have furnished to you such further
certificates and documents as you shall reasonably request
(including certificates of officers of the Company) as to the
accuracy of the representations and warranties of the Company
herein, as to the performance by the Company of their
respective obligations hereunder and as to the other
conditions concurrent and precedent to the obligations of the
Underwriters hereunder.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company will furnish you with such number of
conformed copies of such opinions, certificates, letters and documents as you
shall reasonably request.
d. The shares have been approved for trading upon notice of
issuance on The Nasdaq National Market.
e. The Lockup Letters shall have been delivered to the
Underwriters and the Company shall have noted the restrictions
contained in such Lockup Letters on the books and records of the
Company relating to stock transfers and on any certificates
representing shares of Common Stock held by such persons.
7. Indemnification and Contribution.
a. The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint
or several, to which such Underwriter may become subject, under the
Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based
upon: (i) any untrue statement or alleged untrue statement made by the
Company in Section 1(a) of this Agreement; (ii) any untrue statement
or alleged untrue statement of any material fact contained in (A) the
Registration Statement or any amendment thereto, any Preliminary
Prospectus, Final Prospectus or any amendment or supplement thereto,
or (B) any application or other document, or any amendment or
supplement thereto, executed by the Company or based upon written
information furnished by or on behalf of the Company filed in any
jurisdiction in order to qualify the Shares under the securities or
blue sky laws thereof or filed with the Commission or any securities
association or securities exchange (each an "Application"); or (iii)
the omission or alleged omission to state in the Registration
Statement or any amendment thereto, any Preliminary Prospectus, Final
Prospectus or any amendment or supplement thereto, or any Application,
a material fact required to be stated therein or necessary to make the
statements therein
24
<PAGE> 25
not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection
with investigating, defending against or appearing as a third-party
witness in connection with any such loss, claim, damage, liability or
action; provided, however, that the Company shall not be liable in any
such case to the extent that any such loss, claim, damage, liability
or action arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement or any Amendment thereto, any Preliminary
Prospectus, Final Prospectus or any amendment or supplement thereto or
any Application, in reliance upon and in conformity with written
information furnished to the Company by any Underwriter expressly for
use therein. The obligations of the Company to indemnify the
Underwriters (and any controlling person of each Underwriter) pursuant
to this Agreement is subject to the condition that, insofar as such
indemnity agreement shall not inure to the benefit of any Underwriter
from whom the person asserting such losses, liabilities, claims,
damages or expenses purchased the Shares in the Offering, if (i) such
Underwriter failed to deliver a copy of the Final Prospectus to such
person at or prior to the time delivery is required by the Act, unless
such failure was due to the failure by the Company to provide copies
of the Final Prospectus to such Underwriter; and (ii) the delivery of
such Final Prospectus to such person would have constituted a complete
defense to the losses, claims, damages, liabilities or expenses
asserted by such person. The Company will not, without the prior
written consent of each Underwriter, settle or compromise or consent
to the entry of any judgment in any pending or threatened claim,
action, suit or proceeding (or related cause of action or portion
thereof) in respect of which indemnification may be sought hereunder
(whether or not such Underwriter is a party to such claim, action,
suit or proceeding), unless such settlement, compromise or consent
includes an unconditional release of such Underwriter from all
liability that arises out of such claim, action, suit or proceeding
(or related cause of action or portion thereof).
b. Each Selling Shareholder, severally but not jointly, agrees to
indemnify and hold harmless the Company and each Underwriter against
any losses, claims, damages or liabilities, joint or several, to which
the Company or such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon: (i) any
untrue statement or alleged untrue statement made by such Selling
Shareholder in Section 1(b) of this Agreement; or (ii) any untrue
statement or alleged untrue statement of any material fact contained
in the Registration Statement or any amendment thereto, any
Preliminary Prospectus the Final Prospectus or any amendment or
supplement thereto, or any Application, or arise out of or are based
upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading. Each Selling Shareholder, severally, but not
jointly, agrees to reimburse each Underwriter for any legal or other
expenses reasonably incurred by such Underwriter in connection with
investigating, defending against or appearing as a third-party witness
in connection with any such loss, claim, damage, liability or action;
provided, however, that such Selling Shareholder shall be liable in
any such case only to the extent that any such loss, claim, damage,
liability or action arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission made in
the Registration Statement or any amendment thereto, any Preliminary
Prospectus the Final Prospectus or any amendment or supplement thereto
or any Application, in reliance upon and in conformity with written
information furnished to the Company by such Selling Shareholder
expressly for use therein. The obligations of the Selling Shareholders
to indemnify the Underwriters (or any controlling person of such
Underwriter) pursuant to this indemnity agreement is subject to the
condition that, insofar as such losses, claims, damages, liabilities
or expenses relate to any such untrue statement, alleged untrue
statement, omission or alleged omission made in a Preliminary
Prospectus that is corrected in the Final Prospectus, such indemnity
25
<PAGE> 26
agreement shall not inure to the benefit of any Underwriter from whom
the person asserting such losses, liabilities, claims, damages or
expenses purchased the Shares in the Offering, if (i) such Underwriter
failed to deliver a copy of the Final Prospectus to such person at or
prior to the time delivery of such Final Prospectus is required by the
Act, unless such failure was due to the failure by the Company to
provide copies of the Prospectus to such Underwriter; and (ii) the
delivery of such Final Prospectus to such person would have
constituted a complete defense to the losses, claims, damages,
liabilities or expenses asserted by such person. The Selling
Shareholders will not, without the prior written consent of each
Underwriter, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action, suit or
proceeding (or related cause of action or portion thereof) in respect
of which indemnification may be sought hereunder (whether or not such
Underwriter is a party to such claim, action, suit or proceeding),
unless such settlement, compromise or consent includes an
unconditional release of such Underwriter from all liability arising
out of such claim, action, suit or proceeding (or related cause of
action or portion thereof). Notwithstanding the foregoing provisions
of this Section 7(b), the Underwriters shall not be entitled to
indemnity or contribution from any Selling Shareholder in excess of
the net proceeds of the offering (before deducting expenses) received
by such Selling Shareholder.
c. Each Underwriter, severally but not jointly, agrees to indemnify
and hold harmless the Company and each Selling Shareholder and their
directors and officers who sign the Registration Statement and any
person who controls the Company within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act, against any losses, claims,
damages or liabilities to which the Company or any Selling Shareholder
may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement
or any amendment thereto, any Preliminary Prospectus the Final
Prospectus, or any amendment or supplement thereto, or any
Application, or which arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with
written information furnished to the Company by such Underwriter
expressly for use therein; and will reimburse the Company and each
Selling Shareholder and their directors and officers who sign the
Registration Statement and any person who controls the Company within
the meaning of Section 15 of the Act or Section 20 of the Exchange
Act, for any legal or other expenses reasonably incurred by the
Company or such Selling Shareholder and their directors and officers
who sign the Registration Statement and any person who controls the
Company within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act, in connection with investigating or defending any
such loss, claim, damage, liability or action.
d. Promptly after receipt by an indemnified party under subsection
(a), (b) or (c) above of notice of the commencement of any action,
such indemnified party shall, if a claim in respect thereof is to be
made against the indemnifying party under such subsection, notify the
indemnifying party in writing of the commencement thereof; but the
omission so to notify the indemnifying party shall not relieve it from
any liability which it may have to any indemnified party otherwise
than under such subsection. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying
party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and to the extent that it shall wish,
jointly with any other indemnifying party similarly notified, to
assume the defense thereof, with counsel satisfactory to such
indemnified party (who shall not,
26
<PAGE> 27
except with the consent of the indemnified party, be counsel to the
indemnifying party); provided, however, that if the defendants in any
such action include both the indemnified party and the indemnifying
party and the indemnified party shall have reasonably concluded based
upon written advice of counsel that there may be one or more legal
defenses available to it or other indemnified parties that are
different from or additional to those available to the indemnifying
party, the indemnifying party shall not have the right to assume the
defense of such action on behalf of such indemnified party and such
indemnified party shall have the right to select separate counsel to
defend such action on behalf of such indemnified party, provided,
further, however, that the Company shall be liable for the fees and
expenses of only one separate firm of attorneys (in addition to local
counsel) for all indemnified parties at any time in connection with
any action, suit or proceeding or in a series of separate but
substantially similar or related actions, suits or proceedings arising
out of the same general allegations and circumstances. After such
notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof and approval by such
indemnified party of counsel appointed to defend such action, the
indemnifying party will not be liable to such indemnified party under
this Section 8 for any legal or other expenses, other than reasonable
costs of investigation, subsequently incurred by such indemnified
party in connection with the defense thereof, unless (i) the
indemnified party shall have employed separate counsel in accordance
with the proviso to the next preceding sentence or (ii) the
indemnifying party has authorized the employment of counsel for the
indemnified party at the expense of the indemnifying party. Nothing in
this Section 8(d) shall preclude an indemnified party from
participating at its own expense in the defense of any such action so
assumed by the indemnifying party.
e. If the indemnification provided for in this Section 7 is
unavailable to or insufficient to hold harmless an indemnified party
under subsection (a), (b), (c) or (d) above in respect of any losses,
claims, damages or liabilities (or actions in respect thereof)
referred to therein, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of
such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect the relative
benefits received by the Company and the Selling Shareholders on the
one hand and the Underwriters on the other from the offering of the
Shares. If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law, then each
indemnifying party shall contribute to such amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect
not only such relative benefits but also the relative fault of the
Company and the Selling Shareholders on the one hand and the
Underwriters on the other in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities
(or actions in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the
Company and the Selling Shareholders 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 (before deducting
expenses) received by the Company and the Selling Shareholders bear to
the total underwriting discounts and commissions received by the
Underwriters. The 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 the
Selling Shareholders on the one hand or the Underwriters on the other
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The
Company, the Selling Shareholders and the Underwriters agree that it
would not be just and equitable if contributions pursuant to this
subsection (e) were determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take account of the
equitable considerations referred to above in
27
<PAGE> 28
this subsection (e). The amount paid or payable by an indemnified
party as a result of the losses, claims, damages or liabilities (or
actions in respect thereof) referred to above in this subsection (e)
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 or claim. Notwithstanding the provisions of
this subsection (e), (i) no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price
at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which
such Underwriter has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission,
(ii) no Selling Shareholder shall be required to contribute any amount
in excess of the amount by which the net proceeds received by such
Selling Shareholder from the sale of Shares exceeds the damages which
such Selling Shareholder has otherwise been required to pay by reason
of such untrue or alleged untrue statement or omission or alleged
omission, and (iii) 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. The Underwriters' obligations in this subsection
(e) to contribute are several in proportion to their respective
underwriting obligations and not joint.
f. The obligations of the Company and the Selling Shareholders under
this Section 7 shall be in addition to any liability which the Company
or such Selling Shareholders may otherwise have and shall extend, upon
the same terms and conditions, to each person, if any, who controls
any Underwriter within the meaning of the Act; and the obligations of
the Underwriters under this Section 7 shall be in addition to any
liability which the respective Underwriters may otherwise have and
shall extend, upon the same terms and conditions, to each officer and
director of the Company and any Selling Shareholder and to each
person, if any, who controls the Company or any Selling Shareholder
within the meaning of the Act.
8. Indemnity, Representations and Warranties to Survive Delivery. The
indemnity and contribution provisions contained in this Section 7 and the
representations, warranties and other statements of the Company and the Selling
Shareholders contained in this Agreement shall remain operative and in full
force and effect regardless of (i) any termination of this Agreement, (ii) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, any Selling Shareholder or any person controlling any Selling
Shareholder, or the Company, its officers or directors or any person
controlling the Company and (iii) acceptance of and payment for any of the
Shares.
9. Default by Underwriters. If any Underwriter or Underwriters shall fail
to take up and pay for the number of Firm Shares agreed by such Underwriter of
Underwriters to be purchased hereunder upon tender of such Firm Shares in
accordance with the terms hereof and the aggregate number of Firm Shares that
such defaulting Underwriter or Underwriters so agreed but failed to purchase
does not exceed 10% of the Firm Shares, the remaining Underwriters shall be
obligated severally in proportion to their respective commitments hereunder, to
take up and pay for the Firm Shares of such defaulting Underwriter or
Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate
number of Firm Shares that such defaulting Underwriter or Underwriters agreed
but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
that the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares that the defaulting Underwriter or Underwriters so
agreed but failed to
28
<PAGE> 29
purchase, the Closing Date shall be postponed for twenty-four hours to allow
the several Underwriters to substitute within twenty-four hours (including
non-business hours) another underwriter or underwriters (which may include any
nondefaulting Underwriter) satisfactory to the Company. If no such underwriter
or underwriters shall have been substituted as aforesaid by such postponed
Closing Date, the Closing Date may, at the option of the Company, be postponed
for a further twenty-four hours, if necessary, to allow the Company to find
another underwriter or underwriters, satisfactory to you, to purchase the Firm
Shares that the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If it shall be arranged for the remaining Underwriter or substituted
Underwriters to take up the Firm Shares of the defaulting Underwriter or
Underwriters as provided in this Section, (i) the Company shall have the right
to postpone the time of delivery for a period of not more than seven full
business days, in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Final Prospectus, or in any
other documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statements or supplements to the Final
Prospectus that may thereby be made necessary, and (ii) the respective number
of Firm Shares to be purchased by the remaining Underwriters and substituted
underwriters shall be taken as the basis of their underwriting obligation. If
the remaining Underwriters shall not take up and pay for all such Firm Shares
so agreed to be purchased by the defaulting Underwriter or Underwriters or
substitute another underwriter or underwriters as aforesaid and the Company
shall not find or shall not elect to seek another underwriter or underwriters
for such Firm Shares as aforesaid, then this Agreement shall terminate.
In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section, the Company shall not be liable to any
Underwriter (except as provided in Section 5 and in Section 7 hereof) nor shall
any Underwriter (other than an Underwriter who shall have failed, otherwise
than for some reason permitted under this Agreement, to purchase the number of
Firm Shares agreed by such Underwriter to be purchased hereunder, which
Underwriter shall remain liable to the Company and the other Underwriters for
damages, if any, resulting from such default) be liable to the Company (except
to the extent provided in Section 7 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section.
10. Effective Date of this Agreement and Termination
a. This Agreement shall become effective immediately as to Sections 5,
7, 9 and 11 and, as to all other provisions (i) if at the time of
execution of this Agreement the Registration Statement has not become
effective, at 9:00 A.M., Eastern time, on the first full business day
following the effectiveness of the Registration Statement, or (ii) if
at the time of execution of this Agreement the Registration Statement
has been declared effective, at 9:00 A.M., Eastern time, on the first
business day following the date of execution of this Agreement; but
this Agreement shall nevertheless become effective at such earlier
time after the Registration Statement becomes effective as you may
determine on and by notice to the Company or by release of any of the
Shares of sale to the public. For the purposes of this Section 10, the
Shares shall be deemed to have been so released upon the release for
publication of any newspaper advertisement relating to the Shares or
upon the release by you of telegrams (i) advising the Underwriters
that the Shares are released for public offering, or (ii) offering of
Shares for sale to securities dealers, whichever may occur first. By
giving notice as set forth in Section 11 before the time this
Agreement becomes effective, you, as the Representatives of the
several Underwriters, or the Company, may prevent this Agreement from
becoming effective without liability of any party to any
29
<PAGE> 30
other party, except that the Company shall remain obligated to pay
costs and expenses to the extent provided in Section 5a and 5b hereof.
b. You, as the Representatives of the several Underwriters, shall have
the right to terminate this Agreement by giving notice as hereinafter
specified at any time on or prior to the Closing Date or on or prior
to any later date on which the Option Shares are to be purchased as
the case may be (i) if the Company or Selling Shareholders shall have
failed, refused or been unable, on or prior to the Closing Date, or on
or prior to any later date on which the Option Shares are to be
purchased, as the case may be, to perform any agreement on its part to
be performed, or because any other condition of the Underwriters'
obligations hereunder required to be fulfilled by the Company is not
fulfilled, or (ii) if trading on the New York Stock Exchange shall
have been suspended, or minimum or maximum prices for trading shall
have been fixed, or maximum ranges for prices for securities shall
have been required on the New York Stock Exchange, by the New York
Stock Exchange or by order of the Commission or any other governmental
authority having jurisdiction, or if a banking moratorium shall have
been declared by federal or New York or California authorities, or
(iii) if at or prior to the Closing Date, or on or prior to any later
date on which Option Shares are to be purchased, as the case may be,
the Company shall have sustained a loss by strike, fire, flood,
accident or other calamity of such character as to interfere
materially with the conduct of the business and operations of the
Company regardless of whether or not such loss shall have been
insured, or (iv) if at or prior to the Closing Date, or on or prior to
any later date on which Option Shares are to be purchased, as the case
may be, there shall have been an outbreak or escalation of hostilities
in which the United States is involved or other national or
international calamity or any substantial change in political,
financial or economic conditions shall have occurred or shall have
accelerated to such extent, in the judgment of the Representatives, as
to have a material adverse effect on the financial markets of the
United States, or to make it impracticable or inadvisable to proceed
with completion of the sale of and payment for the Shares. Any such
termination shall be without liability or any party to any other party
except as provided in Sections 5a and 5b hereof and except that in the
event of termination solely pursuant to Section 10(b)(i) hereof, the
Company shall remain obligated to pay costs and expenses pursuant to
Section 5a and b hereof.
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 10, the Company shall be
notified promptly by you by telephone or telegram, confirmed by letter. If the
Company shall elect to prevent this Agreement from becoming effective, you
shall be notified promptly by the Company by telephone or telegram, confirmed
by letter.
11. Notices. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to you shall
be mailed, delivered or telegraphed and confirmed to Raymond James &
Associates, Inc., 880 Carillon Parkway, P.O. Box 12749, St. Petersburg, FL
33733-2749, Attention: Mr. Robert Dressler, with a copy sent to William J.
Schifino, Esq., Schifino & Fleischer, P.A., 201 N. Franklin Street, Suite 2700,
Tampa, FL 33602; if sent to the Company shall be mailed, delivered or
telegraphed and confirmed c/o Flanders Corporation, Attention: Mr. Steven
Clark, with a copy sent to William C. Gibbs, Esq. Snell & Wilmer, 111 East
Broadway, Suite 900, Salt Lake City, UT 84101-1004.
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<PAGE> 31
12. Parties. This Agreement shall inure to the benefit of and be binding
upon the several Underwriters, the Company and Selling Shareholders and their
respective successors and assigns. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person or corporation,
other than the parties hereto and their respective successors and assigns and
the controlling persons, officers and directors referred to in Section 7
hereof, any legal or equitable rights, remedy or claim in respect of this
Agreement or any provisions herein contained, this Agreement and all conditions
and provisions hereof being intended to be and being for the sole and exclusive
benefit of the parties hereto and their respective executors, administrators,
successors and assigns and said controlling persons and said officers and
directors, and for the benefit of no other person or corporation. No purchaser
of any of the shares from any Underwriter shall be construed a successor or
assign by reason merely of such purchase.
In all dealings with the Company under this Agreement, you shall act
on behalf of each of the several Underwriters, and the Company shall be
entitled to act and rely upon any statement, request, notice or agreement on
behalf of each of the several Underwriters as if the same shall have been made
or given in writing by you.
13. Applicable Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Florida.
14. Counterparts. This Agreement may be signed in several counterparts,
each of which will constitute an original.
15. Information Provided by Underwriters. The information set forth in
the last paragraph on the front cover page (insofar as such information relates
to the Underwriters) and under "Underwriting" in any Preliminary Prospectus and
in the Final Prospectus constitutes the only information furnished by the
Underwriters to the Company for inclusion in any Preliminary Prospectus, the
Final Prospectus or the Registration Statement, and you on behalf of the
respective Underwriters, represent and warrant to the Company that the
statements made therein do not contain an untrue statement of a material fact
and do not fail to state any material fact required to be stated therein in
order to make such statements in light of the circumstances under which they
were made not misleading.
If the foregoing correctly sets forth the understanding among the
Company, the several Underwriters and the Selling Shareholders please so
indicate in the space provided below for that purpose, whereupon this letter
shall constitute a binding agreement among the Company, the several
Underwriters and the Selling Shareholders.
Very truly yours,
FLANDERS CORPORATION
By: ----------------------------------
EACH OF THE SELLING SHAREHOLDERS
LISTED ON SCHEDULED II HERETO
By: ----------------------------------
Attorney-in-fact
31
<PAGE> 32
Accepted as of the date first above written:
Raymond James & Associates, Inc.
Cleary Gull Reiland & McDevitt Inc.
on their behalf and on behalf of each of the
Several Underwriters named in Schedule I hereto.
By: Raymond James & Associates, Inc.
By:
--------------------------------
Robert Dressler, Vice President
<TABLE>
<CAPTION>
SCHEDULE I
NUMBER OF NUMBER OF MAXIMUM
COMPANY SELLING TOTAL NUMBER NUMBER OF
FIRM SHARES SHAREHOLDER OF FIRM SHARES OPTIONAL
TO BE FIRM SHARES TO TO BE SHARES TO BE
UNDERWRITER PURCHASED BE PURCHASED PURCHASED PURCHASED
- ------------------ ----------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
-------------- ------------
Total.............................. ============== ============
</TABLE>
32
<PAGE> 33
SCHEDULE II
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
SELLING SHAREHOLDERS TO BE SOLD
-------------------- -----------
<S> <C>
</TABLE>
33
<PAGE> 34
SCHEDULE III
SUBSIDIARIES
<TABLE>
<CAPTION>
STATE OF
NAME INCORPORATION % OWNERSHIP
---- ------------- -----------
<S> <C> <C>
Charcoal Service Corporation North Carolina 100.00%
Air Seal Filter Housings, Inc. Texas 100.00%
Precisionaire, Inc. Florida 100.00%
Flanders International PLC, Ltd. Singapore 100.00%
Flanders Filters, Inc. North Carolina 98.86%
Air Seal West, Inc. 60.00%
Flanders Airpure, Inc. North Carolina 100.00%*
Flanders Airpure Products Company, LLC North Carolina 63.00%*
</TABLE>
- ------
* Owned by Flanders Filters, Inc.
34
<PAGE> 35
Raymond James & Associates, Inc.
880 Carillon Parkway
P.O. Box 12749
St. Petersburg, FL 33733-2749
Cleary Gull Reiland & McDevitt Inc.
100 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Dear Sirs:
The undersigned understands that Raymond James & Associates, Inc.
("Raymond James") and Cleary Gull Reiland & McDevitt Inc., as Representatives
of the several Underwriters ("Representatives"), propose to enter into an
Underwriting Agreement (the "Underwriting Agreement") with Flanders
Corporation, a North Carolina corporation, (the "Company") and certain
shareholders of the Company (the "Selling Shareholders") providing for the
public offering (the "Public Offering") by the several Underwriters, including
the Representatives (the "Underwriters"), of 6,000,000 shares of the Common
Stock, par value $.001 per share, of the Company (the "Firm Shares") to be
issued and sold by the Company and up to an additional 400,000 shares of the
Common Stock, par value $.001 per share, of the Company (the "Additional
Shares") to be sold by the Selling Shareholders. The Firm Shares and the
Additional Shares are hereinafter collectively referred to as the "Shares".
To induce the Underwriters that may participate in the Public Offering to
continue their efforts in connection with the Public Offering, the undersigned
hereby agrees that, without the prior written consent of Raymond James on
behalf of the Underwriters, it will not, during the period commencing on the
date hereof and ending 180 days after the date of the final prospectus relating
to the Public Offering (the "Prospectus"), (1) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, or otherwise transfer
or dispose of, directly or indirectly, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock
(provided that such shares or securities are either now owned by the
undersigned or are hereafter acquired prior to or in connection with the Public
Offering), or (2) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
such shares of Common Stock, whether any such transaction described in clause
(1) or (2) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply to the
sale of any Shares to the Underwriters pursuant to the Underwriting Agreement
or to the sale of any shares of Common Stock which are subject to an existing
pledge or other security arrangement, in good faith pursuant to the terms of
such pledge or arrangement. In addition, the undersigned agrees that, without
the prior written consent of Raymond James on behalf of the Underwriters, it
will not, during the period commencing on the date hereof and ending 180 days
after the date of the Prospectus, make any demand for or exercise any right
with respect to, the registration of any shares of Common stock or any security
convertible into or exercisable or exchangeable for Common Stock.
Whether or not the Public Offering actually occurs depends on a number of
factors, including market conditions. Any Public Offering will only be made
pursuant to an Underwriting Agreement, the terms of which are subject to
agreement between the Company, the Selling Shareholders and the Underwriters.
Very truly yours,
35
<PAGE> 1
EXHIBIT 4.1(b)
FLANDERS CORPORATION
AND
RAYMOND JAMES AND ASSOCIATES, INC.
CLEARY GULL REILAND & MCDEVITT INC.
REPRESENTATIVES'
WARRANT AGREEMENT
DATED AS OF SEPTEMBER __, 1997
<PAGE> 2
REPRESENTATIVES' WARRANT AGREEMENT dated as of September __, 1997
between FLANDERS CORPORATION, a North Carolina corporation (the "Company"),
RAYMOND JAMES AND ASSOCIATES, INC. AND CLEARY GULL REILAND & MCDEVITT INC.
(hereinafter referred to variously as the "Holders" or the "Representatives").
WITNESSETH:
WHEREAS, the Company proposes to issue to the Representatives or their
designees warrants ("Warrants") to purchase up to an aggregate _______ shares
of common stock of the Company ("Common Stock"); and
WHEREAS, the Representatives have agreed pursuant to the underwriting
agreement (the "Underwriting Agreement") dated as of the date hereof among the
Representatives, as Representatives of the Several Underwriters named in
Schedule A thereto, and the Company to act as Representatives in connection
with the Company's proposed public offering of up to _________ shares of Common
Stock at a public offering price of $____ per share of Common Stock (the
"Public Offering"); and
WHEREAS, the Warrants to be issued pursuant to this Agreement will be
issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to the Representatives in consideration for, and as
part of the Representatives' compensation in connection with, the
Representatives acting as the Representatives pursuant to the Underwriting
Agreement;
NOW, THEREFORE, in consideration of the premises, the payment by the
Representatives to the Company of an aggregate ________ dollars ($_____), the
agreements herein set forth and other good and valuable consideration, hereby
acknowledged, the parties hereto agree as follows:
1. Grant. The Representatives are hereby granted the right to
purchase, at any time from September __, 1998, until 5:30 P.M., New York time,
on _________, 2002, up to an aggregate of _______ shares of Common Stock (the
"Shares") at an initial exercise price (subject to adjustment as provided in
Section 8 hereof) of $______ per share of Common Stock 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
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.
Section 3.1 Method of Exercise. The Warrants initially are exercisable
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
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
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 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 "Holders") shall be entitled to receive a certificate
or certificates for the shares of
<PAGE> 3
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.
Section 3.2 Exercise by Surrender of Warrant. In addition to the
method of payment set forth in Section 3.1 and in lieu of any cash payment
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
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
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
("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.
Section 3.3 Definition of Market Price. As used herein, the phrase
"Market 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, the
issuance of certificates for shares of Common Stock and/or other securities,
properties or rights underlying such Warrants, shall be made forthwith (and in
any event within five (5) 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) 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.
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
Certificate, by its acceptance thereof, covenants and agrees that the Warrants
are being acquired as an investment and not with a view to the
<PAGE> 4
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 Representatives.
6. Exercise Price.
Section 6.1 Initial and Adjusted Exercise Price. Except as otherwise
provided in Section 8 hereof, the initial exercise price of each Warrant shall
be $______ 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.
Section 6.2 Exercise Price. The term "Exercise Price" herein shall
mean the initial exercise price or the adjusted exercise price, depending upon
the context.
7. Registration Rights.
Section 7.1 Registration Under the Securities Act of 1933. The
Warrants, the Shares, and any of the other securities issuable upon
exercise of the Warrants have not been registered under the Securities
Act of 1933, as amended (the "Act"). The Warrant Certificates and,
upon exercise, in part or in whole, of the Warrants, 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.
Section 7.2 Piggyback Registration. If, at anytime commencing after
the 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 in
connection with a merger or pursuant to Form S-8) it will give written notice
by registered mail, at least thirty (30) days prior to the filing of each such
registration statement, to the Representatives and to all other Holder of the
Warrants and/or the Warrant Securities of its intention to do so. If the
Representatives or other Holder 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 Representatives 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").
If any registration pursuant to this Section 7.2 shall be underwritten
in whole or in part, the Company may require that the Warrant Securities
requested for inclusion pursuant to this Section 7.2 be included in the
underwriting on the same terms and conditions as the securities otherwise being
sold through the underwriters. If the managing underwriter of the public
offering contemplated by such registration statement shall advise the Company
that the inclusion of all of the Warrant Securities originally covered by a
request for registration exceeds the number of Warrant Securities that can be
sold in such offering without adversely affecting the marketing of the
Company's Common Stock, the number of Warrant Securities otherwise to be
included in the
<PAGE> 5
underwritten public offering may be reduced to the minimum extent such managing
underwriter so advises the Company is necessary to avoid such effect, pro rata
among the Holders of the Warrant Securities and any other person to be included
in such registration.
Notwithstanding the provisions of this Section 7.2, the Company shall
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
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.
Section 7.3 Demand Registration.
(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 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 Representatives and Holders, 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 Holders 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 Holders to all
other registered Holders 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
subsection (a) of this Section 7.3, at any time commencing after the date
hereof 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 such registration request and registration and all costs incident
thereto shall be at the expense of the Holders 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 written notice specified in Section 7.3(a) of a Majority of the Holders
of the Warrants and/or Warrant Securities, the Company shall have the option,
upon the written notice of election of a Majority of the Holders of the
Warrants and/or Warrant Securities, 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 Section 7.4(a) and (ii) any and all 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 in this Section.
7.3(d).
Section 7.4 Covenants of the Company With Respect to Registration. In
connection with any registration under Section 7.2 or 7.3 hereof, the Company
covenants and agrees as follows:
<PAGE> 6
(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.
(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
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
fail to comply with the provisions of Section 7.4(a), the Company shall, in
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 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 Holders within the meaning of Section 15 of The Act
or 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 of the Underwriting Agreement.
(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 and directors 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, 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 in Section 7 of the Underwriting
Agreement pursuant to which the Underwriters have agreed 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 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
Holders of the Warrants and Warrant Securities representing a Majority of such
securities.
<PAGE> 7
(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 under-writing 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 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 holders" (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 beginning after the effective date of the registration statement.
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 Holders holding a
Majority of the Warrant Securities requested to be included in such
underwriting, which may be the Representatives, or either of them. Such
agreement shall be satisfactory in form and substance to the Company, each
Holder and 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(s) 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 covenant s 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.
(1) 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.
<PAGE> 8
(m) For purposes of this Agreement, the term "Majority" in reference
to the Holders 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.
8. Adjustments to Exercise Price and Number of Securities.
Section 8.1 Subdivision and Combination. In case the Company shall at
any time 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.
Section 8.2 Stock Dividends and Distributions. In case the Company
shall pay a 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 or distribution.
Section 8.3 Adjustment in Number of Securities. Upon each adjustment
of the Exercise Price pursuant to the provisions of this Section 8, the number
of 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.
Section 8.4 Definition of Common Stock. For the purpose of this
Agreement, the 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.
Section 8.5 Merger or Consolidation. In case of any consolidation of
the 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 subsection shall similarly apply to successive consolidations
or mergers.
Section 8.6 No Adjustment of Exercise Price in Certain Cases. No
adjustment of 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;
<PAGE> 9
(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.
9. Exchange and Replacement of Warrant Certificates. Each Warrant
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
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 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 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 Holders. Nothing contained in this Agreement
shall be construed as conferring upon the Holders 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
<PAGE> 10
(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.
Section 13.1 Delivery of Notices. 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, via registered or certified
mail, return receipt requested, 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.
Section 13.2 Addresses for Notice. 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 Representatives
may from Time to time supplement or amend this Agreement without the approval
of any holder of Warrant Certificates (other than the Representatives) 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 Representatives may deem necessary or desirable and which
the Company and the Representatives 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 ____________, 2004. Notwithstanding the foregoing, the
indemnification provisions of Section 7 shall survive such termination until
the close of business on __________, 2010.
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 Florida and for all
<PAGE> 11
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 Representatives 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
Florida or of the United States of America for the Middle District of Florida,
and irrevocably submits to such jurisdiction, which jurisdiction shall be
exclusive. The Company, the Representatives and the Holder hereby irrevocably
waive any objection to such exclusive jurisdiction or inconvenient foram. Any
such process or summons to be served upon any of the Company, the
Representatives and the 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 Representatives
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 Amendment. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Representatives 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 sole benefit of the Company and
the Representatives and any other registered Holder of Warrant Certificates or
Warrant Securities.
22. Counter-parts. 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.
<PAGE> 12
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
Attest: By: ----------------------------------
Name: Robert R. Amerson
Title: President/CEO
- ---------------------
Name: Steven Clark
Title: CFO
RAYMOND JAMES AND ASSOCIATES, INC.
By: ----------------------------------
CLEARY GULL REILAND & MCDEVITT INC.
By: ----------------------------------
<PAGE> 1
EXHIBIT 5.1
[SNELL & WILMER LETTERHEAD]
September 10, 1997
Flanders Corporation
531 Flanders Filters Road
Washington, North Carolina 27889
Re: Registration Statement of Form S-1
Dear Gentlemen:
We have acted as counsel for Flanders Corporation, a North Carolina
corporation (the "Company"), and in such capacity have examined the Company's
Registration Statement on Form S-1 (the "Registration Statement") to be filed by
the Company with the Securities and Exchange Commission ("Commission") on
September 12, 1997, under the Securities Act of 1933, as amended (the "Act"),
relating to the proposed public offering by the Company of up to 6,480,000
shares of Common Stock, $.001 par value per share, of the Company ("Company
Shares") and 880,000 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.
<PAGE> 2
[SNELL & WILMER LOGO]
Flanders Corporation
September 6, 1997
Page 2
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 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 of 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.
Sincerely,
SNELL & WILMER L.L.P.
<PAGE> 1
EXHIBIT 10.8
PROMISSORY NOTE
Amount of the Note: $2,134,524.00
Date of Note: August 28, 1997
Maturity Date: June 30, 2002
Interest Rate: The principal outstanding under this
Note shall bear interest at the
LIBOR-Based Rate, and shall be adjusted
each month thereafter on each
subsequent Interest Rate Change Date
(as such term is hereafter defined).
The term "LIBOR-Based Rate" means two
percent and 20/100 (2.20%) per annum
above the interest rate per annum
obtained by dividing (i) the LIBOR Base
Rate by (ii) an amount equal to 1 minus
the LIBOR Reserve Requirement. The term
"LIBOR Base Rate" means the interest
rate per annum, which is equal to the
interest rate per annum published one
(1) business day prior to the
applicable Interest Rate Change Date in
the "Money Rates" column of the local
edition of the Wall Street Journal as
"London Interbank Offered Rates" for
U.S. Dollar Deposits having a maturity
of one month. If, for any reason, such
rate if not available, then "LIBOR Base
Rate" will mean the rate per annum at
which, in the opinion of Payee,
U.S. dollars in an amount substantially
equal to the applicable principal
amount are being offered to leading
reference banks at approximately 11:00
a.m. London time, one (1) London
business day prior to the next
succeeding Interest Rate Change Date
for settlement in immediately
available funds by leading reference
banks in the London interbank market.
The term "Interest Rate Change Date"
means one month from the date hereof
and the same day of each month
thereafter. "LIBOR Reserve Requirement"
means, for any day, the percentage
(expressed as a decimal) in effect for
such day as prescribed by the Federal
Reserve Board (or any successor) for
determining the maximum reserve
requirement (including without
limitation any basic, supplemental, or
emergency reserves) for Payee in
respect of Eurocurrency liabilities or
any similar category of liabilities.
Payee: SunTrust Bank, Tampa Bay
Payee's Address: 300 1st Street South, Third Floor
St. Petersburg, Florida 33701
STATE OF FLORIDA DOCUMENTARY STAMPS IN THE AMOUNT
REQUIRED BY LAW ARE AFFIXED TO THE MORTGAGE
WHICH SECURES THIS NOTE AND CANCELLED PURSUANT TO LAW.
Maker's Initials _______
<PAGE> 2
FOR VALUE RECEIVED, the undersigned (the "Maker") does hereby covenant
and promise to pay to the order of the Payee, or to its successors or assigns,
at its principal office, or at such other place as the Payee may designate to
the Maker in writing from time to time, in legal tender of the United States,
the Amount of the Note or so much thereof as may be advanced (the "Principal
Amount") by the Payee, together with interest at the Interest Rate on the
unpaid balance of the Principal Amount.
Principal payments of $17,787.70 per month plus accrued interest, shall
be payable monthly beginning on September __, 1997, and continuing on the same
day of each month thereafter until the Maturity Date whereupon the entire
unpaid balance of principal and interest accrued and unpaid thereon shall be
due and payable.
If interest shall not be paid within ten (10) days of its due date,
then the entire principal sum and accrued interest hereunder shall become due
and payable at once or thereafter, at the option of the holder of this Note.
Payee may at its option collect a late charge not to exceed five cents ($0.05)
for each one dollar ($1.00) of each payment not paid when due to reimburse
Payee for expenses of servicing delinquent payments. Failure to exercise these
options shall not constitute a waiver of the right to exercise the same in the
event of any subsequent default.
It is further agreed that the Maker and each endorser, surety,
guarantor, jointly and severally, shall pay all costs of collection of this
Note, including a reasonable attorney's fee, including all costs, expenses and
attorney's fee for any retrial, rehearing, bankruptcy proceedings or appeals,
on failure to pay the unpaid balance of the Principal Amount or any accrued
interest due hereunder on the due date thereof. This Note and all sums due
hereunder shall bear interest at a rate equal to the lesser of (a) the rate of
eighteen percent (18.0%) per annum or (b) the highest lawful rate of interest
per annum allowed by the laws of the State of Florida (the "Default Rate") from
the date when the principal and accrued interest under this Note shall be due
and payable. Notwithstanding any term, condition, obligation or provision
herein to the contrary, it is the expressed intent of the Payee that no
interest, consideration or change in excess of that permitted in the State of
Florida may be accrued, charged or taken or become payable hereunder. In the
event it is hereafter determined that the Payee of this Note has taken, charged
or reserved interest in excess of that permitted, whether due to prepayment,
acceleration, or otherwise, such excess shall be refunded to the Maker or
credited against the sums due the Payee hereunder.
This Note is secured by a mortgage deed and security agreement of even
date herewith (the "Mortgage"), encumbering property located in Polk County,
Florida, granted by the Maker to the Payee, to which reference is hereby made
for a description of the mortgaged property, the nature and extent of the
security, the rights of the Payee in respect thereof and the terms and
conditions upon which this Note is issued. A default under the Loan Agreement
or the Mortgage shall constitute a default of this Note.
The unpaid balance of the Principal Amount, plus accrued interest shall
become due and payable at the option of the Payee under the happening of an
event by which said balance shall or may become due and payable under the
terms of the Mortgage.
This Note may not be changed orally, but only by an agreement in
writing, signed by the party against whom enforcement of any waiver, change,
modification or discharge is sought.
Notwithstanding anything herein or in the Mortgage to the contrary,
Maker may prepay the indebtedness evidenced by this Note or any portion of it
without premium or Penalty and with interest on the portion so prepaid
calculated through the date of prepayment only.
2
<PAGE> 3
All parties to this Note, whether Maker, principal, surety, guarantor
or endorser, hereby waive presentment for payment, demand, protest, notice of
protest, and notice of dishonor, and expressly agree jointly and severally to
remain and continue bound for the payment of the principal and interest
provided for by the terms of this Note, notwithstanding any extension or
extensions of the time of, or for the payment of said principal or interest, or
any change or changes in the amount or amounts agreed to be paid under or by
virtue of the obligation to pay provided for in this Note, or any change or
changes by way of release or surrender or substitution of any real property and
collateral, or either, held as security for this Note, and waive all and every
kind of notice of such extension or extensions, change or changes, and agree
that the same may be made without the joinder of the Maker.
This Note shall be governed by and construed in accordance with the
laws of the State of Florida.
The interest rate charged in the Note is authorized by Chapter 665 and
Section 687.12 of the Florida Statutes, and applicable federal law.
MAKER AND PAYEE HEREBY KNOWINGLY, VOLUNTARILY, INTENTIONALLY, AND
IRREVOCABLE WAIVE THE RIGHT EITHER OF THEM MAY HAVE TO A TRIAL BY JURY IN
RESPECT TO ANY LITIGATION, WHETHER IN CONTRACT OR TORT, AT LAW OR IN EQUITY,
BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS NOTE, THE
MORTGAGE, AND ANY OTHER DOCUMENT OR INSTRUMENT CONTEMPLATED TO BE EXECUTED IN
CONJUNCTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS
(WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY HERETO. THIS PROVISION IS A
MATERIAL INDUCEMENT FOR PAYEE AGREEING TO ACCEPT THIS NOTE. FURTHER, MAKER
HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF PAYEE, NOR THE PAYEE'S
COUNSEL, HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT PAYEE WOULD NOT, IN THE
EVENT OF SUCH LITIGATION, SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL
PROVISION. NO REPRESENTATIVE OR AGENT OF THE PAYEE, NOR PAYEE'S COUNSEL HAS THE
AUTHORITY TO WAIVE, CONDITION, OR MODIFY THIS PROVISION.
PRECISIONAIRE, INC.,
a Florida corporation
By: Illegible Signature
----------------------------------
Name:
As its President
Address of Maker:
c/o 2399 26th Avenue North [CORPORATE SEAL]
St. Petersburg, Florida 33713
3
<PAGE> 1
EXHIBIT 10.9
ASSUMPTION AND AMENDMENT AGREEMENT
This Assumption and Amendment Agreement is dated as of the 1st day
of August, 1997, and is by and among Polk County Industrial Development
Authority (the "Issuer"), POF Realty, a Florida general partnership (the
"Original Borrower"), Precisionaire, Inc., a Florida Corporation
("Precisionaire"), a North Carolina corporation ("Flanders"), SunTrust Bank,
Central Florida, National Association (the "Trustee"), and SunTrust Bank, Tampa
Bay (the "Bank").
BACKGROUND:
The Issuer previously issued its $2,040,000 Polk County Industrial
Development Authority Industrial Development Revenue Bonds (POF Realty
Project), Series 1988, dated January 13, 1988 (the "Bonds"), pursuant to
Resolution No. 87-08 adopted by the Issuer on November 12, 1987 and Resolution
No. 87-10, adopted by the Issuer on November 10, 1987 (collectively, the
"Resolution") and an Indenture of Trust (the "Indenture"), dated as of January
13, 1988, between the Issuer and the Trustee, formerly known as Sun Bank,
National Association, as trustee (the "Trustee"), to generate funds to make a
loan to POF Realty, a Florida general partnership, and its successors and
assigns (the "Original Borrower"), pursuant to a Loan Agreement (the "Loan
Agreement") dated as of January 13, 1988, and a Promissory Note (the "Note")
dated January 13, 1988, both between the Original Borrower and the Issuer.
The Bonds are payable from amounts paid by the Original Borrower under
the Loan Agreement and the Note is secured by a Mortgage and Security Agreement
(the "Mortgage"), dated as of January 13, 1988, from the Original Borrower to
the Issuer.
The manufacturing facility and related properties financed with the
proceeds of the Bonds (the "Project") was leased by the Original Borrower to
Precisionaire.
Flanders now owns Precisionaire and Precisionaire wishes to purchase
the Project from the Original Borrower and assume all obligations of the
Original Borrower under the Loan Agreement, the Note and all other documents
relating to the Bonds, such documents being hereinafter referred to as the
"Borrower Documents." The outstanding aggregate principal amount of the Bonds
as of the date hereof is $1,020,143.38. The Bank is the registered owner of all
of the Bonds outstanding as of the date hereof.
Flanders has agreed to guarantee Precisionaire's obligations and the
Bank, the Issuer and the Trustee have agreed to the release of the Original
Borrower and Emily C. Beck, William L. Beck, Lisette Beck, Robert V. Beck, Eva
M. Beck, Gustavo Hernandez, Ana Hernandez and O. Stephen Lackley (collectively,
the "Individual Guarantors").
<PAGE> 2
Precisionaire and Flanders have requested that the Issuer approve the
assumption and the amendment of the Borrower Documents, and the Issuer,
pursuant to Resolution No. 97-04, adopted on July 14, 1997, has given such
approval.
The Trustee, the Issuer, the Original Borrower, Flanders and the Bank,
by execution of this Assumption and Amendment Agreement, hereby approve and
consent to such assumption and amendments as set forth below.
AGREEMENT:
In consideration of the premises hereof, the mutual covenants of the
parties hereto and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. Precisionaire hereby agrees to assume, pay and undertake all
obligations of the Original Borrower under the Borrower Documents and all other
obligations of the Original Borrower with respect to the Bonds, including,
without limitation, the obligation to pay the Loan Installments (as that term
is defined in the Loan Agreement) and to pay when due, the principal of and
interest on the Bonds.
2. Precisionaire as the Borrower (as that term is defined in the Loan
Agreement) hereby affirms, on its behalf, the representations set forth in
subsections (e), (j) and (r) of Section 2.3 of the Loan Agreement. Further,
Precisionaire hereby covenants to continue the use of the Project as a
"project" within the meaning of Section 159.27(5), Florida Statutes, for the
Agreement Term (as defined in the Loan Agreement).
3. The Borrower Documents are hereby amended to provide that notices
to the Original Borrower thereunder shall be given to Precisionaire at the
following address:
Precisionaire, Inc.
2399 26th Avenue North
----------------------
St. Petersburg, Florida 33713
-----------------------------
Attention: Gustavo Hernandez
----------------------------
With a copy to: Flanders Corporation
--------------------------------
--------------------------------
--------------------------------
Attention:
----------------------
2
<PAGE> 3
4. The Borrower Documents are hereby amended to reflect Flanders as
Guarantor and the release of the Individual Guarantors and the Original
Borrower thereunder.
5. The Borrower Documents are hereby amended to reflect the foregoing
assumptions, amendments and releases and shall be deemed to conform to the
provisions of this Assumption and Amendment Agreement. Nothing contained herein
invalidates or shall invalidate any security now held by the Trustee or the
Bank nor impair or release any covenant, condition, agreement or stipulation in
the Borrower Documents, except as expressly modified herein, and such documents
shall continue in full force and effect.
6. No other term, provision or condition of any of the documents
executed in connection with the issuance and delivery of the Bonds, including,
but not limited to, the Bonds and the Borrower Documents, shall be deemed to be
modified or amended except to the extent expressly set forth herein, and this
Assumption and Amendment Agreement shall not be considered a novation.
7. The parties hereto agree to execute and record any instruments
which may be advisable to evidence the purchase by Precisionaire of the
Project, the assumption by Precisionaire of the obligations of the Original
Borrower under the Borrower Documents, the guarantee of the obligations of
Precisionaire by Flanders, and the release of the Original Borrower and the
Individual Guarantors.
8. The costs and expenses incurred by the Issuer, the Trustee, and the
Bank in connection with the execution, delivery and performance of this
Assumption and Amendment Agreement, including, without limitation, reasonable
attorneys' fees and expenses, shall be paid by Precisionaire.
9. The parties hereby expressly consent to the sale of the Project
pursuant to Section 6.17 of the Loan Agreement. The parties hereto further
consent to the encumbrance of the Project and a lien thereon being granted by
Precisionaire to the Bank by way of a Mortgage and Security Agreement from
Precisionaire to the Bank, junior and subordinate in all respects to the
Mortgage.
10. This Assumption and Amendment Agreement and all agreements related
hereto shall not be interpreted to diminish or extinguish the original rights
of the Bank and other original parties to the referenced Borrower Documents or
be interpreted to release Precisionaire from any liabilities arising under the
Borrower Documents. The parties hereto also agree that the Assumption and
Amendment Agreement and all agreements related thereto are not intended to, and
do not, in any way constitute a novation or accord and satisfaction of any
provision of the Borrower Documents.
3
<PAGE> 4
11. In the event any provision of this Assumption and Amendment
Agreement shall be held invalid or unenforceable by any court of competent
jurisdiction, such holding shall not invalidate or render unenforceable any
other provision hereof.
12. This Assumption and Amendment Agreement shall be governed by and
construed in accordance with the laws of the State of Florida.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have set their hands and seals
as of the date first written above.
POLK COUNTY INDUSTRIAL
DEVELOPMENT AUTHORITY
(SEAL)
ATTEST: By:
-------------------------------
Chairman
- --------------------------------
Secretary or Assistant Secretary
ORIGINAL BORROWER
POF REALTY, a Florida general
partnership
By: /s/ Gustavo Hernandez
-------------------------------------
Name: GUSTAVO HERNANDEZ
-----------------------------------
Title: General Partner
By:
-------------------------------------
Name:
-----------------------------------
Title: General Partner
PRECISIONAIRE
(SEAL)
ATTEST: By: /s/ Steve K. Clark
-------------------------------------
Name: Steve K. Clark
/s/ Sylvia Sanchez -----------------------------------
- -------------------------------- Title: Chief Financial Officer
Name: Sylvia Sanchez ----------------------------------
---------------------------
Title: Secretary
SUNTRUST BANK, CENTRAL FLORIDA,
NATIONAL ASSOCIATION, as
Trustee
(SEAL)
By:
-------------------------------------
Name:
-----------------------------------
Authorized Officer
5
<PAGE> 6
FLANDERS CORPORATION
(SEAL)
ATTEST:
By /s/ Steven K. Clark
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Name: Steven K. Clark
-----------------------------------
/s/ Sylvia Sanchez Title: Chief Financial Officer
- -------------------------------- ----------------------------------
Name: Sylvia Sanchez
---------------------------
Title: Corp. Secretary
--------------------------
SUNTRUST BANK, TAMPA BAY, as
Bondholder
(SEAL)
By: /s/ Frank A. Cog
-------------------------------------
Name: FRANK A. COG
-----------------------------------
Authorized Officer
6
<PAGE> 1
Exhibit 10.10
MORTGAGE DEED AND SECURITY AGREEMENT
THIS MORTGAGE DEED AND SECURITY (the "Mortgage"), dated as of August 28,
1997, by and between PRECISIONAIRE, INC., a Florida corporation, whose address
is C/O 2399 26th Avenue North, St. Petersburg, Florida 33713 (hereinafter called
the "Mortgagor"), and SUNTRUST BANK, TAMPA BAY, a Florida banking corporation,
having an office at 300 1st Street South, Third Floor, St. Petersburg, Florida
33701 (hereinafter called "Mortgagee");
WITNESSETH, that in consideration of the premises and in order to secure
the payment of both the principal of, and interest and any other sums payable on
the Note (as hereinafter defined) or this Mortgage and the performance and
observance of all of the provisions hereof and of said Note, Mortgagor hereby
grants, sells, warrants, conveys, assigns, transfers, mortgages and sets over
and confirms unto Mortgagee, all of Mortgagor's estate, right, title and
interest in, to and under all that certain real property situate in Polk County,
Florida, more particularly described as follows:
[SEE EXHIBIT "A" ATTACHED HERETO AND
MADE A PART HEREOF BY REFERENCE]
TOGETHER WITH all improvements now or hereafter located on said real
property and all fixtures, appliances, apparatus, equipment, furnishings,
heating and air conditioning equipment, machinery and articles of personal
property and replacement thereof (other than those owned by lessees of said
real property) now or hereafter affixed to, attached to, placed upon, or used
in any way in connection with the complete and comfortable use, occupancy, or
operation of the said real property, all licenses and permits used or required
in connection with the use of said real property, all leases and sales
contracts of said real property now or hereafter entered into and all right,
title and interest of Mortgagor thereunder, including without limitation, cash
or securities deposited thereunder pursuant to said leases or sales contracts,
and all rents, issues, proceeds and profits accruing from said real property
and together with all proceeds of the conversion, voluntary or involuntary of
any of the foregoing into cash or
STATE OF FLORIDA DOCUMENTARY STAMPS AND
EVIDENCE OF PAYMENT OF INTANGIBLE TAX
IN THE AMOUNT PRESCRIBED BY LAW FOR THE
NOTE ARE AFFIXED TO THIS MORTGAGE AND
CANCELLED PURSUANT TO LAW.
This Instrument prepared by
and is to be returned to:
James A. Park, III, Esquire
Holland & Knight LLP
P.O. Box 32092 - Lakeland, FL 33602-2092
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liquidated claims, including without limitation, proceeds of insurance and
condemnation awards (the foregoing said real property, tangible and intangible
personal property hereinafter referred to collectively as the "Mortgaged
Property"). Mortgagor hereby grants to Mortgagee a security interest in the
foregoing described tangible and intangible personal property.
TO HAVE AND TO HOLD the Mortgaged Property, together with all and
singular the tenements, hereditaments and appurtenances thereunto belonging or
in anywise appertaining and the reversion and reversions thereof and all the
estate, right, title, interest, homestead, dower and right of dower, separate
estate, possession, claim and demand whatsoever, as well in law as in equity, of
Mortgagor and unto the same, and every part thereof, with the appurtenances of
Mortgagor in and to the same, and every part and parcel thereof unto Mortgagee.
Mortgagor warrants that Mortgagor has a good and marketable title to an
indefeasible fee estate in the real property comprising the Mortgaged Property
subject to no lien, charge or encumbrance except such as Mortgagee has agreed to
accept and shown on Schedule B-II of title insurance commitment #9702609 issued
by Lawyers Title Insurance Corporation to Mortgagee, including the first
mortgage to the Polk County Industrial Development Authority and assigned to Sun
Bank, National Association, as Trustee, (the "First Mortgage") and Mortgagor
covenants that this Mortgage is and will remain a valid and enforceable
mortgage on the Mortgaged Property subject only to the exceptions herein
provided. Mortgagor has full power and lawful authority to mortgage the
Mortgaged Property in the manner and form herein done or intended hereafter to
be done. Mortgagor will preserve such title and will forever warrant and defend
the same to Mortgagee and will forever warrant and defend the validity and
priority of the lien hereof against the claims of all persons and parties
whomsoever. Any other provision of this Mortgagee to the contrary, Mortgagor
will not be in default hereunder if compliance by Mortgagor hereunder would
result in a default by Mortgagor under the First Mortgage, provided that
Mortgagor has complied with the terms and conditions of the First Mortgage.
Mortgagor will, at the cost of Mortgagor, and without expense to
Mortgagee, do, execute, acknowledge and deliver all and every such further acts,
deeds, conveyances, mortgages, assignments, notices of assignment, transfers and
assurances as Mortgagee shall from time to time require in order to preserve the
priority of the lien of this Mortgage or to facilitate the performance of the
terms hereof.
PROVIDED, HOWEVER, that if Mortgagor shall pay to Mortgagee the
indebtedness in the principal sum of $2,134,524.00 as evidenced by that certain
promissory note of even date herewith executed by Mortgagor and payable to
order of Mortgagee (the "Note"), or any renewal or replacement of such Note,
with interest and upon the terms as provided therein, and together with all
other sums advanced by Mortgagee to or on behalf of Mortgagor pursuant to the
Note or this Mortgage prior to the final maturity date of the Note and this
Mortgage as specified in the Note and shall perform all other covenants and
conditions of the Note, all of the terms of which Note are incorporated herein
by reference as though set forth fully herein, and of any renewal, extension or
modification thereof and of this Mortgage, then this Mortgage and the estate
hereby created shall cease and terminate.
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Mortgagor further covenants and agrees with Mortgagee as follows:
1. To pay all sums, including interest secured hereby when due, as
provided for in the Note and any renewal, extension or modification thereof and
in this Mortgage, all such sums to be payable in lawful money of the United
States of America at Mortgagee's aforesaid principal office, or at such other
place as Mortgagee may designate in writing.
2. To pay when due, and without requiring any notice from Mortgagee,
all taxes, assessments of any type or nature and other charges levied or
assessed against the Mortgaged Property or this Mortgage and produce receipts
therefore upon demand. To immediately pay the First Mortgage when due and
payable, and to immediately pay and discharge any other claim, lien or
encumbrance against the Mortgaged Property which may be or become superior to
this Mortgage and to permit no default or delinquency on the First Mortgage or
any other lien, encumbrance or charge against the Mortgaged Property.
3. [Intentionally omitted.]
4. To promptly pay all taxes and assessments assessed or levied under
and by virtue of any state, federal, or municipal law or regulation hereafter
passed, against Mortgagee upon this Mortgage or the debt hereby secured, or upon
its interest under this Mortgage, and provided further that in the event of the
passage of any such law or regulation imposing a tax or assessment against
Mortgagee upon this Mortgage or the debt secured hereby, that the entire
indebtedness secured by this Mortgage shall thereupon become immediately due and
payable at the option of Mortgagee.
5. To keep the Mortgaged Property insured against loss or damage by
fire, and all perils insured against by an extended coverage endorsement, and
such other risks and perils as Mortgagee in its discretion may require. The
policy or policies of such insurance shall be in the form in general use from
time to time in the locality in which the Mortgaged Property is situated, shall
be in such amount as Mortgagee may reasonably require, shall be issued by a
company or companies approved by Mortgagee, and shall contain a standard
mortgagee clause with loss payable to Mortgagee. Whenever required by
Mortgagee, unless otherwise required by the First Mortgage, such policies,
shall be delivered immediately to and held by Mortgagee. Subject to the
requirements of the First Mortgage, any and all amounts received by Mortgagee
under any of such policies may be applied by Mortgagee on the indebtedness
secured hereby in such manner as Mortgagee may, in its sole discretion, elect
or, at the option of Mortgagee, the entire amount so received or any part
thereof may be released. Neither the application nor the release of any such
amounts shall cure or waive any default. Subject to the requirements of the
First Mortgage, upon exercise of the power of sale given in this Mortgage or
other acquisition of the Mortgaged Property or any part thereof by Mortgagee,
such policies shall become the absolute property of Mortgagee. Subject to the
requirements of the First Mortgage, notwithstanding the foregoing, if Mortgagor
provides written documentation satisfactory to the Mortgagee that the fair
market value of the Mortgaged Property (as modified) following relocation or
reconstruction after a casualty loss with be equal to or exceed the fair market
value of the Mortgaged Property, both as of the date hereof and as of the date
immediately prior to such casualty loss, then Mortgagee will apply any
insurance proceeds to such relocation or reconstruction rather than as a
reduction of
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principal and interest due under the Note; provided Mortgagor keeps all interest
and installment payments current under such Note.
6. To first obtain the written consent of Mortgagee, such consent to
be granted or withheld at the sole discretion of Mortgagee, but not to be
unreasonably withheld or delayed, before (a) removing or demolishing any
building now or hereafter erected on the premises, (b) materially altering the
arrangement, design or structural character thereof, (c) making any repairs
which involve the removal of structural parts or the exposure of the interior of
such building to the elements, (d) cutting or removing or permitting the cutting
and removal of any trees or timber on the Mortgaged Property, (e) removing or
exchanging any material tangible personal property which is part of the
Mortgaged Property, other than in the ordinary course of Mortgagor's business,
or (f) entering into or modifying any leases of the Mortgaged Property, other
than in the ordinary course of Mortgagor's business.
7. To maintain the Mortgaged Property in good condition and repair,
including but not limited to the making of such repairs as Mortgagee may from
time to time reasonably determine to be necessary for the preservation of the
Mortgaged Property and to not commit or permit any waste thereof, and Mortgagee
shall have the right to inspect the Mortgaged Property or reasonable notice to
Mortgagor.
8. To comply with all laws, ordinances, regulations, covenants,
conditions and restrictions affecting the Mortgaged Property, and not to cause
or permit any violation thereof.
9. If Mortgagor fails to pay any payments under the First Mortgage
when due or any other claim, lien or encumbrance which is superior to this
Mortgage, or when due, any tax or assessment or insurance premium, or to keep
the Mortgaged Property in repair, or shall commit or permit waste, or if there
be commenced any action or proceeding affecting the Mortgaged Property or the
title thereto, or the interest of Mortgagee therein, including, but not limited
to, eminent domain and bankruptcy or reorganization proceedings, then
Mortgagee, at its option, may pay said claim, lien, encumbrance, tax,
assessment or premium, with right of subrogation thereunder, may make such
repairs and take such steps as it deems advisable to prevent or cure such
waste, and may appear in any such action or proceeding and retain counsel
therein, and take such action therein as Mortgagee deems advisable, and for any
of such purposes Mortgagee may advance such sums of money, including all costs,
reasonable attorney's fees and other items of expense as it deems necessary.
Mortgagee shall be the sole judge of the legality, validity and priority of any
such claim, lien, encumbrance, tax, assessment and premium and of the amount
necessary to be paid in satisfaction thereof. Mortgagee shall not be held
accountable for any delay in making any such payment, which delay may result in
any additional interest, costs, charges, expenses or otherwise.
10. Mortgagor will pay to Mortgagee, immediately and without demand,
all sums of money advanced by Mortgagee to protect the security hereof pursuant
to this Mortgage, including all costs, reasonable attorney's fees and other
items of expense, together with interest on each such advancement at the
default rate of interest specified in the Note and all such sums and interest
thereon shall be secured hereby.
11. All sums of money secured hereby shall be payable without any
relief whatever from any valuation or appraisement laws:
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12. Subject to Paragraph (30) hereof, if default be made in payment of
any installment of principal or interest of the Note or any part thereof when
due, or in payment, when due, or any other sum secured hereby and such default
continues for three (3) days beyond the date on which such payment was due, or
in performance of any of Mortgagor's obligations, covenants or agreements
hereunder and such default is not cured within thirty (30) days after
written notice of such default, all of the indebtedness secured hereby shall
become and be immediately due and payable at the option of Mortgagee, without
further notice or demand which are hereby expressly waived, in which event
Mortgagee may avail itself of all rights and remedies, at law or in equity, and
this Mortgage may be foreclosed with all rights and remedies afforded by the
laws of Florida and Mortgagor shall pay all reasonable costs, charges and
expenses thereof, including a reasonable attorney's fee, for any retrial,
rehearing or appeals. The indebtedness secured hereby shall bear interest at
the Default Rate from and after date of any such default of Mortgagor. If the
Note provides for installment payments, the Mortgagee may, at its option,
collect a late charge as may be provided for in the Note, to reimburse the
Mortgagee for expenses in collecting and servicing such installment payments.
13. If default be made in payment, when due, of any indebtedness
secured hereby, or in performance of any of Mortgagor's obligations, covenants
or agreement hereunder, and such default is not cured within any applicable cure
period, but, in all cases subject to the rights of the holder of the First
Mortgage;
(a) Mortgagee is authorized at any time, in its sole discretion
to enter upon and take possession of the Mortgaged Property or any part thereof,
to perform any acts Mortgagee deems necessary or proper to conserve the security
and to collect and receive all rents, issued and profits thereof, including
those past due as well as those accruing thereafter;
(b) Mortgagee shall be entitled, as a matter of strict right,
without notice and ex parte, and without regard to the value or occupancy of the
security, or the solvency of Mortgagor, or the adequacy of the Mortgaged
Property as security for the Note, to have a receiver appointed to enter upon
and take possession of the Mortgaged Property, collect the rents and profits
therefrom and apply the same as the court may direct, such receiver to have all
the rights and powers permitted under the laws of Florida.
In either such case, Mortgagee or the receiver may also take
possession of, and for these purposes use, any and all personal property which
is a party of the Mortgaged Property and used by Mortgagor in the rental or
leasing thereof or any party thereof. The reasonable expenses (including
receiver's fees, counsel fees, costs and agent's compensation) incurred pursuant
to the powers herein contained shall be secured hereby. Mortgagee shall (after
payment of all costs and expenses incurred) apply such rents, issues and profits
received by it on the indebtedness secured hereby in such order as Mortgagee
determines. The right to enter and take possession of the Mortgaged Property,
to manage and operate the same, and to collect the rents, issues and profits
thereof, whether by a receiver or otherwise, shall be cumulative to any other
right or remedy hereunder or afforded by law, and may be exercised concurrently
therewith or independently thereof. Mortgagee shall be liable to account only
for such rents, issues and profits actually received by Mortgagee.
14. If the indebtedness secured hereby is now or hereafter further
secured by chattel mortgages, security interests,
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financing statements, pledges, contracts of guaranty, assignments of leases, or
other securities, or if the Mortgaged Property hereby encumbered consists of
more than one parcel of real property, Mortgagee may at its option exhaust any
one or more of said securities and security hereunder, or such parcels of the
security hereunder, either concurrently or independently, and in such order as
it may determine.
15. This mortgage shall secure not only existing indebtedness, but
also such future advances, whether such advances are obligatory or to be made
at the option of Mortgagee, or otherwise, as are made within twenty (20)
years from the date hereof, to the same extent as if such future advances were
made on the date of the execution of this Mortgage, but such secured
indebtedness shall not exceed at any time the maximum principal amount of two
times the amount of the Note, plus interest thereon, and any disbursements made
for the payment of taxes, levies, or insurance, on the Mortgaged Property, with
interest on such disbursements. Any such future advances whether obligatory or
to be made at the option of the Mortgagee, or otherwise, may be made either
prior to or after the due date of the Note or any other notes secured by this
Mortgage. This Mortgage is given for the specific purpose of securing any and
all indebtedness by the Mortgagor to Mortgagee (but in no event shall the
secured indebtedness exceed at any time the maximum principal amount set forth
in this paragraph) in whatever manner this indebtedness may be evidenced or
represented, until this Mortgage is satisfied of record. All covenants and
agreements contained in this Mortgage shall be applicable to all further
advances made by Mortgagee to Mortgagor under this future advance clause.
16. No delay by Mortgagee in exercising any right or remedy hereunder,
or otherwise afforded by law, shall operate as a waiver thereof or preclude the
exercise thereof during the continuance of any default hereunder. No waiver by
Mortgagee of any default shall constitute a wavier of or consent to subsequent
defaults. No failure of Mortgagee to exercise any option herein given to
accelerate maturity of the debt hereby secured, no forbearance by Mortgagee
before or after the exercise of such option and no withdrawal or abandonment of
foreclosure proceeding by Mortgagee shall be taken or construed as a waiver of
its right to exercise such option or to accelerate the maturity of the debt
hereby secured by reason of any past, present or future default on the part of
Mortgagor; and, in like manner, the procurement of insurance or the payment of
taxes or other liens or charges by Mortgagee shall not be taken or construed as
a waiver of its right to accelerate the maturity of the debt hereby secured.
17. Without affecting the liability of Mortgagor or any other person
(except any person expressly released in writing) for payment of any
indebtedness secured hereby or for performance of any obligation contained
herein, and without affecting the rights of Mortgagee with respect to any
security not expressly released in writing, Mortgagee may, at any time and from
time to time, either before or after the maturity of said note, and without
notice or consent:
(a) Release any person liable for payment of all or any part of
the indebtedness or for performance of any obligation;
(b) Make any agreement extending the time or otherwise altering
the terms of payment of all or any part of the indebtedness, or modifying or
waiving any obligation, or subordinating, modifying or otherwise dealing with
the lien or charge hereof;
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(c) Exercise or refrain from exercising or waive any right
Mortgagee may have;
(d) Accept additional security of any kind; and
(e) Release or otherwise deal with any property, real or
personal, securing the indebtedness, including all or any part of the Mortgaged
Property.
18. Any agreement hereafter made by Mortgagor and Mortgagee pursuant
to this Mortgage shall be superior to the rights of the holder of any
intervening lien or encumbrance.
19. Mortgagor hereby waives all right of homestead exemption, if any,
in the Mortgaged Property.
20. Subject to the terms of the First Mortgage, in the event of
condemnation proceedings of the Mortgaged Property, the award or compensation
payable thereunder is hereby assigned to and shall be paid to Mortgagee.
Mortgagee shall be under no obligation to question the amount of any such award
or compensation and may accept the same in the amount in which the same shall be
paid. In any such condemnation proceedings, Mortgagee may be represented by
counsel selected by Mortgagee. Subject to the terms of the First Mortgage, the
proceeds of any award or compensation so received shall, at the option of
Mortgagee, either be applied to the prepayment of the Note and at the rate of
interest provided therein, regardless of the rate of interest payable on the
award by the condemning authority, or at the option of Mortgagee, such award
shall be paid over to Mortgagor for restoration of the Mortgaged Property.
Notwithstanding the foregoing, if Mortgagor provides written documentation
satisfactory to the Mortgagee that the fair market value of the Mortgaged
Property (as modified) following relocation of reconstruction after condemnation
will be equal to or exceed the fair market value of the Mortgaged Property, both
as of the date hereof and as of the date immediately prior to such condemnation,
then Mortgagee will apply any condemnation to such relocation or reconstruction
rather than as a reduction of principal and interest due under the Note;
provided Mortgagor keeps all interest and installment payments current under
such Note.
21. Mortgagor shall provide Mortgagee with the following periodic
statements of the operations of and the financial condition of Mortgagor and
Guarantor:
(a) Annual audited financial statements of Flanders Corporation
(the "Guarantor"), on both a consolidated and consolidating basis, to be
received by Mortgagee within 90 days of fiscal year end;
(b) Quarterly internally prepared financial statements of the
Guarantor, on both a consolidated and consolidating basis;
(c) Quarterly compliance certificates certified by an officer
of Mortgagor; and
(d) Copies of such reports as Mortgagor or Guarantor files from
time to time with the U.S. Securities and Exchange Commission within thirty (30)
days of the date of the filing.
22. The loan represented by this Mortgage and the Note is personal to
the Mortgagor and the Mortgagee made the loan to the Mortgagor based upon the
credit of the Mortgagor and the Mortgagee's judgment of the ability of the
Mortgagor to repay all
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sums due under this Mortgage, and therefore this Mortgage may not be assumed by
any subsequent holder of an interest in the Mortgaged Property. If all or any
part of the Mortgaged Property, or any interest therein, is sold, conveyed,
transferred (including a transfer by agreement for deed or land contract) or
further encumbered by Mortgagor without Mortgagee's prior written consent,
excluding the grant of any leasehold interest in the Mortgaged Property not
containing an option to purchase, which lease is made in the ordinary course of
Mortgagor's business, then in that event Mortgagee may declare all sums secured
by this Mortgage immediately due and payable.
23. Mortgagor shall keep and maintain the Mortgaged Property in
compliance with, and shall not cause or permit the Mortgaged Property to be in
violation of any federal, state or local laws, regulations, guidelines, codes
and ordinances relating to zoning, land use, health, asbestos usage, industrial
hygiene or environmental conditions in, on or under or surrounding the Mortgaged
Property including, but not limited to, soil and groundwater conditions; and
shall not, other than in compliance with applicable law, use, generate,
manufacture, store, release or dispose of in, on, under or surrounding the
Mortgaged Property or transport to or from the Mortgaged Property any flammable
explosives, radioactive materials, asbestos, hazardous wastes, toxic substances
or related materials, including, without limitation, any substances defined as
or included in the definition of "asbestos," or "asbestos products," "radon" or
"radon gas," "hazardous substances," "hazardous wastes," "hazardous materials,"
"wastes," solid waste," "contaminant" or "toxic substance" under any
applicable federal, state or local laws, regulations, guidelines, codes and
ordinances (collectively referred to hereinafter as "Hazardous Materials").
Mortgagor represents and warrants that to the best of Mortgagor's knowledge, no
Hazardous Materials have been used in the construction of the Mortgaged Property
or generated, stored, buried, handled, releases or disposed of on, in under or
surrounding the Mortgaged Property or a location that will adversely affect the
Mortgaged Property, and there are no facts, conditions or circumstances which
could result in an investigation or inquiry by any federal, state or local
governmental authority with regard to the foregoing. Mortgagor further
warrants, covenants and agrees not to allow the Mortgaged Property to be used as
a site for generating, manufacturing, storing, releasing or disposing of
Hazardous Materials (without the prior written consent of Mortgagee and unless
all required permits, bonds and insurance have been obtained and are
maintained). Mortgagor further warrants, covenants and agrees to provide
Mortgagee with prompt written notice of (1) any proposed or actual investigation
or inquiry of Mortgagor or the Mortgaged Property with regard to Hazardous
Materials by any federal, state or local governmental authority (2) Mortgagor's
obtaining knowledge of any discovery of or release of any Hazardous Material in,
on, under or from the Mortgaged Property or any other site owned, occupied or
operated by Mortgagor or by any person for whose conduct Mortgagor is
responsible or whose liability may result in a lien on the Mortgaged Property,
(3) Mortgagor's receipt of any notice to such effect regarding (1) or (2) or
notice to obtain a permit from any federal, state or local government authority,
and (4) Mortgagor's obtaining knowledge of the incurring of any expense or loss
by such governmental authority in connection with the assessment, containment or
removal of any Hazardous Materials for which expense or loss Mortgagor may be
liable or for which expense a lien may be imposed on the Mortgaged Property.
Mortgagor warrants, covenants and agrees at all time to comply fully and in a
timely manner with, and to cause all employees, agents, contractors and
subcontractors of Mortgagor and any other persons occupying or present on the
Mortgaged Property to so comply with, all applicable federal, state
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and local laws, regulations, guidelines, codes and ordinances regarding any
Hazardous Materials. Mortgagor warrants, covenants and agrees to indemnify and
hold Mortgagee harmless from and against, and immediately pay, any and all
claims, losses, damages, liabilities, fines, penalties, charges, administrative
and judicial proceedings and orders, judgments, remedial action requirements,
enforcement actions of any kind, and all costs and expenses incurred in
connection therewith (including, but not limited to, expenses and attorney's
fees and legal assistant's fees including such fees and expenses in any
appellate proceeding), arising directly or indirectly, in whole or in part, from
any past, present or future failure of Mortgagor, its employees, agents,
contractors, subcontractors or other such persons, to comply with any such laws,
regulations, guidelines, codes or ordinances or the provisions of this
Paragraph.
In the event that Mortgagee incurs any losses, damages, claims,
costs, fees, penalties, charges, assessments, taxes, fines or expenses,
including reasonable attorney's fees and legal assistants' fees in connection
with detection of, monitoring of, cleaning up, removing, disposal of or
otherwise eliminating any Hazardous Materials from the Mortgaged Property, such
losses, damages, claims, costs, fees, penalties, charges, assessments, taxes,
fines or expenses, including reasonable attorneys' fees and legal assistants'
fees, shall constitute remedial advances by Mortgagee as provided in Paragraphs
9 and 10 hereinabove. The provisions of this Paragraph will survive the
foreclosure of this Mortgage or any deed in lieu of foreclosure delivered to
Mortgagee by the Mortgagor.
24. Mortgagor represents and warrants that if a corporation, it is
duly organized and validly existing, in good standing under the laws of the
state of its incorporation, has stock outstanding which has been duly and
validly issued, and is qualified to do business and is in good standing in the
State of Florida, with full power and authority to consummate the loan
contemplated hereby; and if a partnership, it is duly formed and validly
existing, and is fully qualified to do business in the State of Florida; with
full power and authority to consummate the loan contemplated hereby.
25. In the event any one or more of the provisions contained in this
Mortgage or in the Note shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall, at the option of the Mortgagee, not affect any other provisions of this
Mortgage, but this Mortgage shall be construed as if such invalid, illegal or
unenforceable provision had never been contained herein or therein. The total
interest payable pursuant to the Note or this Mortgage shall not in any one year
exceed the highest lawful rate of interest permitted in the State of Florida.
26. The covenants and agreements herein contained shall bind and the
benefits and advantages shall inure to the respective heirs, executors,
administrators, successors, and assigns of the parties hereto. Wherever used,
the singular number shall include the plural, the plural the singular, and the
use of any gender shall be applicable to all genders. All covenants, agreements
and undertakings shall be joint and several. In the event additional numbered
covenants or paragraphs are for convenience inserted in this Mortgage, such
additional covenants shall be read and given effect as though following this
covenant is consecutive order.
27. Mortgagor shall keep and maintain the Mortgaged Property in
compliance with, and shall not cause or permit the Mortgaged Property to be in
violation of the Americans With
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Disabilities Act of 1990 (hereinafter "ADA") and any other federal, state or
local laws, regulations, guidelines, codes or ordinances relating to the
accessibility of properties to persons with disabilities. Mortgagor represents
and warrants that the Mortgaged Property complies with the requirements of the
ADA and all other federal, state and local laws, regulations, guidelines, codes
and ordinances regarding the accessibility of properties to persons with
disabilities. Mortgagor further warrants that there are no facts, conditions
or circumstances, which could result in an investigation or inquiry by any
federal, state or local government authority or by any person with disabilities
with regard to the foregoing. Mortgagor further warrants and represents that
it will provide Mortgagee with prompt written notice of: (1) any
investigations or inquiry; (2) the lodging of any grievance or complaint with
Mortgagor or with any federal, state or local authority charged with the
responsibility of enforcing compliance with the accessibility requirements of
the ADA or any other federal, state or local laws, regulations, guidelines,
codes or ordinances; (3) the institution of any administrative proceeding which
seeks to enforce compliance by Mortgagor with the accessibility requirements of
the ADA and any other federal, state or local laws, regulations, guidelines,
codes or ordinances; and (4) the filing of a complaint or charge in a court of
competent jurisdiction regarding an alleged violation of the ADA or of any
other federal, state or local laws, regulations, guidelines, codes and
ordinances regarding accessibility of properties to persons with disabilities.
Mortgagor further warrants, covenants and agrees that any modification,
renovation or remodeling of the Mortgaged Property shall be undertaken and
completed in such manner as to ensure that the Mortgage Property continues to
meet or exceed the requirements of the ADA and any other federal, state or
local laws, regulations, guidelines, codes and ordinances with regard to
accessibility of properties to persons with disabilities. Mortgagor further
warrants, covenants and agrees to indemnify and hold Mortgagee harmless from
and against, and immediately pay any and all claims, losses, damages,
liabilities, fines, penalties, charges, administrative and judicial proceedings
and orders, judgments, remedial action requirements, enforcement actions of any
kind, and all costs and expenses incurred in connection therewith (including
but not limited to expenses and attorneys' fees and legal assistants' fees
including such fees and expenses in any appellate or bankruptcy proceedings)
arising directly or indirectly, in whole or in part, from any past, present or
future failure of Mortgagor, its employees, agents, contractors, subcontractors
or other such persons, to comply with the ADA and any other federal, state, or
local laws, regulations, guidelines, codes and ordinances, and to take all
required remedial action.
In the event Mortgagee incurs any losses, damages, claims, costs,
fees, penalties, charges, assessments, taxes, fines or expenses, including
reasonable attorneys' fees and legal assistants' fees in connection with such
deemed non-compliance, such losses, damages, claims, costs, fees, penalties,
charges, assessments, taxes, fines and expenses, including reasonable attorneys'
fees and legal assistants' fees, shall constitute remedial advances by Mortgagee
as provided in Paragraph 9 and 10 above. The provisions of this paragraph will
survive the foreclosure of this Mortgage or any deed in lieu of foreclosure
delivered to Mortgagee by Mortgagor.
28. [Intentionally omitted.]
29. [Intentionally omitted.]
Page 10 of initials /s/
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<PAGE> 11
30. MORTGAGOR AND MORTGAGEE HEREBY KNOWINGLY, VOLUNTARILY,
INTENTIONALLY, AND IRREVOCABLY WAIVE THE RIGHT EITHER OF THEM MAY HAVE TO A
TRIAL BY JURY IN RESPECT TO ANY LITIGATION, WHETHER IN CONTRACT OR TORT, AT LAW
OR IN EQUITY, BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS
MORTGAGE AND ANY OTHER DOCUMENT OR INSTRUMENT CONTEMPLATED TO BE EXECUTED IN
CONJUNCTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS
(WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY HERETO. THIS PROVISION IS A
MATERIAL INDUCEMENT FOR MORTGAGEE ACCEPTING THIS MORTGAGE. FURTHER, MORTGAGOR
HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF MORTGAGEE, NOR THE
MORTGAGEE'S COUNSEL, HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT MORTGAGEE
WOULD NOT, IN THE EVENT OF SUCH LITIGATION, SEEK TO ENFORCE THIS WAIVER OF RIGHT
TO JURY TRIAL PROVISION. NO REPRESENTATIVE OR AGENT OF THE MORTGAGEE, NOR
MORTGAGEE'S COUNSEL HAS THE AUTHORITY TO WAIVE, CONDITION, OR MODIFY THIS
PROVISION.
31. Breach of Financial Covenants of Guarantor: Mortgagor hereby
agrees that the breach of any of the following financial covenants by Guarantor
shall be a default hereunder and, upon the occurrence of such an event of
default, Mortgagee may exercise any or all of its rights and remedies set forth
herein:
(a) Guarantor shall maintain, as measured quarterly on a
consolidated basis an in accordance with generally accepted accounting
principles:
<TABLE>
<S> <C> <C>
1. Minimum Current Ratio: 1.50
2. Maximum total Liabilities
to Tangible New Worth: 2.50
3. Minimum Fixed Charge Coverage: 1.30
(Fixed Charge = EBITDA + Interest Expense +
Current Portion of Long Term Debt + Cash
Taxes)
4. Minimum Tangible Net Worth: $30 million plus
60% of Net Income plus
75% of equity proceeds
</TABLE>
IN WITNESS WHEREOF, Mortgagor has duly executed this Mortgage as of the
date first above written.
Witnesses as to PRECISIONAIRE, INC.
Mortgagor: a Florida corporation
/s/ Steven K. Clark By: /s/ Gustavo Hermandel
- ------------------------- ---------------------------
Name: Steven K. Clark Name: /s/ Gustavo Hermandel
-------------------- ----------------------
As its President
---------------------
/s/ Sylvia Sanchez
- -------------------------
Name: Sylvia Sanchez
--------------------
[CORPORATE SEAL]
Page 11 of initials /s/
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<PAGE> 12
State of Florida
----------------
County of Pinellas
----------------
The foregoing instrument was acknowledged before me on August 27th, 1997,
by Gustavo Hernandez, as President of PRECISIONAIRE, INC., a Florida
corporation, on behalf of the corporation.
/s/ Sylvia Sanchez
--------------------------------
Notary Public--State of Florida
Personally Known X Print Notary Name:
--- --------------
Produced Identification My Commission Number is:
----- --------
Type of Identification My Commission Expires
-------------- ----------
[SEAL] [OFFICIAL NOTARY SEAL
SYLVIA L SANCHEZ
COMMISSION NUMBER
CC39183
MY COMMISSION EXP.
SEPT. 30, 1996]
Page 12 of initials /s/
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<PAGE> 1
EXHIBIT 21.1
FLANDERS CORPORATION
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
STATE OR OTHER
JURISDICTION OF
INCORPORATION OR NAMES UNDER WHICH EACH
SUBSIDIARY NAME ORGANIZATION SUBSIDIARY DOES BUSINESS
- --------------- ------------ ------------------------
<S> <C> <C>
Air Seal Filter Housings, Inc. Texas Air Seal Filter Housings, Inc.
Airseal West, Inc. Utah Airseal West, Inc.
Charcoal Service Corporation North Carolina Charcoal Service Corporation
Precisionaire, Inc. Florida Precisionaire, Inc.
Flanders Filters, Inc. North Carolina Flanders Filters, Inc.
Flanders International Pte, Ltd. Singapore Flanders International, Pte, Ltd.
Subsidiary of Flanders Filters, Inc.
- ------------------------------------
Flanders Airpure Products North Carolina Flanders Airpure Products
Company, LLC Company, LLC
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors
Flanders Corporation
Washington, North Carolina
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-1 and in the related Prospectus of our report, dated
February 7, 1997, except for the second paragraph of Note 8 and the first
paragraph of Note 23 as to which the date is March 10, 1997 and the second
paragraph of Note 23 as to which the date is September 9, 1997, relating to the
consolidated financial statements of Flanders Corporation and subsidiaries and
to our report dated February 7, 1997, relating to the financial statement
schedule. We also consent to the reference to our Firm under the caption
"Experts" in the Prospectus.
/s/ McGladrey & Pullen, LLP
New Bern, North Carolina
September 11, 1997
<PAGE> 1
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.
/s/ ARTHUR ANDERSEN LLP
----------------------------------
Arthur Andersen LLP
Tampa, Florida,
September 11, 1997
