UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required] for the fiscal year ended
December 31,1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [No Fee Required] for the transition
period from __________ to __________
Commission File Number 0-27958
FLANDERS CORPORATION
(Exact name of registrant as specified in its charter)
North Carolina 13-3368271
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(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
531 Flanders Filters Road,
Washington, NC 27889
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (919) 946-8081
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of exchange on which registered
- --------------------------------------- ------------------------------------
Common Stock, $.001 per share par value Nasdaq
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent fliers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
As of March 24, 1998, the number of shares outstanding of the
registrant's common stock was 25,663,425 shares.
As of March 24, 1998, the aggregate market value of the voting stock
held by non-affiliates of the registrant was $73,558,092 (only stock held
by directors, officers and principal shareholders filing Schedules 13D
and 13G were excluded).
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FLANDERS CORPORATION
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
PART I
Item 1. Business......................................................3
Item 2. Properties...................................................12
Item 3. Legal Proceedings............................................13
Item 4. Submission of Matters to a Vote of Security Holders..........14
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters..........................................15
Item 6. Selected Financial Data......................................16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................17
Item 8. Financial Statements and Supplementary Data..................26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..........................26
PART III
Item 10. Directors and Executive Officers.............................27
Item 11. Executive Compensation.......................................28
Item 12. Security Ownership of Certain Beneficial Owners and
Management...................................................30
Item 13. Certain Relationships and Related Party Transactions.........32
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.....................................................33
Signatures...................................................................37
FINANCIAL STATEMENTS
Independent Auditor's Report............................................F-2
Consolidated Balance Sheets.............................................F-3
Consolidated Statements of Income.......................................F-4
Consolidated Statements of Stockholders' Equity.........................F-5
Consolidated Statements of Cash Flows...................................F-6
Notes to Consolidated Financial Statements..............................F-9
Financial Statement Schedules..........................................F-26
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PART I
Item 1. Business
OVERVIEW
Flanders Corporation (the "Company" or "Flanders") 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 which are 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.
Although the Company historically has specialized in 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 other companies (the "Acquisitions"): Charcoal Service Corporation, now
known as Flanders/CSC 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 through standard-grade filters. 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.
GENERAL DEVELOPMENT OF BUSINESS
Elite Acquisitions, Inc. ("Elite"), the predecessor of the Company, was
incorporated on July 2, 1986 in the State of Nevada. Flanders Filters, Inc.
("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 become the
historical results 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.
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In February 1994, the Company organized Flanders Airpure Products Company, LLC
("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, Flanders
Airpure West, Inc. ("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 facility in Henderson, Nevada.
Effective May 1996, pursuant to a stock purchase agreement, the Company acquired
all of the outstanding stock of CSC, a charcoal filter manufacturer based in
North Carolina specializing in activated charcoal filters and containment
environments. The purchase price for CSC was approximately $4,435,690 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
accounted for as a purchase. As of December 31, 1997, 79,000 shares have been
earned and as of February 15, 1998, 79,000 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 purchase price for Air Seal was
approximately $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 December 31, 1997, no shares have been released. Also in June
1996, the Company formed a wholly owned subsidiary in Singapore, Flanders
International Pte., Ltd. ("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 December 31, 1997, 547,986 shares were
released from escrow to the Precisionaire sellers.
In February 1997, the Company organized Airseal West, Inc. ("Airseal West"), an
80% owned subsidiary of Flanders. In March 1997, pursuant to an acquisition
agreement the Company acquired, through Airseal West, the majority of the assets
of Intermountain Paint and Sub-Assembly, Inc. and BB&D Manufacturing, Inc.
(collectively "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. In November 1997, the Company increased its ownership
interest in Airseal West to 80% through the conversion of debt into common
stock. BB&D currently owns 20% 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.
In December 1997, the Company organized Flanders Acquisitions, Inc.
("Acquisitions, Inc."), a wholly owned subsidiary of Flanders. Effective
December 1, 1997, pursuant to an agreement and plan of merger the Company
acquired GFI, Inc., through Acquisition, Inc., in a stock for stock exchange.
The GFI, Inc. shareholders received a total of 187,502 shares of Flanders common
stock. The total cost of acquisition was $1,394,639, based on the price of the
Company's common stock on November 26, 1997. GFI, Inc. was merged with and into
Acquisitions, Inc. with GFI, Inc. continuing as the surviving corporation. GFI,
Inc. manufactures glass-based filter media and specialty filters.
INDUSTRY BACKGROUND
Frost & Sullivan, a leading industry analyst, estimates that the total domestic
industrial air filtration market was approximately $960 million in 1996 and
$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
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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.
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 indoor air quality ("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 "Item 1 -- Business --
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
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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 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, except for a non-binding letter of
intent for the purchase of Eco-Air Products, Inc.
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 once the region stabilizes.
Establish Facilities and Expand Manufacturing Capacity Throughout the United
States. The Company has recently established facilities in Illinois and
North Carolina which will manufacture mid-range and standard-grade filters
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and equipment. See "Item 1 -- 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.
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.
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 30% 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 as described in "Item 7 -- Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Outlook."
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 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% 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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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 them to manufacture "completely separatorless"
filters, while competing filters use aluminum, tape, glue or strings to
separate adjacent pleats of the media which obstruct air flow and contribute
to off-gassing and particle generation. Laminar flow grade filters are
essential for the production of semiconductors, pharmaceuticals and many
other high-technology products.
HEGA Products. High-efficiency gas 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
"Item 1-- 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 Pureform7
Separatorless Filters, Separator-Type filters with corrugated aluminum
separators, electrostatic precipitators, 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
PakTM extended surface area "bag" type filters, Rigi-PleatTM deep-pleated
filters, Multi-FoldTM 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 18,000 square feet to
approximately 400,000 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 addition, the
Company designs, manufactures and assembles the majority of its own automation
production equipment.
10
<PAGE>
The Company's manufacturing operations are subject to periodic inspection by
regulatory authorities. Because of the nature of some of the Company's products,
these agencies include, in some cases, the Department of Energy, the Food and
Drug Administration and other agencies responsible for overseeing sensitive
technologies. One of the considerations in deciding which types of products each
facility will manufacture is the segregation of highly-regulated products to a
minimal number of facilities to reduce the overhead associated with regulatory
monitoring and compliance.
Each of the Company's manufacturing facilities utilize testing and design
strategies appropriate to the products manufactured. These range from standard
statistical process quality controls for standard-grade residential replacement
filters to individual testing and certification with patented proprietary
particle scanning technologies for each laminar-grade HEPA filter. The Company
believes that its ability to comprehensively test and certify its filters
provides it with a competitive advantage.
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 one of the components related to its Absolute Isolation Barriers.
The Company has applied for federal trademark protection for the following
marks: Precisionaire7, E-Z flow7, Smilie7, AirvelopeTM, Channel-Ceil7,
Channel-HoodTM, PureformTM, EconocellTM and Pureseal7. 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. One customer, Wal- Mart
Stores, Inc., accounted for 11% of net sales during the year ended December 31,
1997, and no other single customer accounted for net sales equal to or greater
than 10% of the total net sales of the Company. The Company's other significant
customers include Abbott Laboratories, Home Depot, Inc., Motorola, Inc., Merck &
Co., Inc., Upjohn Co., Westinghouse Electric Corp., and several large computer
chip manufacturers.
BACKLOG
The Company had approximately $12,940,861 in firm backlog on December 31, 1997,
compared to $13,872,000 at December 31, 1996. 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
11
<PAGE>
by the United States government. Backlog varies from week to week, based on the
timing and mix of orders received. All backlog at December 31, 1997, is expected
to be shipped by the end of the second quarter of 1998.
EMPLOYEES
The Company employed 1,479 full-time employees on December 31, 1997; 1,220 in
manufacturing, 43 in development and technical staff, 52 in sales and marketing,
and the remaining 164 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.
RESEARCH AND DEVELOPMENT
The Company's research and development is focused in the following areas:
Automated equipment design, to increase the efficiency and profitability of
production lines used for mass production of off-the- shelf filters;
Alternative filtration media types, including evaluation of new synthetic
media products, which might either increase efficiency or decrease media
costs;
Improved media production techniques, particularly at FFI's plant in
Washington, NC, where the Company produces its Dimple-Pleat media and other
media for high-end HEPA products; during the past ten years, the Company has
increased the efficiency of its filters through advances in media
formulation and production techniques from 99.97% to 99.999997%; and
Application development, where new methods and products are developed from
existing technologies. See "Item 1 -- Business -- Strategies -- Expand
Market with New Products."
Research and development costs for fiscal years 1997, 1996 and 1995 were
approximately $373,000, $460,000, and $120,000, 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 "Item 3 -- Legal Proceedings." There can be no assurance that
future regulations will not require the Company to modify its products to meet
revised particulate or other requirements.
Item 2. Properties.
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 Washington, 220,000 $ 13,775 Owned
manufacturing facility (1) North Carolina
Manufacturing, service and Bath, North 44,282 N/A Owned
office facility Carolina
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Approximate Approximate
Floor Space Monthly Type of
Principal Facility Location (sq. ft.) Payment Holding
- -------------------------- --------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Plant and office Selma, North 100,000 $ 12,038 Owned
facility (1) Carolina
Manufacturing plant (1) Bartow, Florida 175,000 $ 29,121 Owned
Warehouse Lakeland, 40,000 $ 6,559 Lease
Florida
Manufacturing plant Bartow, Florida 30,000 $ 10,783 Monthly Lease
Manufacturing plant (1) Terrell, Texas 146,256 $ 29,858 Owned
Manufacturing plant (1) Auburn, 91,000 $ 7,097 Owned
Pennsylvania
Office space St. Petersburg, 12,000 N/A Owned
Florida
R&D; Cafeteria St. Petersburg, 6,000 N/A Owned
Florida
Warehouse South Holland, 33,226 $ 8,307 Lease
Illinois
Manufacturing plant Henderson, 100,000 $ 26,000 Lease
Nevada
Manufacturing plant (1) Momence, 210,000 $ 44,062(2) Owned
Illinois
Sales Office, Warehouse Singapore 10,000 $ 3,350 Lease
Manufacturing plant Salt Lake City, 70,805 $ 21,963 Lease
Utah
Office Space; Stafford, Texas 18,000 N/A Owned
Manufacturing Plant
Manufacturing plant Salt Lake City, 60,000 $ 14,400 Lease
Utah
Manufacturing plant Smithfield, 399,090 N/A Owned
North Carolina
</TABLE>
(1) This property is encumbered by a mortgage.
(2) This mortgage is paid quarterly rather than monthly; the quarterly
payments are $132,187.
Item 3. Legal Proceedings
The Company recently purchased property in Momence, County of Kankakee, Illinois
(the "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 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 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.
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 is currently negotiating with the EPA to resolve
issues related to monthly monitoring of groundwater. The Company estimates the
monitoring will last from 3-5 years, and believes the total cost for such
monitoring will not exceed $45,000. The Company has received a limited
indemnification from Thomas
13
<PAGE>
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 "Item 13 -- 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.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of Shareholders on December 4, 1997. During
the meeting, holders of 15,791,791 shares, out of 24,888,690 shares outstanding
on the record date, of the Company's common stock voted to adopt the following
proposals with holders of the remaining 9,096,899 shares abstaining:
* Elect as members of the Board of Directors of the Company the
following individuals: Thomas T. Allan, Robert R. Amerson, Gustavo
Hernandez, Steven K. Clark, William M. Claytor and William H. Clark.
* Ratify the selection of the firm of McGladrey & Pullen, LLP as the
Company's independent auditors for the fiscal year ended December 31,
1997.
There were no votes against any of the proposals.
14
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is listed on the Nasdaq National Market System under
the symbol FLDR.
PRICE RANGE OF COMMON STOCK
The following table sets forth, for the periods indicated, the high and low
closing prices of the Company's common stock as reported by the Nasdaq National
Market System, 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 System 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 10, 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 ended September 30, 1997 8.25 6.75
Fourth Quarter ended December 31, 1997 9.25 6.94
</TABLE>
On March 24, 1998, the closing price for the stock was $6.81. As of March 24,
1998, there were approximately 350 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 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 of Directors in light of the Company's
earnings, financial position, capital requirements and such other factors as the
Board of Directors deems relevant. Under the terms of its revolving credit line
with SunTrust Bank, Tampa Bay and Zions First National Bank (collectively
referred to as "SunTrust"), the Company cannot pay dividends without the prior
written consent of SunTrust. See "Item 7 -- Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources."
RECENT SALES OF 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.
15
<PAGE>
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 February 22, 1996, the Company issued to certain accredited investors
under Section 4(2) of the Securities Act options to purchase 700,000 shares of
common stock at an exercise price of $2.50 per share. On February 22, 1996, the
Company issued 200,000 additional options at $3.50 per share. On October 29,
1997, such investors exercised a portion of the options and purchased 25,000
shares of common stock at $2.50 per share. On December 31, 1997, such investors
exercised a portion of the options and purchased 335,000 shares of common stock;
135,000 at $2.50 per share and 200,000 at $3.50 per share.
4. 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.
5. In September 1996, the Company sold 855,445 shares of its common stock to
certain accredited investors under Regulation D of the Securities Act of 1933
(the "September Offering"). 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.
6. On September 18, 1996, the Company 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 Company's common stock at an exercise price of $9.63 per share. Net proceeds
to the Company were $2,500,000.
7. On September 19, 1996, the Company 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. Proceeds from the offering, after
deducting commissions of $280,000, were $3,720,000. Such notes were converted on
(1) February 25, 1997 into 51,403 shares of common stock at a conversion price
of $8.11 per share; (2) February 26, 1997 into 51,152 shares of common stock at
a conversion price of $8.16 per share; (3) September 16, 1997 into 277,744
shares of common stock at a conversion price of $5.54 per share; (4) September
23, 1997 into 114,843 shares of common stock at a conversion price of $5.75 per
share; and (5) December 26, 1997 into 227,233 shares of common stock at a
conversion price of $5.95 per share.
8. 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.
9. 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.
10. In December 1997, the Company issued to the shareholders of GFI, Inc. under
Section 4(2) of the Securities Act, 187,502 shares of common stock in a stock
for stock exchange. See "Item 1 -- Business -- General Development of Business."
Item 6. Selected Consolidated Financial Data
The following financial data is an integral part of, and should be read in
conjunction with the "Consolidated Financial Statements" and notes thereto.
Information concerning significant trends in the financial condition and results
of operations is contained in "Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations."
16
<PAGE>
Selected Historical Operations Data (In thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Ended
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales $ 134,135 $ 73,056 $ 38,636 $ 26,706 $ 20,569
Cost of goods sold 100,812 53,597 28,953 18,845 14,065
Gross profit 33,323 19,459 9,682 7,861 6,504
Operating expenses 24,156 13,460 7,263 7,239 6,695
Operating income 9,167 5,999 2,419 622 356
Income before income taxes 9,544 5,771 1,830 171 25
Income taxes 3,705 2,177 685 176 15
Income (loss) from continuing
operations 5,839 3,594 1,146 (5) 10
Cumulative effect of
accounting changes - - - - 307
Net income (loss) $ 5,839 $ 3,594 $ 1,146 $ (5) $ 317
Earnings from continuing
operations per weighted
average common share
outstanding:
Basic: $ 0.32 $ 0.21 $ 0.12 $ - $ -
Diluted $ 0.27 $ 0.21 $ 0.12 $ - $ -
Earnings per weighted average
common share outstanding:
Basic: $ 0.32 $ 0.27 $ 0.12 $ - $ 0.03
Diluted $ 0.27 $ 0.23 $ 0.12 $ - $ 0.03
Weighted average common
equivalent shares outstanding:
Basic: 18,509 13,171 9,832 9,693 9,654
Diluted 22,477 16,384 9,832 9,693 9,654
</TABLE>
Selected Historical Balance Sheet Data (In thousands)
<TABLE>
<CAPTION>
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Working capital $ 55,179 $ 22,570 $ 4,108 $ 349 $ 675
Total assets 145,881 86,518 18,529 14,414 12,213
Long-term obligations (1) 14,771 42,156 1,761 1,892 1,803
Total stockholders' equity 106,207 25,353 8,208 3,953 3,967
</TABLE>
(1) Long-term obligations includes notes payable (1996 only), current
maturities of long-term debt, convertible debt and committed capital.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the "Item 6 --
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
"Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Outlook."
17
<PAGE>
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 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 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. As of December 1997, the Company
acquired GFI, Inc. in a stock for stock exchange. GFI manufactures glass- based
filter media and specialty air filters. 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
Fiscal Year Ended December 31, 1997 Compared to Fiscal Year Ended December
31, 1996
The following table summarizes the Company's results of operations as a
percentage of net sales for the fiscal years ended December 31, 1997 and
1996.
<TABLE>
<CAPTION>
Fiscal Year Ended
December 31, 1997 December 31, 1996
---------------------- ----------------------
(000's Omitted)
<C> <C> <C> <C> <C>
Net sales $ 134,135 100.0% $ 73,056 100.0%
Gross profit 33,323 24.8 19,459 26.6
Operating expenses 24,156 18.0 13,460 18.4
Operating income 9,167 6.8 5,999 8.2
Income before income
taxes 9,544 7.1 5,771 7.9
Income taxes 3,705 2.8 2,177 3.0
Net income 5,839 4.4 3,594 4.9
</TABLE>
Net Sales: Net sales for 1997 increased by $61,079,000, or 83.6%, to
$134,135,000, from $73,056,000 for 1996. The increase in net sales was due
to the Acquisitions and establishment of new subsidiaries, which contributed
approximately $60,750,000 of net sales. Excluding the Acquisitions,
comparable sales from the Company's business at December 31, 1996 to
December 31, 1997 were up approximately $329,000, or 0.5%. The Company
attributes this slowdown in growth to a cyclical downturn in demand for new
semiconductor production facilities. Because of this cyclical slowdown, the
Company has redirected underutilized capacity normally utilized in the
manufacture of high-end filtration products for semiconductor cleanrooms to
containment environments for the pharmaceutical industry. See "Industry
Outlook."
18
<PAGE>
Gross Profit: Gross profit for 1997 increased by $13,864,000, or 71.2%, to
$33,323,000, which represented 24.8% of net sales, from $19,459,000 in 1996,
which represented 26.6% of net sales. The primary reasons for the decrease
in gross margin percentage were (i) higher than normal costs associated with
opening new facilities in Momence, Illinois and Henderson, Nevada, which
consisted primarily of labor inefficiencies associated with training new
production employees; (ii) higher than normal freight costs associated with
shipping products from facilities on the East Coast to meet demand from new
customers while the new facilities were in their startup phase; and (iii)
higher than normal costs associated with changing portions of the Company's
high-end production facilities to emphasize production of containment
environments for the pharmaceutical industry instead of HEPA filters for the
semiconductor industry. See "Industry Outlook."
Operating Expenses: Operating expenses for 1997 increased by $10,696,000, or
79.5%, to 24,156,000, which represented 18.0% of net sales, from $13,460,000
in 1996, which represented 18.4% of net sales. The primary reasons for the
overall increase in operating expenses were the Acquisitions and the
establishment of Airseal West, which accounted for $10,785,000 of the
increase. Operating expenses decreased as a percentage of net sales compared
to 1996, primarily due to the impact of savings associated with the
consolidation of operations of the various subsidiaries. Other factors
affecting operating expenses included: an increase in sales commissions
related to the increase in sales volume; additional travel and management
expenses associated with establishing new facilities; and expenses incurred
developing and marketing new containment and filtration products. See
"Industry Outlook."
Net Income: Net income for 1997 increased by $2,245,000, or 62.5%, to
$5,839,000, or $0.32 per share ($0.27 diluted), from $3,594,000, or $0.27
per share ($0.23 diluted) for 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.
<TABLE>
<CAPTION>
Fiscal Year Ended
December 31, 1997 December 31, 1996
----------------------- -----------------------
Historical Pro Forma Historical Pro Forma
-------------- ------------- -------------- -------------
(000's Omitted)
<C> <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.
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
19
<PAGE>
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.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $55,179,000 at December 31, 1997 compared to $22,570,000 at
December 31, 1996. This includes cash, cash equivalents and other short- term
investments of $35,455,000 and $2,390,000 at December 31, 1997 and 1996,
respectively.
Trade receivables increased $2,888,000, or 16.1% to $20,795,000 at December 31,
1997 from $17,907,000 at December 31, 1996. The increase was due to the increase
in sales volume, and normal differences in timing and receipt of orders and
payments. Included in trade receivables of $20,794,675 is approximately $2.3
million which is in dispute. The dispute involves HEPA filters manufactured by
the Company on behalf of a customer to conform to certain specifications. Based
on independent testing performed on such filters and other relevant information,
the Company believes its receivable is valid and collectible. Nevertheless, it
is reasonably possible that the Company's estimate of collection could be
reduced significantly in the near term. 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 $5,850,000 and $1,613,000 for the
years ended December 31, 1997 and 1996, respectively. The Company's investing
activities consumed $23,166,000 and $33,028,000 for the years ended December 31,
1997 and 1996, respectively. Significant investing activities during 1997
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. Significant
investing activities during 1996 included the acquisition of Precisionaire,
Airseal and CSC, for approximately $31,971,000 in net cash outlay, and the
purchase of equipment. Financing activities provided $50,380,000 and $30,832,000
of cash during the years ended December 31, 1997 and 1996. Financing activities
during 1997
20
<PAGE>
consisted primarily of (i) 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, and (ii) proceeds from the Company's underwritten public offering
dated October 16, 1997, of 6,480,000 shares of the Company's common stock at
$7.00 per share; net proceeds to the Company after deducting commissions and
expenses from the offering of approximately $4,168,000 amounted to $41,192,000.
Using proceeds from the offering, the Company repaid the entire outstanding
balance of its revolving credit line with NationsBank, N.A. of approximately
$8,253,000, and terminated the revolving credit facility under the terms of its
agreement with NationsBank, N.A. The Company will utilize the remaining proceeds
of $32,939,000 from the offering for new facilities, expansion of existing
facilities, automation, and general corporate purposes.
The Company has arranged a revolving line of credit facility with SunTrust. The
credit agreement is for a term of two years and provides the Company with a line
of credit up to a maximum principal amount of $30,000,000. Outstanding balances
on the credit line bear interest at the option of the Company, at either (a) the
"prime" rate of interest publicly announced by SunTrust Bank, or (b) the "LIBOR"
rate as reported by the Wall Street Journal plus an amount equal to 1.00% to
1.95%, depending on the ratio of total liabilities of the Company to its
tangible net worth; as of December 31, 1997, this rate would be 6.656%. As of
December 31, 1997, the Company had used none of the revolving credit facility.
In September 1996, the Company sold $4,000,000 principal amount of 10%
Convertible Notes pursuant to Regulation S to certain unrelated offshore
investors. As of December 31, 1997, such holders have converted all of the
Convertible Notes into an aggregate of 722,375 shares of common stock.
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 growth 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
Phase I and a 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.
The Company's business and operations have not been materially affected by
inflation during the periods for which financial information is presented.
SUBSEQUENT EVENTS
In February 1998, the Company acquired, through FFI, certain assets and assumed
certain liabilities from Enviro Spin Technologies, Inc. ("Enviro Spin"). In
connection with such acquisition, FFI also entered into a license agreement with
Enviro Spin in which Enviro Spin licensed to FFI the right to utilize Enviro
Spin's technologies and processes to produce and sell certain bonded carbon
products. The purchase price for such acquisition was $307,000. The Company also
agreed to pay an initial license fee of $500,000 plus royalty payments equal to
4% of sales of certain products up to a maximum of $1,300,000. Enviro Spin
manufactures, builds and designs bonded carbon panel filters.
OUTLOOK: ISSUES AND UNCERTAINTIES
This Outlook section, and other sections of this document, contains many
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, including, among others (i) results of operations
(including expected changes in the Company's gross margin and general,
administrative and selling expenses); (ii) the Company's business strategy
21
<PAGE>
for expanding its market share of the air filtration industry (iii) the
Company's strategy to increase the size and customer base of the air filtration
market; and (iv) the Company's ability to distinguish itself from its current
and future competitors.
These forward-looking statements are based largely on the Company's current
expectations and are subject to a number of risks and uncertainties. Actual
results could differ materially from these forward-looking statements. Important
factors to consider in evaluating such forward-looking statements include (i)
the shortage of reliable market data regarding the air filtration market; (ii)
changes in external competitive market factors or in the Company's internal
budgeting process which might impact trends in the Company's results of
operations; (iii) anticipated working capital or other cash requirements; (iv)
changes in the Company's business strategy or an inability to execute its
strategy due to unanticipated changes in the market; (v) product obsolescence
due to the development of new technologies, and (vi) various competitive factors
that may prevent the Company from competing successfully in the marketplace. In
light of these risks and uncertainties, there can be no assurance that the
events contemplated by the forward-looking statements contained in this Form
10-K will in fact occur.
Additionally, while management of Flanders is optimistic about the Company's
long-term prospects, the following issues and uncertainties, among others,
should be considered in evaluating the Company's prospects.
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.
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 83.6% from the
year ended December 31, 1996 to the same period ended December 31, 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 three 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.
Acquisition Strategy. The Company intends to continue to seek increased
market share through strategic acquisitions of synergistic businesses. The
Company seeks to identify potential acquisition targets with (i) dominant
positions in local or regional markets, (ii) excess or under-utilized
capacity, (iii) an ability to add new product lines to the Company's
business, and (iv) significant asset value to enable the Company to obtain
debt financing or non-diluted equity financing for such acquisition. The
Company is continuously evaluating acquisition opportunities in light of the
above criteria. Once a potential target is identified, the Company commences
an in-depth due diligence evaluation of the target's operations, markets,
profitability and examines all potential liabilities including environmental
liabilities and any contingent liabilities. The Company'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 the 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. Other than a non-binding letter of intent with Eco-Air
Products, Inc., the Company has no specific agreements with respect to
future acquisitions, but is continuing to investigate potential acquisition
opportunities.
22
<PAGE>
Need for Additional Financing for Future Acquisitions. The Company believes
that the revenues from current operations 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. Failure to obtain sufficient capital
could materially adversely affect the Company's acquisition strategy.
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, 1997,
approximately 29% 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.
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.
Product Demand. Approximately 10% of the Company's net sales in 1997 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 may be less
in future years than previous years.
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.
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 adversely affect the Company's business and results of
operations.
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,
and Steven K. Clark, its Chief Financial Officer. The
23
<PAGE>
loss of any key person could have a material adverse effect on the business,
financial condition and results of operations of the Company.
Distribution Channels. The Acquisitions give the Company a broader product
line of air filtration products. As part of the integration of the
Acquisitions, the Company has adopted a strategy of increasing its market
share by providing its manufacturers' representatives with the ability to
offer a full product line of the Company's products and "one stop"
purchasing of air filtration products to existing and new customers. Many of
the Company's representatives have indicated a willingness to offer the
Company's products exclusively now that the Company offers a broader range
of products; however, the Company does not have any written agreements with
such representatives that require exclusivity for the Company's entire
product line. These representatives may decide to work exclusively with some
other company for various reasons; thus, the current distribution channels
would be unavailable.
Automation. 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 30% 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, and will fund such automation
from funds raised in its recent public offering.
New Markets. 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 products
with high replacement potential.
Year 2000. The Company is in the process of identifying operating and
application software problems related to the "Year 2000" issue, both
internally and externally. The Company expects to resolve its internal Year
2000 compliance issues substantially through replacement and upgrades of
software and hardware. The Company estimates it will spend approximately
$275,000 to modify existing systems. Additionally, the Company is working
with third parties to resolve external Year 2000 issues. However, there can
be no assurance that there will not be interruption of operations or other
limitations of system functionality or that the Company will not incur
substantial costs to avoid such limitations. Any failure to effectively
monitor, implement or improve the Company's operational, financial,
management and technical support systems could have a material adverse
effect on the Company's business and consolidated results of operations.
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. The Company believes this will have a beneficial impact
upon its future operating results as these changes are phased in during the
next year.
Because of the foregoing factors, as well as other variables affecting the
Company's operating results, past financial performance should not be considered
a reliable indicator of future performance, and investors should not use
historical trends to anticipate results or trends in future periods.
24
<PAGE>
INDUSTRY OUTLOOK
The Company believes that the semiconductor industry has been experiencing a
cyclical slowdown in capital spending for new facilities, and thus spending on
filtration products, since the first quarter of 1997. While the Company does
expect capital spending for new semiconductor facilities to increase in the
future, it does not expect this to be a significant factor in the Company's
overall business during 1998, where sales for semiconductor plants are expected
to remain flat.
Because of this slowdown, the Company has determined to utilize its excess
production capacity and development resources toward the production and
marketing of isolation environments to the semiconductor and pharmaceutical
industries. Isolating critical process steps from contaminants and the outside
environment may increase production yields and operator safety, while decreasing
the costs and risks associated with environmental contamination. The Company
estimates that industry-wide, revenues from placing isolation environments in
new and existing semiconductor and pharmaceutical production facilities could
reach $100 million during the next three years.
Data collected by the Company indicates that a residential filter user replaces
their filters, on average, approximately once per year. Manufacturers of
residential furnace and air condition systems recommend that these filters be
changed every month. A minor trend toward increased maintenance of these
residential heating and cooling systems could have a positive impact on the
Company's business.
The Company's most common products, in terms of both unit and dollar volume, are
residential "throw-away" filters, which usually sell for prices under $1.00. Any
increase in consumer concern regarding air pollution, airborne pollens,
allergens, and other residential airborne contaminants could result in
replacement of some of these sales with higher value sales, such as the
Company's anti-microbial or higher-efficiency filters for residential use, with
associated sales prices typically over $5.00 each. Any such trend would have a
beneficial effect on the Company's business.
Currently, the largest domestic market for air filtration products is for
mid-range "ASHRAE-rated" products and HVAC systems, typically used in commercial
and industrial buildings. To date, the Company's penetration of this market has
been relatively small, consisting of approximately $17 million, or 13% of net
sales, in 1997. The Company believes that its ability to offer a "one stop"
supply of air filtration products to HVAC distributors and wholesalers will
increase its share of this market segment. See "Distribution Channels" above.
NEW ACCOUNTING STANDARDS
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. The Company reclassified its financial statements for
earlier periods that are provided for comparative purposes. The Company believes
that this standard will not have any material effect on the Company's
consolidated financial position, results of operations, or cash flows.
Item 8. Financial Statements and Supplementary Data
Attached, beginning at page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Upon recommendation of the Audit Committee of the Board of Directors of the
Company, the Company dismissed Smith & Company as its independent public
accounting firm on January 31, 1996. Effective February 1, 1996, the Audit
Committee engaged McGladrey & Pullen, LLP, the auditors of FFI, as the Company's
independent public accounting firm. The prior accountant's report of Smith &
Company on the financial statements of the Company for the years ended June 30,
1995, June 30, 1994 and June 30, 1993 and for the period of July 2, 1986 (date
of inception) to August 31, 1995, was not qualified or modified in any manner
(other than a going concern qualification) and contained no disclaimer of
opinion or adverse opinion. There were no disagreements with Smith & Company on
any matter of accounting principle or practice, financial disclosure or
25
<PAGE>
auditing scope or procedure as related to the financial statements for the years
ended June 30, 1995, June 30, 1994 and June 30, 1993 and/or the period of July
2, 1986 (date of inception) through August 31, 1995 or for the interim period
beginning September 1, 1995 through January 31, 1996, the date of dismissal.
26
<PAGE>
PART III
Item 10. Directors and Executive Officers
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is information regarding (i) the current directors of the
Company, who will serve until the next annual meeting of shareholders or until
their successors are elected or appointed and qualified, and (ii) the current
executive officers of the Company, who are elected to serve at the discretion of
the Board of Directors.
<TABLE>
<CAPTION>
Name Age Title
<S> <C> <C>
Thomas T. Allan 60 Chairman of the Board
Robert R. Amerson 48 President, Chief Executive Officer and Director
Steven K. Clark 45 Vice President of Finance, Chief Financial
Officer and Director
Steven D. Klocke 37 Vice President of Engineering
Knox Oakley 39 Vice President of Corporate Marketing and Sales
Gustavo Hernandez(1) 63 Director, Vice President of Operations, President
of Precisionaire
William H. Clark 55 Director
William M. Claytor(2) 56 Director
</TABLE>
(1) Mr. Hernandez resigned as Vice President of Operations and President
of Precisionaire on December 31, 1997.
(2) Mr. Claytor retired from the Board of Directors effective January
19, 1998.
______________________________________________
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.
27
<PAGE>
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.
Gustavo Hernandez. Mr. Hernandez 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 and was President of Precisionaire from
1979 to 1997. Effective December 31, 1997, Mr. Hernandez terminated his
employment with the Company. Mr. Hernandez will continue as a director of
the Company throughout his elected term and will also provide certain
consulting services to the Company through March 31, 1998. Mr. Hernandez has
a Bachelor of Arts degree in Accounting from the University of South
Florida.
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. Mr. Claytor retired from the Board
of Directors effective January 19, 1998.
COMPLIANCE WITH SEC REPORTING REQUIREMENTS
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the SEC
reports of ownership and changes in ownership of common stock and other equity
securities of the Company. Officers, directors and greater than ten percent
shareholders are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms they file.
The Company assists its officers and directors in the preparation of Section
16(a) Forms based on the information provided by them. Based solely on review of
this information, including written representations that no other reports were
required, the Company believes that, during the 1997 fiscal year, all filing
requirements applicable to its officers, directors and greater than ten percent
beneficial owners were met, except that William H. Clark was late in filing two
Form 4s and Gustavo Hernandez was late in filing one Form 4.
Item 11. Executive Compensation
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Company's Board of Directors
for 1997 were Mr. Claytor and Mr. Allan. Mr. Claytor is a non- employee
director. Mr. Allan is the Chairman of the Board, whose compensation is fixed at
$71,000 per year, and he is not eligible for bonuses.
28
<PAGE>
SUMMARY COMPENSATION TABLE
The following table sets forth the aggregate cash compensation paid by the
Company for services rendered during the last three years to the Company's
Chief Executive Officer and to each of the Company's other executive
officers whose annual salary, bonus and other compensation exceeded $100,000
in 1997.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------- LONG-TERM COMPENSATION
----------------------------
AWARDS PAYOUTS
OTHER -------------------- -------
ANNUAL RESTRICTED
COMPEN- STOCK LTIP
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS SATION AWARDS OPTIONS PAYOUTS
- --------------------------- ---- ----------- --------- ----------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert R. Amerson 1997 $250,000(1) - $ 5,500 - - -
Chief Executive Officer 1996 212,550 - - - 2,000,000 -
1995 128,846 - $137,077(2) - 1,150,000 -
Steven K. Clark 1997 $250,000(2) - - - - -
Chief Financial Officer 1996 150,192 - - - 2,000,000 -
1995 15,000 - - - 1,150,000
Gustavo Hernandez 1997 $250,000(4) - - - - -
President of 1996 292,269 - - - - -
Precisionaire, Inc. 1995 218,049 - - - - -
</TABLE>
(1) Robert R. Amerson's annual salary is $250,000, plus a possible bonus
each year, under his Employment Agreement, as amended. See "Item 11
-- Executive Compensation -- Employment Agreements."
(2) Represents compensation paid by the Company to Flanders Equity
Corporation, a company owned principally by Messrs. Allan and Amerson.
(3) 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 "Item 11 -- Executive Compensation -- Employment Agreements."
(4) Gustavo Hernandez, a director of the Company, retired as the Vice
President of Operations of the Company and as the President of
Precisionaire on December 31, 1997. He commenced his employment with
the Company in September 1996 with the Company's acquisition of
Precisionaire. During 1996, the Company and Precisionaire paid
Mr. Hernandez a total of $292,269 and during 1995, Precisionaire paid
Mr. Hernandez $218,049.
AGGREGATED 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 exceed $100,000.
29
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS
AT FISCAL AT FISCAL
YEAR-END YEAR-END
SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE VALUE REALIZED UNEXERCISABLE UNEXERCISABLE
---- --------------- ------------------ --------------- ----------------
<S> <C> <C> <C> <C>
Robert R. Amerson - - 3,150,000/- $ 17,987,500/-
Steven K. Clark - - 3,150,000/- $ 17,987,500/-
Gustavo Hernandez - - -/- -/-
</TABLE>
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 and terminate in 2005. 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 also entered into an employment agreement with Mr. Hernandez
effective September 23, 1996. This agreement provided for a base salary of
$250,000 and had a five year term. Effective December 31, 1997, Mr. Hernandez
terminated his employment with the Company. Mr. Hernandez will continue as a
director of the Company throughout his elected term and will also provide
certain consulting services to the Company through March 31, 1998.
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 at or above the market price of the common stock on the date of
grant for every year they remain a director.
Item 12. Security Ownership of Certain Owners and Management
The following table sets forth certain information regarding the beneficial
ownership of the Company's common stock, as of March 24, 1998, 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 Company's
executive officers, and (iv) all directors and executive officers of the Company
as a group.
30
<PAGE>
<TABLE>
Shares of Common Percentage of
Name and Address of Stock Beneficially Outstanding Shares
Beneficial Owner Owned of Common Stock (1)
- ---------------------------------- ------------------ -------------------
<S> <C> <C>
Thomas T. Allan (2)
531 Flanders Filters Road
Washington, NC 27889 561,982 2.18%
Robert R. Amerson (3)
531 Flanders Filters Road
Washington, NC 27889 7,934,370 27.54%
Steven K. Clark (3)
531 Flanders Filters Road
Washington, NC 27889 5,213,088 18.09%
Dresdner Bank AG
Jurgen Ponto - Plaza 1
60301 Frankfurt, Germany 1,516,300 5.91%
Dresdner RCM Global Investors LLC
RCM Limited L.P.
RCM General Corporation
Four Embarcadero Center
San Francisco, CA 94111 1,513,800 5.90%
Gustavo Hernandez
2339 29th Avenue North
St. Petersburg, FL 33734 67,182 *
Steven Klocke (4)
531 Flanders Filters Road
Washington, NC 27889 109,427 *
Knox Oakley (4)
531 Flanders Filters Road
Washington, NC 27889 94,525 *
William H. Clark (5)
531 Flanders Filters Road
Washington, NC 27889 33,069 *
William M. Claytor (6),(7),(8)
531 Flanders Filters Road
Washington, NC 27889 169,172 *
The Crabbe Huson Group, Inc. (9)
121 SW Morrison, Suite 1400
Portland, OR 97204 4,346,800 16.94%
Officers and Directors as a
Group (2),(3),(4),(5),(6),(7) 14,182,815 43.98%
</TABLE>
* Represents less than 1% of the total issued and outstanding shares of
common stock.
31
<PAGE>
(1) Applicable percentage of ownership is based on 25,663,425 shares of
common stock outstanding as of March 24, 1998, 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) Includes 150,000 shares which are subject to an option to purchase
such shares from the Company at $1.00 per share.
(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 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.
(5) Includes 5,000 shares which are subject to an option to purchase such
shares from the Company at $7.375 per share.
(6) Includes 50,000 shares which are subject to an option to purchase
such shares from the Company at $1.00 per share.
(7) Includes 5,000 shares which are subject to an option to purchase such
shares from the Company at $8.50 per share.
(8) Mr. Claytor retired from the Board of Directors effective January 19, 1998.
(9) The Crabbe Huson Group, Inc. is an Investment Advisor and it does not
directly own any shares of the Company. It shares voting and dispositive
power with respect to the 4,346,800 shares owned by approximately 62 of its
clients.
Item 13. 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 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
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.
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 the time the terms of purchase
were negotiated, Mr. Hernandez was not an affiliate of the Company.
32
<PAGE>
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 certain option agreements between the
respective parties. 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.
At December 31, 1997, Steven K. Clark, an officer and director of the Company,
owed the Company $768,763 which he borrowed to settle claims, to make certain
payments under the Indemnity Agreement described above and to exercise options
with Thomas T. Allan. 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. On April 25,
1997, Mr. Clark issued a note to the Company in the amount of $250,000 at the
above-described interest rate and both the interest and principal due under the
note are payable on April 24, 1999. On September 5, 1997, Mr. Clark assumed
$409,750 of Mr. Allan's notes, described above, in consideration for the
exercise of 163,900 options under certain option agreements between the
respective parties. 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.
At December 31, 1997, Robert R. Amerson, an officer and director of the Company,
owed the Company $768,763 which he borrowed to settle claims, to make certain
payments under the Indemnity Agreement described above and to exercise options
with Thomas T. Allan. 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. On April 25, 1997, Mr. Amerson issued a
note to the Company in the amount of $250,000 at the above-described interest
rate and both the interest and principal due under the note are payable on April
24, 1999. On September 25, 1997, Mr. Amerson assumed $409,750 of Mr. Allan's
notes, described above, in consideration for the exercise of 163,900 options
under certain option agreements between the respective parties. 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.
Effective December 31, 1997, Mr. Hernandez terminated his employment with the
Company. Mr. Hernandez will continue as a director of the Company throughout his
elected term and will also provide certain consulting services to the Company
through March 31, 1998.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements: Financial Statements are included beginning
at page F-1 as follows:
Independent Auditor's Report....................................F-2
Consolidated Balance Sheets at December 31, 1997 and 1996.......F-3
Consolidated Statements of Income for the years ended
December 31, 1997, December 31, 1996 and December
31, 1995....................................................F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, December 31, 1996 and
December 31, 1995...........................................F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, December 31, 1996 and
December 31, 1995...........................................F-6
Notes to Consolidated Financial Statements......................F-9
(a)(2) Financial Statement Schedules:
33
<PAGE>
Independent Auditor's Report...................................F-27
Schedule II. Valuation and Qualifying Accounts................F-28
All schedules not listed have been omitted because they are not applicable or
the information has been otherwise supplied in the Registrant's financial
statements and schedules.
(a)(3) Exhibits:
Exhibit No. Description
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.
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.
(filed with the October 21, 1996 Form S-1 (Reg. No.
333-14655), 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 -- Promissory Note from Precisionaire, Inc. to SunTrust
Bank, Tampa Bay, in the amount of $2,134,524 dated
August 28, 1997, filed with the September 15, 1997 Form
S-1 (Reg No. 333-33635), and incorporated herein by
reference.
10.8 -- Assumption Agreement between POF Realty, Precisionaire,
Inc., Polk County Industrial Development Authority and
SunTrust Bank, dated August 1, 1997, filed with the
September 15, 1997 Form S-1 (Reg No. 333-33635), and
incorporated herein by reference.
10.9 -- Mortgage Deed and Security Agreement between
Precisionaire, Inc. and Sun Trust Bank, Tampa Bay
dated August 28, 1997, filed with the September
15, 1997 Form S-1 (Reg No. 333-33635), and
incorporated herein by reference.
34
<PAGE>
10.10 -- Credit Agreement between Flanders Corporation, SunTrust
Bank, Tampa Bay and Zions First National Bank, dated
November 10, 1997.
10.11 -- Loan Agreement between Will-Kankakee Regional
Development Authority and Flanders Corporation dated
December 15, 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.
24 -- Power of Attorney (included on Signature page of this
report).
27 -- Financial Data Schedule.
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 -- Amendment to Employment Agreement between Elite
Acquisitions, Inc., Flanders Filters, Inc. and Steven
K. Clark.
99.6 -- 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.
99.7 -- 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.
99.8 -- Amendment to Employment Agreement between Elite
Acquisitions, Inc., Flanders Filters, Inc. and Robert
R. Amerson.
99.9 -- Employment Agreement between Flanders Corporation,
Precisionaire, Inc. and Gustavo Hernandez, filed with
Form S-1, dated October 21, 1996 (Reg No. 333-14655) and
incorporated herein by reference.
99.10 -- 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.
35
<PAGE>
99.11 -- 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.
99.12 -- 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.
99.13 -- 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.
99.14 -- 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.
99.15 -- 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.
99.16 -- Stock Option Agreement between Elite Acquisitions, Inc.
and Thomas T. Allan, filed with the December 31, 1995
Form 10-K, incorporated herein by reference.
99.17 -- Stock Option Agreement between Elite Acquisitions, Inc.
and William M. Claytor, filed with the December 31, 1995
Form 10-K, incorporated herein by reference.
(b) -- Reports on Form 8-K.
None.
(c) -- Financial Statement Schedules: See (a)(2) above.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated this 31st day of March, 1998.
FLANDERS CORPORATION
By: /s/ Robert R. Amerson
Robert R. Amerson
President, Chief Executive Officer, Director
By: /s/ Steven K. Clark
Steven K. Clark
Vice President, Chief Financial Officer, Director
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 amendments to this report, 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 Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Date Title Signature
-------------------------
<C> <C> <C>
March 31, 1998 President, Chief Executive Officer /s/ Robert R. Amerson
and Director Robert R. Amerson
March 31, 1998 Vice President, Chief Financial /s/ Steven K. Clark
Officer and Director Steven K. Clark
March 31, 1998 Chairman of the Board /s/ Thomas T. Allan
Thomas T. Allan
March 31, 1998 Director /s/ Gustavo Hernandez
Gustavo Hernandez
March 31, 1998 Director /s/ William H. Clark
William H. Clark
</TABLE>
37
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
OF
FLANDERS CORPORATION
For the Years ended December 31, 1997, 1996 and 1995
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Flanders Corporation
Washington, North Carolina
We have audited the accompanying consolidated balance sheets of Flanders
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
New Bern, North Carolina
March 23, 1998
F-2
<PAGE>
<TABLE>
<CAPTION>
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
ASSETS 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 35,454,580 $ 2,390,411
Restricted cash (Note 2) - 8,000,005
Receivables:
Trade, less allowance for doubtful
accounts: 1997 $380,566;
1996 $346,480 (Note 7) 20,794,675 17,906,879
Related party (Note 16) - 905,930
Other 1,336,282 786,811
Inventories (Notes 3 and 7) 16,520,154 9,894,707
Deferred taxes (Note 12) 1,057,383 920,520
Income tax refund 217,737 -
Other current assets 870,897 687,524
-------------- --------------
Total current assets 76,251,708 41,492,787
Related party receivables (Note 16) 1,861,005 -
Other assets (Note 4) 2,842,767 909,307
Intangible assets (Notes 5 and 7) 17,164,629 14,016,691
Property and equipment, net (Notes 6 and 7) 47,760,407 30,099,626
-------------- --------------
$ 145,880,516 $ 86,518,411
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Current liabilities
Current maturities of long-term debt (Note 7) $ 1,092,442 $ 4,379,973
Accounts payable (Note 8) 16,940,981 11,002,587
Accrued expenses (Note 9) 3,038,800 3,540,110
-------------- --------------
Total current liabilities 21,072,223 18,922,670
-------------- --------------
Long-term debt, less current maturities (Note 7) 13,679,052 25,776,295
-------------- --------------
Convertible debt (Note 10) - 4,000,000
-------------- --------------
Deferred taxes (Note 12) 4,922,383 4,466,676
-------------- --------------
Committed capital (Notes 2 and 11) - 8,000,005
-------------- --------------
Commitments and contingencies (Notes 7, 14,
15, and 17)
-------------- --------------
Stockholders' equity (Notes 11, 16 and 19)
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:
1997 25,663,425; 1996 15,951,548 25,663 15,952
Additional paid-in capital 91,969,830 16,964,713
Retained earnings 14,211,365 8,372,100
-------------- --------------
106,206,858 25,352,765
-------------- --------------
$ 145,880,516 $ 86,518,411
============== ==============
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
<TABLE>
<CAPTION>
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Net sales $ 134,135,433 $ 73,056,197 $ 38,635,810
Cost of goods sold (Notes 15, 16 and 17) 100,812,262 53,597,621 28,953,729
-------------- -------------- --------------
Gross profit 33,323,171 19,458,576 9,682,081
Operating expenses (Notes 15, 16 and 17) 24,156,197 13,459,721 7,262,668
-------------- -------------- --------------
Operating income 9,166,974 5,998,855 2,419,413
-------------- -------------- --------------
Nonoperating income (expense):
Other income 1,234,541 975,750 43,852
Interest expense (857,527) (1,203,226) (633,029)
-------------- -------------- --------------
377,014 (227,476) (589,177)
-------------- -------------- --------------
Income before income taxes 9,543,988 5,771,379 1,830,236
Income taxes (Note 12) 3,704,723 2,177,591 684,582
-------------- -------------- --------------
Net income $ 5,839,265 $ 3,593,788 $ 1,145,654
============== ============== ==============
Earnings per common share (Note 20)
Basic $ 0.32 $ 0.27 $ 0.12
============== ============== ==============
Diluted $ 0.27 $ 0.23 $ 0.12
============== ============== ==============
Weighted average common shares
outstanding (Note 20)
Basic 18,508,763 13,171,440 9,831,996
============== ============== ==============
Diluted 22,477,184 16,383,962 9,831,996
============== ============== ==============
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
<TABLE>
<CAPTION>
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
Additional
Common Paid-In Retained
Stock Capital Earnings
---------- ------------- -------------
<S> <C> <C> <C>
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
Release of committed capital (Note 2) - 8,000,005 -
Issuance of 8,377,000 shares of common stock
(Note 11) 8,377 57,045,636 -
Issuance of 722,375 shares of common stock
upon conversion of convertible
debt (Note 10) 722 4,381,689 -
Issuance of 425,000 shares of common stock
upon exercise of options (Note 19) 425 1,262,075 -
Valuation and release from escrow of 344,691
shares of common stock related to the
Acquisitions - 2,984,635 -
Issuance of 187,502 shares of common stock
related to the Acquisitions (Note 13) 187 1,394,452 -
Income tax benefit from stock options
exercised - 969,125 -
Issuance of receivables secured by stock
related to exercise of options - (1,262,500) -
Payment on receivables secured by stock
related to exercised warrants and options - 230,000 -
Net income - - 5,839,265
---------- ------------- -------------
Balance, December 31, 1997 $ 25,663 $ 91,969,830 $ 14,211,365
========== ============= =============
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
<TABLE>
<CAPTION>
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,839,265 $ 3,593,788 $ 1,145,654
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,799,957 1,485,740 636,178
Provision for doubtful accounts 9,086 (120,423) 108,000
Allowance for obsolete inventory 17,000 (115,000) (45,000)
(Gain) loss on sale of property and
equipment 31,942 (54,002) -
Gain on disposition of cash value of
life insurance - (24,600) -
Realized gain on sale of marketable
securities - 12,123 -
Deferred income taxes (34,555) (113,520) 160,000
Indemnification of claim by stockholders - - 375,000
Income tax benefit from exercise of
stock options 969,125 37,433 -
Change in working capital components:
Receivables (3,245,972) (871,440) (1,937,752)
Inventories (6,554,150) (504,576) 790,947
Other current assets (183,373) (520,092) 77,763
Accounts payable 5,920,363 (997,168) (339,999)
Accrued expenses (22,597) 302,682 158,591
Income tax (payable) refund (696,450) (497,767) 481,157
-------------- -------------- --------------
Net cash provided by operating
activities 5,849,641 1,613,178 1,610,539
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash acquired - (31,971,448) -
Purchase of equipment (20,287,003) (2,501,308) (611,713)
Proceeds from sale of marketable equity
securities - 823,396 -
Proceeds from sale of property and equipment 92,572 226,234 -
Proceeds from disposition of cash value of
life insurance - 884,895 -
Disbursements on notes receivables,
stockholders (955,075) (905,930) -
Proceeds from repayment of notes receivable,
stockholders - 458,428 -
Disbursements on trademarks and trade names - (17,246) -
Disbursement on deferred expenses (461,824) - -
Proceeds from repayment of notes receivable
related to exercise of options and warrants 230,000 - -
Increase in cash designated for equipment
additions (856,441) - -
Disbursements on prepaid commissions (491,273) - -
Disbursements for deposits on equipment (415,464) - -
Increase in cash value of life insurance (21,054) (25,272) (52,524)
-------------- -------------- --------------
Net cash used in investing activities (23,165,562) (33,028,251) (664,237)
-------------- -------------- --------------
</TABLE>
- Continued -
See Notes to Consolidated Financial Statements
F-6
<PAGE>
<TABLE>
<CAPTION>
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on revolving credit agreement $ (62,320,442) $ (58,637,083) $ (38,562,227)
Proceeds from revolving credit agreement 46,378,297 67,618,777 38,329,791
Proceeds from long-term borrowings 10,050,118 9,340,200 -
Principal payments on long-term borrowings (8,781,901) (2,782,871) (481,147)
Proceeds from issuance of common stock, net
of committed capital 57,054,013 11,894,353 2,596,024
Release of committed capital 8,000,005 - -
Disbursement of loan origination fees - (634,689) -
Purchase of common stock for retirement - - (11,638)
Proceeds from exercise of options and warrants - 33,000 -
Proceeds from issuance of convertible debt - 4,000,000 -
-------------- -------------- --------------
Net cash provided by financing activities 50,380,090 30,831,687 1,870,803
-------------- -------------- --------------
Net increase (decrease) in cash and cash
equivalents 33,064,169 (583,386) 2,817,105
CASH AND CASH EQUIVALENTS
Beginning 2,390,411 2,973,797 156,692
-------------- -------------- --------------
Ending $ 35,454,580 $ 2,390,411 $ 2,973,797
============== ============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash payments for:
Interest, net of $424,332 interest
capitalized to property and equipment
for 1997 $ 1,328,380 $ 732,976 $ 667,117
============== ============== ==============
Income taxes $ 4,435,728 $ 2,293,555 $ 43,425
============== ============== ==============
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING
ACTIVITIES
Fair value of warrants issued with
convertible debt $ - $ 33,971 $ -
============== ============== ==============
Valuation and release from escrow of 344,691
and 282,295 shares of common stock
related to the Acquisitions for the
years ended December 31, 1997 and
1996, respectively $ 2,984,635 $ 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
receivables $ - $ 240,700 $ -
============== ============== ==============
Issuance of 425,000 shares of common stock
upon exercise of options in exchange for
receivable $ 1,262,500 $ - $ -
============== ============== ==============
Issuance of 722,375 shares of common stock
upon conversion of $4,000,000 of
convertible debt and $382,411 of related
accrued interest $ 4,382,411 $ - $ -
============== ============== ==============
Acquisition of property through assumption
of debt $ 1,642,099 $ - $ -
============== ============== ==============
Cancellation of capital lease $ 2,764,634 $ - $ -
============== ============== ==============
Capital lease obligation incurred for use
of property and equipment $ - $ 284,250 $ 350,000
============== ============== ==============
Indemnification of claims by Officers and
Directors (Note 16) $ - $ - $ 525,000
============== ============== ==============
</TABLE>
- Continued -
See Notes to Consolidated Financial Statements
F-7
<PAGE>
<TABLE>
<CAPTION>
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
ACQUISITION OF COMPANIES (Note 13)
Working capital acquired, net of cash and
cash equivalents received $ 270,646 $ 4,677,588 $ -
Fair value of other assets acquired,
principally property and equipment 930,000 25,152,612 $ -
Goodwill 547,393 10,823,053 $ -
Long-term debt assumed (353,400) (8,681,805) $ -
-------------- -------------- --------------
$ 1,394,639 $ 31,971,448 $ -
============== ============== ==============
</TABLE>
See Notes to Consolidated Financial Statements
F-8
<PAGE>
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") designs, manufactures
and markets a broad range of air filtration products, including (i) high-end
High Efficiency Particulate Air ("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
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
("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 some of its
products to maintain control over the quality and composition of such media.
The Company had revenues from one customer which accounted for 11 percent of net
sales during the year ended December 31, 1997. The Company had a $1,156,094
accounts receivable balance due from this customer at December 31, 1997.
Although the Company historically has specialized in HEPA and mid-range filters,
the Company has positioned itself to offer its customers a full range of air
filtration products. As a result of certain 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.
Principles of consolidation: The consolidated financial statements include the
accounts of the Company and its subsidiaries, all of which are wholly owned,
except for one subsidiary which was 80 percent owned for the year ended December
31, 1997. One of the Company's subsidiaries has a subsidiary which was 63.0
percent owned for the years ended December 31, 1997 and 1996. 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. The Company
is involved in a dispute with a customer involving a trade account receivable of
approximately $2.3 million. The customer contends that certain filters
manufactured by the Company did not conform to specifications. Independent
testing and other information available to management indicate the receivable
should be fully collectible. However, it is reasonably possible the estimate of
collection may change in the near term.
Cash and cash equivalents: The Company maintains its cash in bank deposit
accounts, which at times 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 or designated for equipment acquisitions 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.
F-9
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies - Continued
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, 1997.
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, 1997.
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, 1997.
Revenue recognition: All sales are recognized when shipments are made to
customers.
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.
To the extent that undistributed earnings of subsidiaries are expected to be
indefinitely invested in the subsidiaries' businesses, no provision is made for
income taxes which would be payable if those earnings were paid as dividends to
the parent company.
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 $373,000, $460,000 and $120,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Reclassifications: Certain account balances for the years ended December 31,
1996 and 1995 have been reclassified with no effect on net income or retained
earnings to be consistent with the classification adopted for the year ended
December 31, 1997.
F-10
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Finished goods $ 7,456,542 $ 3,321,713
Work in progress 1,924,024 1,490,438
Raw materials 7,201,588 5,127,556
------------ ------------
16,582,154 9,939,707
Less allowance for obsolete raw materials 62,000 45,000
------------ ------------
$16,520,154 $ 9,894,707
============ ============
</TABLE>
Note 4. Other Assets
Other assets consist of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Real estate held for sale $ 266,486 $ 266,486
Cash value of officers' life insurance 98,850 77,796
Cash designated for equipment acquisitions 856,441 -
Prepaid commissions 491,273 -
Deposits on equipment 415,464 -
Deferred expenses, net of accumulated amortization
$49,207 1997; $104,962 for 1996 714,253 565,025
------------ ------------
$ 2,842,767 $ 909,307
============ ============
</TABLE>
Note 5. Intangible Assets
Intangible assets consist of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Goodwill, net of accumulated amortization
$415,468 1997; $85,901 1996 $16,217,984 $13,012,439
Trademarks and trade names, net of accumulated
amortization $75,099 1997; $17,098 1996 946,645 1,004,252
------------ ------------
$17,164,629 $14,016,691
============ ============
</TABLE>
F-11
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Property and Equipment
Property and equipment consist of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
Estimated
1997 1996 Useful Lives
------------ ------------ ------------
<S> <C> <C> <C>
Land $ 1,018,007 $ 638,465
Buildings, including assets acquired under capital
lease: 1997 $-0-; 1996 $2,974,000 24,026,169 15,049,245 15-40 years
Machinery and equipment, including assets acquired
under capital lease: 1997 $1,007,144;
1996 $779,321 23,645,191 16,640,939 10 years
Office equipment 3,115,607 2,718,124 5 years
Vehicles 635,844 557,988 5 years
Construction in progress 4,966,421 1,361,682
------------ ------------
57,407,239 36,966,443
Less accumulated depreciation, including
amortization applicable to assets acquired under
capital lease: 1997 $158,354; 1996 $129,152 9,646,832 6,866,817
------------ ------------
$47,760,407 $30,099,626
============ ============
</TABLE>
Total depreciation expense charged to operations totaled $3,103,271, $1,382,741,
and $633,226 for the years ended December 31, 1997, 1996 and 1995, respectively.
Note 7. 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, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<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 11. $ - $ 2,500,000
Lower of Prime or LIBOR plus defined percentage line
of credit agreement with two banks(B) (C). - -
Prime plus 1.0 percent revolving credit agreement
with a bank due September 1998, collateralized at
December 31, 1996 by a first security interest on
receivables, inventory, substantially all machinery
and equipment, securities and general intangibles.(A) - 15,942,146
</TABLE>
F-12
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Pledged Assets and Long-Term Debt - Continued
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
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.(A) $ - $ 4,869,130
Prime plus 0.25 percent notes payable to a mortgage
company due in monthly payments of $30,096 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
approximately $3,650,000 at December 31, 1997. 1,988,226 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 approximately $1,000,000 at December 31, 1997, and
a second security interest in certain machinery and
equipment. 783,519 864,953
Note payable to a bank with interest at the
One Month London Interbank Offered Rate
(LIBOR) plus 2.67 percent, due in monthly payments of
$5,670 plus interest through March 2001,
collateralized by equipment with a carrying value of
$282,403 at December 31, 1997. 221,130 289,170
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
approximately $2,900,000 at December 31, 1996. - 2,906,202
Various notes payable to a bank with interest at
prime plus .25 percent due in monthly installments of
$12,038, including interest, expiring at various
times through April 2004, collateralized by a deed of
trust on property with a carrying value of
approximately $1,550,000 at December 31, 1997. 1,228,372 -
6.5 percent note payable to a regional development
authority, due in varying quarterly installments,
plus interest, through December 2017, collateralized
by a security agreement and financing statement on
real and personal property with a carrying value of
approximately $5,800,000 at December 31, 1997. 6,000,000 -
Note payable to a bank with interest at 7.9 percent
until June 2001 when interest rate changes to prime
plus 0.25 percent, due in monthly payments of $7,098
including interest through June 2017 subject to a
10-year call option by bank which would cause Note to
be paid in full by June 2007, collateralized by a
deed of trust on real properties with a carrying
value of approximately $1,935,000 at December 31,
1997. 866,335 -
</TABLE>
F-13
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Pledged Assets and Long-Term Debt - Continued
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Note payable to industrial development authority,
with an interest rate of 83 percent of prime rate,
due in monthly installments of $11,333 plus interest
through January 2005, collateralized by a deed of
trust on real property with a carrying value of
approximately $3,000,000 at December 31, 1997. $ 963,477 $ -
Note payable to a bank with interest at LIBOR plus an
adjusted base rate, as defined, due in monthly
installments of $17,788 plus interest, with a balloon
payment due on June 30, 2002, of $1,120,625,
collateralized by a second deed of trust and security
agreement on real property with a carrying value of
approximately $3,000,000 at December 31, 1997. 2,081,161 -
Various contracts payable including capital lease
obligations; interest rates from 5.9 percent to 9.6
percent and 5.9 percent to 10 percent at December 31,
1997 and 1996, respectively, collateralized by
certain equipment; due in monthly payments of
approximately$20,000 and $24,000 including interest
at December 31, 1997 and 1996, respectively, expiring
at various times through October 2001. 639,274 630,170
------------ ------------
14,771,494 30,156,268
Less current maturities 1,092,442 4,379,973
------------ ------------
$13,679,052 $25,776,295
============ ============
</TABLE>
(A) The lender's prime rate at December 31, 1996 was 8.25 percent. The revolving
credit agreement provided for maximum borrowings based on the lesser of
defined borrowing bases and $25,000,000 at December 31, 1996. The weighted
average interest rate at December 31, 1996 was 9.4 percent. The notes were
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 were classified as long-term debt,
since subsequent to December 31, 1996, the Company completed an underwritten
public offering for the purpose of repaying the debt on these loan
agreements. In connection with the revolving and term loan agreements, the
Company 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 revolving credit
and term loan agreements were paid in full during the year ended December
31, 1997.
(B) At December 31, 1997, the Company has a revolving credit facility with two
banks which provides a line of credit up to a maximum principal amount of
$30,000,000. The line of credit bears an interest rate at the option of the
Company at either 1) prime rate, which was 8.5% at December 31, 1997, or 2)
LIBOR, which was 5.656% at December 31, 1997, plus an amount equal to 1.00%
to 1.95%, depending on the ratio of total liabilities of the Company to its
tangible net worth. The line of credit agreement expires on November 10,
1999. The line of credit is collateralized by the pledge of all common stock
of the subsidiaries owned by the Company.
(C) In connection with the line of credit agreement and notes payable to a
regional development authority and bank, the Company has agreed to certain
restrictive covenants which include, among other things, not paying
dividends and maintenance of certain financial ratios at all times including
a current ratio equal to or greater than 1.5 to 1.0, tangible net worth
equal to or greater than $60,000,000, plus specified additions, a ratio of
total liabilities to tangible net worth less than or equal to 2.5 to 1.0
during the first year of the agreement, and 2.25 to 1.0 thereafter and a
minimum fixed charge coverage ratio greater than or equal to 1.3 to 1.0.
The Company was in violation of certain covenants with a lender as of December
31, 1997; however, these violations have been waived by the lender through
January 1, 1999.
F-14
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Pledged Assets and Long-Term Debt - Continued
Aggregate maturities required on long-term debt as of December 31, 1997 are due
in future years as follows:
<TABLE>
<CAPTION>
Fiscal Years Ending
- -------------------
<S> <C>
1998 $ 1,092,442
1999 1,153,889
2000 1,181,086
2001 1,062,717
2002 2,380,230
Later years 7,901,130
------------
$14,771,494
</TABLE>
Note 8. Accounts Payable
Accounts payable consist of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Accounts payable, trade $14,589,651 $ 8,655,757
Commissions payable 1,795,944 2,007,761
Customer deposits 555,386 339,069
------------ ------------
$16,940,981 $11,002,587
============ ============
</TABLE>
Note 9. Accrued Expenses
Accrued expenses consists of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Payroll (Note 14) $ 1,051,981 $ 966,465
Insurance, including workers compensation 939,548 1,118,711
Sales and use taxes 186,015 98,307
Interest 31,281 502,134
Income tax payable - 478,713
Other 829,975 375,780
------------ ------------
$ 3,038,800 $ 3,540,110
============ ============
</TABLE>
F-15
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. 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 the notes.
During the year ended December 31, 1997, all $4,000,000 of Convertible Notes
were converted into 722,375 shares of common stock. 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. During the
year ended December 31, 1997, 72,239 warrants were issued due to the conversion
of convertible debt into common stock. 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 11. Stockholders' Equity
During the year ended December 31, 1997, the Company raised $57,054,013, net of
offering commissions and expenses of $6,052,237, through the sale of 8,320,000
shares of Common Stock by underwritten public offerings dated January 16, 1997
at $9.50 per share and October 16, 1997 at $7.00 per share and the private
placement of 57,000 shares of Common Stock at a weighted average price of $4.67
per share. In conjunction with these offerings, the Company granted warrants to
purchase a total of 540,000 shares to the underwriters.
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 had
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 President and Vice President/Chief Financial Officer of
the Company exercised options to acquire 2,830,732 and 1,799,188 shares,
respectively, of the Company common stock from the two stockholders on December
1, 1997. The remaining options were not exercised and expired on December 15,
1997.
F-16
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Income Tax Matters
The components of income tax expense for the years ended December 31, 1997, 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal $ 3,266,645 $ 1,750,374 $ 419,492
State 472,633 540,737 105,090
------------ ------------ ------------
3,739,278 2,291,111 524,582
------------ ------------ ------------
Deferred:
Federal (151,017) (42,509) 130,000
State 116,462 (71,011) 30,000
------------ ------------ ------------
(34,555) (113,520) 160,000
------------ ------------ ------------
$ 3,704,723 $ 2,177,591 $ 684,582
============ ============ ============
</TABLE>
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate of 34% to pretax income for years
ended December 31, 1997, 1996 and 1995 due to the following:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Computed "expected" tax expense $ 3,244,956 $ 1,962,269 $ 622,280
Increase (decrease) in income
taxes resulting from:
Nondeductible expenses 82,051 33,158 50,980
State income taxes net of
federal tax benefit 435,000 115,027 89,159
Change in valuation allowance (19,224) 22,822 (32,490)
Tax credits (5,396) (10,914) (45,347)
Other (32,664) 55,229 -
------------ ------------ ------------
$ 3,704,723 $ 2,177,591 $ 684,582
============ ============ ============
</TABLE>
Net deferred tax assets and liabilities consist of the following components as
of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable allowance $ 56,711 $ 48,064
Inventory allowances 418,028 284,930
Accrued expenses 564,398 541,314
Loss carryforwards 37,819 85,009
------------ ------------
1,076,956 959,317
Less valuation allowance 19,573 38,797
------------ ------------
1,057,383 920,520
Deferred tax liabilities:
Property and equipment (4,922,383) (4,466,676)
------------ ------------
$(3,865,000) $(3,546,156)
============ ============
</TABLE>
F-17
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Income Tax Matters - Continued
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, 1997 and 1996 as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Current assets $ 1,057,383 $ 920,520
Noncurrent liabilities (4,922,383) (4,466,676)
------------ ------------
$(3,865,000) $(3,546,156)
============ ============
</TABLE>
Note 13. 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 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, 1997, 79,000 CSC escrow shares with a market value of $628,500 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.
F-18
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Mergers and Acquisitions - Continued
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 were
placed 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, 1997, 547,986 Precisionaire escrow shares with a market value of
$5,037,938 were released from escrow to the Precisionaire sellers.
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, basic $ 0.38 $ 0.20
============== ==============
Net income per common share, diluted $ 0.30 $ 0.18
============== ==============
</TABLE>
Effective December 1, 1997, the Company acquired all the outstanding stock of
GFI, Inc. ("GFI"), a manufacturer of glass fiber, by exchanging 187,502 shares
of the Company's stock for all the outstanding stock of GFI in a tax free
merger. The total cost of acquisition was $1,394,639, based on the price of the
Company's stock on November 26, 1997 of approximately $7.44. Pro forma results
of operations of the Company as though GFI had been acquired as of January 1,
1995 are not presented because amounts of pro forma differences are not
significant.
Note 14. Employment Agreements and Discretionary Bonuses
The Company has employment agreements with its President and Chief Executive
Officer and its Vice President Finance/Chief Financial Officer, which expire in
December 2005. 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, and $50,000 for the years ended December 31, 1996 and
1995, respectively. The Company did not pay bonuses for the year ended December
31, 1997.
F-19
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. Employee Benefit Plans
During 1996, due to the Acquisitions, the Company had 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 401(k) plans allow employees to defer up to the lessor of a plan defined
limit ranging from 12 percent to 20 percent of their salary, depending on which
of the 401(k) 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. Effective January 1, 1997, the
Company combined the 401(k) Plans into the Flanders Corporation 401(k) Salary
Savings Plan ("Salary Savings Plan"). The Salary Savings Plan allows the
eligible employees, as defined in the plan document, to defer up to 15 percent
of their eligible compensation, with the Company contributing an amount
determined at the discretion of the Company's Board of Directors. The Company
contributed approximately $145,000, $44,000 and $18,000 to the Salary Savings
Plan and the 401(k) Plans for the years ended December 31, 1997, 1996 and 1995,
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 per individual. The employer's portion of claims charged to
operations for the years ended December 31, 1997, December 31, 1996 and December
30, 1995 totaled approximately $650,000, $222,000 and $314,000, 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 under the LTI Plan. During
the years ended December 31, 1997 and 1996, the Company awarded options to
purchase 95,600 and 236,520 shares of Common Stock under the LTI Plan,
respectively. See Note 19.
During the year ended December 31, 1996, the Company adopted the 1996 Director
Option Plan which 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
on such date, assuming such outside director had been serving for at least six
months prior to the date of grant. The Company has reserved 500,000 shares of
its Common Stock for issuance under the 1996 Director Option Plan which expires
in 2006. During the year ended December 31, 1997, the Company awarded options to
purchase 5,000 shares of Common Stock under the 1996 Director Option Plan.
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 19
As permitted under generally accepted accounting principles, grants under the
LTI Plan and other grants of options 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, 1997, 1996 and 1995:
F-20
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. Employee Benefit Plans - Continued
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net income:
As reported $ 5,839,265 $ 3,593,788 $ 1,145,654
Pro forma $ 5,766,265 $ 765,682 $ 843,243
Basic earnings per share:
As reported $ 0.32 $ 0.27 $ 0.12
Pro forma $ 0.31 $ 0.06 $ 0.09
Diluted earnings per share:
As reported $ 0.27 $ 0.23 $ 0.12
Pro forma $ 0.26 $ 0.05 $ 0.09
Weighted average fair value per
option of options granted during
the year $ 2.11 $ 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 on the date
of grant. The weighted average assumptions for options granted in 1997, 1996 and
1995 were as follows: Dividend rate of 0%; average risk-free interest rate of
6.11%, 5.46% and 5.25%, respectively; average expected lives of 2.5, 2.4 and 2.5
years, respectively; and average expected price volatility of 40%, 20% and 21%,
respectively.
Note 16. 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. 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 $375,000 for the year ended December 31,
1995. The Company has a remaining $975,000 indemnification by three officers and
directors with respect to claims by the United States Environmental Protection
Agency ("EPA"). The Company entered into an agreement with the EPA to monitor
the groundwater at the North Carolina site. The Company expects the monitoring
requirement to cease in 1998 and believes the cost of monitoring is immaterial.
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, 1997, 1996 and 1995
amounted to $41,607, $84,375 and $6,250, respectively. In May 1997, the Company
purchased the property from ABB Partnership for $879,862.
F-21
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16. Related Party Transactions and Balances - Continued
LHB 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 LHB 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 years ended December 31, 1997 and 1996
amounted to approximately $81,000 and $49,000, respectively. In June 1997, the
Company purchased the property from LHB Partnership for $910,000.
Transactions with Flanders Equity Corporation, a company affiliated through
common ownership, consisted of $532,000 of management fees during the year ended
December 31, 1995.
At December 31, 1997 and 1996, the Company had notes receivable of $1,861,005
and $905,930 due from various directors, officers and employees with interest
thereon varying between 6.9% and 8.0%, maturing at various dates from February
1999 to October 2001.
Note 17. Lease Commitments and Total Rental Expense
Certain equipment and buildings are leased under agreements expiring between
1998 and 2002. The following is a schedule for the total rental commitments
under these leases as of December 31, 1997:
<TABLE>
<CAPTION>
Fiscal Years Ending
- -------------------
<S> <C>
1998 $ 873,217
1999 675,361
2000 467,776
2001 434,168
2002 155,000
------------
$ 2,605,522
============
</TABLE>
The total rental expense charged to operations totaled approximately $2,300,000,
$465,000 and $148,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
Note 18. 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,
1997 and 1996 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, 1997 and 1996.
F-22
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19. Stock Options and Warrants
During the year ended December 31, 1997, the Company granted options to purchase
95,600 shares of common stock under its LTI Plan at an exercise price of $7.13
per share. The Company also issued options to purchase 5,000 shares to a
director under the Director Option Plan, at an exercise price of $7.38 per
share. All options granted during the year ended December 31, 1997 were
non-qualified fixed price options, and were not exercisable at December 31,
1997.
The following table summarizes the activity related to the Company's stock
options and warrants for the years ended December 31, 1997 and 1996:
<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, 1996 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 - $ 2.50
----------- ---------
Outstanding at December 31, 1996 25,000 7,623,320 $ 9.63 $1.00- 9.50 $ 9.63 $ 3.43
Granted 612,239 100,600 $5.54-14.73 $7.13- 7.38 $ 9.57 $ 7.14
Exercised - 425,000 $ - $2.50- 3.50 $ - $ 2.97
Canceled or expired - 6,000 $ - $ 7.50 $ - $ 7.50
----------- ---------
Outstanding at December 31, 1997 637,239 7,292,920 $5.54-14.73 $1.00- 9.50 $ 9.57 $ 3.51
=========== =========
Exercisable at December 31, 1997 97,239 7,192,320 $5.54- 9.63 $1.00- 9.50 $ 6.98 $ 3.46
=========== =========
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 September 1999 to
February 2006. A further summary of information related to fixed options
outstanding at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Weighted Average Weighted Average
Range of Exercise Number Remaining Exercise Price
Prices Outstanding/Exercisable Contractual Life Outstanding/Exercisable
- ----------------- ----------------------- ---------------- -----------------------
<S> <C> <C> <C>
$ 1.00 2,500,000 / 2,500,000 2.88 Years $ 1.00 / 1.00
2.50 2,581,320 / 2,581,320 3.35 2.50 / 2.50
6.94 to 7.50 2,171,600 / 2,071,000 3.48 7.25 / 7.13
9.50 40,000 / 40,000 3.49 9.50 / 9.50
</TABLE>
The weighted-average grant-date fair value of warrants granted was $8.40, $9.88
and $2.50 for the years ended December 31, 1997, 1996 and 1995, respectively.
F-23
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20. Earnings per Share
The FASB issued Statement No. 128, Earnings per Share, which supersedes APB
Opinion No. 15. Statement No. 128 requires the presentation of earnings per
share by all entities that have common stock or potential common stock, such as
options, warrants and convertible securities, outstanding that trade in a public
market. Those entities that have only common stock outstanding are required to
present basic earnings per-share amounts. Basic per-share amounts are computed
by dividing net income (the numerator) by the weighted-average number of common
shares outstanding (the denominator). All other entities are required to present
basic and diluted per-share amounts. Diluted per-share amounts assume the
conversion, exercise or issuance of all potential common stock instruments
unless the effect is to reduce the loss or increase the income per common share
from continuing operations.
The Company initially applied Statement No. 128 for the year ended December 31,
1997 and, as required by the Statement, has restated all per share information
for the prior years to conform to the Statement.
Following is information about the computation of the earnings per share data
for the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
Per Share
Amounts
Numerator Denominator Net Income
------------- ----------- ----------
Year Ended December 31, 1997
--------------------------------------
<S> <C> <C> <C>
Basic earnings per share, income
available to common stockholders $ 5,839,265 18,508,763 $ 0.32
==========
Effect of Dilutive securities:
Options - 2,737,642
Contingent shares - 752,187
Convertible debt 163,956 470,250
Warrants - 8,342
============= ===========
Diluted earnings per share, income
available to common stockholders
plus assumed exercise of options
and warrants, conversion of debt
and issuance of contingent shares $ 6,003,221 22,477,184 $ 0.27
============= =========== ==========
Year Ended December 31, 1996
--------------------------------------
Basic earnings per share, income
available to common stockholders $ 3,593,788 13,171,440 $ 0.27
==========
Effect of Dilutive securities:
Options - 2,378,008
Contingent shares - 590,652
Convertible debt 148,110 227,086
Warrants - 16,776
============= ===========
Diluted earnings per share, income
available to common stockholders
plus assumed exercise of options
and warrants, conversion of debt
and issuance of contingent shares $ 3,741,898 16,383,962 $ 0.23
============= =========== ==========
Year Ended December 31, 1995
--------------------------------------
Basic and dilutive earnings per
share, income available to
common stockholders $ 1,145,654 9,831,996 $ 0.12
============= =========== ==========
</TABLE>
F-24
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20. Earnings per Share - Continued
The Company granted options to employees to purchase 40,000 shares of common
stock at $9.50 per share and approximately 550,000 warrants at prices ranging
from $8.15 per share to $14.73 per share during the year ended December 31,
1997. These options and warrants were not included in the computation of diluted
earnings per share for the year ended December 31, 1997 because effect of the
inclusion of the exercise of these options and warrants would have been
anti-dilutive.
Note 21. Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
Quarters Ended
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net sales $ 27,866,841 $ 33,383,196 $ 39,232,931 $ 33,652,465
Gross profit 7,003,564 8,940,061 9,344,956 8,034,590
Operating income 1,260,961 2,829,274 3,217,132 1,859,652
Net income $ 795,264 $ 1,870,140 $ 2,126,063 $ 1,047,798
============ ============ ============ ============
Basic earnings per share $ 0.05 $ 0.11 $ 0.12 $ 0.05
============ ============ ============ ============
Diluted earnings per share $ 0.04 $ 0.09 $ 0.10 $ 0.04
============ ============ ============ ============
Weighted average shares outstanding:
Basic 16,726,939 17,189,106 17,312,516 22,806,492
============ ============ ============ ============
Diluted 21,278,723 21,152,105 21,119,669 26,358,239
============ ============ ============ ============
Common stock prices:
High 12 9 7/8 8 1/4 9 1/4
============ ============ ============ ============
Low 9 3/8 5 7/8 6 3/4 6 15/16
============ ============ ============ ============
</TABLE>
Earnings per share amounts for the first three quarters of 1997 have been
restated to comply with FASB Statement No. 128, Earnings per Share.
Note 22. New Accounting Standard
In 1997, the Financial Accounting Standards Board issued Statements of Financial
Accounting Standards No. 130, Reporting Comprehensive Income and No. 131,
Disclosures About Segments of an Enterprise and Related Information. These
statements, which are effective for fiscal years beginning after December 15,
1997, expand or modify disclosures and are not expected to impact the Company's
consolidated financial position, results of operations or cash flows.
Note 23. Subsequent Events
In March 1998, the Company entered into a non-binding letter of intent for the
purchase of all the outstanding capital stock of Eco-Air Products, Inc. The
acquisition is contingent upon, among other things, the execution of definitive
agreements.
F-25
<PAGE>
FLANDERS CORPORATION
FINANCIAL STATEMENT SCHEDULES
<PAGE>
INDEPENDENT AUDITOR'S REPORT ON THE SUPPLEMENTAL SCHEDULE
To the Board of Directors
Flanders Corporation
Washington, North Carolina
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The consolidated
Supplemental Schedule II is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audits of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic consolidated financial statements taken as a whole.
/s/ McGladrey & Pullen, LLP
New Bern, North Carolina
March 23, 1998
F-27
<PAGE>
FLANDERS CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Additions
-----------------------
Balance at Charged to Charged to Balance
Beginning Cost and Other at End
of Period Expense Accounts Deductions of Period
---------- ---------- ----------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
For the year ended Dec. 31, 1997
Allowance for doubtful accounts $ 346,480 $ 80,245 $ 25,000(3) $ (71,159)(1)(2) $ 380,566
Allowance for inventory value 45,000 17,000 - - 62,000
Valuation allowance for deferred tax assets 38,797 - - $ (19,224)(2) 19,573
---------- ---------- ----------- ---------------- ---------
Total $ 430,277 $ 97,245 $ 25,000 $ (90,383) $ 462,139
========== ========== =========== ================ =========
For the year ended Dec. 31, 1996
Allowance for doubtful accounts $ 148,000 - $318,903(3) $(120,423)(2) $ 346,480
Allowance for inventory value 60,000 - 100,000(3) (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
========== ========== =========== ================ =========
</TABLE>
(1) Uncollected receivables written-off, net of recoveries.
(2) Reduction in valuation allowance.
(3) Increase due to acquisition of subsidiaries.
F-28
CREDIT AGREEMEENT
THIS CREDIT AGREEMENT is made and entered into as of this 10th day of November,
1997, by and between Flanders Corporation, a North Carolina corporation
("Borrower") the Lenders (as defined below), and SunTrust Bank, Tampa Bay, as a
Lender and Administrative Lender.
BACKGROUND
Borrower has applied to Lenders for a revolving line of credit availability in
the maximum principal amount of $30,000,000. Lenders are willing to establish on
their books such line of credit availability for Borrower upon the terms and
conditions described in this Agreement.
TERMS
NOW, THEREFORE, in consideration of the premises and the mutual agreements,
covenants, and conditions herein, Borrower, Lenders and Administrative Lender
agree as follows:
SECTION 1. DEFINITIONS.
1.1 Defined Terms. Except as otherwise expressly provided in this Agreement, the
following capitalized terms shall have the respective meanings ascribed to them
for all purposes of this Agreement:
"Advance" means an advance made by a Lender to the Borrower pursuant to Section
2.01 hereof.
"Administrative Lender" means SunTrust Bank, Tampa Bay.
"Affiliate" means a Person that directly or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with
another Person.
"Agreement" means this Credit Agreement, as the same may be amended,
supplemented, restated, replaced, or otherwise modified from time to time in
accordance with the provisions hereof.
"Applicable Margin" means with respect to LIBOR Advances, the following per
annum percentages applicable in the following situations:
<PAGE>
Applicability Applicable Margin
(i) If the Ratio is less than 1.00 1.00%
(ii) If the Ratio is greater than 1.50%
or equal to 1.00 but is less than
or equal to 2.00
(iii) If the Ratio is greater than 1.95%
or equal to 2.00
The Applicable Margin payable by the Borrower shall be subject to reduction or
increase, as applicable and as set forth in the table above, on a quarterly
basis according to the performance of the Borrower as tested by the Ratio.
"Available Commitment" means $30,000,000, and as the same may be reduced from
time to time or terminated pursuant to the terms hereof.
"Base Advance" means an Advance bearing interest at the Base Rate.
"Base Rate" means a per annum interest rate equal to the lesser of (a) the
highest lawful rate, and (b) the Prime Rate.
"Borrower" has the meaning specified in the first sentence hereof.
"Business Day" means a day that is not a Saturday, a Sunday, or a day on which
Administrative Lender is closed pursuant to authorization or requirement of law.
"Capital Stock" means, as to any Person, the equity interests in such Person,
including, without limitation, the shares of each class of capital stock of any
Person that is a corporation and each class of partnership interests (including
without limitation, general, limited and preference units) in any Person that is
a partnership.
"Consequential Loss" with respect to (a) the Borrower's payment of all or any
portion of the then-outstanding principal amount of a LIBOR Advance on a day
other than the last day of the related Interest Period, including, without
limitation, payments made as a result of the acceleration of the maturity of a
Note, (b) subject to Administrative Lenders' prior consent, a LIBOR Advance made
on a date other than the date on which the Advance is to be made according to
Section 2.02(a) or Section 2.07 hereof to the extent such Advance is made on
such other date at the request of the Borrower, or (c) any of the circumstances
specified in Section 2.04 hereof on which a Consequential Loss may be incurred,
means any loss, cost or expense incurred by any Lender as a result of the timing
of the payment or Advance or in liquidating, redepositing, redeploying or
reinvesting the principal amount so paid or affected by the timing
2
<PAGE>
of the Advance or the circumstances described in Section 2.04 hereof, which
amount shall be the same of (i) the interest that, but for the payment or timing
of Advance, such Lender would have earned in respect of that principal amount,
reduced, if such Lender is able to redeposit, redeploy, or reinvest the
principal amount, by the interest earned by such Lender as a result of
redepositing, redeploying or reinvesting the principal amount plus (ii) any
expense or penalty incurred by such Lender by reason of liquidating,
redepositing, redeploying or reinvesting the principal amount. Each
determination by each Lender of any Consequential Loss is, in the absence of
manifest error, presumptive evidence of the validity of such claim.
"Consistent Basis" means, in reference to the application of Generally Accepted
Accounting Principles that the accounting principles observed in the current
period are comparable in all material respects to those applied in the preceding
period.
"Continue," "Continuation" and "Continued" each refer to the continuation of a
LIBOR Advance from one Interest Period to the next Interest Period.
"Current Ratio" means the ratio of current assets to current liabilities of
Borrower and its Subsidiaries on a consolidated basis.
"EBITDA" means, for the Borrower and its Subsidiaries on a consolidated basis,
for any period of determination, the sum of (a) net income for such period, plus
(b) amortization and depreciation for such period, plus (c) non-cash charges
(minus extraordinary non-cash income) and other extraordinary items for such
period, plus (d) interest expense for such period, plus (f) income tax expense
for such period.
"ERISA" means the Employee Retirement Income Security Act of 1974, as the same
may be supplemented or amended from time to time.
"Event of Default" means any of the events specified in Section 8 hereof.
"Federal Funds Rate" means, for any period, a fluctuating interest rate per
annum equal for each day during such period to the weighted average of the rates
on overnight federal nds transactions with members of the Federal Reserve System
arranged by federal funds brokers, as published for such day (or, if such day is
not a Business Day, for the next preceding Business Day) by the Federal Reserve
Bank of Dallas, or, if such rate is not so published for any day which is a
Business Day, the average of the quotations for such date on such transactions
received by Administrative Lender from three federal funds brokers of recognized
standing selected by it.
"Fixed Charge Coverage Ratio" means the ratio of EBITDA to Fixed Charges.
"Fixed Charges" means for the Borrower and its Subsidiaries on a consolidated
basis the sum of (a) required or scheduled principal and interest payments, plus
(b) cash paid for taxes for such period.
3
<PAGE>
"Generally Accepted Accounting Principles" means those principles of accounting
set forth in opinions of the Financial Accounting Standards Board or the
American Institute of Certified Public Accountants or which have other
substantial authoritative support and are applicable in the circumstances as of
the date of any report required herein or as of the date of an application of
such principles as required herein.
"Guarantor" and "Guarantors" means each currently owned or hereafter acquired
Subsidiary of Borrower.
"Guaranty" and "Guaranties" have the meaning specified in Subsection 3.2 hereof.
"Interest Period" means, with respect to any LIBOR Advance, the period beginning
on the date the Advance is made or Continued as a LIBOR Advance and ending one,
two, or three months thereafter (as the Borrower shall select), provided,
however, that:
(a) the Borrower may not select any Interest Period that ends after any
principal repayment date unless, after giving effect to such selection, the
aggregate principal amount of LIBOR Advances having Interest Periods that end on
or prior to such principal repayment date, shall be at least equal to the
principal amount of Advances due and payable on and prior to such date;
(b) whenever the last day of any Interest Period would otherwise occur on a day
other than a Business Day, the last day of such Interest Period shall be
extended to occur on the next succeeding Business Day, provided, however, that
if such extension would cause the last day of such Interest Period to occur in
the next following calendar month, the last day of such Interest Period shall
occur on the next preceding Business Day; and
(c) whenever the first day of any Interest Period occurs on a day of an initial
calendar month for which there is no numerically corresponding, day in the
calendar month that succeeds such initial calendar month by the number of months
equal to the'number of months in such Interest Period, such Interest Period
shall end on the last Business Day of such succeeding calendar month.
"Lenders" means SunTrust Bank, Tampa Bay and Zions First National Bank, their
successors and assigns.
"LIBOR Advance" means an Advance bearing interest at the LIBOR Rate.
"LIBOR Rate" means a simple per annum interest rate equal to the lesser of (a)
the highest lawful rate, and (b) sum of the Applicable Margin plus the LIBOR
Rate Basis. The LIBOR Rate shall, with respect to LIBOR Advances subject to
reserve or deposit requirements under any law, be subject to premiums, assessed
therefor by each Lender, which are payable directly to each Lender in an amount
sufficient to compensate such Lender for any increased cost
4
<PAGE>
or reduced rate of return attributable to such reserve deposit requirements. Any
calculation by a Lender of such increased cost or reduced rate of return which
is in reasonable detail and submitted to Borrower shall, in the absence of
manifest error, be presumptive evidence of the validity of such claim. Once
determined for any LIBOR Advance, the LIBOR Rate shall remain unchanged during
the applicable Interest Period.
"LIBOR Rate Basis" means, for any LIBOR Advance for any Interest Period
therefor, the rate per annum (rounded upwards, if necessary, to the nearest I/ 1
00 of 1 %) appearing in The Wall Street Joumal as the London interbank offered
rate for deposits in U.S. dollars at approximately 11:00 a.m. (London time) two
Business Days prior to the first day of such Interest Period for a term
comparable to such Interest Period. If for any reason such rate is not
available, the term "LIBOR Rate Basis" shall mean, for any LIBOR Advance for any
Interest Period therefor, the rate per annum (rounded upwards, if necessary, to
the nearest 1/100 of 1 %) appearing on Reuters Screen LIBO Page as the London
interbank offered rate for deposits in U.S. dollars at approximately 1 1: 00
a.m. (London time) two Business Days prior to the first day of such Interest
Period for a term comparable to such Interest Period; J)rovided, however, if
more than one rate is specified on Reuters Screen LIBO Page, the applicable rate
shall be the arithmetic means of all such rates.
"Loan Documents" means this Agreement, the Notes, the Tax Indemnification
Agreement, the Guaranties, the Stock Pledge, and all other documents executed in
connection therewith.
"Material Adverse Effect" means (a) a material adverse effect upon the business,
operations, properties, assets, condition (financial or otherwise), or prospects
of Borrower and its Subsidiaries, taken as a whole or (b) the material
impairment of the ability of Borrower to perform, or of Administrative Lender or
Lenders to enforce, the obligations hereunder.
"Maturity Date" means November 10, 1999.
"Note" means each Note of the Borrower evidencing Advances hereunder, together-
with any extension, renewal or amendment thereof, or substitution therefor.
"Permitted Acquisition" means any acquisition by Borrower or any Subsidiary of
substantially all assets, Capital Stock or other equity interests of any Person
if: (a) as a consequence of such transaction, Borrower would not be in violation
of the provisions of Section 6.15 hereof, or any other terms or conditions of
this Agreement, (b) the total consideration for such acquisition (including
without limitation cash paid, stock issued, and debt assumed by Borrower or any
Subsidiary), when aggregated with the total consideration for all other such
acquisitions by Borrower or any of its Subsidiaries on or after the date of this
Agreement, does not exceed @-five percent (35 %) of the Tangible Net Worth of
Borrower and its Subsidiaries on a consolidated basis, and (c) if such
transaction involves a merger to which Borrower or any Subsidiary is a party,
Borrower (or the applicable Subsidiary) must be the survivor of such merger.
5
<PAGE>
"Permitted Indebtedness" means (a) indebtedness to Lenders pursuant to this
Agreement; (b) indebtedness now existing, in such amounts, and with such terms
as described in Schedule 1.l(a) attached hereto; and (c) indebtedness incurred
in connection with the purchase of equipment or vehicles and secured by purchase
money security interests therein in an aggregate amount not to exceed $500,000
outstanding at any time.
"Permitted Liens" means (a) mortgages or security interests that secure
Borrower's indebtedness to Lenders pursuant to the term of this Agreement; (b)
liens now existing and in such amounts as described in Schedule 1. l(b) attached
hereto; (c) purchase money security liens incurred in connection with purchase
money indebtedness constituting Permitted Indebtedness; (d) mechanics',
workmen's, materialmen's, or other like liens arising in the ordinary course of
business in respect of obligations which are not due or which are being
contested in good faith; (d) liens for taxes not yet due or being contested in
good faith by appropriate proceedings, and, in the case of those being
contested, as to which Borrower shall have set aside on its books adequate
reserves; and (e) easements, rights-of-way, restrictions, and other similar
encumbrances incurred in the ordinary course of business and not interfering
with the ordinary course of the business.
"Person" means any corporation, business entity, natural person, firm, joint
venture, partnership, trust, unincorporated organization, association,
government, or any department or agency of any government.
"Prime Rate" means the annual interest rate announced by SunTrust Banks, Inc.,
from time to time, as the "prime rate" (which interest rate is only a bench
mark, is purely discretionary, and is not necessarily the best or lowest rate
charged borrowing customers of any subsidiary bank of SunTrust Banks, Inc.
"Pro Rata" means, as to any Lender, in accordance with its Specified Percentage.
"Ratio" means the ratio of total liabilities of Borrower and its Subsidiaries
(on a consolidated basis) to Tangible Net Worth.
"Solvent" means, with respect to any Person, that as of the date of
determination, both (a)(i) the then fair saleable value of the property of such
Person is (y) greater than the total amount of liabilities (including contingent
obligations) of such Person and (z) greater than the amount that will be
required to pay the probable liabilities of such Person's then existing debts as
they become absolute and matured considering all financing alternatives and
potential asset sales reasonably available to such Person; (ii) such Person's
capital is not unreasonably small in relation to its business or any
contemplated or undertaken transaction; and (iii) such Person does not intend to
incur, or believe or reasonably should believe that it will incur, debts beyond
its ability to pay such debts as they become due and (b) such Person is solvent
within the meaning given that term and similar terms under applicable laws
relating to fraudulent transfers.
6
<PAGE>
"Specified Percentage" means, as to any Lender, the percentage indicated beside
its name on the signature pages hereof.
"Subsidiary" means, for any Person, any corporation, partnership, or other
entity of which fifty percent (50%) or more of the securities or other ownership
interests having ordinary voting power to elect the board or directors or having
direct power to perform functions similar to that of a board of directors is at
the time directly or indirectly owned or controlled by such Person. Unless the
context clearly indicates other-wise, the term "Subsidiary" refers to each
Subsidiary of Borrower currently owned or hereafter acquired.
"Tangible Net Worth" means the aggregate amount of assets shown on the balance
sheet of Borrower and its Subsidiaries on a consolidated basis, excluding
capitalized organization and development costs, capitalized interest, goodwill,
patents, trademarks, copy rights, franchises, licenses, amounts due or to become
due from officers, employees, directors, stockholders, and affiliates, and such
other assets classified as "intangible assets" under Generally Accepted
Accounting Principles, less all liabilities of Borrower and its Subsidiaries on
a consolidated basis.
"Tax Indemnification Agreement" means the agreement between Borrower, Lenders
and Administrative Lender of even date regarding payment of and reimbursement
for documentary stamp taxes and intangible taxes, and any similar agreements
that may be entered into between Borrower, Lenders and Administrative Lender
from time to time.
1.2 Other Definitional Provisions. The terms "material" and "materially" shall
have the meanings ascribed to such terms under Generally Accepted Accounting
Principles as such would be applied to the business of Borrower or others,
except as the context shall clearly otherwise require; (b) all of the terms
defined in this Agreement shall have such defined meanings when used in other
documents issued under, or delivered pursuant to, this Agreement unless the
context shall otherwise require; (c) words in singular shall include the plural
and words in plural shall include the singular, unless the context clearly
requires otherwise; (d) accounting terms to the extent not otherwise defined
shall have the respective meanings given them under, and shall be construed in
accordance with, Generally Accepted Accounting Principles; (e) terms defined in,
or by reference to, Article 9 of the Uniform Commercial Code as adopted in
Florida to the extent not otherwise defined herein shall have the respective
meanings given to them in Article 9 with the exception of the word "document"
unless the context clearly requires such meaning; (f) the words "hereby, "
"hereto, " "hereof, " "herein, " "hereunder" and words of similar import when
used in this Agreement shall refer to this Agreement as a whole and not to any
particular provision of this Agreement; (g) words of any gender shall include
all other genders; and (h) whenever in this Agreement any of the parties hereto
is referred to, such reference shall be deemed to include the successors and
assigns of such parties unless the context shall expressly provide otherwise.
7
<PAGE>
SECTION 2. TERMS OF ADVANCES
2.1 The Advances. Each Lender severally agrees, on the terms and subject to the
conditions hereinafter set forth, to make Advances to the Borrower on a Business
Day during the period from the date hereof to the Maturity Date, in an aggregate
principal amount not to exceed at any time outstanding such Lender's Specified
Percentage of the Available Commitment. Subject to the terms and conditions of
this Agreement, the Borrower may borrow, repay and reborrow the Advances;
provided, however, that at no time shall the sum of all outstanding Advances
ever exceed the Available Commitment.
2.2 Making Advances.
(a) Each borrowing of Advances shall be made upon the written notice of the
Borrower, received by Administrative Lender not later than (i) 10:00 a.m. two
Business Days prior to the date of the proposed borrowing in the case of LIBOR
Advances, and (ii) 10:00 a.m. on the date of such Borrowing, in the case of Base
Advance. Each such notice of a borrowing (a "Borrowing Notice") shall be by
telecopy or telephone, promptly confirmed by letter, in substantially the form
of Exhibit A hereto specifying therein:
(i) the date of such proposed borrowing, which shall be a Business Day;
(ii) the type of Advances of which the borrowing is to be comprised;
(iii) the amount of such proposed borrowing which: (A) shall not exceed the
unused portion of the Available Commitment, and (B) shall, in the case of a
borrowing of LIBOR Advances, be in an amount of not less than $100,000 or an
integral multiple of $50,000 in excess thereof; and
(iv) if the borrowing is to be comprised of LIBOR Advances, the duration of the
initial Interest Period applicable to such Advances.
If the Borrowing Notice fails to specify the duration of the initial Interest
Period for any Borrowing comprised of LIBOR Advances, such Interest Period shall
be three months. Administrative Lender shall promptly notify Lenders of each
such notice. Each Lender shall, before 1:00 p.m. on the date of each Advance
hereunder make available to Administrative Lender, at its office at 300 1st
Avenue South, St. Petersburg, Florida 33701, such Lender's Specified Percentage
of the aggregate Advances to be made on that day in immediately available funds.
(b) Unless any applicable condition specified in Section 5 has not been
satisfied, Administrative Under will make the funds promptly available to the
Borrower by
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wiring such amounts pursuant to any wiring instructions specified by the
Borrower to the Administrative Lender in writing.
(c) After giving effect to any borrowing, the aggregate principal amount of
outstanding Advances shall not exceed the Available Commitment.
(d) No Interest Period applicable to any Advance shall extend beyond the
Maturity Date
(e) Unless a Lender shall have notified Administrative Lender prior to the date
of any Advance that it will not make available its Specified Percentage of any
Advance, Administrative Lender may assume that such Lender has made the
appropriate amount available in accordance with Section 2.2(a) hereof, and
Administrative Lender may, in reliance upon such assumption, make available to
the Borrower a corresponding amount. If and to the extent any Lender shall not
have made such amount available to Administrative Lender, such Lender and the
Borrower severally agree to repay to Administrative Lender immediately on demand
such corresponding amount together with interest thereon, from the date such
amount is made available to the Borrower until the date such amount is repaid to
Administrative Lender, at (i) in the case of the Borrower, the Base Rate, and
(ii) in the case of such Lender, the Federal Funds Rate.
(f) The failure by any Lender to make available its Specified Percentage of any
Advance hereunder shall not relieve any other Lender of its obligation, if any,
to make available its Specified Percentage of any Advance. In no event, however,
shall any Lender be responsible for the failure of any other Lender to make
available any portion of any Advance.
(g) The Borrower shall indemnify each Lender against any Consequential Loss
incurred by each lender as a result of (i) any failure to fulfill, on or before
the date specified for the Advance, the conditions to the Advance set forth
herein or (ii) the Borrower's requesting that an Advance not be made on the date
specified in the Borrowing Notice.
2.3 Evidence of Debt
(a) The Advances made by each Lender shall be evidenced by a Note in the amount
of such Lender's Specified Percentage of the Aggregate Commitment in effect on
the date hereof.
(b) Administrative Lender's and each Lender's records shall be presumptive
evidence as to amounts owed Administrative Lender and such Lender under the
Notes and this Agreement.
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2.4 Optional Prepayments.
(a) The Borrower may, upon at least two Business Days prior written notice to
Administrative Lender stating the proposed date and aggregate principal amount
of the prepayment, prepay the outstanding principal amount of any Advances in
whole or in part, together with accrued interest to the date of such prepayment
on the principal amount prepaid and any Consequential Loss, but without premium
or penalty other than any Consequential Loss; provided, however, that in the
case of a prepayment of a Base Advance, the notice of prepayment may be given by
telephone by 10:00 a.m. on the date of prepayment. Each partial prepayment
shall, in the case of Base Advances, be in an aggregate principal amount of not
less than $50,000 or a larger integral multiple of $50,000 in excess thereof
and, in the case of LIBOR Advances, be in an aggregate principal amount of not
less than $100,000 or a larger integral multiple of $50,000 in excess thereof.
If any notice of prepayment is given, the principal amount stated therein,
together with accrued interest on the amount prepaid and the amount, if any, due
under Section 2.11 hereof, shall be due and payable on the date specified in
such notice unless the Borrower revokes its notice, provided that, if the
Borrower revokes its notice of prepayment prior to such date specified, the
Borrower shall reimburse the Administrative Lender for the account of all
Lenders for all Consequential Losses suffered by each Lender as a result of the
Borrower's failure to repay. A certificate of each Lender claiming compensation
under this Section 2.4(a), setting forth in reasonable detail the calculation of
the additional amount or amounts to be paid to it hereunder shall be presumptive
evidence of the validity of such claim.
(b) As a condition precedent to any prepayment herein, each prepayment must be
in the amount of 100% of the principal amount to be prepaid, plus accrued
interest thereon, plus any other sums that have become due to Administrative
Lender and Lenders hereunder on or before the prepayment date but have not been
paid, plus any Consequential Loss.
2.5 Principal. The Borrower shall repay all Advances on the Maturity Date
2.6 Interest. The Borrower shall pay interest on the unpaid principal amount of
each Advance from the date of such Advance until such principal shall be paid in
full, at the following rates per annum:
(a) Base Advances. Base Advances shall bear interest at a rate per annum equal
to the Base Rate as in effect from time to time.
(b) LIBOR Advances. LIBOR Advances shall bear interest at the rate per annum
equal to the LIBOR Rate applicable to such Advance.
(c) Payment Dates. Accrued and unpaid interest on Base Advances shall be paid
monthly in arrears, and on the Maturity Date. Accrued and unpaid interest in
respect of each LIBOR Advance shall be paid on the last day of the appropriate
Interest Period and on the date of any prepayment or repayment of such Advance.
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2.7 Continuation and Conversion Elections.
(a) The Borrower may upon irrevocable written notice to Administrative Lender
and subject to the terms of this Agreement:
(i) elect to convert, on any Business Day, all or any portion of outstanding
Base Advances (in an aggregate amount not less than $100,000 or an integral
multiple of $50,000 in excess thereof) into LIBOR Advances; or
(ii) elect to convert at the end of any Interest Period therefor, all or any
portion of outstanding LIBOR Advances comprised in the same Borrowing (in an
aggregate amount not less than $100,000 or an integral multiple of $50,000 in
excess thereof) into Base Advances; or
(iii) elect to continue, at the end of any Interest Period therefor, any LIBOR
Advances;
provided, however, that if the aggregate amount of outstanding LIBOR Advances
comprised in the same Borrowing shall have been reduced as a result of any
payment, prepayment or conversion of part thereof to an amount less than
$100,000, the LIBOR Advances comprised in such Borrowing shall automatically
convert into Base Advances at the end of each respective Interest Period.
Interest Period. (b) The Borrower shall deliver a notice of conversion or
continuation (a "Conversion or Continuation Notice"), in substantially the form
of Exhibit B hereto, to Administrative Lender not later than 10:00 a.m. (i) two
Business Days prior to the proposed date of conversion or continuation, if the
Advances or any portion thereof are to be converted into or continued as LIBOR
Advances; and (ii) on the Business Day of the proposed conversion, if the
Advances or any portion thereof are to be converted into Base Advances.
Each such Conversion or Continuation Notice shall be by telecopy or telephone,
promptly confirmed by letter, specifying therein:
(i) the proposed date of conversion or continuation;
(ii) the aggregate amount of Advances to be converted or continued;
(iii) the nature of the proposed conversion or continuation; and
(iv) the duration of the applicable Interest Period.
(c) If, upon the expiration of any Interest Period applicable to LIBOR Advances,
the Borrower shall have failed to select a new Interest Period to be applicable
to such LIBOR Advances or if an Event of Default shall then have occurred and be
continuing, the
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Borrower shall be deemed to have elected to convert such LIBOR Advances into
Base Advances effective as of the expiration date of such current Interest
Period.
2.8 Fees.
(a) Facility Fee. The Borrower shall pay to Administrative Lender for the
account of each of the Lenders an origination and facility fee in the aggregate
amount of $45,000.00.
(b) Administrative Lender Fee. The Borrower shall pay to Administrative Lender
for its own account an administrative fee of $5,000 per annum for each year
during the term hereof, commencing on the date of this Agreement and continuing
on the like day of each year thereafter.
2.9 Reduction of the Available Commitment.
(a) Mandatory Termination of the Available Commitment. The Available Commitment
terminates on the Maturity Date.
(b) Voluntary Available Commitment Reductions. The Borrower may from time to
time, upon notice to Administrative Lender not later than 1:00 p.m., five
Business Days in advance, terminate in whole or reduce in part the Available
Commitment, as designated by the Borrower; provided, however, that the Borrower
shall pay the accrued interest on the amount of such reduction and all amounts
due, and any partial reduction shall be in an aggregate amount which is an
integral multiple of $500,000.
(c) Available Commitment Reductions, Generally. To the extent outstanding
Advances exceed the applicable Available Commitment after any reduction thereof,
the Borrower shall repay, on the date of such reduction, any such excess amount
and all accrued interest thereon, and all amounts due together with all
Consequential Losses. Once reduced or terminated, the Available Commitment may
not be increased or reinstated without the prior written consent of the Lenders.
2.10 Computations and Manner of Payments.
(a) The Borrower shall make each payment hereunder and under the other Loan
Documents not later than 1:00 p.m. on the day when due in same day funds to
Administrative Lender, for the Pro Rata account of Lenders unless otherwise
specifically provided herein, at Administrative Lender's office at 300 lst
Avenue South, St. Petersburg, Florida 33701
(b) Unless Administrative Lender shall have received notice from the Borrower
prior to the date on which any payment is due hereunder that the Borrower will
not make payment in full, Administrative Lender may assume that such payment is
so made on such date
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and may, in reliance upon such assumption, make distributions to Lenders. If and
to the extent the Borrower shall not have made such payment in full, each Lender
shall repay to Administrative Lender forthwith on demand the applicable amount
distributed, together with interest thereon at the Federal Funds Rate, from the
date of distribution until the date of repayment. The Borrower hereby authorizes
each Lender, if and to the extent payment is not made when due hereunder, to
charge the amount so due against any account of the Borrower with such Lender.
Each Lender will provide Borrower written notice of any such charge.
(c) Interest on Advances under the Loan Documents shall be calculated on the
basis of actual days elapsed but computed as if each year consisted of 360 days.
All payments under the Loan Documents shall be made in U.S. dollars, and without
setoff, counterclaim, or other defense.
(d) Whenever any payment to be made hereunder or under any other Loan Documents
shall be stated to be due on a day other than a Business Day, such payment shall
be made on the next succeeding Business Day, and such extension of time shall be
included in the computation of interest or fees, if applicable; provided,
however, if such extension would cause payment of interest on or principal of
LIBOR Advances to be made in the next following calendar month, such payment
shall be made on the next preceding Business Day.
(e) Reference to any particular index or reference rate for determining any
applicable interest rate under this Agreement is for purposes of calculating the
interest due and is not intended as and shall not be construed as requiring any
Lender to actually obtain funds for any Advance at any particular index or
reference rate.
2.11 Yield Protection; Changed Circumstances.
(a) If any Lender determines that either (i) the adoption, after the date
hereof, of any applicable law, rule, regulation or guideline regarding capital
adequacy and applicable to commercial banks or financial institutions generally
- - or any change therein, or any change, after the date hereof, in the
interpretation or administration thereof by any tribunal, central bank or
comparable agency charged with the interpretation or administration thereof, or
(ii) compliance by any Lender with any request or directive made after the date
hereof applicable to commercial banks or financial institutions generally
regarding capital adequacy (whether or not having the force of law) of any such
authority, central bank or comparable agency has the effect of reducing the rate
of return on such Lender's capital as a consequence of its obligations hereunder
to a level below that which such Lender could have achieved but for such
adoption, change or compliance (taking into consideration such Lender's policies
with respect to capital adequacy) by an amount reasonably deemed by such Lender
to be material, then from time to time, within fifteen days after demand by such
Lender, the Borrower shall pay to such Lender such additional amount or amounts
as will adequately compensate such Lender for such reduction. Each Lender will
notify the Borrower of any event occurring after the date of this Agreement
which will entitle such Lender to compensation pursuant to this Section 2.11 (a)
as promptly as practicable after such Under obtains actual knowledge of such
event; provided, no
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Lender shall be liable for its failure or the failure of any other Lender to
provide such notification. A certificate of such Lender claiming compensation
under this Section 2.11(a), setting forth in reasonable detail the calculation
of the additional amount or amounts to be paid to it hereunder and certifying
that such claim is consistent with such Lender's treatment of similar customers
having similar provisions generally in their agreements with such Lender shall
be presumptive evidence of the validity of such claim. Each Lender shall use
reasonable efforts to mitigate the effect upon the Borrower of any such
increased costs payable to such Lender under this Section 2.11(a).
(b) If, after the date hereof, any tribunal, central bank or other comparable
authority, at any time imposes, modifies or deems applicable any reserve
(including, without limitation, any imposed by the Board of Governors of the
Federal Reserve System), special deposit or similar requirement against assets
of, deposits with or for the amount of, or credit extended by, any Lender, or
imposes on any Lender any other condition affecting a LIBOR Advance, the Notes,
or its obligation to make a LIBOR Advance; and the result of any of the
foregoing is to increase the cost to such Lender of making or maintaining its
LIBOR Advances, or to reduce the amount of any sum received or receivable by
such Lender under this Agreement or under the Notes, by an amount deemed by such
Lender, to be material, then, within five days after demand by such Lender, the
Borrower shall pay to such Lender such additional amount or amounts as will
compensate such Lender for such increased cost or reduction. Each Lender will
notify the Borrower of any event occurring the date of this Agreement that
entitles such Lender to compensation pursuant to this Section 2.11(b), as
promptly as practicable after such Lender obtains actual knowledge of the event;
provided, no Lender shall be liable for its failure or the failure of any other
Lender to provide such notification. A certificate of such Lender claiming
compensation under this Section 2.11(b), setting forth in reasonable detail the
computation of the additional amount or amounts to be paid to it hereunder and
certifying that such claim is consistent with such Lender's treatment of similar
customers having similar provisions generally in their agreements with such
Lender shall be presumptive evidence of the validity of such claim. If such
Lender demands compensation under this Section 2.11(b), the Borrower may at any
time, on at least five Business Days' prior notice to such Lender (i) repay in
full the then outstanding principal amount of LIBOR Advances, of such Lender,
together with accrued interest thereon, or (ii) convert the LIBOR Advances to
Base Advances in accordance with the provisions of this Agreement; provided,
however, that the Borrower shall be liable for the Consequential Loss arising
pursuant to those actions.
(c) Notwithstanding any other provision of this Agreement, if the introduction
of or any change in or in the interpretation or administration of any law shall
make it unlawful, or any central bank or other tribunal shall assert that it is
unlawful, for a Lender to perform its obligations hereunder to make LIBOR
Advances or to continue to fund or maintain LIBOR Advances hereunder, then, on
notice thereof and demand therefor by such Lender to the Borrower, (i) each
LIBOR Advance will automatically, upon such demand, convert into a Base Advance,
(ii) the obligation of such Lender to make, or to convert Advances into, LIBOR
Advances shall be suspended until such Lender notifies Administrative Lender and
the Borrower that such Lender has determined that the circumstances causing such
suspension no longer exist,
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notifies Administrative Lender and the Borrower that such Lender has determined
that the circumstances causing such suspension no longer exist.
(d) Upon the occurrence and during the continuance of any Default or Event of
Default, (i) each LIBOR Advance will automatically, on the last day of the then
existing Interest Period therefor, convert into a Base Advance and (ii) the
obligation of each Lender to make, or to convert Advances into, LIBOR Advances
shall be suspended.
(e) If any Lender notifies Administrative Lender that the LIBOR Rate for any
Interest Period for any LIBOR Advances will not adequately reflect the cost to
such Lender of making, funding or maintaining LIBOR Advances for such Interest
Period, Administrative Lender shall promptly so notify the Borrower, whereupon
(i) each such LIBOR Advance will automatically, on the last day of the then
existing Interest Period therefor, convert into a Base Advance and (ii) the
obligation of such Lender to make, or to convert Advances into, LIBOR Advances
shall be suspended until such Lender notifies Administrative Under that such
Lender has determined that the circumstances causing such suspension no longer
exist and Administrative Lender notifies the Borrower of such fact.
(f) Failure on the part of any Lender to demand compensation for any increased
costs, increased capital or reduction in amounts received or receivable or
reduction in return on capital pursuant to this Section 2. 1 1 with respect to
any period shall not constitute a waiver of any Lender's right to demand
compensation with respect to such period or any other period, subject, however,
to the limitations set forth in this Section 2.11.
(g) The obligations of the Borrower under this Section 2.11 shall survive any
termination of this Agreement, provided that, in no event shall the Borrower be
required to make a payment under this Section 2.11 with respect to any event of
which the Lender making such claim had knowledge more than twelve months prior
to demand for such payment.
(h) Determinations by Lenders for purposes of this Section 2.11 shall be
presumptively correct. Any certificate delivered to the Borrower by a Lender
pursuant to this Section 2.11 shall include in reasonable detail the basis for
such Lender's demand for additional compensation and a certification that the
claim for compensation is consistent with such Lender's treatment of similar
customers having similar provisions generally in their agreements with such
Lender.
SECTION 3. SECURITY AND GUARANTIES
Payment of the loan or loans hereunder shall be secured and guaranteed as
provided in this Section 3.
3.1 Stock Pledge. Payment of the Notes, any other obligations under the Loan
Documents, and any other obligations of Borrower to Lenders, presently existing
or hereafter
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arising, shall be secured by a pledge of all Capital Stock of the Subsidiaries
owned by Borrower. Borrower shall execute and deliver such pledge to
Administrative Lender in form and substance satisfactory to Lenders (the "Stock
Pledge"). The Stock Pledge shall be sufficient, when delivery of the stock
certificates and other security is made, to grant a first perfected security
interest in the Capital Stock of the Subsidiaries owned by Borrower, subject to
no prior liens or encumbrances. Borrower shall deliver into the actual physical
possession of Administrative Lender the stock certificates and securities which
Borrower has pledged as security, and shall execute stock powers for each
certificate or security. Borrower agrees to execute or otherwise provide to
Administrative Lender any and all modifications, fmancing statements, and other
agreements or consents required by Administrative Lender now or in the future in
connection therewith.
3.2 Guaranties. Payment of the Notes, and any other obligations under the Loan
Documents, presently existing or hereafter arising, shall be guaranteed by all
Guarantors, which guarantees shall be evidenced by the execution and delivery to
Administrative Lender by Guarantors of continuing and unconditional guaranties
in form and substance satisfactory to Lenders (individually, a "Guaranty" and
collectively, the "Guaranties").
SECTION 4. REPRESENTATIONS AND WARRANTEES.
To induce Lender to enter into this Agreement and to make the loan or loans
hereunder, Borrower represents and warrants to each Lender and Administrative
Lender (which representations and warranties shall survive the delivery of the
documents mentioned herein and the making of the loan or loans contemplated
hereby) as follows:
4.1 Corporate Existence; Compliance with Law; Name History. Borrower is a
corporation duly incorporated and organized, validly existing, and in good
standing under the laws of the jurisdiction of its incorporation. Borrower has
all requisite power (corporate and otherwise) to own and operate its properties
and to carry on its business as now being conducted, is duly qualified as a
foreign corporation to do business in every jurisdiction in which the nature of
its business or the ownership of its properties makes such qualification
necessary and is in good standing in such jurisdictions, has all licenses and
permits necessary to carry on and conduct its business in all states and
localities wherein it now operates (except for such licenses and permits that
the failure to obtain would not cause a Material Adverse Effect), and is in
compliance with all other requirements of law, rule, or regulation applicable to
it and to its business. Borrower does not have any Subsidiaries, except as set
forth on the attached Schedule 4.1(a). Borrower has not merged, changed its
name, or done business under a fictitious name during the past five years,
except as set forth on the attached Schedule 4.1.
4.2 Corporate Power and Authorization to Execute Loan Documents; No Conflict; No
Consent. Borrower has the corporate power and authority and the legal right to
execute and deliver the Loan Documents to be executed by it and to perform its
obligations thereunder and has taken all corporate action necessary to authorize
the execution, delivery, and performance
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of such Loan Documents and to authorize the transactions contemplated thereby.
The execution, delivery, and performance by Borrower of the Loan Documents to be
executed by it will not: (a) contravene, conflict with, result in the breach of,
or constitute a violation of or default under (i) the articles of incorporation
or bylaws of Borrower, (ii) any applicable law, rule, regulation, judgment,
order, writ, injunction, or decree of any court or governmental authority, or
(iii) any agreement or instrument to which Borrower is a party or by which
Borrower or its property may be bound or affected; or (b) result in the creation
of any lien, charge, or encumbrance upon any property or assets of Borrower
pursuant to any of the foregoing, except the liens created by the Loan
Documents. No consent, license, or authorization of, or filing with, or notice
to, any Person or entity (including, without limitation, any governmental
authority), is necessary or required in connection with the execution, delivery,
performance, validity, or enforceability of the Loan Documents and the
transactions as contemplated thereunder, except for consents, licenses,
authorizations, filings, and notices already obtained or performed and of which
Administrative Lender has been provided written notice, or referred to or
disclosed in the Loan Documents. Any such consents, licenses, authorizations,
filings, or notices remain in full force and effect.
4.3 Enforceable Obligations. The Loan Documents constitute legal, valid, and
binding agreements enforceable against the respective parties thereto and any
property described therein in accordance with their respective terms.
4.4 Financial Condition.
(a) The consolidated financial statements as of June 30, 1997, of Borrower and
its Subsidiaries, copies of which have been furnished to Administrative Lender,
are correct, complete, and fairly present the financial condition of Borrower
and its Subsidiaries as of the date of the financial statements and fairly
present the results of the operations of Borrower and its Subsidiaries for the
period covered thereby.
(b) The financial statements described above have been prepared in accordance
with Generally Accepted Accounting Principles applied on a Consistent Basis
maintained throughout the period involved. There has been no material adverse
change in the business, proper-ties, or condition, financial or otherwise, of
Borrower or its Subsidiaries since the date of such financial statements.
(c) Neither Borrower nor any of its Subsidiaries have any material direct or
contingent liabilities, liabilities for taxes, long-term leases, or unusual
forward or long-term commitments as of the date of this Agreement which are not
disclosed by, provided for, or reserved against in the foregoing financial
statements or referred to in notes thereto, and at the date of this Agreement
there are no material unrealized or anticipated losses from any unfavorable
commitments of Borrower or any of its Subsidiaries.
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4.5 No Litigation. There is no suit or proceeding at law or in equity or other
proceeding or investigation (including proceedings by or before any court,
arbitrator, governmental or administrative commission, board, bureau, or other
administrative agency) pending, or to the best knowledge of Borrower threatened,
by or against or involving Borrower or against any of its Subsidiaries,
properties, existence, or revenues which, individually or in the aggregate, if
adversely determined, is reasonably likely to have a Material Adverse Effect on
the properties, assets, or business or on the condition, financial or
other-wise, of Borrower or impair the right or ability of Borrower to carry on
its operations substantially as now conducted or as anticipated to be conducted
in the future, or, regardless of outcome, which would be required to be
disclosed in notes to any balance sheet as of the date hereof of Borrower
prepared in reasonable detail in accordance with Generally Accepted Accounting
Principles applied on a Consistent Basis. Set forth on the attached Schedule 4.5
is a list of all suits or proceedings to which Borrower or any of its
Subsidiaries is a party.
4.6 Investment Company Act; Regulation.
(a) Borrower is not an "investment company," an "affiliated person" of, or
"promoter" or "principal under-writer" for, any "investment company," or a
company " controlled " by an " investment company, " and Borrower is not an "
investment advisor " or an "affiliated person" of an "investment advisor" (as
each of the quoted terms is defined or used in the Investment Company Act of
1940, as amended). Neither the making of the loans, nor the establishment of the
credits hereunder, nor the application of the proceeds or repayment thereof by
Borrower, nor the consummation of the other transactions contemplated hereby,
will violate the provisions of the foregoing Act or any rule, regulation, or
order promulgated thereunder.
(b) Borrower is not subject to regulation under any state or local public
utilities code or federal, state, or local statute or regulation limiting the
ability of Borrower to incur indebtedness for money borrowed or to pledge assets
of the type contemplated hereunder.
4.7 Disclosure and No Untrue Statements. No representation or warranty made by
Borrower in the Loan Documents or which will be made by Borrower from time to
time in connection with the Loan Documents (a) contains or will contain any
misrepresentation or untrue statement of any material fact, or (b) omits or will
omit to state any material fact necessary to make the statements therein not
misleading. There is no fact (excluding information relating to world or
national economic, social, or political conditions generally) known to Borrower
which materially adversely affects, or which might in the future materially
adversely affect, the business, assets, properties, or condition, financial or
other- wise, of Borrower, or the ability of Borrower to perform its obligations
under the Loan Documents, except as set forth or referred to in the Loan
Documents or otherwise disclosed in writing to Administrative Lender.
4.8 Title to Assets; Leases in Good Standing. Borrower has good and marketable
title in fee to such of its fixed assets as are real property and good and
marketable title to its other properties and assets, including the properties
and assets reflected in the financial statements and notes thereto described in
Subsection 4.4 hereof, except for such assets as have
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been disposed of in the ordinary course of business, and all such properties and
assets are free and clear of all liens, mortgages, pledges, security interests,
charges, title retention agreements, or other encumbrances of any kind except
those permitted under Subsection 7.2. Borrower enjoys peaceful and undisturbed
possession under all leases under which it is now operating, none of which
contain any burdensome or unusual provisions which may affect its operations,
and all such leases are valid, subsisting, and in full force and effect and
Borrower is not in violation of any material term of any such lease.
4.9 Payment of Taxes. Borrower has filed or caused to be filed all federal,
state, and local tax returns which are required to be filed by it and has paid
or caused to be paid all taxes as shown on said returns or on any assessment
received by it, to the extent that such taxes have become due, other than taxes
being contested in good faith by appropriate proceedings diligently conducted
and for which adequate reserves have been established in accordance with
Generally Accepted Accounting Principles, and no controversy in respect of
additional taxes of Borrower is pending, or, to the knowledge of Borrower,
threatened.
4.10 Agreement or Contract Restrictions; No Default. Borrower is not a party to,
nor is bound by, any agreement, contract, or instrument or subject to any
charter or other corporate restriction which materially or adversely affects the
business, properties, assets, operations, or condition, financial or otherwise,
of Borrower except as disclosed in the financial statements and notes thereto
described in Subsection 4.4 hereof. Borrower is in full compliance with and is
not in default in the performance, observance, or fulfillment of any
obligations, covenants, or conditions contained in any agreement or instrument
to which it is a party.
4. 11 Patents, Trademarks, Licenses, Etc. Borrower owns, possesses, or has the
right to use, and holds free from burdensome restrictions or known conflicts
with the rights of others, all patents, patent rights, licenses, trademarks and
service marks, trademark and service mark rights, trade names, trade name
rights, and copyrights, and all rights with respect to the foregoing, necessary
to conduct its business as now conducted, and is in full compliance with the
terms and conditions, if any, of all such patents, patent rights, licenses,
trademarks and service marks, trademark and service mark rights, trade names,
trade name rights, or copyrights and the terms and conditions of any agreements
relating thereto.
4.12 Government Contract. Borrower is not subject to the renegotiation of any
government contract in any material amount.
4.13 ERISA Requirement. Except as previously disclosed to Lenders in writing,
Borrower does not have in force any written or oral bonus plan, stock option
plan, employee welfare, pension or profit sharing plan, or any other employee
benefit arrangement or understanding. In addition, Borrower and any predecessor
of Borrower is not now or was not formerly during the five year period
immediately preceding the effective date of this Agreement a participating
employer in any multi-employer or "multiple employer" plans within the meaning
of Sections 4001(l)(a)(3), 4063, and 4064 of ERISA. Each employee benefit plan
subject to the requirements of ERISA complies with all of the requirements of
ERISA and those plans which
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are subject to being "qualified" under Sections 401(a) and 501(a) of the
Internal Revenue Code of 1986, as amended from time to time, have since their
adoption been "qualified" and have received favorable determination letters from
the Internal Revenue Service so holding. There is no matter which would
adversely affect the qualified tax exempt status of any such trust or plan, and
except as previously disclosed to Lenders there are no deficiencies or
liabilities for any such plan or trust. No employee benefit plan sponsored by
Borrower has engaged in a nonexempt "prohibited transaction" as defined in
ERISA.
4.14 Solvency. Borrower is, and on and after the consummation of the
transactions contemplated herein will be, Solvent.
4.15 Racketeer Influenced and Corrupt Organization(s) Act. Borrower has never
been and is not now engaged, and will not engage, directly or indirectly, in any
pattern of "racketeering activity" or in any "collection of any unlawful debt,"
as each of the quoted terms or phrases is defined or used by the Racketeer
Influenced and Corrupt Organization(s) Act of either the United States or the
State of Florida, Title 18, United States Code, Section 1961 et seg.; Chapter
895, Florida Statutes, respectively, as each act now exists or is hereafter
amended (the "RICO Lien Acts"). None of Borrower's real property, none of
Borrower's interest or interests of any kind, including any beneficial interest
or interests, mortgages, and leases, in or on real property and none of
Borrower's personal property, including money, has ever been, is now, or is in
any way reasonably anticipated by Borrower to become, subject to any lien,
notice, civil investigative demand, action, suit, or other proceeding pursuant
to the RICO Lien Acts.
4.16 Location of Offices. The chief executive office, the principal place of
business, and the office where all books and records of Borrower are kept, and
all other offices of Borrower are described in Schedule 4.16 attached hereto.
SECTION 5. CONDITIONS OF LENDING.
The obligation of each Lender to make Advances or to permit any borrowings
hereunder is conditioned upon the performance of all agreements by Borrower
contained herein, as well as satisfaction of the following conditions precedent:
5.1 Continuing Accuracy of Representations and Warranties. At the time of each
borrowing hereunder, the representations and warranties set forth in Section 4
hereof shall be true, correct, and complete on and as of the date of the
borrowing with the same effect as though the representations and warranties had
been made on and as of the date of the borrowing, except to the extent that such
representations and warranties may expressly relate to an earlier date, in which
case they shall continue to be true as of such date.
5.2 No Default. At the time of each borrowing hereunder, Borrower shall be in
compliance with all terms and conditions set forth herein, and no Event of
Default, nor any
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event which upon notice or lapse of time or both would constitute an Event of
Default, shall have occurred and be continuing at the time of such borrowing.
5.3 Opinion of Borrower's Counsel. On or prior to the date of this Agreement,
and to the extent required by Administrative Lender at the time of any borrowing
hereunder, each Lender and Administrative Lender shall have received the
favorable opinion of counsel for Borrower, in form and substance satisfactory to
each Lender and Administrative Lender, as to such matters as they may require.
5.4 Approval of Counsel. All legal matters in connection with the Loan Documents
and the transactions herein and therein contemplated and all documents and
proceedings shall be satisfactory in form and substance to Holland & Knight LLP,
counsel for SunTrust Bank, Tampa Bay.
5.5 Loan Documents. On or prior to the date of this Agreement, Administrative
Lender shall have received, duly executed, this Agreement and the other Loan
Documents, all in form and substance satisfactory to Administrative Lender and
its counsel.
5.6 UCC Filings and Stock Certificates. Termination of all UCC filings
identified on the attached Schedule 5.6, and delivery to Administrative Lender's
possession of all stock certificates encumbered by the Stock Pledge
5.7 Supporting Documents. On or prior to the date of this Agreement,
Administrative Lender shall have received all other documents and instruments
required hereunder or otherwise reasonably required by Lenders to be executed
and delivered or otherwise provided to Administrative Lender in form and
substance satisfactory to Lender and their counsel, including without
limitation:
(a) a certificate of good standing of Borrower and each Subsidiary certified by
the secretary of state, or other appropriate governmental authority, of the
state of incorporation of Borrower and each Subsidiary;
(b) a copy of the articles of incorporation of Borrower and each Subsidiary in
effect on the date hereof certified by the secretary of state, or other
appropriate governmental authority, of the state of incorporation of Borrower
and each Subsidiary, accompanied by a certificate from an appropriate officer of
Borrower and each Subsidiary that the copy is complete and that the articles of
incorporation have not been amended, annulled, rescinded, or revoked since the
date of the certificate of the secretary of state or other appropriate
governmental authority;
(c) a copy of the bylaws of Borrower and each Subsidiary in effect on the date
of this Agreement, accompanied by a certificate from an appropriate officer of
Borrower and each Subsidiary that the copy is true and complete and that the
bylaws have not been amended,
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annulled, rescinded, or revoked since the date of the bylaws or the last
amendment reflected in the copy, if any;
(d) a copy of resolutions of the board of directors of Borrower and each
Subsidiary authorizing the execution, delivery, and performance of the Loan
Documents to which it is a party and the transactions thereunder, and specifying
the officer or officers of Borrower and each Subsidiary authorized to execute
the Loan Documents, accompanied by a certificate from an appropriate officer
that the resolutions are true and complete, were duly adopted at a duly called
meeting in which a quorum was present and acting throughout, or were duly
adopted by written action, and have not been amended, annulled, rescinded or
revoked in any respect and remain in full force and effect on the date of the
certificate, together with an incumbency certificate containing the names,
titles, and genuine signatures of all duly elected officers of Borrower and each
Subsidiary as of the date of this Agreement, accompanied by a certificate from
an appropriate officer that the information is true and complete; and
(e) such additional supporting documents as Lenders may request.
SECTION 6. AFFIRMATIVE COVENANTS.
Borrower covenants and agrees that from the date of this Agreement until payment
in full of all present or future indebtedness hereunder and termination of all
present or future credit facilities established hereunder, unless Lenders shall
otherwise consent in writing, Borrower will fully comply with the following
provisions:
6.1 Financial Reports and Other Information. Borrower will deliver or cause to
be delivered to each Lender the following:
(a) As soon as practicable and in any event within sixty (60) days after the end
of each fiscal quarter, a consolidated and consolidating balance sheet as of the
last day of such quarter and the related consolidated and consolidating
statement of income for such quarter and cumulative year-to-date for Borrower,
setting forth in each case in comparative form figures for the corresponding
period in the preceding fiscal year, all in reasonable detail and satisfactory
in scope to Lenders and certified by the chief financial officer of Borrower as
to the fairness of such financial statements and that the same have been
prepared in accordance with Generally Accepted Accounting Principles applied on
a Consistent Basis, subject to changes resulting from normal, recurring year-end
adjustments;
(b) As soon as practicable and in any event within ninety (90) days after the
end of each fiscal year, the consolidated and consolidating balance sheet of
Borrower as of the end of such fiscal year, and related consolidated and
consolidating statements of income, and changes in financial position for such
fiscal year, setting forth in each case in comparative form figures for the
corresponding period in the preceding fiscal year, all in reasonable detail and
satisfactory in scope to Lenders and certified by and containing an unqualified
opinion of
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independent certified public accountants of recognized national standing
selected by Borrower and satisfactory to Lenders;
(c) Together with each delivery of those items required by clause 6(a) above, a
certificate executed by the chief financial officer of Borrower, containing
computations in reasonable detail indicating compliance with Sections 6 and 7
hereof, and stating that to the best of the officer's knowledge, (i) Borrower
has kept, observed, per-formed, and fulfilled each and every agreement binding
on it contained in the Loan Documents, and is not at the time in default of the
keeping, observance, performance, or fulfillment of any of the terms,
provisions, and conditions thereof, and (ii) none of the Events of Default or
events which upon notice or the lapse of time or both would constitute Events of
Default has occurred (or specifying all such defaults and events of which he may
have knowledge and what actions Borrower is taking or proposes to take with
respect thereto);
(d) Together with each delivery of the financial statements required by clause
6(b) above, a certificate of the independent certified accountants stating that
in making the examination necessary to said certification of the financial
statements, they obtained no knowledge of any condition or event pertaining to
financial or accounting matters, that constitutes an Event of Default or event
which after notice by Administrative Lender or lapse of time, or both, would
constitute an Event of Default; or if the accountants have obtained knowledge of
any Event of Default or other such event, a statement specifying the nature and
period of existence thereof. In addition, such accountants' certificate shall
state that with respect to the fulfillment of any of the terms, covenants,
provisions, or conditions of the Loan Documents, other than those relating to
financial or accounting matters, they have obtained no knowledge of any default
or Event of Default, or if the accountants have obtained knowledge of any such
default or Event of Default they shall make disclosure thereof, but the
accountants shall not be liable to Lenders for any failure to obtain knowledge
of any default or Event of Default referred to in this sentence;
(e) Within ten (10) days after receipt thereof, copies of any management audit
letters or other communications provided to Borrower by the independent
certified public accountant who prepared Borrower's financial statements;
(f) As soon as practicable and in any event within ten (10) days after the
filing thereof with the United States Securities and Exchange Commission, copies
of the quarterly 10-Q and annual 10-K reports, and any 8-K reports, filed by
Borrower;
(g) With reasonable promptness, such additional financial or other data
(including but not limited to consolidating financial statements) as Lenders may
from time to time reasonably request.
Lenders and Administrative Lender are hereby authorized to deliver a copy of any
financial statements or any other information relating to the business,
operations, properties, or financial condition of Borrower which may be famished
to it or come to its attention pursuant
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to the Loan Documents or otherwise, to any regulatory body or agency having
jurisdiction over them or to any Person which shall, or shall have the right or
obligation to, succeed to all or any part their respective interests in the Loan
Documents.
6.2 Payment of Indebtedness; Performance of Other Covenants; Payment of Other
Obligations. (a) Borrower will make full and timely payment of the principal of
and interest on the indebtedness owed hereunder; (b) Borrower will duly comply
with all the terms and covenants contained in the Loan Documents; and (c)
Borrower will make full and timely payment of all other indebtedness of
Borrower, whether now existing or hereafter arising.
6.3 Conduct of Business; Maintenance of Existence and Rights. Borrower will do
or cause to be done all things necessary to preserve and to keep in full force
and effect its corporate existence and rights and privileges as a corporation
and its franchises, licenses, trade names, patents, trademarks, and permits
which are necessary for the continuance of its business, and continue to engage
principally in the business currently operated by Borrower.
6.4 Maintenance of Property. Borrower will maintain its property in good
condition and repair and, from time to time, make all necessary and proper
repairs, renewals, replacements, additions, and improvements thereto, so that
the business carried on may be properly and advantageously conducted at all
times in accordance with prudent business management.
6.5 Right of Inspection; Discussions. Borrower will permit any Person designated
by Lenders, to visit and inspect any of the properties, corporate books,
records, papers, and financial reports of Borrower, including the making of any
copies thereof and abstracts therefrom, and to discuss its affairs, finances,
and accounts with its principal officers, all at such reasonable times and as
often as Lenders may reasonably request. Borrower will also permit Lenders, or
its designated representative, to audit or appraise any of its assets or
financial and business records.
6.6 Notices. Borrower will promptly give notice to Administrative Lender of:
(a) The occurrence of any default or Event of Default (or event which would
constitute a default or Event of Default but for the requirement that notice be
given or time elapse or both) hereunder, in which case such notice shall specify
the nature thereof, the period of existence thereof, and the action that
Borrower proposes to take with respect thereto;
(b) the occurrence of any material casualty to any material facility of Borrower
or any other force majeure (including, without limitation, any strike or other
labor disturbance) materially affecting the operation or value of any such
facility, and whether or not such casualty or force majeure is covered by
insurance;
(c) the commencement or any material change in the nature or status of any
litigation, dispute, or proceeding that may involve a claim for damages,
injunctive relief,
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enforcement, or other relief pending, being instituted, or threatened by,
against, or involving Borrower, or the institution of any attachment, levy,
execution, or other process by or against any assets of Borrower, which might
impair the conduct of Borrower's business or might adversely affect financially
or otherwise its business, operations, properties, condition, or prospects; and
(d) the occurrence of a material change in, modification to, cancellation or
early termination of, or default in (or event which would constitute a default
but for the requirement that notice be given or time elapse or both) any
material obligation, contract, or agreement of Borrower with any Person.
6.7 Payment of Taxes; Liens. Borrower will pay, or cause to be paid, when due,
subject to any permitted extensions, all taxes, assessments, and other
governmental charges which may lawfully be levied or assessed (a) upon the
income or profits of Borrower; (b) upon any property, real, personal or mixed,
belonging to Borrower, or upon any part thereof; or (c) by reason of employee
benefit plans sponsored by Borrower, and will also pay, or cause to be paid,
when due, subject to any permitted extensions, any lawful claims for labor,
material, or supplies which, if unpaid, might become a lien or charge against
any property of Borrower; provided, however, Borrower shall not be required to
pay any such tax, assessment, charge, levy, or claim so long as the validity
thereof shall be actively contested in good faith by appropriate proceedings and
Borrower shall have set aside on its books adequate reserves (determined in
accordance with Generally Accepted Accounting Principles) with respect to any
such tax, assessment, charge, levy, or claim so contested; but provided further
that any such tax, assessment, charge, levy, or claim shall be paid forthwith
upon the commencement of proceedings to foreclose any lien securing the same.
6.8 Insurance of Properties. Borrower will keep its business and properties
insured at all times by insurance companies acceptable to Lenders against the
risks for which provision for such insurance is usually made by other Persons
engaged in a similar business similarly situated (including without limitation
insurance for fire and other hazards and insurance against liability on account
of damage to persons or property and insurance under all applicable workmen's
compensation laws) and to the same extent thereto and carry such other types and
amounts of insurance as are usually carried by Persons engaged in the same or a
similar business similarly situated, and upon request deliver to Lenders a
certificate from the insurer setting forth the nature of the risks covered by
such insurance, the amount carried with respect to each risk, and the name of
the insurer.
6.9 True Books. Borrower will keep proper and true books of record and account,
satisfactory to Bank, in which full, true, and correct entries will be made of
all of its dealings and transactions, and establish on its books such reserves
as may be required by Generally Accepted Accounting Principles with respect to
all taxes, assessments, charges, levies, and claims referred to in Subsection
[6.7] hereof, and with respect to its business in general, and will include such
reserves in any interim as well as year-end financial statements.
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6.10 Observance of Laws. Borrower will conform to and duly observe all laws,
regulations, and other valid requirements of any governmental authority with
respect to the conduct of its business.
6.11 Further Assurances. At its cost and expense, upon request of any Lender,
Borrower will duly execute and deliver or cause to be duly executed and
delivered to Lenders such further instruments or documents and do and cause to
be done such further acts as may be reasonably necessary or proper in the
opinion of Lenders to carry out more effectively the provisions and purposes of
this Agreement.
6.12 ERISA Benefit Plans. Borrower will comply with all requirements of ERISA
applicable to it and will not materially increase its liabilities under or
violate the terms of any present or future benefit plans maintained by it
without the prior approval of Lenders. Borrower will furnish to Lenders as soon
as possible and in any event within 10 days after Borrower or a duly appointed
administrator of a plan (as defined in ERISA) knows or has reason to know that
any reportable event, funding deficiency, or prohibited transaction (as defined
in ERISA) with respect to any plan has occurred, a statement of the chief
financial officer of Borrower describing in reasonable detail such reportable
event, funding deficiency, or prohibited transaction and any action which
Borrower proposes to take with respect thereto, together with a copy of the
notice of such event given to the Pension Benefit Guaranty Corporation or the
Internal Revenue Service or a statement that said notice will be filed with the
annual report of the United States Department of Labor with respect to such plan
if such filing has been authorized.
6.13 Withholding Taxes. Borrower will pay, as and when due, all employee
withholding, FICA, and other tax payments required by federal, state, and local
governments with respect to wages paid to employees.
6.14 Change of Name, Principal Place of Business, Office, or Agent. Borrower
will notify Lenders of any change in the name of Borrower, the principal place
of business of Borrower, the office where the books and records of Borrower are
kept, or any change in the registered agent of Borrower for the purposes of
service of process.
6.15 Financial Covenants. Borrower will, in accordance with Generally Accepted
Accounting Principles applied on a Consistent Basis, maintain:
(a) A Minimum Current Ratio at all times greater than or equal to 1.50 to 1.00.
(b) A minimum Tangible Net Worth greater than or equal to $60,000,000. Beginning
with Beginning with Borrower's fiscal quarter ending December 31, 1997, and
continuing each quarter thereafter during the term of this Agreement, the
required minimum Tangible Net Worth amount shall be increased by an amount equal
to the sum of 60% of net income of Borrower (on a consolidated basis) during the
preceding quarter.
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(c) A ratio of total liabilities to Tangible Net Worth less than or equal to (i)
2.50 to 1.00 during the first year following the date of this Agreement, and
(ii) 2.25 to 1.00 thereafter.
(d) A minimum Fixed Charge Coverage Ratio at all times greater than or equal to
1.30 to 1.00.
SECTION 7. NEGATRVE COVENANTS.
Borrower covenants and agrees that from the date of this Agreement until payment
in full of all present or future indebtedness hereunder and termination of all
present or future credit facilities established hereunder, unless Lenders shall
otherwise consent in writing, Borrower will fully comply with the following
provisions:
7.1 Indebtedness. Borrower will not, directly or indirectly, create, incur,
assume, or permit to exist any indebtedness for borrowed money, except Permitted
Indebtedness.
7.2 Limitations on Mortgages, Liens, Etc. Borrower will not, directly or
indirectly, create, incur, assume, or suffer or permit to exist any mortgage,
pledge, lien, security interest, or other charge or encumbrance (including the
lien or retained security title of a conditional vendor or lessor) upon or with
respect to any of its assets, or assign or otherwise convey any right to receive
income, except Permitted Liens.
7.3 Guaranties. Borrower will not, directly or indirectly, guarantee, assume,
endorse, become a surety or accommodation party for, or otherwise in any way
extend credit or become responsible for or remain liable or contingently liable
in connection with any indebtedness or other obligations of any other Person or
entity except guaranties and endorsements made in connection with the deposit of
negotiable instruments and other items for collection or credit in the ordinary
course of business.
7.4 Merger, Sale of Assets, Dissolution, Etc. Borrower will not, and will not
permit any Subsidiary, to directly or indirectly: (a) enter into any transaction
of merger or consolidation, except pursuant to a Permitted Acquisition; (b)
transfer, sell, assign, lease, or otherwise dispose of all or a substantial part
of its properties or assets; (c) transfer, sell, assign, discount, lease, or
otherwise dispose of any of its notes or other instruments, accounts receivable,
or contract rights with or without recourse, except for collection in the
ordinary course of business, or any assets or properties necessary or desirable
for the proper conduct of its business; (d) change the scope or nature of its
business; (e) enter into any arrangement, directly or indirectly, with any
Person whereby Borrower shall sell or transfer any property, real or personal,
used or useful in its business, whether now owned or hereafter acquired, and
thereafter rent or lease such property which Borrower intends to use for
substantially the same purpose or purposes as the property being sold or
transferred; (f) invest in, acquire assets or stock of, transfer any assets to,
or do business through any Subsidiary not described in
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Subsection [4-1] hereof except for Subsidiaries formed by Borrower for the
purpose of consummating a Permitted Acquisition, which Subsidiaries will survive
any such Permitted Acquisition; (g) wind up, liquidate, or dissolve itself or
its business; or (h) agree to any of the foregoing.
7.5 Acquisitions. Borrower will not, and will not permit any Subsidiary, to
acquire all or substantially all assets, or Capital Stock (or other equity
interest) of any Person except pursuant to Permitted Acquisitions.
7.6 Prohibitions on Dividends, Redemptions, Distributions and Other Payments.
Borrower will not, directly or indirectly, declare allocate or pay any dividends
on any shares of stock of any class of Borrower, now or hereafter outstanding,
or purchase, redeem, or otherwise acquire or retire any shares of stock of any
class of Borrower or apply or set apart any of its assets therefor or make any
other distribution (by redemption of capital or otherwise) in respect of any
such shares.
7.7 Limitations on Loans, Advances, Investments, Transfer of Assets, and
Acquisition of Assets. Borrower will not, directly or indirectly, make or have
outstanding a loan or advance to or an investment in, or transfer assets to, or
acquire all or a substantial part of the assets or proper-ties of, or own or
acquire stock or other securities of, any Person, except: (a) stock or other
securities received in settlement of a debt that was created in the ordinary
course of business; (b) travel advances in the ordinary course of business to
its officers and employees; (c) readily marketable securities issued by the
United States of America; and (d) certificates of deposit or repurchase
agreements of Lenders or of any other financial institution of comparable
standing; (e) such outstanding matters as are set forth on the attached Schedule
7.7; and (f) loans and advances to, and investments in, Subsidiaries.
7.8 Regulation U. Borrower will not permit any part of the proceeds of the loan
or loans made pursuant to this Agreement to be used to purchase or carry or to
reduce or retire any loan incurred to purchase or carry any margin stock (within
the meaning of Regulation U of the Board of Governors of the Federal Reserve
System) or to extend credit to others for the purpose of purchasing or carrying
any such margin stock, or to be used for any other purpose which violates, or
which would be inconsistent with, the provisions of Regulation U or other
applicable regulation. Borrower covenants that it is not engaged and will not
become engaged as one of its principal or important activities in extending
credit for the purpose of purchasing or carrying such margin stock. If requested
by Lenders, Borrower will furnish to Lenders in connection with any loan or
loans hereunder, a statement in conformity with the requirements of Federal
Reserve Form U-1 referred to in said regulation. In addition, Borrower covenants
that no part of the proceeds of the loan or loans hereunder will be used for the
purchase of commodity future contracts (or margins therefor for short sales) for
any commodity not required for the normal raw material inventory of Borrower.
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7.9 Insider Transactions. Borrower will not, directly or indirectly, purchase,
acquire, or lease any property or services from, or sell, provide, or lease any
property or services to, or otherwise deal with, in the ordinary course of
business or otherwise, (i) any stockholder or (ii) any business entity,
corporation, partnership, or association in which a stockholder owns a
controlling interest, except upon terms and conditions not less favorable to
Borrower than if no such relationship existed, and except for such outstanding
matters as are set forth on the attached Schedule 7.9.
7.10 Loans to Officers, Stockholders, Employees, Etc. Borrower will not,
directly or indirectly, lend or advance or permit to be outstanding any loans or
advances of money, credit, or property to officers, stockholders, employees,
agents, or consultants of Borrower (other than travel advances in the ordinary
course of business) in an aggregate amount in excess of $50,000 for each fiscal
year, except for such outstanding loans or advances as are set forth on the
attached Schedule 7.10.
7.11 Changes in Governing Documents, Accounting Methods, Fiscal Year. Borrower
will not amend in any respect its articles of incorporation or bylaws from that
in existence on the date of this Agreement or change its accounting methods or
practices, its depreciation or amortization policy or rates, or its fiscal year
end from that in existence as of the date of the financial statements provided
to Lenders pursuant to Subsection 4.4 hereof, except as required to comply with
law or with Generally Accepted Accounting Principles.
SECTION 8. EVENTS OF DEFAULT.
The following events shall constitute "Events of Default" hereunder.
8.1 Payment of Obligations Under Loan Documents. Borrower fails to make payment
of any principal, interest, or other amount due on any indebtedness owed any
Lender under the Loan Documents, or fails to make any other payment to any
Lender as contemplated thereunder either by the terms hereof or otherwise.
8.2 Representation or Warranty. Any representation or warranty made or deemed
made by Borrower or any other Person herein or in any writing furnished in
connection with or pursuant to the Loan Documents, or any report, certificate,
financial statement, or other information provided by Borrower or any other
Person to any Lender in connection with or pursuant to the Loan Documents, shall
be false or misleading in any material respect on the date when made or when
deemed made, and continues to be false or misleading for a period of thirty (30)
days.
8.3 Covenants Under the Loan Documents. Borrower or any other Person fails to
fully and promptly perform when due any agreement, covenant, term, or condition
binding on it contained in this Agreement or any other Loan Document, or
otherwise a part of the transactions covered hereby, and with respect to
agreements, covenants, terms or conditions
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other than payment obligations (a) set forth in Section 6.15, such failure to
perform continues for a period of fifteen (15) days, and (b) and other than
those set forth in Section 6.15, such failure to perform continues for a period
of thirty (30) days.
8.4 Other Defaults under the Loan Documents. A default or event of default
occurs under any other Loan Document, other than with respect to any matters
described in Subsection 8.1, 8.2, or 8.3 above, and such default continues for a
period of thirty (30) days.
8.5 Cross-Default. A default or event of default occurs under any present or
future indebtedness of Borrower to any Lender not evidenced by the Loan
Documents or a default or event of default occurs under any guaranty or security
document executed by any Person in connection therewith, and any such default or
event of default continues beyond the expiration of any applicable grace or cure
period. An Event of Default hereunder shall constitute a default under any such
indebtedness, guaranty, or security document.
8.6 Payment, Performance, or Default of Other Monetary0bligations.Borrower fails
to make payment on any contract obligation or of principal or interest on any
indebtedness other than that created under the Loan Documents or other-wise owed
to any Lender, or Borrower fails to fully and promptly perform any other
obligation, agreement, term, or condition contained in any agreement under which
any such other indebtedness is created or there is otherwise a default or event
of default thereunder.
8.7 Other Covenants or Defaults to Lenders or Others. Borrower fails to fully
and promptly perform when due any agreement, covenant, term, or condition
involving an amount in excess of $100,000, binding on it contained in any lease,
contract, or other agreement to which it is a party or in respect of which it is
obligated, other than the Loan Documents and other than those containing
monetary obligations (as described in Subsections 8.5 and 8.6 above), or there
is otherwise a default or event of default thereunder, and such failure to
perform continues for a period of thirty (30) days.
8.8 Liquidation; Dissolution; Bankruptcy; Etc. Borrower liquidates or dissolves;
the business of Borrower is suspended; Borrower files or commences a voluntary
petition, case, proceeding, or other action seeking reorganization, arrangement,
readjustment of its debts, or any other relief under any existing or future law
of any jurisdiction, domestic or foreign, state or federal, relating to
bankruptcy, insolvency, reorganization, or relief of debtors, or Borrower takes
any other action indicating its consent to, approval of, or acquiescence in, any
such petition, case, proceeding, or other action seeking to have an order for
relief entered with respect to it or its debts; Borrower applies for, or
consents to or acquiescence in, the appointment of a receiver, trustee,
custodian, or other similar official for Borrower or for all or a substantial
part of its property; Borrower makes an assignment for the benefit of creditors;
or Borrower is unable to pay its debts as they mature or admits in writing its
inability to pay its debts as they mature.
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8.9 Involuntary Bankruptcy, Etc. An involuntary petition, case, proceeding, or
other action is commenced against Borrower under the Bankruptcy Code or seeking
reorganization, arrangement, readjustment of its debts, or any other relief
under any existing or future law of any jurisdiction, domestic or foreign, state
or federal, relating to bankruptcy, insolvency, reorganization, or relief of
debtors; a receiver, trustee, custodian, or other similar official is
involuntarily appointed for Borrower or for all or a substantial part of
Borrower's property or assets; or any case, proceeding, or other action seeking
issuance of a warrant of attachment, execution, distraint, or similar process
against all or a substantial part of Borrower's assets or property results in
the entry of an order for such relief; and any of the foregoing continues for
sixty (60) days without being vacated, discharged, stayed, bonded, or dismissed.
8. 10 Judgments. A judgment is entered against Borrower for the payment of
damages or money in excess of $100,000, if the same is not discharged or if a
writ of execution or similar process is issued with respect thereto and is not
stayed within the time allowed by law for filing notice of appeal of the final
judgment.
8.11 Attachment, Garnishment, Liens Imposed by Law. A writ of attachment or
garnishment is issued against, or a lien is imposed by operation of law on, any
property of Borrower, if the amount of the claim or the value of the affected
property is in excess of $100,000, if the lien is not discharged within thirty
(30) days after it has attached.
8.12 Corporate Existence, Transfer of Property. Any act or omission (formal or
informal) of Borrower or its officers, directors, or shareholders leading to, or
resulting in: (a) the termination, invalidation (partial or total), revocation,
suspension, interruption, or unenforceability of (i) its corporate existence, or
(ii) any rights, licenses, franchises, or permits the failure of which to retain
would have a Material Adverse Effect; or (b) the transfer or disposition
(whether by sale, lease, or otherwise) to any Person of all or a substantial
part of its property.
8.13 Invalidity of Security Interest and Liens; Transfer of Collateral. For any
reason after the execution and delivery thereof, any document delivered pursuant
hereto that creates, or was intended to create, a security interest, or other
lien to secure indebtedness created hereunder, for a period of thirty (30) days:
(a) ceases to be in full force and effect; or (b) the liens intended to be
created thereby cease to be or are not valid and perfected first liens subject
to no other liens except as expressly permitted herein; (c) or the party
executing such document contests the validity or enforceability thereof or the
lien created thereby; or (d) any collateral covered thereby is transferred to
another Person without the prior written consent of Lenders.
8.14 Invalidity of Guaranty. For any reason after the execution and delivery
thereof, any document that gives rise to or was intended to give rise to a
guaranty of the indebtedness created hereunder, for a period of thirty (30)
days: (a) ceases to be in full force and effect; or (b) the party executing such
document contests the validity or enforceability of its guaranty or
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denies that it has further liability with respect to any portion thereof,
including without limitation with respect to future loans.
8.15 Subsidiaries. Any of the matters described at Subsections 8.8 or 8.9 hereof
occur with respect to any Subsidiary and continues beyond any applicable cure
period; or any of the matters described at Subsection 8.6, 8.7, 8.10, 8.11, or
8.12 hereof occur with respect to any Subsidiary and such occurrence results in
a Material Adverse Effect with respect to Borrower, and continues beyond any
applicable cure period.
SECTION 9. RIGHTS AND REMEDIES.
9.1 Remedies Available Under Loan Documents and Otherwise. Lenders and
Administrative Lender shall have, in addition to the rights and remedies
contained in this Agreement and the other Loan Documents, all of the rights and
remedies of a creditor and, to the extent applicable, of a secured party, now or
hereafter available at law or in equity. Administrative Lender may, at its
option, exercise any one or more of such rights and remedies individually,
partially, or in any combination from time to time. No right, power, or remedy
conferred by the Loan Documents shall be exclusive of any other right, power, or
remedy referred to therein or now or hereafter available at law or in equity.
9.2 Remedies Upon Event of Default. Without limiting the generality of the
foregoing, if an Event of Default shall occur: (a) All commitments of Lenders to
make advances shall terminate; (b) Administrative Lenders may declare the
indebtedness owed to Lenders or Administrative Lender by Borrower hereunder and
any or all of any other indebtedness owed by Borrower to Lenders or
Administrative Lender, whether direct or indirect, contingent or certain, to be
accelerated and due and payable at once, whereupon such indebtedness, together
with interest thereon, shall forthwith become due and payable, all without
presentment, demand, protest, or other notice of any kind, all of which are
hereby expressly waived; and (c) Administrative Lender may proceed to do other
all things provided by law, equity, or contract to enforce its rights under such
indebtedness and to collect all amounts owing hereunder.
SECTION 10. THE ADMINISTRATIVE LENDER
10.1 Authorization and Action. Each Lender hereby appoints and authorizes
Administrative Lender to take such action as Administrative Lender on its behalf
and to exercise such powers under this Agreement and the other Loan Documents,
as are delegated to the Administrative Lender by the terms of the Loan
Documents, together with such powers as are reasonably incidental thereto. As to
any matters not expressly provided for by this Agreement and the other Loan
Documents (including without limitation enforcement or collection of the Notes),
Administrative Lender shall not be required to act or to refrain from acting
(and shall be fully protected in so acting or refraining from acting) upon the
instructions of any Lender, and Administrative Lender shall not be required to
take any action which exposes Administrative
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Lender to personal liability or which is contrary to any Loan Documents or
applicable law. Administrative Lender agrees to give to each Lender notice of
each notice given to it by the Borrower pursuant to the terms of this Agreement,
and to distribute to each applicable Lender in like funds all amounts delivered
to Administrative Lender by Borrower for the Pro Rata or individual account of
any Lender. Functions of the Administrative Lender are administerial in nature
and in no event shall the Administrative Lender have a fiduciary or trustee
relationship in respect of any Lender by reason of this agreement or any Loan
Document.
10.2 Administrative Lender's Reliance, Etc. Neither Administrative Lender, nor
any of its directors, officers, agents, employees, or representatives shall be
liable for any action taken or omitted to be taken by it or them under or in
connection with this Agreement or any other Loan Document, except for its or
their own gross negligence or willful misconduct. Without limitation of the
generality of the foregoing, Administrative Lender (a) may treat the payee of
any Note as the holder thereof until Administrative Lender receives written
notice of the Lender; (b) may consult with legal counsel (including counsel for
the Borrower or any of its Subsidiaries), independent public accountants, and
other experts selected by it, and shall not be liable for any action taken or
omitted to be taken in good faith by it in accordance with the advice of such
counsel, accountants, or experts; (c) makes no warranty or representation to any
Lender and shall not be responsible to any Lender for any statements,
warranties, or representations made in or in connection with this Agreement or
any other Loan Documents; (d) shall not have any duty to ascertain or to inquire
as to the performance or observance of any of the terms, covenants, or
conditions of this Agreement or any other Loan Documents on the part of any
obligor or its Subsidiaries or to inspect the property (including the books and
records) of any obligor or its subsidiaries; (e) shall not be responsible to any
Lender for the due execution, legality, validity, enforceability, genuineness,
sufficiency, or value of this Agreement, any other Loan Documents, or any other
instrument or document furnished pursuant hereto; and (f) shall incur no
liability under or in respect of this Agreement or any other Loan Documents by
acting upon any notice, consent, certificate, or other instrument or writing
believe by it to be genuine and signed or sent by the proper party or parties.
10.3 SunTrust Bank, Tampa Bay and Affiliates. With respect to its Available
Commitment, its Advances, and any Loan Documents, SunTrust Bank, Tampa Bay has
the same rights under this Agreement as any other Lender and may exercise the
same as though it were not Administrative Lender. SunTrust Bank, Tampa Bay and
its Affiliates may accept deposits from, lend money to, act as trustee under
indentures of, and generally engage in any kind of business with, any obligor,
any Affiliate thereof, and any Person who may do business therewith, all as if
SunTrust Bank, Tampa Bay were not Administrative Lender and without any duty to
account therefor t any Lender.
10.4 Lender Credit Decision. Each Lender acknowledges that it has, independently
and without reliance upon Administrative Lender or any other Lender, and based
on the financial statements provided by Borrower and such other documents and
information as it has deemed appropriate, made its own credit analysis and
decision to enter into this Agreement. Each Lender also acknowledges that it
will, independently and without reliance upon Administrative
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Lender or any other Lender and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit decisions in
taking or not taking action under this Agreement and the other Loan Documents.
10.5 Indemnification by Lenders. Lenders shall indemnify Administrative Lender,
Pro Rata, from and against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses, or disbursements
of any kind or nature whatsoever which may be imposed on, incurred by, or
asserted against Administrative Lender in any way relating to or arising out of
any Loan Documents or any action taken or omitted by Administrative Lender
thereunder, including any negligence of Administrative Lender; provided,
however, that no Lender shall be liable for any portion of such liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses, or disbursements resulting from Administrative Lender's gross
negligence or willful misconduct. Without limitation of the foregoing, Lenders
shall reimburse Administrative Lender, Pro Rata, promptly upon demand for any
out-of-pocket expenses (including reasonable attorneys' fees) incurred by
Administrative Lender in connection with the preparation, execution, delivery,
administration, modification, amendment, or enforcement (whether through
negotiation, legal proceedings or other-wise) of, or legal and other advice in
respect of rights or responsibilities under, the Loan Documents. The indemnity
provided in this Section 10.5 shall survive the termination of this Agreement.
10.6 Successor Administrative Lender. Administrative Lender may resign any time
by giving written notice thereof to Lenders and the Borrower, and may be removed
at any time with or without cause by the action of all Lenders (other than
Administrative Lender, if it is a Lender). Upon any such resignation, Lenders
shall have the right to appoint a successor Administrative Lender. If no
successor Administrative Lender shall have been so appointed and shall have
accepted such appointment within thirty days after the retiring Administrative
Lender's giving of notice of resignation, then the retiring Administrative
Lender may, on behalf of Lenders, appoint a successor Administrative Lender,
which shall be a commercial bank organized under the laws of the United States
of America or of any state thereof and having a combined capital and surplus of
at least $50,000,000. Upon the acceptance of any appointment as Administrative
Lender hereunder by a successor Administrative Lender, such successor
Administrative Lender shall thereupon succeed to and become vested with all the
Rights and duties of the retiring Administrative Lender, and the retiring
Administrative Lender shall be discharged from its duties and obligations under
the Loan Documents, provided that if the retiring or removed Administrative
Lender is unable to appoint a successor Administrative Lender, Administrative
Lender shall, after the expiration of a sixty day period from the date of
notice, be relieved of all obligations as Administrative Lender hereunder.
Notwithstanding any Administrative Lender's resignation or removal hereunder,
the provisions of this Section shall continue to inure to its benefit as to any
actions taken or omitted to be taken by it while it was Administrative Lender
under this Agreement.
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SECTION 11. MISCELLANEOUS.
11.1 Amendments and Waivers. No amendment or waiver of any provision of this
Agreement or any other Loan Documents, nor consent to any departure by the
Borrower or any obligor therefrom, shall be effective unless the same shall be
in writing and signed by the Borrower and the Administrative Lender with the
consent of SunTrust Bank, Tampa Bay, and then any such waiver or consent shall
be effective only in the specific instance and for the specific purpose for
which given; provided, however, that no amendment, waiver, or consent shall (and
the result of action or failure to take action shall not), unless in writing and
signed by all of Lenders and Administrative Lender, (a) increase the Available
Commitment, (b) reduce any principal, interest, fees, or other amounts payable
hereunder, or waive or result in the waiver of any Event of Default, (c)
postpone any date fixed for any payment of principal, interest, fees, or other
amounts payable hereunder, (d) release any collateral or guaranties securing any
obligor's obligations hereunder, other than releases contemplated hereby and by
the Loan Documents, (e) change the meaning of "Specified Percentage" or the
number of Lenders required to take any action hereunder, or change the
definitions of "Available Commitment, " or "Maturity Date, " or (f) amend
Section 2 or this Section 11.1. No amendment, waiver, or consent shall affect
the rights or duties of Administrative Lender under any Loan Documents, unless
it is in writing and signed by Administrative Lender in addition to the
requisite Lenders.
11.2 Sharing of Payments. If any Lender shall obtain any payment (whether
voluntary, involuntary, through the exercise of any Right of set-off, or
otherwise) on account of its Advances in excess of its Pro Rata share of
payments made by the Borrower, such Lender shall forthwith purchase
participations in Advances made by the other Lenders as shall be necessary to
share the excess payment Pro Rata with each of them, provided, however, that if
any of such excess payment is thereafter recovered from the purchasing Lender,
its purchase from each Lender shall be rescinded and each Lender shall repay the
purchase price to the extent of such recovery together with a Pro Rata share of
any interest or other amount paid or payable by the purchasing Lender in respect
of the total amount so recovered. The Borrower agrees that any Lender so
purchasing a participation from another Lender pursuant to this Section 11.2
may, to the fullest extent permitted by law, exercise all its rights of payment
(including the right of setoff) with respect to such participation as full as if
such Lender were the direct creditor of the Borrower in the amount of such
participation.
11.3 Liens; Set-Off. Borrower hereby grants to each Lender and Administrative
Lender a continuing lien to secure all indebtedness of Borrower whether created
hereunder, pursuant hereto, or otherwise upon any and all monies, securities and
other property of Borrower and the proceeds thereof, now or hereafter held or
received by or in transit to, the Lender or Administrative Lender, if
applicable, from or for Borrower, and also upon any and all deposits (general or
special) and credits of Borrower, if any, at Bank, at any time existing. Upon
the occurrence of any Event of Default, each Lender is hereby authorized at any
time and from time to time, without notice to Borrower, to set off, appropriate,
and apply any or all items hereinabove referred to against all indebtedness of
Borrower owed to it, whether under the Loan
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Documents or otherwise, whether now existing or hereafter arising. A Lender
shall be deemed to have exercised such right of set-off and to have made a
charge against such items immediately upon the occurrence of such Event of
Default although made or entered on its books subsequent thereof.
11.4 Payment of Expenses, Including Attorneys' Fees and Taxes. Borrower agrees:
(a) to pay or reimburse Lenders and Administrative Lender for all their
respective reasonable and customary out-of-pocket costs and expenses incurred in
connection with the preparation, negotiation, execution, and delivery of, and
any amendment, supplement, or modification to, or waiver or consent under, the
Loan Documents, and the consummation of the transactions contemplated thereby,
including, without limitation, the reasonable and customary fees and
disbursements of their counsel, taxes, and all recording or filing fees; (b) to
pay or reimburse Lenders and Administrative Lender for all of its costs and
expenses incurred in connection with the administration, supervision,
collection, or enforcement of, or the preservation of any rights under, the Loan
Documents, including, without limitation, the fees and disbursements of their
counsel, including attorneys' fees out of court, in trial, on appeal, in
bankruptcy proceedings, or otherwise; (c) without limiting the generality of
provision (a) hereof, to pay or reimburse Lenders and Administrative Lender for,
and indemnify and hold them harmless against liability for, any and all
documentary stamp taxes, nonrecurring intangible taxes, or other taxes, together
with any interest, penalties, or other liabilities in connection therewith, that
Lenders and Administrative Lender now or hereafter determines are payable with
respect to the Loan Documents, the obligations evidenced by the Loan Documents,
any advances under the Loan Documents, and any guaranties or security
instruments; and (d) to pay, indemnify, and hold Lenders and Administrative
Lender harmless from and against any and all other liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses, or
disbursements of any kind or nature whatsoever with respect to the execution,
delivery, enforcement, performance, and administration of the Loan Documents.
The agreements in this Subsection shall survive repayment of all other amounts
payable hereunder or pursuant hereto, now or in the future, and shall be secured
by all collateral that secures the loan or loans described herein.
11.5 Notices. Unless otherwise expressly agreed herein, and notwithstanding any
provisions to the contrary contained in the other Loan Documents, all notices,
requests, and demands to or upon the parties hereto pursuant to any Loan
Document shall be deemed to have been given or made when delivered by hand or by
courier service, when provided to a nationally recognized overnight delivery
service for overnight delivery, when transmitted to a receiving telecopier, or
three days after deposit in the mail, postage prepaid by registered or certified
mail, return receipt requested, addressed as follows or to such other address as
may be hereafter designated in writing by one party to the other:
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Borrower: Flanders Corporation
531 Flanders Filter Road
Washington, North Carolina 27889
Attention: Steven K. Clark
Telecopy: (919) 946-4738
Administrative Lender: SunTrust Bank, Tampa Bay
300 1st Avenue South
St. Petersburg, Florida 33701
Attention: Frank A. Coe
Telecopy: (813) 892-4810
Any Lender: The address shown opposite its name
on the signature pages hereof
11.6 Governing Law. The validity, interpretation, and enforcement of the Loan
Documents and the rights and obligations of the parties thereto, shall be
governed by, and construed and interpreted in accordance with, the laws of the
State of Florida excluding those laws relating to the resolution of conflicts
between laws of different jurisdictions.
11.7 Venue; Personal Jurisdiction. In any litigation in connection with or to
enforce any of the Loan Documents, Borrower irrevocably consents to and confers
personal jurisdiction on the courts of the State of Florida or the United States
courts located within the State of Florida, expressly waives any objections as
to venue in any of such courts, and agrees that service of process may be made
on Borrower by mailing a copy of the summons and complaint by registered or
certified mail, return receipt requested, to the address set forth herein (or
otherwise expressly provided in writing). Nothing contained herein shall,
however, prevent Administrative Lender or Lenders from bringing any action or
exercising any rights within any other state or jurisdiction or from obtaining
personal jurisdiction by any other means available by applicable law.
11.8 Severability and Enforceability of Provisions. In the event that any one or
more of the provisions of the Loan Documents is determined to be invalid,
illegal, or unenforceable in any respect as to one or more of the parties, all
remaining provisions nevertheless shall remain effective and binding on the
parties thereto and the validity, legality, and enforceability thereof shall not
be affected or impaired thereby. If any such provision is held to be illegal,
invalid, or unenforceable, there will be deemed added in lieu thereof a
provision as similar in terms to such provision as is possible, that is legal,
valid, and enforceable. To the extent permitted by applicable law, the parties
hereby waive any law that renders any such provision invalid, illegal, or
unenforceable in any respect.
11.9 Failure of Party to Execute. Any party executing any of the Loan Documents
shall be bound by the terms thereof without regard to execution by any other
party, and the
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failure of any party to execute any of the Loan Documents shall not release or
other-wise affect the obligations of the party or parties who do sign the other
Loan Documents.
I 1. 10 Counterparts; Facsimile Signatures; Effective Date. The Loan Documents
and any amendments, waivers, consents, or supplements hereto may be signed in
original counterparts and by facsimile transmission of signed counterparts, in
any number, each of which shall be deemed an original, no one of which need
contain all of the signatures of the parties, and as many of such counterparts
as shall together contain all of the signatures of the parties shall be deemed
to constitute one and the same instrument. A set of the counterparts of this
Agreement signed by all parties hereto shall be lodged with Administrative
Lender. This Agreement shall become effective upon the receipt by Administrative
Lender of original signed counterparts or facsimile confirmation of signed
counterparts of this Agreement, each of which shall be deemed an original, from
each of the parties hereto.
11.11 No Waiver. No omission or failure of Administrative Lender or any Lender
to exercise and no delay in exercising of any right, power, or privilege under
any of the Loan Documents shall impair such right, power, or privilege, shall
operate as a waiver thereof or be construed to be a waiver thereof; nor shall
any single or partial exercise of any right, power, or privilege preclude any
other or further exercise thereof or the exercise of any other right, power, or
privilege.
11.12 Cumulative Remedies. The rights and remedies provided in the Loan
Documents are cumulative, and not exclusive of any rights or remedies provided
by law or in equity, and may be pursued singularly, successively, or together,
and may be exercised as often as the occasion therefor shall arise. The
warranties, representations, covenants, and agreements made herein and therein
shall be cumulative, except in the case of irreconcilable inconsistency, in
which case the provisions of this Agreement shall control.
11.13 Course of Dealing; Amendment; Supplemental Agreements. No course of
dealing between the parties hereto shall be effective to amend, modify, or
change any provision of the Loan Documents. The Loan Documents may not be
amended, modified, 'or changed in any respect except by an agreement in writing
signed by the party against whom such change is to be enforced. The parties may,
subject to the provisions of this Subsection, from time to time, enter into
written agreements supplemental to the Loan Documents for the purpose of adding
any provisions to the Loan Documents or changing in any manner the rights and
obligations of the parties thereunder. Any such supplemental agreement shall be
binding upon the parties thereto.
11.14 Time of Essence. Time is of the essence in the performance of the Loan
Documents.
11.15 Successors and Assigns. The Loan Documents shall be binding upon the
parties thereto and their respective successors and assigns, and shall inure to
the benefit of the parties thereto, and, to the extent permitted herein, their
respective successors and assigns. Borrower
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may not assign any of its rights or obligations under the Loan Documents without
the prior written consent of Lenders.
11.16 Reliance Upon, Survival of and Materiality of Representations and
Warranties, Agreements, and Covenants. All representations and warranties,
agreements, and covenants made in the Loan Documents are material and shall be
deemed to have been relied upon by Lenders, notwithstanding any investigation
heretofore or hereafter made by any Lender or Administrative Lender, and shall
survive the execution and delivery of the Loan Documents and the making of the
loan or loans herein contemplated, and shall continue in full force and effect
so long as any indebtedness is owed to any Lender or Administrative Lender
pursuant hereto or so long as there shall be any commitment to make loans
hereunder. All statements contained in any certificate or other paper delivered
to Lenders at any time pursuant to the Loan Documents shall constitute
representations and warranties under the Loan Documents.
11.17 Legal or Governmental Limitations. Anything contained in the Loan
Documents to the contrary notwithstanding, no Lender shall be obligated to
extend credit or make loans to Borrower in an amount in violation of any
limitations or prohibitions provided by any applicable statute or regulation.
11.18 WAIVER OF TRIAL BY JURY. BORROWER, LENDERS AND ADMINISTRATIVE LENDER
HEREBY KNOWINGLY, IRREVOCABLY, VOLUNTARILY, AND INTENTIONALLY WAIVE ANY RIGHT TO
A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON THIS AGREEMENT OR THE
OTHER LOAN DOCUMENTS, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS
AGREEMENT, THE OTHER LOAN DOCUMENTS, OR ANY OTHER DOCUMENT EXECUTED IN
CONJUNCTION WITH THE TRANSACTIONS CONTEMPLATED THEREUNDER, OR ANY COURSE OF
CONDUCT, COURSE OF DEALING, STATEMENT (WHETI[IER ORAL OR WRITTEN), OR ACTION OF
ANY PARTY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR LENDERS AND
ADMINISTRATIVE LENDER TO ENTER INTO THE TRANSACTIONS EVIDENCED HEREBY.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed and delivered by their duly authorized officers as of the day and year
first above written.
BORROWER: FLANDERS CORPORATION,
a North Carolina Corporation
By: /s/ Steven K. Clark
Steven K. Clark
Vice President
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ADMINISTRATIVE LENDER: SUNTRUST BANK, TAMPA BAY,
a Florida banking corporation
By: /s/ Frank A. Coe
Frank A. Coe
Vice President
LENDERS:
Specified Percentage: 66.667% SUNTRUST BANK, TAMPA BAY,
Address: Corporate Banking, Tampa Bay a Florida banking corporation
300 1st Street South, 3rd Floor
St. Petersburg, Florida 33701
By: /s/ Frank A. Coe
Frank A. Coe
Vice President
Specified Percentage: 33.333% ZIONS FIRST NATIONAL BANK,
Address: One South Main Street a national banking association
Salt Lake City, Utah 84111
By: /s/ Brett L. Eliason,
Brett L. Eliason,
Relationship Manager
STATE OF UTAH
COUNTY OF Salt Lake
Execution of the foregoing instrument was acknowledged before me this 10th of
November, 1997, by Steven K. Clark, as Vice President of Flanders Corporation, a
North Carolina corporation, on behalf of the corporation. He is either
personally known to me or has produced ______________________________________ as
identification.
/s/ Dawn M. Call
Notar Public, State of Utah
(Name) Dawn M. Call
Commission Number:_____________________ My Commission Expires:
40
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STATE OF UTAH
COUNTY OF Salt Lake
Execution of the foregoing instrument was acknowledged before me this 10th of
November, 1997, by Frank A. Coe, as Vice President, of SunTrust Bank, Tampa Bay,
a Florida banking corporation, on behalf of the corporation. He is either
personally known to me or has produced ______________________________________ as
identification.
/s/ Dawn M. Call
Notar Public, State of Utah
(Name) Dawn M. Call
Commission Number:_____________________ My Commission Expires:
STATE OF UTAH
COUNTY OF Salt Lake
Execution of the foregoing instrument was acknowledged before me this 10th of
November, 1997, by Brett L. Eliason, as Relationship Manager, of Zions First
National Bank, a national banking association, on behalf of the association. He
is either personally known to me or has produced
______________________________________ as identification.
/s/ Dawn M. Call
Notar Public, State of Utah
(Name) Dawn M. Call
Commission Number:_____________________ My Commission Expires:
41
LOAN AGREEMENT
between
WILL-KANKAKEE REGIONAL DEVELOPMENT AUTHORITY
and
FLANDERS CORPORATION
Dated as of December 15, 1997
The right, title and interest of the Will-Kankakee Regional Development
Authority in and to this Loan Agreement has been assigned to Norwest Bank
Arizona, N.A., in Phoenix, Arizona, as trustee, pursuant to the Indenture of
Trust, dated as of December 15, 1997, from the Authority to such Trustee.
This document prepared by:
SNELL & WILMER L.L.P.
One Arizona Center
Phoenix, Arizona 85004-0001
<PAGE>
TABLE OF CONTENTS
Page
RECITALS...................................................................1
ARTICLE 1 DEFINITIONS AND CONSTRUCTION..................................1
Section 1.01 Definition of Terms....................................1
Section 1.02 Rules of Construction..................................2
Section 1.03 Exhibits...............................................3
ARTICLE 2 GENERAL REPRESENTATIONS.......................................3
Section 2.01 Representations of the Issuer..........................3
Section 2.02 Representations of the Company.........................3
ARTICLE 3 COMPLETION OF PROJECT.........................................7
Section 3.01 Acquisition, Rehabilitation and Equipping of
the Project............................................7
Section 3.02 Modifications to the Plans.............................8
Section 3.03 Payment of Cost by the Company.........................9
Section 3.04 Issuance of Series 1997 Bonds and Application
of Proceeds...........................................11
Section 3.05 Items, Documents and Instruments to be
Delivered Prior to Issuance of the Bonds..............11
Section 3.06 Payment or Reimbursement of Cost......................12
Section 3.07 Establishment of Completion Date......................14
Section 3.08 Enforcement of Contracts and Surety Bonds.............15
ARTICLE 4 THE LOAN.....................................................16
Section 4.01 Amount and Source of Loan.............................16
Section 4.02 Repayment of Loan....................................16
Section 4.03 Quarterly Payments....................................16
Section 4.04 Additional Payments...................................16
Section 4.05 Company's Obligations Unconditional...................17
Section 4.06 Company's Remedies....................................17
Section 4.07 Amounts Remaining in Bond Fund........................18
Section 4.08 Notice to the Issuer of Certain Events................18
Section 4.09 Designation by the Company of Application of
Loan Repayments.......................................18
ARTICLE 5 USE, MAINTENANCE, MODIFICATIONS,TAXES AND INSURANCE..........18
Section 5.01 Possession, Use and Prohibition Against
Further Encumbrances..................................18
Section 5.02 Maintenance...........................................19
Section 5.03 Improvements..........................................19
Section 5.04 Liens.................................................19
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Section 5.05 Removal of Project Equipment..........................19
Section 5.06 Taxes and Other Governmental Charges and
Utility Charges.......................................21
Section 5.07 Insurance.............................................21
Section 5.08 Advances..............................................23
Section 5.09 Installation of the Company's Equipment...............23
ARTICLE 6 DAMAGE, DESTRUCTION AND CONDEMNATION.........................24
Section 6.01 Company to Repair, Replace, Rebuild or Restore........24
Section 6.02 Cooperation of the Issuer and Trustee.................26
ARTICLE 7 COMPANY'S COVENANTS;TAX EXEMPT STATUS OF SERIES 1977 BONDS...26
Section 7.01 Covenants for Benefit of Trustee and
Bondholders...........................................26
Section 7.02 Inspection and Access.................................27
Section 7.03 Reports...............................................27
Section 7.04 Indemnity.............................................27
Section 7.05 Continuing Existence and Qualification................28
Section 7.06 Maintenance of Security Interests.....................29
Section 7.07 Mortgage..............................................29
Section 7.08 Indenture.............................................30
Section 7.09 Assignment of Issuer's Rights.........................30
Section 7.10 Operation of Project as a Manufacturing
Facility..............................................30
Section 7.11 Financial Covenants...................................30
Section 7.12 Assurance of Tax Exemption............................32
Section 7.13 Arbitrage Covenant and Compliance.....................34
Section 7.14 Covenant of the Issuer Relating to Tax
Exemption.............................................34
Section 7.15 Compliance with Laws; Environmental Laws..............34
Section 7.16 Annual Certificate....................................35
Section 7.17 Reports on Employment at Project......................35
Section 7.18 No Warranty by Issuer.................................35
Section 7.19 Environmental Immunity and Indemnity..................35
ARTICLE 8 COMPANY'S OPTIONS............................................36
Section 8.01 Sale or Lease or Other Disposition of the
Project...............................................36
Section 8.02 Easements and Release of Real Property for
Access and Utilities..................................37
Section 8.03 Prepayment of Loan Repayments.........................38
Section 8.04 Abatement of Loan Repayments..........................38
Section 8.05 Termination Upon Retirement of Bonds..................39
Section 8.06 Company's Option to Direct Redemption of Bonds........39
ARTICLE 9 EVENTS OF DEFAULT AND REMEDIES...............................40
Section 9.01 Events of Default.....................................40
Section 9.02 Remedies..............................................42
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Section 9.03 Disposition of Funds..................................42
Section 9.04 Manner of Exercise....................................42
Section 9.05 Attorneys' Fees and Expenses..........................43
Section 9.06 Effect of Waiver......................................43
ARTICLE 10 GENERAL.....................................................43
Section 10.01 Notices...............................................43
Section 10.02 Governing Law and Binding Effect......................44
Section 10.03 Severability..........................................44
Section 10.04 Amendments, Changes, Modifications and
Assignments...........................................44
Section 10.05 Execution Counterparts................................44
Section 10.06 Limitation of Issuer's Liability......................44
Section 10.07 Rights Created in Third Parties.......................45
Section 10.08 Payments Due on Saturdays, Sundays and
Holidays..............................................45
Section 10.09 Survival..............................................45
EXHIBIT A - Description and Estimated Cost of the Project
EXHIBIT B - Project Equipment
EXHIBIT C - Form of Acquisition and Construction Fund
Disbursement Request
EXHIBIT D - Form of Issuance Cost Fund Disbursement Request
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LOAN AGREEMENT
THIS LOAN AGREEMENT, dated as of December 15, 1997, between the WILL-KANKAKEE
REGIONAL DEVELOPMENT AUTHORITY, a political subdivision, body politic and
municipal corporation (the "Issuer") duly organized and validly existing
pursuant to 70 Illinois Compiled Statutes, 1996, Section 535/1 et seq., as
supplemented and amended (the "Act"), and FLANDERS CORPORATION, a North Carolina
corporation (the "Company"),which is authorized and qualified to transact
business in the State of Illinois,
W I T N E S S E T H
WHEREAS, the Issuer is authorized by the Act to promote development within the
geographic confines of Will and Kankakee Counties in the State of Illinois and
is directed to use the powers conferred upon it by the Act to assist in the
development, construction and acquisition of "projects" within those counties,
including the issuance of its revenue bonds and the loan of the proceeds thereof
to achieve such purposes; and
WHEREAS, the Company has requested the Issuer to issue its revenue bonds and
loan the proceeds thereof to the Company for the purpose of financing a portion
of the acquisition, construction, rehabilitation and equipping of a project, to
wit, a facility for the manufacture of air filtration products (the "Project"),
located in the City of Momence, Kankakee County, Illinois; and
WHEREAS, the Issuer has determined to assist in the financing of the Project by
issuing its Economic Development Revenue Bonds (Flanders
Corporation/Precisionaire Project), Series 1997 ( the "Series 1997 Bonds"), and
making a loan to the Company of the proceeds of the Series 1997 Bonds in such
aggregate principal amount (the "Loan"), upon the terms and conditions set forth
herein; and
WHEREAS, the Company will secure its obligation to repay the Loan by the
execution and delivery to the Issuer of a Mortgage, Assignment of Rents and
Leases, Security Agreement and Financing Statement, dated as of December 15,
1997 (the "Mortgage") relating to the Project Site, the Project Building and the
Project Equipment (as those terms are hereinafter defined),
NOW THEREFORE, in consideration of the premises and the respective
representations and covenants herein contained, the parties hereto agree as
follows:
ARTICLE 1
DEFINITIONS AND CONSTRUCTION
Section 1.01 Definition of Terms. Unless the context otherwise requires, the
capitalized terms used in this Loan Agreement shall have the meanings specified
in Section 1.01 of the Indenture of Trust, dated as of December 15, 1997 (the
"Indenture"), between the Issuer and Norwest Bank
<PAGE>
Arizona, N.A., as trustee (the "Trustee"), providing for the issuance of and
security for the Bonds, as such Indenture is originally executed or as it may
from time to time be supplemented or amended as provided therein.
In addition, the following terms shall have the following meanings for the
purposes of this Loan Agreement:
Clean-Up: the removal, remediation, or monitoring of and all other response to,
any Contamination to the satisfaction of all applicable governmental agencies,
in compliance with all applicable Environmental Laws and otherwise in compliance
with good commercial practice.
Contamination: the presence of any Hazardous Materials or the Release of any
Hazardous Materials.
Environmental Law: any and all Federal, State and local laws, regulations,
administrative or administrative guidelines relating to Hazardous Materials.
Hazardous Materials: without limitation, tretrachloroethylene, asbestos,
gasoline, petroleum products, explosives, radioactive materials, polychlorinated
biphenyls, chemical liquids, or related or similar materials, or any other
substance or material defined as a hazardous or toxic substance, material or
waste by any applicable Federal, State or local law, ordinance, rule,
regulation, administrative order or administrative guideline.
Release: the intentional or unintentional presence, seepage, spilling, leaking,
disposing, discharging, emitting, depositing, injecting, leaching, escaping or
any other release or threatened release, however defined, of any Hazardous
Materials.
Section 1.02 Rules of Construction.
(a) The singular form of any word used herein, including the terms defined in
Section 1.01 of the Indenture, shall include the plural, and vice versa. The use
herein of a word of any gender shall include correlative words of all genders.
(b) Unless otherwise specified, references to Articles, Sections and other
subdivisions of this Loan Agreement are to the designated Articles, Sections and
other subdivisions of this Loan Agreement as originally executed. The words
"hereof," "herein," "hereunder" and words of similar import refer to this Loan
Agreement as a whole.
(c) The headings or titles of the several articles and sections, and the table
of contents appended to copies hereof, shall be solely for convenience of
reference and shall not affect the meaning, construction or effect of the
provisions hereof.
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Section 1.03 Exhibits.
(a) Exhibit A: Description and Estimated Cost of the Project.
(b) Exhibit B: Project Equipment.
(c) Exhibit C: Form of Acquisition and Construction Fund Disbursement Request.
(d) Exhibit D: Form of Issuance Cost Fund Disbursement Request.
ARTICLE 2
GENERAL REPRESENTATIONS
Section 2.01 Representations of the Issuer. The Issuer makes the following
representations as the basis for its undertakings herein contained:
(a) The Issuer is duly created pursuant to the Act as a political subdivision,
body politic and municipal corporation of the State.
(b) To finance the Cost of the Project, as presently estimated by the Company,
in anticipation of the collection of the Revenues to be received hereunder, the
Issuer has duly authorized the Bonds in the aggregate principal amount of
$6,000,000 to be issued upon the terms set forth in the Indenture, under the
provisions of which certain of the Issuer's rights and interests in, to and
under this Loan Agreement and the Revenues hereunder, together with the
Mortgage, are pledged and assigned to the Trustee as security for the payment of
the principal of, premium, if any, and interest on the Bonds.
(c) The Issuer has not pledged and will not pledge or grant (except as provided
in the Indenture) any security interest in, or assign any of its rights under,
this Loan Agreement or the Loan Repayments, or the Revenues or income to be
derived by the Issuer hereunder or the Mortgage for any purpose other than to
secure the Bonds.
(d) The Issuer makes no representation or warranty that the amount of the Loan
as provided in this Loan Agreement will be adequate or sufficient to finance the
Cost of the Project, or that the Project will be adequate or sufficient for the
purposes of the Company.
Section 2.02 Representations of the Company. The Company makes the following
representations as the basis for its undertakings herein contained:
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(a) The Company has been incorporated and is validly existing as a corporation
under the laws of the State of North Carolina, is in good standing in the State
of North Carolina, is duly qualified to transact business in and is in good
standing in the State, has the corporate power and authority to own its
properties and assets and to carry on its business as now conducted and as
contemplated to be conducted as described in this Loan Agreement, the Indenture,
the Mortgage and the Limited Offering Memorandum, and has the corporate power to
enter into and has duly authorized, by all requisite corporate action, the
execution and delivery of this Loan Agreement and all other documents
contemplated hereby to be executed by the Company, including, without
limitation, the Mortgage and the Limited Offering Memorandum.
(b) Neither the execution and delivery of this Loan Agreement or the Mortgage,
or any other document in connection with the financing of the Project, the
consummation of the transactions contemplated hereby and thereby, nor the
fulfillment of or compliance with the terms and conditions hereof and thereof,
results or will result in a material breach of or conflict with any of the
terms, conditions or provisions of the Company's Articles of Incorporation,
Bylaws, or any statute or order of any court or regulatory agency or of any
material agreement or instrument to which the Company is now a party or by which
it is bound, or constitutes a material default (with due notice or the passage
of time or both) under any of the foregoing, or results in the creation or
imposition of any prohibited lien, charge or encumbrance whatsoever upon any of
the property or assets of the Company under the terms of any instrument or
agreement to which the Company is now a party or by which it is bound.
(c) The Project will be located wholly within corporate boundaries of the City
of Momence (the "City"), and wholly within Kankakee County, Illinois.
(d) The Company has and will have title to the Project sufficient to carry out
the purposes of this Loan Agreement, and such title shall be in and remain in
the Company, except as permitted by Section 8.01 hereof.
(e) The estimated Cost of the Project is as set forth in Exhibit A hereto and
has been determined in accordance with sound architectural and engineering
principles.
(f) The Project consists of a manufacturing facility (i.e., a facility used in
the manufacturing or production of tangible personal property (including
processing resulting in a change in the condition of such property)), as
described in Exhibit A hereto and defined in Section 144(a)(12)(C) of the Code;
the Company will make no changes to the Project or to the operation thereof
which would affect the qualification of the Project under the Act or adversely
affect the exclusion of the interest on the Series 1997 Bonds from the gross
income of the Bondholders for Federal income tax purposes. The Company currently
intends and expects to utilize the Project as a facility for the manufacture of
air filtration products during the entire term of the Bonds.
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(g) All of the proceeds of the Bonds (after payment of certain costs of issuance
thereof) plus income from the investment thereof (subject to the provisions of
Section 7.13 hereof) will be used to pay Costs of the Project.
(h) The average reasonably expected economic life of the Project is at least
years and the weighted average maturity of the Series 1997 Bonds is not more
than 120% of such economic life.
(i) Except as disclosed in the Limited Offering Memorandum relating to the
Series 1997 Bonds, the Project and the Company, there is no action, suit or
proceeding at law or in equity or by or before any governmental instrumentality
or other agency now pending, or, to the best knowledge of the Company,
threatened against or affecting the Company or any of its properties or rights,
which, if determined adversely to the Company, would materially and adversely
impair its ability to carry on its business substantially as now conducted or as
now contemplated to be conducted, or would materially and adversely affect its
financial condition, assets, properties or operations, and the Company is not in
default with respect to any order or decree of any court or any order,
regulation or decree of any federal, state, municipal or other governmental
agency, which default would materially and adversely affect its operation or its
properties or the completion of the acquisition, rehabilitation and equipping of
the Project. The Company is not in material default in the performance,
observance or fulfillment of any obligations, covenants or conditions contained
in any material agreement or instrument to which it is a party.
(j) The operation and design of the Project in the manner presently contemplated
and as described herein will not violate or conflict with any applicable zoning,
soil, water or air pollution or other ordinance, order, law or regulation
relating to zoning, building, safety or environmental quality, which violation
or conflict would materially and adversely affect its completion of the
acquisition, rehabilitation and equipping, or the operation, of the Project. .
(k) The Company has filed or caused to be filed all Federal, state and local tax
returns which are required to be filed, and has paid or caused to be paid all
taxes as shown on said returns or on any assessment received by it, to the
extent that such taxes have become due.
(l) The information contained in the Limited Offering Memorandum with respect to
the Bonds, the Company and the Project is accurate in all material respects and
does not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
made therein, in light of the circumstances under which they were made, not
misleading.
(m) To the best of the Company's knowledge, no member, officer or other
official, or relative thereof, of the Issuer has any interest, direct or
indirect, in the Project, the
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Company, this Loan Agreement, the Mortgage or the Indenture, or in the
transactions contemplated hereby or thereby.
(n) The Company has obtained all necessary certificates, approvals, permits and
authorizations with respect to the rehabilitation of the Project from applicable
local, state, and federal governmental agencies.
(o) Neither the Company nor any "related person" (as defined in Section
144(a)(3) or Section 147(a)(2) of the Code) is, or will be, a party to any
arrangement, formal or informal, pursuant to which it has or will purchase any
of the Bonds.
(p) The participation by the Issuer in the financing of the acquisition,
rehabilitation and equipping of the Project has materially induced the Company
to pursue the acquisition, rehabilitation and equipping of the Project within
the corporate boundaries of the City.
(q) The Project consists, and will at all times consist, of land and property
which are subject to the allowance for depreciation provided in Section 167 of
the Code.
(r) The estimated cost of the acquisition, rehabilitation and equipping of the
Project includes only, and all expenditures for and costs of the Project paid or
reimbursed out of the Acquisition and Construction Fund will be, amounts (i)
which are chargeable to the Company's capital account for Federal income tax
purposes or would be so chargeable either with a proper election by the Company
or but for a proper election by the Company to deduct such amounts, and (ii)
which were incurred subsequent to the Official Action Date, except for legal
fees incurred in connection with the application for approval by the Issuer with
respect to the financing of the Project.
(s) At least 95% of the net proceeds of the Series 1997 Bonds will be used for
the acquisition, rehabilitation and equipping of the Project.
(t) No portion of the proceeds of the Bonds will be used, directly or
indirectly, to provide working capital for the Company or any related person.
(u) Preliminary approval for the issuance of the Bonds was granted by the Issuer
on February 25, 1997, and the Company acquired the Project Site and Project
Building on July 25, 1997. The Bonds are being issued not later than one year
after the date on which the Project was placed in service by the Company.
(v) Neither the Company nor any other person, whether or not related to the
Company, has paid or incurred any "Section 144(a)(4) capital expenditures", as
described in Section 144(a)(4)(A)(ii) of the Code, with respect to the Project
and there are no other facilities located within the City having as principal
users (within the meaning of Section
6
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144(a)(2) of the Code) the Company or a related person (within the meaning of
Section 144(a)(3) of the Code). No other person besides the Company or one of
its wholly-owned subsidiaries is or is expected to be a principal user of the
Project.
(w) The Company's Federal employer identification number is 133368271 and the
Company currently files its Federal income tax returns with the Internal Revenue
Service Center in Memphis, Tennessee.
(x) To the extent the first use of any items of property to be acquired as part
of the Project, including the Project Building and any of the Project Equipment,
will not occur pursuant to such acquisition, the Company will incur
rehabilitation expenditures with respect to such property in the amounts of 15%
or 100%, as applicable, in accordance with the provisions of Section 147(d) of
the Code.
(y) The sum of the outstanding principal amount of the Series 1997 Bonds, plus
any "outstanding tax-exempt facility-related bonds" of the Company within the
meaning of Section 144(a)(10) of the Code, does not exceed $40,000,000.
(z) Less than 25% of the proceeds of the Series 1997 Bonds will be used to
acquire land, and no portion of the proceeds of the Series 1997 Bonds will be
used (directly or indirectly) for the acquisition of land, or an interest
therein, to be used for farming purposes.
(aa) The Project will create employment opportunities within the City and within
Kankakee County, Illinois, and will otherwise accomplish the public purposes of
the Act.
ARTICLE 3
COMPLETION OF PROJECT
Section 3.01 Acquisition, Rehabilitation and Equipping of the Project.
The Company:
(a) has acquired title to the Project Site and the
Project Building, and has expended, or will, within two years
following the issuance of the Bonds, expend, not less than
$150,000 of Rehabilitation Expenditures in connection with the
rehabilitation of the Project Building, cause the renovation
and rehabilitation of the Project Building to be completed in
accordance with all applicable building code and zoning
requirements and substantially in accordance with the Plans,
and provide all other improvements, access roads, utilities,
and other items required to make such facilities fully
operable for the purposes specified in Section 2.02(f) hereof;
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(b) will cause to be acquired and properly installed in the Project such items
of furniture, machinery and equipment and other items of personal property as
may be necessary and desirable in the Company's reasonable judgment for
operation of the Project for the purposes specified in Section 2.02(f) hereof;
(c) will cause insurance relating to the Project to be procured and maintained
in accordance with the provisions of Section 5.07 hereof;
(d) will cause to be paid when due all fees, costs and expenses incurred in
connection with the acquisition, rehabilitation, and equipping of the Project;
and
(e) in the reasonable judgment of the Company, will ask, demand, sue for, levy,
recover and receive all those sums of money, debts and other demands whatsoever
which may be due, owing and payable under the terms of any contract, order,
receipt, writing and instruction in connection with the acquisition,
rehabilitation, furnishing and equipping of the Project, and enforce the
provisions of any contract, agreement, obligation, bond or other performance
security with respect thereto.
Section 3.02 Modifications to the Plans. Modifications to the Plans may be made
only in accordance with this Section 3.02.
(a) No modifications to the Plans may be made which would (i) alter the scope or
character of the Project as a "project" within the meaning of the Act or (ii)
change the scope of the Project, without the prior written consent of the
Trustee and a Majority of Holders. No modifications to the Plans may be made
unless the Company shall first furnish to the Trustee an opinion of Bond Counsel
to the effect that such modifications to the Plans will not cause the interest
on the Series 1997 Bonds to be included in the gross income of the Bondholders
for Federal income tax purposes. Changes in scope shall include changes which
materially adversely impair the marketability of the Project, vary the proposed
use of the Project, impair the suitability for that proposed use, materially
reduce the fair market value of the Project or materially change the quality or
aesthetic appearance of the Project.
(b) Modifications to the Plans may be made without the consent of the Trustee if
they (i) have a cost not more than $250,000, individually or in the aggregate,
(ii) are required by applicable law or governmental order or regulation, or
(iii) are required due to labor disputes, fire, unusual delay in transportation,
adverse weather conditions which could not reasonably be anticipated,
unavoidable casualty, emergency affecting the safety of persons or property,
concealed conditions encountered below the surface of the ground or concealed or
unknown conditions in existing structures of an unusual nature differing
materially from those ordinarily encountered and generally recognized as
inherent in work of similar character under similar circumstances, if beyond the
control of, and not reasonably foreseeable by, the Company and the Company could
not reasonably have taken steps in anticipation thereof so as to avoid the
necessity for the modification.
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(c) Modifications to the Plans, other than those described in Section 3.02(b),
which will increase the Cost of the Project by more than $250,000, either
singularly or in the aggregate, or extend the time for completion of the
Project, may be made only with the written consent of the Trustee and a Majority
of Holders, which consent shall be given upon the Company furnishing to the
Trustee a report, addressed to the Trustee, verifying that the additional cost
resulting from such modification will not cause the total Cost of the Project to
exceed the amount available therefor, taking into account the amounts available
for such purposes then credited to the Acquisition and Construction Fund the
amounts expected to be received on investments then credited or to be credited
to such fund on or before the expected disbursement date and any amounts
available to and committed by the Company for completion of the Project.
(d) Notwithstanding the foregoing, the Company shall advise the Trustee on a
regular quarterly basis, in writing, of all changes in the Plans, including,
without limitation, those the Company is entitled to implement without the
consent of the Trustee pursuant to Section 3.02(b) above.
(e) Prior to implementing any modifications to the Plans, the Company shall
determine whether such modifications will increase the Cost of the Project. In
the event any such modifications shall increase the Cost of the Project, and in
the event the amount then on deposit in the Acquisition and Construction Fund
shall not be sufficient to complete the Project as modified by such
modifications to the Plans, and pay in full the increased Cost of the Project,
the Company shall deposit with the Trustee, to be held in a separate account of
the Acquisition and Construction Fund, such additional amounts as shall be
necessary to pay in full the increased Cost of the Project.
Section 3.03 Payment of Cost by the Company. The Company agrees that it will
provide promptly any and all sums of money required to complete the Project,
including all of the following items of Cost, which the Issuer agrees shall be
reimbursable to the extent provided in Section 3.06 hereof:
(a) all expenses to be incurred in connection with the subjection of the Project
to the lien of, and the security interest granted by, the Mortgage, acquisition
of all rights-of-way for access and utility connections to and from the Project
Site, the initial or acceptance fee and expenses of the Trustee, and all fees
required for recording the Mortgage and all financing statements and title
curative documents relating to the Project;
(b) the expense of preparation of the Plans and of all other architectural,
engineering and supervisory services incurred and to be incurred in the
planning, rehabilitation and completion of the Project;
(c) all legal, abstracting, title insurance, financial and accounting fees and
expenses, printing and engraving costs and other expenses incurred in connection
with the
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establishment and insurance of title to the Project Site, the authorization,
sale and issuance of the Bonds, fees and expenses payable to the Underwriter,
and the preparation of this Loan Agreement, the Indenture, the Mortgage, the
Limited Offering Memorandum and all other related documents;
(d) the contract price of all labor, services, materials, supplies and equipment
furnished under any contract for rehabilitation and equipping of the Project and
the cost of all other labor, services, materials, supplies and equipment
necessary to complete the acquisition, rehabilitation, equipping, furnishing and
improving of the Project;
(e) the purchase price for the acquisition of the Project Site and the Project
Building and the cost of acquisition and installation of all items of Project
Equipment included in the Project;
(f) all fees and expenses of the Trustee that become due during the acquisition,
construction, rehabilitation and equipping of the Project;
(g) interest accrued on money borrowed by the Company for temporary financing of
the Cost of the Project, if such money was borrowed by the Company for the
specific purpose of temporarily financing the Cost of the Project and was not
part of a general-purpose open line of credit;
(h) to the extent not paid by a contractor for rehabilitation or installation
with respect to any part of the Project, payment of the premiums on all
insurance required to be taken out and maintained during the period the Project
is under rehabilitation;
(i) payment of, or reimbursement for, interest accruing on the Bonds and taxes
or assessments, if any, that may become payable with respect to the Project
during the period the Project is under construction;
(j) payment of expenses incurred in seeking to enforce any remedy against any
contractor or subcontractor in respect of any default under a contract relating
to the Project;
(k) without limitation by the foregoing, all other expenses which under
generally accepted accounting principles constitute necessary capital
expenditures for the acquisition, rehabilitation and equipping of the Project,
but not including any working capital or expendable supplies or necessary
equipment other than Project Equipment (all of which will nevertheless to be
supplied by the Company from its own funds without reimbursement); and
(l) all advances, payments and expenditures made or to be made by the Issuer,
the Trustee and any other persons with respect to any of the foregoing expenses.
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Anything herein to the contrary notwithstanding, Issuance Costs in excess of two
percent (2%) of the lesser of the face amount of the Series 1997 Bonds or the
proceeds of the Series 1997 Bonds shall not be considered a Cost of the Project
and shall not be eligible to be paid or reimbursed from the proceeds of the
Series 1997 Bonds unless a requisition for such an item is accompanied by an
opinion of Bond Counsel to the effect that the payment of such item will not
result in interest on the Series 1997 Bonds being includable in the gross income
of any owner thereof for Federal income tax purposes.
The Issuer makes no representation or warranty, express or implied, that the
Loan will be sufficient to pay the entire Cost of the Project. If the balance
available for that purpose is not sufficient, the Company will nevertheless
complete the entire Project in accordance with the requirements of Section 3.01
hereof (including the provision of all improvements, access roads, utilities,
machinery, equipment and other items of real and personal property required to
be provided by Sections 3.01(a) and 3.01(b) hereof, regardless of whether such
items are part of the Project or are items of Project Equipment) and pay the
entire Cost, without reimbursement and without abatement or diminution of the
Loan Repayments payable under Article 4 hereof.
Section 3.04 Issuance of Series 1997 Bonds and Application of Proceeds. To
provide funds to finance a portion of the Cost of the Project, all as provided
herein and in the Indenture, the Issuer will issue and sell the Series 1997
Bonds in accordance with the Indenture and the Limited Offering Memorandum and
will cause the proceeds thereof to be received by the Trustee on behalf of the
Issuer as provided in the Indenture.
The Company and the Issuer agree that the proceeds of the Series 1997 Bonds
shall be deposited with the Trustee and applied as provided in the Indenture.
The Company acknowledges and agrees that it shall have no interest in the
proceeds of the Series 1997 Bonds equal to or greater than that of the
Bondholders who shall have a first and prior beneficial interest in such money
and investments until applied in accordance herewith and with the Indenture.
Section 3.05 Items, Documents and Instruments to be Delivered Prior to Issuance
of the Bonds. In addition to those items, documents and instruments required by
Section 2.07 of the Indenture, at or prior to delivery of the Bonds, the Company
shall deliver the following to the Trustee:
(a) certified articles of incorporation of the Company and certificates of good
standing from the State of North Carolina and the State, together with
satisfactory evidence of the Company's qualification to transact business in the
State;
(b) a detailed statement, or estimate, of the Costs of the Project, including
all hard and soft costs, of the entire Project, including, without limitation,
all equipment to be
11
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acquired, certified by the Company Representative to the best of his knowledge
and belief, upon due inquiry, to be correct;
(c) copies of all policies of insurance required by this Loan Agreement or the
Mortgage, or a certificate or certificates of the respective insurers or
insurance agents stating that such insurance is in force and effect;
(d) a commitment to issue an ALTA extended coverage lender's policy of title
insurance in favor of the Trustee in a face amount not less than the principal
amount of the Bonds insuring the first lien position of the Mortgage on fee
simple title to the Project Site free and clear of liens and encumbrances except
Permitted Encumbrances, which title insurance shall be issued by a title
insurance company licensed to do business in the State of Illinois; and
(e) copies of all environmental studies or reports in the Company's possession
relating to the Project Site, together with copies of any correspondence,
opinions or recommendations relating thereto.
Section 3.06 Payment or Reimbursement of Cost.
(a) The Issuer has authorized and directed the Trustee to disburse money from
the Acquisition and Construction Fund and the Issuance Costs Fund in payment or
reimbursement of items of Project Costs and Issuance Costs, respectively,
enumerated in Section 3.03 hereof upon compliance with the requirements of this
Section 3.06.
(b) The Indenture authorizes and directs the Trustee to disburse moneys in the
Acquisition and Construction Fund to or upon the order of the Company for
payments of Costs of the Project, including reimbursement for the cost of
acquiring the Project Site and the Project Building and renovating and
rehabilitating the Project Building, upon receipt by the Trustee of a written
requisition for such payment signed by the Company Representative, pursuant to
which the Company Representative shall certify as follows:
(i) That an obligation in the stated amount has been incurred in connection with
the Project;
(ii) That such obligation is a proper charge against the Acquisition and
Construction Fund and has not been the basis of any previous withdrawal from the
Acquisition and Construction Fund, and specifying to whom such obligation is
owed, accompanied by a bill or statement of account for such obligation;
(iii) That such requisition is for an item which is properly chargeable to the
capital account of the Company for Federal income tax purposes or would be so
chargeable, either with a proper election by the Company or but for a proper
election
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by the Company to deduct the costs, and that payment of this item, when added to
all other payments previously made from the Acquisition and Construction Fund,
will not result in less than substantially all (at least 95%) of the Net
Proceeds of the Series 1997 Bonds being used for Qualified Project Costs;
(iv) That such requisition contains no request for payment of an obligation paid
or incurred prior to the Official Action Date;
(v) That payment of the requisition, as requested, will not result in the
provision of any working capital, directly or indirectly, to the Company or any
related person; and
(vi) That no default or Event of Default exists under this Loan Agreement, the
Mortgage or the Indenture.
In making any such payment from the Acquisition and Construction Fund, the
Trustee may rely on any such requisitions and certificates of the Company
delivered to it pursuant to this Section 3.06(b) and the Trustee shall be
relieved of all liability with respect to making such payments in accordance
with any such requisitions and certificates without inspection of the Project or
any other investigation.
(c) The Indenture authorizes and directs the Trustee to disburse monies in the
Issuance Costs Fund for the payment or reimbursement to the Company of Issuance
Costs upon the receipt by the Trustee of a written requisition for such payment
signed by the Company Representative, pursuant to which the Company
Representative shall certify as follows:
(i) That an obligation in the stated amount has been incurred for Issuance Costs
in connection with the issuance of the Bonds;
(ii) That such obligation is a proper charge against the Issuance Costs Fund and
has not been the basis of any previous withdrawal from the Issuance Costs Fund,
and specifying the purpose and circumstances of such obligation and to whom such
obligation is owed, accompanied by a bill or statement of account of such
obligation;
(iii) That payment of this item, when added to all other payments previously
made from the Issuance Costs Fund, will not result in more than an amount equal
to two percent (2%) of the lesser of the face amount of the Series 1997 Bonds or
the proceeds of the Series 1997 Bonds having been paid or reimbursed from the
proceeds of the Series 1997 Bonds for costs of issuing and selling the Series
1997 Bonds unless such requisition is accompanied by an opinion of Bond Counsel
to the effect that the payment of such item will not result in any interest on
the Series 1997
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Bonds being includable in the gross income of the owners thereof for Federal
income tax purposes;
(iv) That such requisition contains no request for payment of an obligation
incurred prior to the Official Action Date;
(v) That payment of the requisition, as requested, will not result in the
provision of any working capital, directly or indirectly, to the Company or any
related person; and
(vi) That no Event of Default exists under this Loan Agreement or the Indenture.
In making any such payment from the Issuance Costs Fund, the Trustee may rely on
any such requisitions and certificates of the Company delivered to it pursuant
to this Section 3.06(c) and the Trustee shall be relieved of all liability with
respect to making such payments in accordance with any such requisitions and
certificates without any other investigation.
(d) Each request of the Company for disbursement from the Acquisition and
Construction Fund shall be made pursuant to an Acquisition and Construction Fund
Disbursement Request in substantially the form attached hereto as Exhibit C.
Each request of the Company for disbursement from the Issuance Costs Fund shall
be made pursuant to an Issuance Costs Fund Disbursement Request in substantially
the form attached hereto as Exhibit D.
Section 3.07 Establishment of Completion Date. The Completion Date shall be the
date that the following items have been delivered to the Trustee:
(a) The Certificate of Occupancy.
(b) A certificate of the Company Representative stating that:
(i) the renovations and rehabilitation of the Project has been completed in
substantial accordance with the Plans such that the Project is fully operable
for the purposes specified in Section 2.02(f) hereof;
(ii) all buildings and other improvements comprising the Project have direct
connections to all utilities necessary for the intended use thereof, including,
without limitation, adequate sewer, telephone, gas and/or electric services as
of the date of such certificate;
(iii) adequate ingress and egress to and from the Project is available over
dedicated and accepted public streets and rights of way;
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(iv) no default or Event of Default under the Loan Agreement has occurred and is
continuing;
(v) all costs and expenses incurred in connection with the acquisition,
rehabilitation, and equipping of the Project have been fully paid or are being
contested and provisions have been made for the payment thereof if such contest
is unsuccessful;
(vi) the Project and all other facilities in connection therewith have been
acquired, rehabilitated and installed to the Company's satisfaction and are
suitable and sufficient for the operation of the Project for the purpose set
forth in Section 2.02(f) hereof;
(vii) at least 95% of the proceeds of the Series 1997 Bonds have been used to
acquire the Project Site, the Project Building and the Project Equipment, and to
pay Rehabilitation Expenditures in connection with the rehabilitation of the
Project; and
(viii) the Trustee may conclusively rely on such certificate.
Notwithstanding the foregoing, such certificate by the Company Representative
shall state that it is given without prejudice to any rights against third
parties which exist on the date of such certificate or which may subsequently
come into being.
Section 3.08 Enforcement of Contracts and Surety Bonds. In the event of material
default of any contractor or subcontractor under any construction contract or
any other contract made in connection with the Project, or in the event of a
material breach of warranty with respect to any materials, workmanship or
performance, the Company will promptly proceed, either separately or in
conjunction with others, to pursue the remedies of the Company and the Trustee
against the contractor or subcontractor in default and against any surety on a
bond securing the performance of such contract in such manner and to the extent
determined by the Company to be reasonable and prudent. If the Company requests
the Trustee, and agrees with the Trustee to pay all costs and expenses incurred
by the Trustee and to indemnify the Trustee and save the Trustee harmless
against any risks, claims or liabilities arising out of such action, the Company
may in the name of the Trustee, or in its own name, prosecute or defend any
action or proceeding or take any other action involving any such contractor,
subcontractor or surety which the Company on the advice of its Counsel deems
reasonably necessary, and in such event the Trustee will cooperate fully with
the Company and will take all action necessary to effect the substitution of the
Company for the Trustee in any such action or proceeding. Any amounts recovered
by way of damages, refunds, adjustments or otherwise in connection with the
foregoing, after deduction of expenses incurred in such recovery, shall be paid
into the Acquisition and Construction Fund if received before the Completion
Date, and otherwise shall be paid into the Bond Fund and used to purchase or pay
interest on the Bonds as directed by the Company.
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ARTICLE 4
THE LOAN
Section 4.01 Amount and Source of Loan. The Issuer agrees, upon the terms and
conditions herein specified, to make the Loan to the Company in an amount equal
to the aggregate principal amount of the Series 1997 Bonds for the purpose of
financing the Costs of the Project.
Section 4.02 Repayment of Loan. The Company agrees to pay as Loan Repayments
during the Term of this Loan Agreement amounts which, together with any balance
held in the Bond Fund, shall at all times be sufficient to pay all principal of,
premium, if any, and interest on the Bonds as such principal, premium, if any,
and interest become due, at maturity, upon acceleration, upon optional or
mandatory redemption or otherwise.
Loan Repayments may be made by means of Company check or otherwise, provided
that all Loan Repayments shall be good funds in the hands of the Trustee on such
dates as are necessary to satisfy the requirements set forth herein for the
payment of the principal of, premium, if any, and interest on the Bonds.
Section 4.03 Quarterly Payments. Payment of principal of and interest on the
Bonds shall be due in Quarterly Payments commencing on March 1, 1998, and
continuing on each March 1, June 1, September 1, and December 1 thereafter, to
and including the date that all such unpaid principal of the Bonds shall be paid
in full. Principal payments on the Bonds are to be paid to the Trustee in the
four Quarterly Payments prior to the Interest Payment Date on which such
principal is to be paid on the Bonds, either at maturity or by mandatory sinking
fund redemption prior thereto. Interest payments on the Bonds are to be paid to
the Trustee in the two Quarterly Payments prior to the Interest Payment Date on
which such interest is to be paid on the Bonds. The Company shall only be
required to make Quarterly Payments to the extent that monies held in the Bond
Fund for the payment of the principal of and interest due on all Outstanding
Bonds on the next succeeding Interest Payment Date are not sufficient for such
purpose.
Section 4.04 Additional Payments. The Company agrees to pay the following
amounts to the following persons as Additional Payments under this Loan
Agreement:
(a) to the Trustee, when due, all reasonable fees of the Trustee for services
rendered under the Indenture and all fees and charges of paying agents,
registrars, Counsel, accountants, engineers and others incurred at the request
of the Trustee in the performance of services under the Indenture for which the
Trustee and such other persons are entitled to payment or reimbursement;
provided that the Company may, without creating a default hereunder, contest in
good faith the reasonableness of any such services, fees or expenses, other than
the Trustee's fees for ordinary services, as set forth in the Indenture; and
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(b) to the Issuer and its counsel, their fees and expenses in connection with
the authorization, issuance and sale of the Series 1997 Bonds, and all
reasonable costs, expenses and liabilities, including necessary and reasonable
attorneys' fees (i) incurred or paid by the Issuer in satisfaction of any
obligations of the Company hereunder not performed by the Company, (ii) incurred
or paid by the Issuer as a result of a request by the Company or a requirement
of this Loan Agreement or the Indenture, or (iii) incurred by the Issuer in the
defense of any action or proceeding with respect to the Project or this Loan
Agreement or the Indenture or in enforcing this Loan Agreement, the Indenture or
the Mortgage, or arising out of or based upon any other document related to the
issuance of the Bonds including, without limitation, those described in Section
7.04 hereof; provided that, prior to paying any such cost, expense or liability,
the Issuer shall first afford the Company an opportunity to make such payment or
prepayment by giving the Company fifteen (15) days' prior written notice of the
Issuer's intention to do so; provided, however, that the Company shall not be
required to make any such payment under this Section 4.04(b) in the event and to
the extent that such payment would cause the interest on the Series 1997 Bonds
to be includable in the gross income of the owners thereof for Federal income
tax purposes.
(c) to the Bondholders, their reasonable expenses, including reasonable
attorneys' fees, in connection with the occurrence and during the continuation
of an Event of Default hereunder.
Following the payment, prepayment or incurrence of any such cost, expense or
liability, the Additional Payments are payable upon written demand therefor, or
within thirty (30) days following such demand.
Section 4.05 Company's Obligations Unconditional. All Loan Repayments,
Additional Payments and all other payments required of the Company hereunder
shall be paid without set off, counterclaim, abatement, deduction or defense
except as provided in Section 8.05 hereof. The Company will not suspend or
discontinue any Loan Repayments, and will perform and observe all of its other
agreements in this Loan Agreement, and, except as expressly permitted in this
Loan Agreement, will not terminate this Loan Agreement for any cause, including
but not limited to any acts or circumstances that may constitute failure of
consideration, destruction of or damage to the Project, eviction by paramount
title, commercial frustration of purpose, bankruptcy or insolvency of the Issuer
or the Trustee, change in the tax or other laws or administrative rulings or
actions of the United States of America or of the State or any political
subdivision thereof, or failure of the Issuer to perform and observe any
agreement, whether express or implied, or any duty, liability or obligation
arising out of or connected with this Loan Agreement.
Section 4.06 Company's Remedies. Nothing contained in this Article 4 shall be
construed to release the Issuer from the performance of any of its agreements in
this Loan Agreement, and if the Issuer shall fail to perform any such agreement,
the Company may institute such action against the Issuer as the Company may deem
necessary (consistent with the limitations of Section 10.06 hereof), so long as
such action shall not violate the Company's agreements in Section 4.05 hereof.
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The Company may at its own cost and expense, and in its own name, prosecute or
defend any action or proceeding against third parties or take any other action
which the Company deems reasonably necessary in order to ensure the acquisition,
rehabilitation, furnishing, equipping, improving and completion of the Project
and to secure or protect its right of possession, occupancy and use of the
Project under this Loan Agreement.
Section 4.07 Amounts Remaining in Bond Fund. It is agreed by the parties hereto
that after (a) payment in full of the Bonds, (b) payment of all fees, charges
and expenses of the Trustee and any Paying Agents in accordance with the terms
of the Indenture, and (c) payment of all other amounts required to be paid under
this Loan Agreement and the Indenture (including any amounts owed to the
Issuer), and performance of all other obligations of the Company hereunder, any
amounts remaining in the Bond Fund held by Trustee under the Indenture shall be
paid by the Trustee to the Company, and the Issuer shall have no claims to such
amounts.
Section 4.08 Notice to the Issuer of Certain Events. The Company shall promptly
notify the Issuer in writing (a) at such time as the Bonds have been paid in
full, and (b) if an Event of Default occurs hereunder or (c) if a default or an
event which, with the giving of notice or the passage of time, would constitute
a default occurs under the terms of any long-term debt agreement to which the
Company is a party.
Section 4.09 Designation by the Company of Application of Loan Repayments.
Except as set forth in Section 8.03 hereof, the Company shall not be entitled to
designate or direct the application by the Trustee of Loan Repayments made by
the Company, which Loan Repayments shall be applied as set forth in Section 5.05
of the Indenture.
ARTICLE 5
USE, MAINTENANCE, MODIFICATIONS,
TAXES AND INSURANCE
Section 5.01 Possession, Use and Prohibition Against Further Encumbrances. It is
agreed that, as between the Company and the Issuer, the Company shall have sole
and exclusive possession of the Project, subject to the right of the Issuer, the
Trustee and the Bondholders to enter thereon as contemplated herein, in the
Indenture, or in the Mortgage, or for the purpose of inspection at reasonable
times and upon reasonable notice, and the Issuer covenants and agrees that it
will not take any action other than pursuant to this Loan Agreement, the
Indenture, or the Mortgage to prevent the Company from having quiet and
peaceable possession and enjoyment of the Project during the Term of this Loan
Agreement. The Company agrees that it will not make, do, execute or suffer any
act or thing whereby its interest in any property now or hereafter included in
the Project shall or may be impaired, charged or encumbered in any manner
whatsoever, except by Permitted Encumbrances; any impairment, charge or
encumbrance created in violation of this covenant shall, to the extent permitted
by law, be void and of no effect, unless the Company, the Issuer and the Trustee
shall have
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consented in writing to its creation. The Company shall have the right to use
the Project throughout the Term of this Loan Agreement in the conduct of the
Company's business, and for all purposes related or incidental to these
purposes, and such other uses as the Company may decide upon, subject to the
right of the Issuer and the Trustee to enter thereon as contemplated herein or
in the Indenture, and provided that all uses shall conform to the policies and
purposes of the Act and are not inconsistent with the purposes specified in
Section 2.02(f) of this Loan Agreement.
Section 5.02 Maintenance. During the Term of the Loan Agreement, the Company
will at its own expense keep the Project and all parts thereof in good repair
and good operating condition and in safe condition, making all repairs thereto
and renewals and replacements thereof necessary for this purpose, so that the
Project will remain suitable and efficient for use as a facility of the
character described in and contemplated by this Loan Agreement, or such other
uses as are not inconsistent with the Act or this Loan Agreement.
Section 5.03 Improvements. The Company may from time to time, at its own
expense, make any Improvements, located wholly within the boundary lines of the
Project Site, or partially within and partially without such boundary lines,
that it may deem desirable for its purposes and that do not adversely affect the
structural integrity or value of the Project. Except as otherwise provided in
Section 5.09, all Improvements made by the Company within the boundary lines of
the Project Site shall become a part of the Project and subject to the
provisions of this Loan Agreement and the Mortgage.
Section 5.04 Liens. The Company will not permit any mechanics' or other liens to
remain outstanding against the Project for labor or materials furnished in
connection with completion of the Project or any Improvements, repairs, renewals
or replacements; provided, that if the Company shall first obtain and cause to
be recorded in the office of the County Recorder of Kankakee County, Illinois, a
surety bond which shall be sufficient in all respects under applicable law to
require the lien claimant to discharge his lien against the Project, the Company
may in good faith contest any mechanics' or other liens filed or established and
in such event may permit the items contested to remain undischarged and/or
unsatisfied during the period of such contest and any appeal therefrom.
Section 5.05 Removal of Project Equipment. The Company may remove or permit the
removal of any Project Equipment from the Project Site in accordance with the
following provisions:
(a) In any instance where the Company in its sound discretion determines that
any item of Project Equipment with a market value of $50,000 or more has become
inadequate, obsolete, worn out, unsuitable, undesirable or unnecessary for the
operation of the Project, the Company may, at its own expense, remove and
dispose of such item of Project Equipment and (except as provided in subsection
(b) hereof) substitute and install other items of machinery, equipment or other
personal property, not necessarily having the same function, provided that such
removal and substitution shall not impair the operating utility of the Project
and, provided, further, that the Company shall not dispose of Project Equipment
having a market value greater than $350,000 in any fiscal year without prior
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approval of a Majority of Holders. Subject to the provisions of Section 5.09
hereof, all such substituted items shall be installed free of all liens and
encumbrances, other than Permitted Encumbrances, and shall become a part of the
Project as Project Equipment. The Company will cooperate with the Issuer and the
Trustee and will pay all costs, including counsel's fees, incurred in subjecting
to the lien of the Mortgage all items so substituted, and the Trustee and, to
the extent reasonably necessary, the Issuer, will cooperate with the Company at
the Company's expense in securing, if necessary, release of the property for
which the substitution is made under the Mortgage and in providing such bills of
sale or other documents as may be required to facilitate the removal and
substitution. In the event the market value of the substituted items is less
than the market value of the Project Equipment disposed of as reasonably
determined by the Company Representative, the Company shall pay into the
Redemption Account an amount equal to the difference.
(b) Upon removal of items of Project Equipment of the type described in
subsection (a) above, and provided the operating utility of the Project is not
impaired, the Company may decide not to make any substitution and installation
of other items of machinery, equipment or other personal property, provided
(unless the lien of the Indenture has been discharged under Article Eight
thereof or the Company's obligation to make Loan Repayments has been abated
under Article Eight hereof): (1) that in the case of the sale of any such
Project Equipment, the Company shall deposit the sale proceeds in the Redemption
Account, (2) that in the case of a trade-in of any such Project Equipment for
items not to be utilized as a part of the Project, the Company shall account for
the credit received by it in the trade-in by depositing an equivalent amount in
the Redemption Account and (3) that in the case of any other disposition of such
Project Equipment, the Company shall deposit in the Redemption Account an amount
equal to the market value of the removed items as reasonably determined by the
Company Representative. The Issuer and the Trustee will cooperate with the
Company at the Company's expense in securing a release of the property to be
removed if required under the Mortgage and in securing such bills of sale or
other documents as may be required to facilitate the removal and disposition.
(c) The Company shall annually, within ninety (90) days following the end of
each fiscal year of the Company, commencing with the fiscal year ending December
1998, report to the Trustee by Company Representative's certificate the removal
of any Project Equipment pursuant to subsections (a) or (b) above, and amounts
required to be accounted for by the Company, if any, shall promptly be paid to
the Trustee for deposit in the Redemption Account after any substitution, sale,
trade-in or other disposition. When required pursuant to this subsection (c),
the certificate submitted shall specify the items of the Project Equipment
removed, the items of property substituted therefor, if any, and the amount, if
any, required to be paid to the Trustee pursuant to the provisions of this
Section 5.05. Where such certificate indicates that substitute items of property
have been acquired and installed, the certificate shall be accompanied by (i)
the financing statement with respect to such substitute items of property and
(ii) a certificate of the Company Representative stating that all steps
requisite to perfection of the security interests of the Trustee in and to
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such substitute items of property under the Mortgage have been duly taken. The
Company will execute all instruments advisable in the opinion of Counsel for
perfection of the respective security interests as aforesaid.
(d) Any amounts paid by the Company to the Trustee for deposit in the Redemption
Account pursuant to the provisions of this Section 5.05 shall be deposited by
the Trustee in the Redemption Account and shall be used on the next succeeding
Interest Payment Date on which principal is payable on the Bonds toward the
payment of the principal of the Bonds due and payable, or subject to mandatory
sinking fund redemption or, to the extent the Bonds may then be redeemed prior
to maturity, optional redemptions of the Bonds, on such Interest Payment Date.
(e) In addition to the rights provided in Sections (a) through (d) of this
Section 5.05, the Company shall have the right to remove any items of Project
Equipment from the Project Site, provided that such Project Equipment shall (1)
be removed to and situated on other property adjacent to the Project Site on
which the Company may presently or in the future conduct the same kind of
operation as that to be conducted at the Project, (2) be used by the Company for
the same purpose as contemplated by this Loan Agreement, and (3) remain subject
to the lien of the Mortgage and to no other liens, except for Permitted
Encumbrances.
Section 5.06 Taxes and Other Governmental Charges and Utility Charges. The
Company will make, or will cause to be made, promptly all payments due during
the Term of this Loan Agreement on taxes and special assessments lawfully levied
upon or with respect to the Project, other charges lawfully made by any
governmental body for public improvements that may be or become secured by a
lien on the Project, and utility and other charges incurred in the operation,
maintenance, use, occupancy and upkeep of the Project, including but not limited
to taxes or governmental charges on any property of the Company brought in or
upon the Project, sales and other excise taxes on products thereof, and any
taxes levied upon or with respect to income or profits from the Project which,
if not paid, would become a lien thereon prior to or on a parity with the lien
of the Mortgage or prior to or on a parity with the pledge and assignment of
such revenues and receipts made in the Mortgage. With respect to special
assessments or other governmental charges that may lawfully be paid in
installments over a period of years, with or without interest, the Company shall
be obligated to pay only such installments and interest as are required to be
paid during the Term of this Loan Agreement. Notwithstanding the foregoing, the
Company may, at its own expense, in good faith, contest any such taxes,
assessments and other charges, provided that such contest will not subject the
Project or any part thereof to loss or forfeiture and provided that the Company
shall first deposit with the Trustee a surety bond or cash in the amount of the
taxes, assessments or other charges being contested, pending the outcome of such
contest.
Section 5.07 Insurance. (a) The Company agrees, at its sole cost and expense, to
keep the Project, including all buildings, structures, improvements and personal
property, and all other property of an insurable character, insured at all times
during the Term of this Loan Agreement
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(including any period or periods of time during which any buildings, structures
and improvements are in the course of remodeling or construction) against the
risks set forth below:
(i) Policies of "all-risk" insurance on the Project in an amount equal to at
least 100% of the full replacement cost of the Project, without deduction for
depreciation, providing for a deductible not to exceed $250,000, and in an
amount sufficient to prevent the Company or the Trustee from becoming a
co-insurer within the terms of the applicable policies.
(ii) Flood hazard insurance or evidence that it is not required for the Project.
(iii) Business interruption insurance with respect to the hazards insured
against by the insurance described in clause (i) above in an amount at least
sufficient to pay debt service, taxes or payments in lieu of taxes, the salaries
and expenses of key employees of the Company required for the operation of the
Project and other unavoidable costs for a least a six-month period.
(iv) Boiler and machinery coverage (direct damage and use and occupancy) on a
replacement cost basis.
(b) The Company will deliver copies of all such policies (or certificates
evidencing insurance if the policies are master policies) to the Trustee, and,
prior to the expiration date of each such policy, will deliver to the Trustee a
copy or copies of a renewal policy or policies (or a certificate or certificates
evidencing such renewal or renewals if the policies are master policies) marked
"premium paid" or accompanied by other evidence of payment satisfactory to the
Trustee. The Company will notify the Trustee of any changes to or cancellation
of any such policy prior to such change or cancellation. The Company will not
permit any condition to exist at the Project which would wholly or partially
invalidate the insurance thereon as set forth herein.
(c) The Company agrees, at its own cost and expense, to provide and keep in
force during the Term of this Loan Agreement, comprehensive general liability
insurance with respect to the Project and automobile liability insurance, with
limits not less than the following:
(i) comprehensive general liability insurance
(A) bodily injury - $1,000,000 each person and $1,000,000 in the aggregate.
(B) property damage - $1,000,000 each occurrence.
(ii) comprehensive automobile liability insurance
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(A) bodily injury - $500,000 each person and $500,000 each occurrence
(B) property damage - $500,000 each occurrence
Such insurance shall cover the Project, including elevators, hoists, sidewalks,
passageways and other property in or about the adjoining streets.
(d) The Company agrees, at its own cost and expense, to provide and keep (or
cause to be kept) in force during the Term of this Loan Agreement workers'
compensation and employer's liability insurance covering all employees of the
Company employed at the Project in amounts required by law.
(e) The Company agrees, at its own cost and expense, to provide and keep (or
cause to be kept) in force during the Term of this Loan Agreement, excess
liability insurance for comprehensive general liability insurance and automobile
liability insurance with a combined limit not less than $5,000,000.
(f) The Company will deliver copies of all insurance policies (or certificates
evidencing insurance if the policies are master policies) required by
subsections (c) through (e) above to the Trustee when obtained, and, prior to
the expiration date of each such policy, will deliver to the Trustee a copy or
copies of a renewal policy or policies (or a certificate or certificates
evidencing such renewal or renewals if the policies are master policies) marked
"premium paid" or accompanied by other evidence of payment satisfactory to the
Trustee. The Company will notify the Trustee of any changes to or cancellation
of any such policy prior to such change or cancellation.
Section 5.08 Advances. If the Company shall fail to make all repairs, pay all
liens, taxes, assessments and other charges and maintain all insurance required
in this Article 5 after ten days' written notice from the Trustee, the Issuer or
the Trustee may, but shall not be obligated to, take such action as may be
necessary to cure such failure, including advancement of money, and the Company
shall be obligated to repay all such advances within thirty (30) days after
written notice thereof with interest at the Alternative Rate from the date of
each such advance.
Section 5.09 Installation of the Company's Equipment. The Company may, at any
time and from time to time, in its sole discretion and at its own expense,
install items of furniture, movable machinery and equipment or other personal
property in or upon the land, Project Buildings and structures comprising the
Project in addition to the Project Equipment. All such items shall remain the
sole property of the Company, in which the Issuer and the Trustee shall have no
interest, and may be modified or removed by the Company at any time while it is
not in default hereunder and while such items are not in the Company's
reasonable judgment needed for the continuance of the operation of the Project,
provided that the Company shall repair and restore any and all damage to the
Project resulting from the installation, modification or removal of any such
items.
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Nothing in this Loan Agreement or the Mortgage shall prevent the Company, after
delivery of the Mortgage, from purchasing items to be installed pursuant to this
Section 5.09 under a conditional sale or lease-purchase contract, or subject to
a vendor's lien or security agreement, as security for the unpaid portion of the
purchase price thereof, provided that no such lien or security interest shall
attach to any part of the Project.
ARTICLE 6
DAMAGE, DESTRUCTION AND CONDEMNATION
Section 6.01 Company to Repair, Replace, Rebuild or Restore. If all or any part
of the Project is taken by eminent domain, or destroyed or damaged:
(a) The Company shall proceed promptly, subject to the provisions of subsection
(b), to replace, repair, rebuild and restore the Project to substantially the
same condition as existed before the taking or event causing the damage or
destruction, with such changes, alterations and modifications (including
substitution or addition of other property) as may be desired by the Company and
will be suitable for continued operation of the Project for the purposes
specified in Section 2.02(f) hereof and for the business purposes of the Company
and will not impair the Project as a "project" within the meaning of the Act,
and the Company will pay all costs thereof and be entitled to retain the Net
Loss Proceeds of the condemnation award or insurance claim for such purpose.
(b) If the condemnation award or insurance claim is equal to or less than
$750,000, the Company shall be entitled to receive and retain the Net Proceeds
thereof for the purposes described in subsection (a) hereof, provided that if
the Net Proceeds exceed $500,000, the Company shall promptly give notice thereof
to the Issuer, the Trustee and the Bondholders. In the event the condemnation
award or insurance claim exceeds $750,000, the Net Proceeds thereof shall be
payable directly to the Trustee for deposit in the Property Insurance and Award
Fund. The Company shall retain the services of a nationally-recognized
independent insurance consultant and request such consultant to prepare a report
to determine (i) whether the repair, reconstruction, restoration or replacement
of the Project or any portion thereof damaged, destroyed or taken is
economically feasible and will restore the Project to the physical and operating
condition that existed prior to such event and (ii) whether the Net Proceeds
thereof will be sufficient to pay the cost of repairing, reconstructing,
restoring or replacing the portion of the Project affected by such loss, damage
or condemnation (including, without limitation, architects' and attorneys' fees
and expenses), which report shall be delivered to the Trustee and any Bondholder
owning at least ten percent (10%) in aggregate principal amount of Outstanding
Series 1997 Bonds, within thirty (30) days following the occurrence of such
damage, destruction, condemnation or taking. If the report determines that the
foregoing conditions are satisfied, the Company shall have delivered or shall
thereupon deliver to the Trustee, not later than sixty (60) days following the
delivery of the consultant's report:
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(A) plans and specifications, prepared by an architect, necessary to effect such
repair, reconstruction or replacement and an executed construction contract for
such work; and
(B) cash in an amount equal to the funds, if any, in excess of the Net Proceeds
required , as set forth in the report, to complete the repair, reconstruction or
replacement of the damaged, destroyed, condemned or taken portion of the
Project.
Unless a Majority of Holders object, within fifteen (15) days following receipt
of such report and a copy of the plans and specifications, the Company shall be
entitled to proceed, and, if it has not already done so, shall proceed,
promptly, to repair, reconstruct and/or replace the affected portion(s) of the
Project, including all fixtures, furniture and equipment and effects, to its
original condition to the extent possible. Thereafter, moneys payable to the
Trustee for deposit in the Property Insurance and Award Fund shall be disbursed
upon the written request of the Company Representative which shall set forth (i)
the requisition number, (ii) the name and address of the person, firm or
corporation to whom or which payment is to be made, (iii) the amount to be paid,
and (iv) that the obligation described therein has been properly incurred, is a
proper charge against the Property Insurance and Award Fund and has not been the
basis of any previous disbursement, and shall be accompanied by copies of bills,
invoices or receipts (as appropriate) for each disbursement so requested.
If the report of the insurance consultant delivered as provided above concludes
that the conditions set forth above are not satisfied or fail to meet the
requirements relating to repair or reconstruction or replacement, as set forth
above, or if a Majority of the Holders object to such repair, reconstruction or
replacement, the Company shall apply the Net Proceeds, together with any
additional moneys necessary for such purpose, to repay the Loan and the Series
1997 Bonds shall be redeemed in accordance with the provisions of Section
3.01(2)(a) of the Indenture.
(c) If the Net Proceeds are insufficient to pay in full the cost of any repair,
restoration, modification or improvement undertaken pursuant to this Section
6.01, unless the Series 1997 Bonds will be redeemed, as provided herein, the
Company will nevertheless complete the work and will pay any cost in excess of
the Net Proceeds. If, by reason of any such insufficiency of the Net Proceeds,
the Company shall make any payments pursuant to the provisions of this Section,
the Company shall not, by reason of any such payments, be entitled to any
reimbursement therefor from the Trustee or any Bondholder, nor shall the Company
be entitled to any abatement or diminution of any Loan Repayments or any other
amount payable hereunder.
(d) Any balance of Net Loss Proceeds remaining in the Property Insurance and
Award Fund after payment of all costs of any repair, replacement or restoration
shall be paid into the Redemption Account, or, if there are no Outstanding
Bonds, to the Company.
(e) All Project buildings, improvements and equipment acquired in the repair,
replacement or restoration of the Project, together with any interests in real
property necessary for such restoration, shall be deemed a part of the Project
and available for use and occupancy by the
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Company without the payment of any amounts other than those provided in Article
4 hereof, to the same extent as if they had been specifically described in this
Loan Agreement; provided that no real property, interest in real property,
Project Buildings, improvements or equipment shall be acquired subject to any
lien or encumbrance, other than the Mortgage and Permitted Encumbrances.
(f) The Net Loss Proceeds of any (1) insurance or portion thereof attributable
to damage or destruction separately incurred by property of the Company not
constituting part of the Project, or (2) condemnation award or portion thereof
separately awarded for damages to or taking of the property of the Company not
constituting part of the Project, or for damages on account of the taking of or
interference with the Company's rights to possession, use or occupancy of the
Project, shall be and remain at all times the property of the Company not
constituting part of the Project.
Section 6.02 Cooperation of the Issuer and Trustee. The Issuer and Trustee will
cooperate fully with the Company, at the Company's expense, in filing any proof
of loss with respect to any insurance policy covering casualties referred to in
Section 6.01 hereof, in the handling and conduct of any litigation arising with
respect thereto, and in the handling and conduct of any prospective or pending
condemnation proceedings affecting the Project or any part thereof, and will, to
the extent they may lawfully do so, permit the Company to litigate in any such
litigation or proceeding in the name and on behalf of the Issuer and Trustee.
Provided that no Event of Default has occurred and is continuing hereunder,
neither the Trustee nor the Issuer will voluntarily settle or consent to the
settlement of any proceeding arising out of any insurance claim, or any
prospective or pending condemnation proceeding, with respect to the Project or
any part thereof without the prior written consent of the Company.
ARTICLE 7
COMPANY'S COVENANTS;
TAX EXEMPT STATUS OF SERIES 1977 BONDS
Section 7.01 Covenants for Benefit of Trustee and Bondholders. The Company
recognizes the authority of the Issuer to assign certain of its interests in and
pledge all Loan Repayments receivable under this Loan Agreement to the Trustee
as security for the payment of the principal of, redemption premiums, if any,
and interest on the Bonds and the payment of all fees and expenses of the
Trustee and others as provided in the Indenture. Each of the terms and
provisions of this Loan Agreement is a covenant for the use and benefit of the
Trustee and the Bondholders, so long as any thereof shall remain; but upon
payment or provision for payment in full of the Bonds and of all fees and
charges of the Issuer, the Trustee and any Paying Agent in accordance with
Article Eight of the Indenture, and performance of all other obligations of the
Company hereunder, all references in this Loan Agreement to the Bonds and the
Trustee shall be ineffective, and neither the Trustee nor any Bondholder shall
thereafter have any rights hereunder, save and except those that shall have
theretofore vested.
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Section 7.02 Inspection and Access. The Company agrees that the Issuer, the
Trustee, the Bondholders and their duly authorized agents shall have the right
at all reasonable times upon reasonable notice to examine and inspect, and for
that purpose to enter upon, the Project, and shall also have such rights of
access to the Project as may be reasonably necessary to cause the rehabilitation
of the Project to be completed as provided in Article 3 hereof and to cause the
Project to be properly maintained in accordance with Article 5 hereof, in the
event of failure by the Company to perform these obligations. The granting of
these rights to the Issuer shall not create any duty or obligation on the part
of the Issuer to exercise such rights.
Section 7.03 Reports. The Company covenants and agrees that it will furnish, or
cause to be furnished, to the Trustee the reports required by Section 4.07 of
the Indenture as and when required thereby. In addition, the Company covenants
and agrees to give prompt written notice of the occurrence of any of the
following events, to the extent deemed material by the Company, to each national
municipal securities information repository then approved and recognized by the
Securities and Exchange Commission:
(i) Default in the payment by the Company of amounts due hereunder;
(ii) Breach by the Company of any covenant or agreement herein;
(iii) Default by the Company with respect to any covenant or agreement in
connection with indebtedness in excess of $1,000,000 for borrowed money;
(iv) Receipt by the Company of an adverse tax opinion or the occurrence of an
Event of Taxability with respect to the Bonds;
(v) Modifications of the rights of the Bondholders;
(vi) Bond redemptions (other than mandatory sinking fund redemptions);
(vii) Defeasance of all or any portion of the Bonds; or
(viii) Release, substitution or sale of any real property or improvements
thereto securing repayment of the Bonds.
Section 7.04 Indemnity. (a) The Issuer, the Trustee and the Bondholders and
their respective members, officers, agents, employees, successors and assigns or
other elected or appointed officials of the Issuer, past, present or future
(hereinafter the "Indemnified Persons") shall not be liable to the Company by
reason of the Issuer's execution and delivery of this Loan Agreement, the
Trustee's execution and delivery of the Indenture or the Bondholders purchase of
the Bonds. The Company shall defend, indemnify and hold the Indemnified Persons
harmless from any loss, claim, damage, tax, penalty or expense (including
reasonable attorneys' fees), or liability of any nature due to any and all
suits, actions, legal or administrative proceedings, or claims arising or
resulting from,
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or in any way connected with: (i) the financing, installation, operation, use or
maintenance of the Project (ii) any act, failure to act, or misrepresentation by
any person in connection with the issuance, sale or delivery of the Bonds, or
(iii) any act, failure to act, or misrepresentation by the Issuer in connection
with this Loan Agreement or any other document involving the Issuer, the Trustee
or the Bondholders in this matter. If any suit, action or proceeding is brought
against any Indemnified Person, such suit, action or proceeding shall be
defended by Counsel to the Company and the Company shall immediately, upon
notice thereof, assume the defense thereof at its own cost and expense. None of
the Issuer, the Trustee, the Bondholders or the Company shall be liable for any
settlement of any proceeding made without each of their consent (which consent
shall not be unreasonably withheld).
(b) The Company shall also indemnify the Indemnified Persons for all reasonable
costs and expenses, including reasonable attorneys' fees, incurred in : (i)
enforcing any obligation of the Company under this Loan Agreement, the Mortgage
or any related agreement, (ii) taking any action requested by the Company, (iii)
taking any action required by this Loan Agreement, the Mortgage or any related
agreement, or (iv) taking any action considered necessary in the reasonable
judgment of the Issuer and which is authorized by this Loan Agreement, the
Mortgage or any related agreement.
(c) Any provision of this Loan Agreement, the Mortgage or any other instrument
or document executed and delivered in connection therewith to the contrary
notwithstanding, the Issuer, the Trustee and the Bondholders retain the right to
enforce any rights accorded any of them by Federal or State law or regulation or
ordinance, and nothing in this Loan Agreement shall be construed as an express
or implied waiver thereof.
(d) If the Issuer is required, requested or permitted to take any action
pursuant to this Loan Agreement, the Mortgage or any other instrument executed
in connection herewith for the benefit of the Company, it will do so if, and
only if, (i) the Issuer is a necessary party to any such action or proceeding,
(ii) the Issuer has received specific written direction from the Company, as
required hereunder or under any other instrument executed in connection
herewith, as to the action to be taken by the Issuer, and (iii) a written
agreement of indemnification and payment of costs, liabilities and expenses
satisfactory to the Issuer has been executed by the Company prior to the taking
of any such action by the Issuer.
(e) The obligations of the Company pursuant to this Section 7.04 shall survive
any assignment or termination of this Loan Agreement.
Section 7.05 Continuing Existence and Qualification. The Company is and
throughout the Term of this Loan Agreement will remain duly qualified to do
business in the State and will maintain its existence, will not dissolve or
otherwise dispose of all or substantially all of its assets, and, except as
permitted by this Section or Section 8.01 hereof, will not consolidate with or
merge into another entity or permit any other entity to consolidate with or
merge into it without the express consent of the Trustee and a Majority of
Holders. Notwithstanding the foregoing, the Company shall be
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permitted to merge or consolidate with any other entity or take any other
similar actions without the consent of the Trustee or the Bondholders, if, (i)
in the opinion of Bond Counsel furnished by the Company to the Issuer and the
Trustee, such merger, consolidation or other action will not subject the
interest payable on the Series 1997 Bonds to inclusion in the gross income of
the owners thereof for Federal income tax purposes, (ii) the surviving or
combined entity will have a net worth at least equal to the net worth of the
Company immediately prior to such consolidation, merger or other similar action,
(iii) the surviving or resulting entity in any such transaction, or the
transferee in any sale or other transfer, shall have assumed the obligations
hereunder in writing, and (iv) immediately after giving effect to such
transaction, no Event of Default, and no event which after notice or lapse of
time, or both, would become an Event of Default, shall occur or be continuing.
Every surviving, resulting or transferee entity and other person referred to in
this Section 7.05 shall be bound by all of the covenants and agreements of the
Company herein with respect to any further consolidation, merger, sale or
transfer and shall execute an appropriate instrument assuming such covenants and
agreements.
Section 7.06 Maintenance of Security Interests. In accordance with the
provisions of Section 5.05 hereof, the Company shall annually, within ninety
(90) days following the end of each fiscal year of the Company, commencing with
the fiscal year ending December 31, 1998, deliver to the Trustee a Company
Representative's certificate describing each item of Project Equipment with a
market value of $50,000 or more which has not been described in the Disbursement
Requests hereof or in a previous certificate required by this Section 7.06,
which has been added to the Project, whether as a substitution, replacement or
addition, and whether or not, when added, it became part of the real property,
and further certifying that, except for such items of Project Equipment which
have been released from this Loan Agreement pursuant to Section 5.05 hereof and
from the Indenture pursuant to Section 6.03 thereof or taken by exercise of the
power of eminent domain as provided in Section 6.01 hereof or substituted or
replaced as described in this Section 7.06, the items of Project Equipment
described in Exhibit B to this Loan Agreement are still in existence and are
still situated on the Project Site, together with an opinion of Counsel that all
steps requisite to perfection of the security interests granted to the Trustee
under the Indenture by the Issuer and under the Mortgage by the Company have
been duly taken, or specifying the further filings and/or refilings and renewals
required in order to continue perfection of such security interests for so long
as any Bonds remain Outstanding. The Company will prepare and execute all
instruments, including financing statements and continuation statements,
necessary or advisable for perfection of and continuance of the perfection of
the respective security interests as aforesaid. However, all obligations of the
Company under this Section 7.06 are subject to the condition that the Issuer and
the Trustee shall promptly execute all instruments, including financing
statements and continuation statements, presented to them by the Company and
required of them for such purpose. Subject to the provisions of Article Ten of
the Indenture, the Trustee will file and record all such instruments or cause
them to be filed and recorded.
Section 7.07 Mortgage. The Company agrees to authorize, execute and deliver the
Mortgage to the Issuer and hereby conveys to and grants a security interest in
favor of the Issuer (to be assigned to the Trustee for the benefit of the
Trustee and the Bondholders from time to time) in
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and to its interest in the property described in the granting clauses of the
Mortgage (as the same may exist from time to time). In order to perfect such
conveyance and security interest the Company will deliver to the Trustee,
concurrently with the execution and delivery of this Loan Agreement and the
Mortgage, any appropriate financing statements, and thereafter will execute and
deliver to the Trustee, or appropriate public officer or officers, such other
documents, instruments, financing and other continuation statements when and as
the same may be required to perfect and continue to perfect the lien and
security interest granted to the Trustee pursuant to the Mortgage .
Section 7.08 Indenture. The Company agrees to comply with the terms and
provisions of the Indenture applicable to it and accepts each of its obligations
expressed or implied thereunder.
Section 7.09 Assignment of Issuer's Rights. As security for payment of the
Bonds, the Issuer is assigning to the Trustee pursuant to the Indenture certain
of the Issuer's rights under this Loan Agreement, including the right to receive
payments hereunder (excepting amounts payable or rights granted to the Issuer
relating to rebate to the United States of America, payments of the Issuer's
initial and continuing fees and expenses, reimbursement, indemnification,
limited liability, notice, requests, and other communications). The Issuer
directs the Company to make the payments required hereunder (except such
payments relating to rebate to the United States of America and for fees,
expenses and indemnification of the Issuer) directly to the Trustee, and the
Company hereby assents to such assignment and agrees to make payments directly
to the Trustee without defense or set-off by reason of any dispute between the
Company and the Issuer or the Trustee. By virtue of such assignment, the Trustee
shall be a third-party beneficiary of this Loan Agreement and shall have the
right to enforce the obligations of the Company hereunder.
Section 7.10 Operation of Project as a Manufacturing Facility. During the Term
of this Loan Agreement, the Company shall operate the Project as a
"manufacturing facility" within the meaning of Section 144(a)(12)(C) of the Code
(i.e., a facility used in the manufacturing or production of tangible personal
property (including the processing resulting in a change in the condition of
such property)).
Section 7.11 Financial Covenants. So long as this Loan Agreement is in effect,
and until payment in full of the Bonds and performance of all other obligations
of the Company under this Loan Agreement the Company will maintain:
(a) a minimum current ratio at all times greater than or equal to 1.50 to 1.00.
(b) a minimum tangible net worth greater than or equal to $60,000,000 as of
December 31, 1997. In addition, beginning as of December 31, 1998, and on the
last day of each calendar year thereafter during the term of this Loan
Agreement, the required minimum tangible net worth shall be increased
cumulatively by an amount equal to 60% of the net income of the Company (on a
consolidated basis) for the preceding year.
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(c) a ratio of total liabilities to tangible net worth less than or equal to (i)
2.50 to 1.00 during the first year following the date of this Loan Agreement,
and (ii) 2.25 to 1.00 thereafter.
(d) a minimum fixed charge coverage ratio at all times greater than or equal to
1.30 to 1.00.
All such computations shall be made in accordance with generally accepted
accounting principles consistently applied.
The computations required by subsections (a) through (d) above shall be made at
the end of each Quarter and the Company shall file with the Issuer and the
Trustee, within forty-five (45) days following the end of each Quarter, a
written certification from a Company Representative as to compliance with each
of the requirements in subsections (a) through (d) above. At the end of each
fiscal year of the Company, the Company shall file with the Issuer and the
Trustee, within ninety (90) days following the end of such fiscal year, a
certification by an independent certified public accountant verifying compliance
with each of the requirements in subsections (a) through (d) above. In the event
the Company is not in compliance with any of the requirements set forth in
subsections (a) through (d) above at the end of two successive Quarters, the
Company will be required to submit to the Issuer and the Trustee, together with
the certification of compliance by a Company Representative required above, a
plan designed to place the Company in compliance with any of the above
requirements with which the Company has not been in compliance for two
successive Quarters. In the event the Company is unable to comply with any of
the requirements set forth in subsections (a) through (d) above for four
successive Quarters, the Company shall retain a nationally-recognized management
consulting firm acceptable to the Issuer, the Trustee and a Majority of Holders
to prepare a report making recommendations, and establishing a progress schedule
over a period not to exceed six successive Quarters after the date of issuance
of such report, to correct all deficiencies with such requirements, and the
report of such management consulting firm shall be completed and delivered to
the Issuer, the Trustee and the Bondholders no later than one-hundred- twenty
(120) days after the end of the fourth consecutive Quarter of noncompliance. In
the event the Company shall be in compliance with each of the requirements in
subsections (a) through (d) above for four successive Quarters after the Company
has retained a management consulting firm as set forth above, the Company shall
be required to file only the quarterly written certification by a Company
Representative, and the annual certification by an independent certified public
accountant, as to compliance with such requirements as set forth above until
such time as the Company is not in compliance with any of such requirements at
the end of two successive Quarters, at which time the Company shall again be
required to submit to the Issuer, the Trustee and the Bondholders a plan
designed to place the Company in compliance with such requirements.
The provisions of this Section 7.11 shall be subject to modification and
amendment at any time with the written consent of the Issuer and a Majority of
the Holders.
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Section 7.12 Assurance of Tax Exemption. The Company recognizes that the
exclusion of the interest paid on the Series 1997 Bonds from the gross income of
the owners thereof for Federal income tax purposes is dependent upon the
qualification of the Series 1997 Bonds as "qualified small issue bonds" under
Section 144 of the Code and the Regulations. For this purpose, the Company
hereby further represents, covenants, and agrees as follows:
(a) All of the Net Proceeds of the Series 1997 Bonds, after payment of Issuance
Costs to the extent permitted by Section 7.12(b) hereof, shall be used to pay
for Qualified Project Costs.
(b) An amount not in excess of two percent (2%) of the lesser of the face amount
of the Series 1997 Bonds or the proceeds of the Series 1997 Bonds may be used to
pay for, or provide for the payment of, Issuance Costs. For this purpose, if the
fees of the Underwriter are retained as a discount on the purchase of the Series
1997 Bonds, such retention shall be deemed to be an expenditure of proceeds of
the Series 1997 Bonds to pay Issuance Costs.
(c) The Company shall not take any action or permit or suffer any action to be
taken if the result of the same would be to cause the Series 1997 Bonds to be
"Federally guaranteed" within the meaning of Section 149(b) of the Code and the
Regulations promulgated thereunder.
(d) No portion of the proceeds of the Series 1997 Bonds shall be used to provide
any residential real property for family units, private or commercial golf
course, country club, massage parlor, tennis club, skating facility (including
roller skating, skateboard, and ice skating), racket sports facility (including
any handball or racquetball court), hot tub facility, suntan facility,
racetrack, health club facility, airplane, sky box or other private luxury box,
facility primarily used for gambling, or store the principal business of which
is the sale of alcoholic beverages for consumption off premises.
(e) No portion of the proceeds of the Series 1997 Bonds shall be used to provide
a facility, the primary purpose of which is one of the following: retail food
and beverage services, automobile sales or service, or the provision of
recreation or entertainment.
(f) The proceeds of the Bonds will be used with respect to facilities located or
to be located entirely within the City.
(g) The Company, or one or more of its wholly-owned subsidiaries, will be the
only principal user of the land, facilities and equipment to be acquired and
rehabilitated with the proceeds of the Bonds within the meaning of Section
144(a) of the Code.
(h) There are no outstanding obligations of any state, territory or possession
of the United States, or any political subdivision of the foregoing or of the
District of Columbia,
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the proceeds of which have been or are to be used primarily with respect to
facilities located within the City (or with respect to any contiguous or
integrated facilities within the meaning of the Code) and which are to be used
primarily by the Company (including any person related to the Company within the
meaning of Section 144(a)(3) of the Code) other than the Bonds.
(i) The Project will at all times consist of land and property which is subject
to the allowance for depreciation provided in Section 167 of the Code.
(j) No portion of the proceeds of the Bonds will be used, directly or
indirectly, to provide working capital for the Company or any related person.
(k) The sum of the principal amount of the Series 1997 Bonds, plus capital
expenditures (determined in accordance with Section 144(a)(4) of the Code and
the applicable Regulations) paid or incurred during the six-year period
beginning three years before the date of issuance of the Series 1997 Bonds and
ending three years after the date of issuance of the Series 1997 Bonds for
facilities located within the City having as principal users the Company or any
related person to the Company will not exceed $10,000,000, and the Company
covenants not to sell, lease, or enter into any other arrangement or make any
other capital expenditures with respect to the Project that would cause this
$10,000,000 limitation to be exceeded.
(l) The Company will not allow any other Person to become an owner or principal
user of the Project during the three years following the later of the date of
issuance of the Series 1997 Bonds, or the date the Project is placed in service,
without an opinion of Bond Counsel to the effect that such action will not cause
the Series 1997 Bonds to exceed the $40,000,000 limitation set forth in Section
144(a)(10) of the Code.
(m) Rehabilitation Expenditures with respect to the Project will equal or exceed
15% of the cost of acquiring the Project Building and of the cost of acquiring
any Project Equipment financed with proceeds of the Series 1997 Bonds, the first
use of which will not occur pursuant to such acquisitions, and will be paid
within two years following the issuance date of the Series 1997 Bonds.
(n) The Company will depreciate using the straight line method of depreciation
pursuant to Section 168 of the Code for all costs incurred as Rehabilitation
Expenditures which are paid or reimbursed to the Company from monies in the
Rehabilitation Fund.
The Company further covenants that it (i) will not take any action or permit any
action to be taken which will cause the interest on the Series 1997 Bonds to be
included in the gross income of the owners thereof for Federal income tax
purposes, provided that the Company shall not have violated this covenant if the
interest on any of the Series 1997 Bonds is included in the gross income of any
Person who is a substantial user of the Project or a related person, as provided
in Section
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147(a) of the Code, or if the interest on any of the Series 1997 Bonds is or
becomes subject to an alternative minimum tax or other similar tax, and (ii)
will prepare and file, with copies delivered to the Trustee, and cause to be
prepared and filed by each other principal user of the Project, any statements
required to be filed in accordance with the Regulations promulgated under
Section 144(a)(4) of the Code and applicable to the Series 1997 Bonds.
Section 7.13 Arbitrage Covenant and Compliance.
(a) The Company covenants that it will not take any action, or fail to take any
action, if any such action or failure to take action would adversely affect the
exclusion from gross income of the interest on the Series 1997 Bonds under
Section 103 of the Code. To that end, the Company will comply with all
requirements of Section 148 of the Code to the extent applicable to the Series
1997 Bonds. In the event that at any time the Company is of the opinion that for
purposes of this Section 7.13 it is necessary to restrict or limit the yield on
the investment of any monies held by the Trustee under the Indenture, the
Company shall take such action as may be necessary in accordance with the Tax
Agreement.
(b) Without limiting the generality of the foregoing, the Company agrees that
there shall be paid from time to time to the Trustee all amounts required to be
rebated to the United States pursuant to Section 148(f) of the Code and any
Regulations thereunder as may be applicable to the Series 1997 Bonds from time
to time. This covenant shall survive payment in full or defeasance of the Series
1997 Bonds.
(c) The Company acknowledges having read Section 5.06 of the Indenture and
agrees to perform all duties imposed upon it by such Section and by the Tax
Agreement. Insofar as said Section and the Tax Agreement impose duties and
responsibilities on the Company, they are specifically incorporated herein by
reference.
Section 7.14 Covenant of the Issuer Relating to Tax Exemption. The Issuer
covenants with respect to the exclusion of the interest on the Series 1997 Bonds
from gross income for Federal income tax purposes that, to the extent within its
reasonable control, the Issuer will not knowingly take any action or fail to
take any action which will result in the income of the Issuer to be received
hereunder becoming taxable to it or interest on the Series 1997 Bonds becoming
included in the gross income of the owners of the Series 1997 Bonds for Federal
income tax purposes.
Section 7.15 Compliance with Laws; Environmental Laws. During the Term of this
Loan Agreement, and at no expense to the Issuer, the Company hereby covenants
and agrees promptly to comply or cause compliance with all laws, ordinances,
orders, rules, regulations and requirements of duly constituted authorities
which may be applicable to the Project, including the Project Building and the
Project Equipment, or to the repair or alteration thereof, or to the use or
manner of use of the Project, including the Project Building and the Project
Equipment, including but not limited to the Americans with Disabilities Act, the
Illinois Accessibility Code, all Federal, State and local
34
<PAGE>
environmental and health and safety laws, rules, regulations and orders
applicable to or pertaining to the Project, including the Project Building and
the Project Equipment.
Section 7.16 Annual Certificate. The Company shall furnish to the Issuer and the
Trustee, within one hundred twenty (120) days following the end of each fiscal
year of the Company, a certificate signed by the Company Representative stating
that the Company has made a review of its activities during such fiscal year for
the purpose of determining whether or not the Company has complied with all of
the terms, provision and conditions of this Loan Agreement and whether or not
the Company has kept, observed, performed and fulfilled each and every covenant,
provision and condition of this Loan Agreement on its part to be performed and
is not in default in the performance or observance of any of the terms,
covenants, provisions or conditions hereof, or, if the Company shall be in
default, such certificate shall specify the nature of the each such default and
the status thereof.
Section 7.17 Reports on Employment at Project. Not later than ninety (90) days
following the Completion Date, the Company shall deliver to the Issuer a written
report (which may be prepared in reliance upon information furnished by one or
more of the construction manager, general contractor, or subcontractors) setting
forth in reasonable detail the numbers and types of workers employed in the
acquisition, rehabilitation and equipping of the Project. Thereafter, not later
than one hundred twenty (120) days following the end of each fiscal year of the
Company, the Company shall deliver to the Issuer a written report (which may be
prepared in reliance upon information furnished by any manager at the time
engaged by the Company with respect to the Project) setting forth the average
number of workers, on a full-time-equivalent basis, employed by the Project
during such fiscal year.
Section 7.18 No Warranty by Issuer. The Company recognizes that the Issuer has
not made an inspection of the Project, including the Project Building and the
Project Equipment, or of any fixture or other item constituting a portion
thereof, and the Issuer makes no warranty or representation, express or implied
or otherwise, with respect to the same or the location, use, description,
design, merchantability, fitness for any particular purpose, condition or
durability thereof, or as to the title thereto or ownership thereof or
otherwise, it being agreed that all risks incident thereto are to be borne by
the Company. In the event of any defect or deficiency of any nature in the
Project or any fixture or other item constituting a portion thereof, whether
patent or latent, the Issuer shall have no responsibility or liability with
respect thereto. The provisions of this Section 7.18 have been negotiated and
are intended to be a completed exclusion and negation of any warranties or
representations by the Issuer, express or implied, with respect to the Project
or any fixture or other item constituting a portion thereof, whether arising
pursuant to the Uniform Commercial Code of the State or any other law now or
hereafter in effect or otherwise.
Section 7.19. Environmental Immunity and Indemnity.
(a) The Company will pay and will indemnify, defend and hold the Issuer, the
Trustee and any Bondholder (including any Person at any time serving as a
member, director, officer,
35
<PAGE>
employee, agent or consultant of the Issuer, the Trustee or any Bondholder in
their capacity as such) harmless from and against all claims, liabilities,
losses, damages, costs, expenses (including reasonable attorneys' fees), suits
and judgments of any kind brought, claimed or rendered against the Issuer, the
Trustee or any Bondholder, as a direct or indirect result of the Issuer's, the
Trustee's or any Bondholder's relationship with the Company or the financing or
refinancing of the Project and arising out of Contamination in any way affecting
the Project or any other property, or any personal injury (including wrongful
death) or property damage (real or personal) arising out of or related to such
Contamination, or any lawsuit brought or threatened, settlement reached or
government order relating to such Contamination, or any violation of laws,
orders, regulations, requirements, or demands of government authorities, which
are based upon or in any way related to such Contamination including, without
limitation, the costs and expenses of any Clean-up or other remedial action, or
monitoring, attorney and consultant fees, investigation and laboratory fees,
court costs, and litigation expenses.
(b) The Issuer, the Trustee or any Bondholder shall promptly, upon receipt of
notice of the existence of a claim or the commencement of a proceeding regarding
which indemnity under this section may be sought, notify the Company in writing
thereof. If such a proceeding is commenced against the Issuer, the Trustee or
any Bondholder, the Company may participate in the proceeding and, to the extent
it elects to do so, may assume the defense thereof with counsel satisfactory to
the Issuer, the Trustee or any such Bondholder, as the case may be. If, however,
the Issuer, the Trustee or any such Bondholder is advised in an opinion of
counsel that there may be legal defenses available to it which are different
from or in addition to those available to the Company, or if the Company fails
to assume the defense of such proceeding or to employ counsel for that purpose
within a reasonable time after notice of commencement of the proceeding, the
Company shall not be entitled to assume the defense of the proceeding on behalf
of the Issuer, the Trustee or any Bondholder, but shall be responsible for the
reasonable fees, costs and expenses of counsel to the Issuer, the Trustee or
such Bondholder, as the case may be, in conducting its defense.
(c) The obligations of the Company pursuant to this Section 7.19 shall survive
any assignment or termination of this Loan Agreement.
ARTICLE 8
COMPANY'S OPTIONS
Section 8.01 Sale or Lease or Other Disposition of the Project. The Company may,
without the prior consent of the Issuer but subject to the approval of a
Majority of Holders, sell, lease or otherwise dispose of all or substantially
all of the Project, subject to the following conditions:
(a) the proposed purchaser must be duly qualified to do business in Illinois and
have a net worth at least equal to the net worth of the Company prior to the
sale;
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<PAGE>
(b) the Company must deliver to the Issuer and the Bondholders prior to the
proposed sale, lease, or disposition of the Project the following:
(i) a copy of any purchase agreement and the instrument(s) of conveyance, and an
opinion of Counsel stating that the same are in appropriate form for execution
by the respective parties;
(ii) an opinion of nationally-recognized Bond Counsel stating that such sale and
the proposed use or application of the sale proceeds will not violate any
provision of the Act or subject the interest on the Series 1997 Bonds to
inclusion in gross income for Federal income tax purposes;
(iii) financial statements prepared in accordance with generally accepted
accounting principles for the proposed purchaser's three most recently completed
fiscal years, except that if the proposed purchaser has been in business for
less than three years, such financial statements for such shorter period; and
(iv) a written agreement of the proposed purchaser that it agrees to assume and
be bound by all of the provisions of this Loan Agreement, the Indenture, and the
Mortgage, and shall execute the appropriate instruments assuming such covenants
or agreement.
(c) Any sale, lease, or other disposition of the Project shall not relieve the
Company from primary liability for the Loan Repayments and other payments due
and for the performance of all other agreements and covenants required under
this Loan Agreement, the Indenture, and the Mortgage; provided, however, that if
the Company obtains the written consent of the Issuer, the Trustee and a
Majority of Holders, it may be released from primary liability for all Loan
Repayments and other payments due and for the performance of all other
agreements and covenants under this Loan Agreement, the Indenture and the
Mortgage upon the sale, lease, or other disposition of the Project.
Section 8.02 Easements and Release of Real Property for Access and Utilities.
The Company may at any time, and from time to time, cause the Project Site to be
platted or replatted or become subject to covenants, conditions and restrictions
or convey an easement affecting, or fee title to, any part of the Project Site
to a railroad, corporate utility or public body, or to the owner of any
contiguous real property in conjunction with the execution of a reciprocal or
mutual easement agreement with such owner, provided that such reciprocal or
mutual easement agreement contains a boundary agreement permitting existing
improvements located on the Company's property to encroach upon the property of
the adjacent owner, upon (i) written certification by an Independent Engineer
that the conveyance will not impair the usefulness of the Project for the
purposes contemplated in this Loan Agreement, (ii) written certification by the
Company Representative that the conveyance will not impair the Project as a
"project" within the meaning of the Act and (iii) written consent of a Majority
of Holders. No such conveyance shall result in any abatement of Loan
37
<PAGE>
Repayments or other sums payable by the Company under this Loan Agreement. The
release of such real property from the Mortgage or subordination of the Mortgage
to any such easement shall not become effective until the following items are
filed with the Trustee and the Trustee has executed the instrument described in
paragraph (d) below:
(a) a copy of the conveyance document executed or to be executed by the Company;
(b) a plat or survey of the Project Site, prepared and certified by a registered
Illinois surveyor, showing the real property to be conveyed or subjected to the
easement as described in the conveyance, and the location in relation thereto of
all Project Buildings, structures and permanently installed equipment on the
land, and all other easements, roads, tracks and utility installations;
(c) the certificate of the Independent Engineer referred to above; and
(d) any instrument to be executed by the Trustee, and a copy thereof for the
files of the Trustee, releasing the land from the lien of the Mortgage or
establishing the easement as a Permitted Encumbrance under the Indenture, as the
case may be.
Section 8.03 Prepayment of Loan Repayments. So long as all amounts which have
become due pursuant to Section 4.02 hereof have been paid and the Company is not
in default hereunder, the Company may, on December 15, 2007, and on any December
15th thereafter, pay in advance all or any part of the amounts to become due
pursuant to Section 4.02 hereof, or, in the event a request by the Company for
the consent of a Majority of Holders to any action described in or contemplated
by Section 7.05 or Section 8.01 hereof, is refused, the Company may, within
sixty (60) days thereafter, pay in advance all of the amounts to become due
pursuant to Section 4.02 hereof, if, not less than thirty (30) nor more than
(60) days prior to such prepayment, the Company (i) gives the Trustee notice of
its intent to prepay, (ii) deposits with the Trustee an amount equal to the
redemption price (including any premium) of the Series 1997 Bonds to be redeemed
on such date, and (iii) directs the Trustee to apply such amount to the
redemption of Series 1997 Bonds in accordance with Section 3.01(3) of the
Indenture. In addition, in the event of a Determination of Taxability, the
Company shall pay to the Trustee, not less than thirty (30) days prior to the
next ensuing Interest Payment Date, an amount sufficient to redeem all
Outstanding Bonds on such Interest Payment Date, plus a premium equal to eight
percent (8%) of the principal amount of the Bonds called for redemption.
Section 8.04 Abatement of Loan Repayments. If at any time the Company deposits
with the Trustee for deposit to the Bond Fund an amount of cash or securities as
described in Section 8.02 of the Indenture which, taking into account any
balance which may then be on hand in the Bond Fund, is sufficient to pay all of
the then Outstanding Bands in accordance with Section 8.02 of the Indenture, and
to pay such interest thereon as is required, and to pay all fees and charges of
the Trustee and Paying Agent which are due or to become due on or before the
date on which the last of the Bonds to be so discharged may be redeemed, under
circumstances not otherwise resulting in
38
<PAGE>
termination of the Term of this Loan Agreement, and if no Event of Default shall
have occurred and then be continuing hereunder, the Company shall be entitled to
use and occupy the Project from the date on which such aggregate funds are in
the hands of the Trustee until the expiration of the Term of this Loan Agreement
or its earlier termination under the provisions hereof, without the further
payment of Loan Repayments but otherwise on the terms and conditions herein set
forth.
Section 8.05 Termination Upon Retirement of Bonds. At any time when no Bonds
remain Outstanding, or if the conditions specified in Section 8.04 hereof for
the abatement of Loan Repayments then exist and arrangements satisfactory to the
Trustee have been made for the discharge of all other accrued liabilities under
this Loan Agreement, and the Company has fully performed its obligations
hereunder, this Loan Agreement shall terminate, provided, however, that the
Company shall not be relieved of its obligations under Sections 7.04 and 7.16
hereof.
Section 8.06 Company's Option to Direct Redemption of Bonds. The Company shall
have the option to direct the Trustee to call for redemption of all of the
then-Outstanding Bonds if at any time:
(a) the Project is damaged or destroyed to such extent that, in the reasonable
judgment of the Company, evidenced by a resolution adopted by the Board of
Directors of the Company delivered to the Trustee within thirty (30) days of the
event causing the damage or destruction, the Project cannot be repaired or
restored within six (6) months of the event causing the damage or destruction to
a condition permitting conduct of the normal business operations of the Company,
and at a cost not exceeding the Net Loss Proceeds of insurance received or
likely to be received as a result of such damage or destruction; or
(b) a governmental authority or person, firm or corporation acting under
governmental authority, by exercise of the power of eminent domain, takes title
to all or substantially all of the Project, or so much thereof that in the
reasonable judgment of the Company, evidenced by a resolution adopted by the
Board of Directors of the Company delivered to the Trustee, the Project cannot
be restored within six months following completion of the proceedings by which
such title is taken to a condition permitting conduct of the normal business
operations of the Company and at a cost not exceeding the Net Loss Proceeds of
the award in such condemnation proceedings; or
(c) all or substantially all of the Project is damaged or destroyed, or taken by
exercise of the power of eminent domain, to an extent that, in the reasonable
judgment of the Company, evidenced by a resolution adopted by the Board of
Directors of the Company delivered to the Trustee, it is not financially
desirable to repair or restore the Project for the purpose of conducting
business operations similar to those being conducted at the Project immediately
prior to such damage, destruction or condemnation.
To exercise its options under this Section 8.06, the Company must: (1) deliver
the Trustee written notice of the Company's exercise of the option within ninety
(90) days following the event which
39
<PAGE>
is the basis of the option, describing the event, and (2) deposit with the
Trustee a sum sufficient, when added to amounts on deposit in the Bond Fund and
the Property Insurance and Award Fund, to redeem the Outstanding Bonds to be
called for redemption at their principal amount plus accrued interest, but
without premium, as provided in Article Three of the Indenture.
ARTICLE 9
EVENTS OF DEFAULT AND REMEDIES
Section 9.01 Events of Default.
(a) If any of the following events occur, it is hereby defined as and declared
to be and shall constitute an Event of Default hereunder:
(i) if any Loan Repayment or any other payment required to be made hereunder
shall not be made to the Trustee in full when the same becomes due and payable;
(ii) if the Company shall fail to duly perform any other covenant or agreement
on its part under this Loan Agreement or the Mortgage for a period of thirty
(30) days after the date on which written notice of such failure, specifying the
failure and requiring same to be remedied, shall have been given to the Company
by the Issuer or the Trustee, or to the Company and the Issuer by the
Bondholders of at least twenty-five percent (25%) in aggregate principal amount
of the Bonds then Outstanding; provided, however, if the breach of covenant or
agreement is one which cannot be completely remedied within the thirty (30) days
after written notice has been given, it shall not be an Event of Default for
such longer period, not exceeding ninety (90) days following such failure,
during which the Company is taking active steps in good faith and is proceeding
with reasonable diligence to remedy such default;
(iii) if any representation or warranty made by the Company hereunder or under
the Indenture or under the Limited Offering Memorandum, or by a representative
of the Company in any document or certificate furnished to the Trustee or the
Issuer in connection herewith or therewith or pursuant hereto or thereto or in
connection with the transactions contemplated herein or therein, including but
not limited to any misstatements or omissions in the Limited Offering Memorandum
relating to the Bonds, shall prove at any time to have been incorrect or
misleading in any material respect when made and is not cured within thirty (30)
days after the Company receives written notice from the Trustee or the Issuer
that any such representation or warranty is incorrect or misleading in a
material respect;
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<PAGE>
(iv) if the Company shall file a petition in bankruptcy or for reorganization or
for an arrangement pursuant to any present or future Federal bankruptcy act or
under any similar Federal or state law, or shall be adjudicated a bankrupt or
insolvent, or shall make an assignment for the benefit of its creditors, or
shall admit in writing its inability to pay its debts generally as they become
due, or if a petition or answer proposing the adjudication of the Company as a
bankrupt or its reorganization under any present or future Federal bankruptcy
act or any similar Federal or state law shall be filed in any court and such
petition or answer shall not be discharged or denied within ninety (90) days
after the filing thereof, or if a receiver, trustee or liquidator of the Company
or of all or substantially all of the assets of the Company or of the Project
shall be appointed in any proceeding brought against the Company and shall not
be discharged within ninety (90) days after such appointment or if the Company
shall consent to or acquiesce in such appointment, or if the estate or interest
of the Company in the Project or any part thereof shall be levied upon or
attached in any proceeding and such process shall not be vacated, discharged or
released with sixty (60) days after such levy or attachment, or if the Project
shall have been abandoned by the Company for a period of sixty (60) consecutive
days, or if the Company shall be dissolved or liquidated (other than as a result
of a merger or consolidation of the Company into or with another entity under
the conditions permitting such actions contained in Section 7.05 hereof);
(v) if the Company is required to retain a management consulting firm with
respect to any noncompliance by the Company with any of the requirements set
forth in Section 7.11(a) through (d) hereof and such noncompliance is not cured
within ninety (90) days thereafter;
(vi) (A) if the Company breaches or defaults in the performance of any material
obligation under the terms of the Credit Agreement, dated as of November 10,
1997, among the Company, SunTrust Bank and Zions First National Bank, as
thereafter amended, or (B) if the Company or any consolidated subsidiary
breaches or defaults in the performance of any agreement relating to long-term
indebtedness of the Company or any consolidated subsidiary in an aggregate
amount exceeding $1,000,000; or
(vii) if an event of default occurs under Section 9.01 of the Indenture and is
continuing.
(b) Notwithstanding the foregoing, a Determination of Taxability with respect to
the Series 1997 Bonds shall not constitute an Event of Default or a default;
provided, however, that in such event the Trustee will be entitled to pursue any
available remedy by suit at law or equity to enforce performance and observance
of any agreement, obligation or covenant of the Issuer or the Company herein
relating to the exclusion of interest on the Series 1997 Bonds from the gross
income of the owners thereof for Federal income tax
41
<PAGE>
purposes and the Company shall pay promptly upon demand the amount required to
redeem the Bonds in accordance with Section 3.01(2)(c) of the Indenture.
(c) Upon having actual notice of the existence of a default or Event of Default,
the Trustee shall give written notice thereof to the Issuer and the Company
within three (3) Business Days of having such actual notice. If, in the sole
opinion of the Trustee, the determination of the existence of a default or Event
of Default hereunder requires an opinion of Counsel, the Trustee shall not be
deemed to have actual notice of a default or Event of Default hereunder unless
and until the Trustee receives a written opinion of Counsel with respect to such
default or Event of Default.
Section 9.02 Remedies. Whenever any Event of Default or a Determination of
Taxability shall have occurred and is continuing, any one or more of the
following remedial steps may be taken by the Trustee:
(a) the Trustee may, at its option, and, if the payment of the Bonds has been
accelerated pursuant to the Indenture, shall, declare all installments of Loan
Repayments for the remainder of the Term of this Loan Agreement (being an amount
equal to that necessary to pay in full all Outstanding Bonds assuming
acceleration of the Bonds under the Indenture and to pay all other indebtedness
thereunder and hereunder) to be immediately due and payable, whereupon the same
shall become immediately due and payable by the Company;
(b) the Trustee may require the Company to furnish copies of all books and
records of the Company pertaining to the Project or the Company's operations;
(c) the Trustee may take whatever action at law or in equity may appear
necessary or appropriate to collect the Loan Repayments then due and thereafter
to become due, or to enforce performance and observance of any obligation,
agreement or covenant of the Company under this Loan Agreement or the Mortgage;
and
(d) the Trustee may exercise any or all remedies provided in Article Nine of the
Indenture.
Section 9.03 Disposition of Funds. Any amounts collected pursuant to action
taken under Section 9.02 shall be paid into the Bond Fund and applied in
accordance with the provisions of the Indenture.
Section 9.04 Manner of Exercise. No remedy herein conferred upon or reserved to
the Trustee is intended to be exclusive of any other available remedy or
remedies, but each and every such remedy shall be cumulative and shall be in
addition to every other remedy given under this Loan Agreement or now or
hereafter existing at law or in equity or by statute. No delay or omission to
exercise any right or power accruing upon any default shall impair any such
right or power or shall
42
<PAGE>
be construed to be a waiver thereof, but any such right and power may be
exercised from time to time and as often as may be deemed expedient.
Section 9.05 Attorneys' Fees and Expenses. In the event the Company should
default under any of the provisions of this Loan Agreement and the Trustee or
the Issuer should employ attorneys or incur other expenses for the collection of
amounts owed or the enforcement of performance of any obligation or agreement on
the part of the Company, the Company will on demand pay to the Trustee or the
Issuer the reasonable fees of such attorneys and such other expenses so
incurred.
Section 9.06 Effect of Waiver. In the event any agreement contained in this Loan
Agreement should be breached by either party and thereafter waived by the other
party, such waiver shall be limited to the particular breach so waived and shall
not be deemed to waive any other breach hereunder.
ARTICLE 10
GENERAL
Section 10.1 Notices. All notices, certificates or other communications
hereunder shall be sufficiently given and shall be deemed given when received by
personal delivery or five (5) days after mailing by certified mail, postage
prepaid, return receipt requested, with proper address as indicated below,
unless otherwise provided herein or required under applicable law. The Issuer,
the Company and the Trustee may, by written notice given by each to the others,
designate any other address or addresses to which notices, certificates or other
communications to them shall be sent when required as contemplated by this Loan
Agreement. Until otherwise provided by the respective parties, all notices,
certificates and communications to each of them shall be addressed as follows:
To the Issuer: Will-Kankakee Regional Development Authority
2508 Dickens Drive
Springfield, IL 62704
Attn: Executive Director
To the Company: Flanders Corporation
531 Flanders Filters Road
State Road 1427
Washington, NC 27889
Attention: Chief Financial Officer
To the Trustee: Norwest Bank Arizona, N.A.
Corporate Trust Department (9030)
3300 North Central Avenue, 4th Floor
Phoenix, AZ 85012
43
<PAGE>
To the
Underwriter: Tucker Anthony Incorporated
One Beacon Street
Boston, MA 02108
Section 10.2 Governing Law and Binding Effect. This Loan Agreement shall be
governed by and construed in accordance with the laws of the State and shall
inure to the benefit of and shall be binding upon the Issuer and the Company and
their respective successors and assigns.
Section 10.3 Severability. Severability. In the event any provision of this Loan
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.
Section 10.4 Amendments, Changes, Modifications and Assignments. Except as
otherwise provided in this Loan Agreement or in the Indenture, subsequent to the
initial issuance of Bonds and before the Indenture is satisfied and discharged
in accordance with its terms, this Loan Agreement may not be effectively
amended, changed, modified, altered, assigned or terminated without the written
consent of the Trustee and the Bondholders of a majority in aggregate principal
amount of the Outstanding Bonds.
Section 10.5 Execution Counterparts. This Loan Agreement may be executed in
several counterparts, each of which shall be an original and all of which shall
constitute but one and the same instrument.
Section 10.6 Limitation of Issuer's Liability. No covenant, agreement or
obligation contained herein shall be deemed to be a covenant, agreement or
obligation of any present or future director, officer, employee or agent of the
Issuer in his or her individual capacity, and none of the members of the Issuer
nor any officer thereof executing this Loan Agreement or the Bonds nor any
member of the staff thereof shall be personally liable hereunder or on the Bonds
or be subject to any personal liability or accountability by reason of the
execution and delivery hereof and the issuance thereof. No present or future
director, officer, employee or agent of the Issuer shall incur any personal
liability with respect to any other action taken by him or her pursuant to this
Loan Agreement or the Act.
No agreements or provisions contained in this Loan Agreement nor any agreement,
covenant or undertaking by the Issuer contained in any document executed by the
Issuer in connection with the Project or the issuance, sale and delivery of the
Bonds shall constitute an indebtedness of the Issuer, the State or any political
subdivision thereof, shall give rise to any pecuniary liability of the Issuer,
the State or any political subdivision thereof, or shall constitute a loan of
credit or a charge against the general credit or taxing power of any of them,
within the meaning of any Constitutional or statutory limitation, or shall
obligate the Issuer financially in any way except with respect to this Loan
Agreement and the application of revenues herefrom and the proceeds of the
Bonds. No failure of the Issuer to comply with any term, condition, covenant or
agreement herein, or in any document
44
<PAGE>
executed by the Issuer in connection with the issuance and sale of the Bonds,
shall subject the Issuer to liability for any claim for damages, costs or other
financial or pecuniary charge except to the extent that the same can be paid or
recovered from this Loan Agreement or revenues therefrom or proceeds of the
Bonds. Nothing herein shall preclude a proper party in interest from seeking and
obtaining, to the extent permitted by law, specific performance against the
Issuer for any failure to comply with any term, condition, covenant or agreement
herein; provided, that no costs, expenses or other monetary relief shall be
recoverable from the Issuer except as may be payable from this Loan Agreement or
its revenues or the proceeds of the Bonds.
No recourse shall be had for the payment of the principal of or premium or
interest on any of the Bonds or for any claim based thereon or upon any
obligation, covenant or agreement in this Loan Agreement contained against any
past, present or future officer, director, member, employee or agent of the
Issuer, or of any successor public corporation, as such either directly or
through the Issuer or any successor public corporation, under any rule of law or
equity, statute or constitution or by the enforcement of any assessment or
penalty or otherwise, and all such liability of any such officers, directors,
members, employees or agents as such is hereby expressly waived and released as
a condition of and consideration for the execution of this Indenture, and the
issuance of such Bonds, by the Issuer.
Section 10.7 Rights Created in Third Parties. The terms of this Loan Agreement
are not intended to establish or create any rights in any persons other than the
Issuer, the Company, the Trustee, and the Bondholders and the respective
successors of each.
Section 10.8 Payments Due on Saturdays, Sundays and Holidays. In any case where
the due date of any Loan Repayments or Additional Payments shall be other than a
Business Day, payment of such Loan Repayments or Additional Payments need not be
made on such date but may be made on the next succeeding Business Day with the
same force and effect as if made on the due date.
Section 10.9 Survival. All representations and warranties contained herein and
in the Indenture or in certificates and other instruments delivered pursuant
hereto and thereto shall survive the execution and delivery of this Loan
Agreement and the issue, sale and delivery of the Bonds.
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<PAGE>
IN WITNESS WHEREOF, the Issuer and the Company have caused this Loan Agreement
to be executed in their respective names and attested by their duly authorized
officers, all as of the date first above written.
WILL-KANKAKEE REGIONAL
DEVELOPMENT AUTHORITY
By___________________________
Its Chairman
Attest:
By_______________________________
Its Secretary
FLANDERS CORPORATION
By___________________________
Its Vice President-Finance
46
EXHIBIT 21.1
SUBSIDIARIES
<TABLE>
<CAPTION>
State/Country of
Name Incorporation % Ownership
- ------------------------------------------ ---------------- ---------------
<S> <C> <C>
Flanders/CSC Corporation North Carolina 100.00%
Air Seal Filter Housings, Inc. Texas 100.00%
Precisionaire, Inc. Florida 100.00%
Flanders International Pte, Ltd. Singapore 100.00%
Flanders Filters, Inc. North Carolina 98.86%
Airseal West, Inc. Utah 80.00%
Flanders Airia Technologies, Inc. North Carolina 100.00%
GFI, Inc. Utah 100.00%
S.R.I., Inc. Utah 100.00%
Flanders/Precisionaire Corp. North Carolina 100.00%
Flanders Realty Corp. North Carolina 100.00%
Flanders Airpure Products Company, LLC North Carolina 63.00%(1)
Flanders Airia Technologies International England 100.00%(2)
Ltd.
_____________________
(1) Owned by Flanders Filters, Inc.
(2) Owned by Flanders Airia Technologies, Inc.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS RESTATED FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF
FLANDERS CORPORATION FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND
1995.
</LEGEND>
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1997 JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 35,454,580 2,390,411 2,973,797
<SECURITIES> 0 0 0
<RECEIVABLES> 21,175,241 18,253,359 7,391,557
<ALLOWANCES> 380,566 346,480 148,000
<INVENTORY> 16,520,154 9,894,707 2,321,367
<CURRENT-ASSETS> 76,251,708 41,492,787 18,529,229
<PP&E> 57,407,239 36,955,443 10,891,740
<DEPRECIATION> 9,646,832 6,866,817 5,590,677
<TOTAL-ASSETS> 145,880,516 86,518,411 18,529,229
<CURRENT-LIABILITIES> 21,071,223 18,922,670 9,014,228
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 91,995,493 16,980,665 3,430,105
<OTHER-SE> 14,211,365 8,372,100 4,778,312
<TOTAL-LIABILITY-AND-EQUITY> 145,880,516 86,518,411 18,529,229
<SALES> 134,135,433 73,056,197 38,635,810
<TOTAL-REVENUES> 134,135,433 73,056,197 38,635,810
<CGS> 100,812,262 53,597,621 28,953,729
<TOTAL-COSTS> 24,156,197 13,459,721 7,262,668
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 857,527 1,203,226 633,029
<INCOME-PRETAX> 9,543,988 5,771,379 1,830,236
<INCOME-TAX> 3,704,723 2,177,591 684,582
<INCOME-CONTINUING> 5,839,265 3,593,788 1,145,654
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 5,839,265 3,593,788 1,145,654
<EPS-PRIMARY> 0.32 0.27 0.12
<EPS-DILUTED> 0.27 0.23 0.12
</TABLE>
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") is made and entered
into this 4th day of December, 1997, by and between Flanders Corporation, a
North Carolina corporation (formerly known as Elite Acquisitions, Inc.)
("Flanders Corporation"), Flanders Filters, Inc., a North Carolina corporation
("Flanders Filters") (Flanders Corporation and Flanders Filters are sometimes
hereinafter collectively referred to as the "Company"), and Steven K. Clark
("Clark" or the "Executive"). In this Amendment, Flanders Corporation, Flanders
Filters, and Clark, together with their successors and permitted assignees, are
separately referred to as a "Party" and collectively as the "Parties."
W I T N E S S E T H:
WHEREAS, Flanders Corporation, Flanders Filters and Clark entered into an
Employment Agreement (the "Agreement") dated December 15, 1995;
WHEREAS, Flanders Corporation, Flanders Filters and Clark amended the Agreement
on October 1, 1996; and
WHEREAS, Flanders Corporation, Flanders Filters and Clark desire to further
amend the Agreement upon the terms provided herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the Parties hereby agree to amend the Agreement
as follows:
1. AMENDMENT TO TERM.
Section 3 of the Agreement is hereby amended as follows:
The employment of the Executive by the Company under the provisions of this
Agreement shall end on December 31, 2005, unless further extended or sooner
terminated as hereinafter provided. On December 31, 2005, and on the last day of
December each year thereafter, the term of the Executive?s employment shall,
unless sooner terminated as hereinafter provided, be automatically extended for
an additional two year period from the date thereof unless, at least six (6)
months before such December 31, the Company shall have delivered to the
Executive or the Executive shall have delivered to the Company written notice
that the term of the Executive?s employment hereunder will not be extended
beyond its existing duration.
<PAGE>
2. NO FURTHER AMENDMENT
Except as provided above, the Agreement shall remain in full force and effect,
unless further amended pursuant to the terms of the Agreement.
IN WITNESS WHEREOF, the Parties hereto have executed and delivered this
Amendment as of the day and year first above written.
FLANDERS CORPORATION
By: ______________________________
Its: ______________________________
FLANDERS FILTERS, INC.
By: ______________________________
Its: ______________________________
STEVEN K. CLARK
___________________________________
Steven K. Clark
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") is made and entered
into this 4th day of December, 1997, by and between Flanders Corporation, a
North Carolina corporation (formerly known as Elite Acquisitions, Inc.)
("Flanders Corporation"), Flanders Filters, Inc., a North Carolina corporation
("Flanders Filters") (Flanders Corporation and Flanders Filters are sometimes
hereinafter collectively referred to as the "Company"), and Robert R. Amerson
("Amerson" or the "Executive"). In this Amendment, Flanders Corporation,
Flanders Filters, and Amerson, together with their successors and permitted
assignees, are separately referred to as a "Party" and collectively as the
"Parties."
W I T N E S S E T H:
WHEREAS, Flanders Corporation, Flanders Filters and Amerson entered into an
Employment Agreement (the "Agreement") dated December 15, 1995;
WHEREAS, Flanders Corporation, Flanders Filters and Amerson amended the
Agreement on October 1, 1996; and
WHEREAS, Flanders Corporation, Flanders Filters and Amerson desire to further
amend the Agreement upon the terms provided herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the Parties hereby agree to amend the Agreement
as follows:
1. AMENDMENT TO TERM.
Section 3 of the Agreement is hereby amended as follows:
The employment of the Executive by the Company under the provisions of this
Agreement shall end on December 31, 2005, unless further extended or sooner
terminated as hereinafter provided. On December 31, 2005, and on the last day of
December each year thereafter, the term of the Executive?s employment shall,
unless sooner terminated as hereinafter provided, be automatically extended for
an additional two year period from the date thereof unless, at least six (6)
months before such December 31, the Company shall have delivered to the
Executive or the Executive shall have delivered to the Company written notice
that the term of the Executive?s employment hereunder will not be extended
beyond its existing duration.
<PAGE>
2. NO FURTHER AMENDMENT
Except as provided above, the Agreement shall remain in full force and effect,
unless further amended pursuant to the terms of the Agreement.
IN WITNESS WHEREOF, the Parties hereto have executed and delivered this
Amendment as of the day and year first above written.
FLANDERS CORPORATION
By: ______________________________
Its: ______________________________
FLANDERS FILTERS, INC.
By: ______________________________
Its: ______________________________
ROBERT R. AMERSON
___________________________________
Robert R. Amerson
