SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
Commission File No. 0-27958
FLANDERS CORPORATION
-------------------------------------
(Exact name of registrant as specified in its charter)
North Carolina 13-3368271
-------------------------------- ------------------------
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization.)
2399 26th Avenue North, St. Petersburg, Florida 33734
----------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (727) 822-4411
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date (November 16, 2001).
26,033,153 shares common stock, par value $.001 per share
(Title of Class)
FLANDERS CORPORATION
FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 2001
PART I - FINANCIAL INFORMATION Page
Item 1 -
Financial Statements
Consolidated Condensed Balance Sheets for September 30, 2001
(unaudited) and December 31, 2000 3
Consolidated Condensed Statements of Operations (unaudited) for
the three and nine months ended September 30, 2001 and 2000 4
Consolidated Condensed Statements of Stockholders' Equity for
the nine months ended September 30, 2001 (unaudited) and
the year ended December 31, 2000 5
Consolidated Condensed Statements of Cash Flows (unaudited)
for the three and nine months ended September 30, 2001 and
2000 6
Notes to Consolidated Condensed Financial Statements 7
Item 2 -
Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3 -
Quantitative and Qualitative Disclosures About Market Risk 15
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 16
Item 2 - Changes in Securities and Use of Proceeds 16
Item 3 - Defaults Upon Senior Securities 16
Item 4 - Submission of Matters to a Vote of Security Holders 16
Item 5 - Other Information 16
Item 6 - Exhibits and Reports on Form 8-K 16
SIGNATURES 19
Page 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, December 31,
ASSETS 2001 2000
----------------------------------------------------- ------------ ------------
(unaudited)
Current assets
Cash and cash equivalents $ 3,814,122 $ 1,333,128
Receivables:
Trade, net of allowance for doubtful accounts of
$1,607,609 at 9/30/2001 and $1,777,973 at
12/31/2000 33,232,348 33,481,302
Other 398,549 514,202
Inventories (Note B) 31,877,543 28,299,766
Deferred taxes 3,020,545 3,020,545
Other current assets 5,541,473 6,094,903
------------ ------------
Total current assets 77,884,580 72,743,846
Related party receivables 492,878 385,696
Other assets 2,474,010 2,985,180
Intangible assets, net of accumulated amortization
of $3,456,844 at 9/30/2001 and $2,812,300 at
12/31/2000 28,546,553 29,185,805
Property and equipment, net of accumulated
depreciation of $32,223,272 at 9/30/2001 and
$26,451,929 at 12/31/2000 75,964,674 74,921,196
------------ ------------
$185,362,695 $180,221,723
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
----------------------------------------------------- ------------ ------------
Current liabilities
Current maturities of long-term debt $ 30,350,229 $ 32,832,253
Accounts payable 20,327,178 20,267,236
Accrued expenses and other current liabilities 8,262,068 6,000,140
------------ ------------
Total current liabilities 58,939,475 59,099,629
Long-term capital lease obligation 3,234,654 3,403,664
Long-term debt, less current maturities 17,555,006 13,134,219
Deferred income taxes 6,432,927 6,432,927
Commitments and contingencies
Stockholders' equity
Preferred stock, no par value, 10,000,000 shares
authorized; none issued - -
Common stock, $.001 par value; 50,000,000 shares
authorized; issued and outstanding: 26,033,153
shares at 9/30/2001; 26,379,633 at 12/31/2000 26,033 26,380
Additional paid-in capital 90,331,524 90,898,258
Notes receivable (8,235,218) (7,891,208)
Retained earnings 17,078,294 15,117,854
------------ ------------
Total stockholders' equity 99,200,633 98,151,284
------------ ------------
$185,362,695 $180,221,723
============ ============
See Notes to Consolidated Condensed Financial Statements.
Page 3
FLANDERS CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net sales $ 49,862,475 $ 50,422,300 $146,868,665 $144,555,235
Cost of goods sold 38,974,568 43,400,390 114,481,895 113,448,543
------------ ------------ ------------ ------------
Gross profit 10,887,907 7,021,910 32,386,770 31,106,692
Operating expenses 8,788,590 9,513,636 26,988,002 28,078,715
------------ ------------ ------------ ------------
Operating income (loss) from
continuing operations 2,099,317 (2,491,726) 5,398,768 3,027,977
Nonoperating expenses from continuing operations, net (655,707) (434,026) (1,327,482) (886,440)
------------ ------------ ------------ ------------
Earnings (loss) from continuing operations
before income taxes 1,443,610 (2,925,752) 4,071,286 2,141,537
Provision for income taxes 697,423 (1,080,300) 1,898,493 1,126,615
------------ ------------ ------------ ------------
Earnings (loss) from continuing operations 746,187 (1,845,452) 2,172,793 1,014,922
Loss from operations of discontinued operations,
net of tax benefit of $0 and $242,535 for the
three months ended September 30, 2001 and 2000,
respectively, and $148,997 and $614,028 for the
nine months ended September 30, 2001 and 2000,
respectively - (363,923) (212,353) (921,042)
------------ ------------ ------------ ------------
Net earnings (loss) $ 746,187 $ (2,209,375) $ 1,960,440 $ 93,880
============ ============ ============ ============
Earnings (loss) per share from continuing operations
Basic $ 0.03 $ (0.07) $ 0.08 $ 0.04
============ ============ ============ ============
Diluted $ 0.03 $ (0.07) $ 0.08 $ 0.04
============ ============ ============ ============
Loss per share from discontinued operations
Basic $ - $ (0.01) $ (0.01) $ (0.04)
============ ============ ============ ============
Diluted $ - $ (0.01) $ (0.01) $ (0.04)
============ ============ ============ ============
Net earnings (loss) per share
Basic $ 0.03 $ (0.09) $ 0.08 $ 0.00
============ ============ ============ ============
Diluted $ 0.03 $ (0.09) $ 0.08 $ 0.00
============ ============ ============ ============
Weighted average common and common
equivalent shares outstanding:
Basic 26,033,153 25,039,550 26,038,058 25,193,337
============ ============ ============ ============
Diluted 26,033,153 25,039,550 26,037,058 26,042,228
============ ============ ============ ============
See Notes to Consolidated Condensed Financial Statements
Page 4
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional
Common Paid-In Notes Retained
Stock Capital Receivable Earnings
-------- ------------ ------------ ------------
Balance, January 1, 2000 $ 25,436 $ 91,798,188 $ (6,323,308) $ 22,317,067
Issuance of 2,300,000 shares of common stock upon
exercise of options 2,300 2,297,700 (1,150,000) -
Issuance of notes receivable - - (357,304) -
Interest on notes receivable secured by common
shares - - (60,596) -
Cancellation of 150,000 shares related to unmet
contingent conditions of acquisitions (150) 150 - -
Purchase and retirement of 1,206,000 shares of
common stock (1,206) (3,197,780) - -
Net loss - - - (7,199,213)
-------- ------------ ------------ ------------
Balance, December 31, 2000 26,380 90,898,258 (7,891,208) 15,117,854
Interest on notes receivable secured by common
shares, unaudited - - (344,010) -
Purchase and retirement of 354,000 shares of
common stock, unaudited (354) (585,527) - -
Issuance of 7,520 shares of common stock upon
exercise of options, unaudited 7 18,793 - -
Net earnings, unaudited - - - 1,960,440
-------- ------------ ------------ ------------
Balance, September 30, 2001, unaudited $ 26,033 $ 90,331,524 $ (8,235,218) $ 17,078,294
======== ============ ============ ============
See Notes to Consolidated Condensed Financial Statements
Page 5
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by continuing operations $ 5,636,536 $ 2,694,167 $ 7,992,063 $ 909,145
Net cash provided (used) by discontinued operations - (1,325,094) (212,353) (665,934)
------------ ------------ ------------ ------------
Net cash provided (used) by operating
activities 5,636,536 1,369,073 7,779,710 243,211
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,693,937) (1,545,558) (6,814,822) (6,542,420)
Net payments (advances) on notes receivable 51,022 (44,290) 259,347 (259,049)
Net decrease (increase) in other assets 39,893 (556,762) 72,887 (825,824)
------------ ------------ ------------ ------------
Net cash used in investing activities of
continuing operations (1,603,022) (2,146,610) (6,482,588) (7,627,293)
Net cash used in investing activities of
discontinued operations - (2,977) - (57,277)
------------ ------------ ------------ ------------
Net cash used in investing activities (1,603,022) (2,149,587) (6,482,588) (7,684,570)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of bonds - - - 3,897,694
Purchase and retirement of common stock - (2,775,715) (585,881) (2,850,256)
Net proceeds (payments) from revolving
credit agreement (374,418) 2,485,257 2,688,069 13,290,401
Net principal payments on long-term borrowings (298,281) (291,402) (918,316) (4,914,560)
------------ ------------ ------------ ------------
Net cash provided (used) by financing
activities of continuing operations (672,699) (581,860) 1,183,872 9,423,279
Net cash used in financing activities
of discontinued operations - (18,029) - (71,499)
------------ ------------ ------------ ------------
Net cash provided (used) by financing
activities (672,699) (599,889) 1,183,872 9,351,780
------------ ------------ ------------ ------------
Net change in cash and cash equivalents 3,360,815 (1,380,403) 2,480,994 1,910,421
CASH AND CASH EQUIVALENTS
Beginning of period 453,307 4,115,044 1,333,128 824,220
------------ ------------ ------------ ------------
End of period $ 3,814,122 $ 2,734,641 $ 3,814,122 $ 2,734,641
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes $ 128,733 $ - $ 128,733 $ 421,654
============ ============ ============ ============
Interest $ 1,065,790 $ 585,165 $ 2,679,090 $ 1,567,959
============ ============ ============ ============
See Notes to Consolidated Condensed Financial Statements
Page 6
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note A. Nature of Business and Interim Financial Statements
Nature of business:
We design, manufacture and sell air filters and related products. Our business
is focused on providing complete environmental control systems for end uses
ranging from controlling contaminants in residences and commercial office
buildings through specialized manufacturing environments for semiconductors and
specialized pharmaceuticals. We also design and manufacture much of our
production equipment to automate processes to decrease labor costs associated
with our standard products. We also produce glass-based air filter media for
many of our products. The vast majority of our sales come from the sale of
after-market replacement filters, since air filters are typically placed in
equipment designed to last much longer than the filters.
We have only one segment, filtration products. We sell some products for end
users outside of the United States through domestic specialty cleanroom
contractors. These sales are accounted for as domestic sales. We also sell
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 our wholly owned foreign subsidiary total less than 5% of net
sales. Assets held outside the United States are negligible.
Interim financial statements:
The interim consolidated condensed financial statements presented herein are
unaudited and have been prepared in accordance with the instructions to Form
10-Q and Article 10 of Regulation S-X. These statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in our annual report on Form 10-K for the year ended December 31, 2000.
The accompanying financial statements have not been examined by independent
accountants in accordance with auditing standards generally accepted in the
United States of America, but in the opinion of management such financial
statements include all adjustments (consisting only of normal recurring
adjustments) necessary to summarize fairly our financial position, results of
operations, and cash flows. The results of operations and cash flows for the
three months and nine months ended September 30, 2001 may not be indicative of
the results that may be expected for the year ending December 31, 2001.
Earnings (loss) per common share:
We have adopted FASB Statement No. 128 which requires the presentation of
earnings (loss) per share by all entities that have outstanding common stock or
potential common stock, such as options, warrants and convertible securities,
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 earnings (loss) (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.
Note B. Inventories
Our inventories consist of the following at September 30, 2001 and December 31,
2000:
9/30/2001 12/31/2000
------------ ------------
Finished goods $ 14,864,218 $ 12,423,309
Work in progress 2,609,089 2,440,136
Raw materials 15,789,946 14,822,031
------------ ------------
33,263,253 29,685,476
Less allowances 1,385,710 1,385,710
------------ ------------
$ 31,877,543 $ 28,299,766
============ ============
Page 7
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note C. Stock Options and Warrants
The following table summarizes the activity related to our stock options and
warrants for the nine months ended September 30, 2001 and the year ended
December 31, 2000:
Weighted Average
Exercise Price Exercise Price
per Share per Share
Stock ----------------------------- -----------------
Warrants Options Warrants Options Warrants Options
-------------------- ----------------------------- -----------------
Outstanding at January 1, 2000 612,239 7,013,220 $5.54 - 14.73 $ 1.00 - 9.50 $ 9.57 $ 3.66
Granted - 12,500 - 2.50 - 2.63 - 2.53
Exercised - (2,300,000) - 1.00 - 1.00
Canceled or expired (72,239) - 5.54 - 8.16 - 6.07 -
--------------------
Outstanding at December 31, 2000 540,000 4,725,720 8.40 - 14.73 2.50 - 9.50 10.04 4.96
Granted - 50,000 - 2.05 - 2.05
Exercised - - - - - -
Canceled or expired - (2,137,420) - 2.50 - 9.50 - 7.37
--------------------
Outstanding at September 30, 2001 540,000 2,638,300 $8.40 - 14.73 $ 2.05 - 8.50 $10.04 $ 2.96
====================
Exercisable at September 30, 2001 540,000 2,638,300 $8.40 - 14.73 $ 2.50 - 8.50 $10.04 $ 2.96
====================
The options and warrants expire at various dates ranging from January 2002
through December 2008.
Note D. Disclosures About Debt Agreements
On February 9, 2000, we completed the extension of our $45,000,000 revolving
credit facility with a bank. The credit facility consists of a $30 million
working capital facility and a $15 million line of credit to support issuances
of letters of credit. Outstanding balances on the working capital facility bear
interest, at the option of the Company, at either (a) the "prime" rate of
interest publicly announced by the bank, which was 6.0% at September 30, 2001,
or (b) the "LIBOR" rate as reported by the Wall Street Journal, which was 2.65%
at September 30, 2001, plus an amount equal to 1.0% to 2.5%, depending on the
ratio of total liabilities of the Company to its tangible net worth.
In connection with our lines of credit agreements and a note payable to a
regional development authority and bank, we agreed to certain restrictive
covenants which include, among other things, not paying dividends and
maintenance of certain financial ratios at all times including a minimum current
ratio, minimum tangible net worth, a maximum ratio of total liabilities to
tangible net worth and a minimum fixed charge coverage ratio. At times during
2000 and 2001, including at December 31, 2000, we were in violation of certain
of these financial loan covenants. We have received waivers for these violations
and signed an agreement to amend the credit agreement which modifies required
financial ratios and other loan covenants. The amendment also reduces the amount
available for issuing letters of credit to $10 million.
As of September 30, 2001, the Company had used approximately $28,700,000 of the
working capital facility and had issued $9,400,000 of letters of credit against
the line of credit, leaving approximately $1.3 million available for future
borrowings and $0.6 million available for future letters of credit. Unless this
credit facility is renewed, it will expire in June 2002.
Page 8
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note E. Litigation
The Company is involved in a dispute with a former workers' compensation
administrator and stop-loss insurer for some of the Company's subsidiaries. The
administrator has alleged that they are owed insurance premiums, claims
reimbursement and administrative fees. The Company has counter-sued, claiming
that the administrator was negligent in its duties as administrator of our
claims, that it made payments on our behalf which were specifically disallowed,
that they refused to follow instructions given to them by us, that they failed
to meet minimal acceptable standards for administering claims, and that such
failures constituted a material dereliction of their responsibilities as
administrator, as well as other claims related to malfeasance and negligence.
The amount and probability of any payment or settlement is unknown at this time.
Among the issues being considered is the matter of currently unresolved workers'
compensation claims whose estimate of potential loss may change as a result of
this litigation. While management believes it has reserved an adequate amount
for settlement of these claims, there is no guarantee that the Company's actual
liability will not exceed its current estimate. Accordingly, these matters, if
resolved in a manner different from management's estimate, could have a material
adverse effect on the operating results or cash flows in any one future
accounting period.
From time to time, the Company is a party as plaintiff or defendant to various
legal proceedings related to our normal business operations. In the opinion of
management, although the outcome of any legal proceeding cannot be predicted
with certainty, the ultimate liability of the Company in connection with its
legal proceedings will not have a material adverse effect on the Company's
financial position, but could be material to the results of operations in any
one future accounting period.
Page 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussions should be read in conjunction with our Consolidated
Condensed Financial Statements and the notes thereto presented in "Item 1 -
Financial Statements." 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, including those discussed below under "Factors That May Affect Future
Results" could cause actual results to differ materially from those contained in
the forward-looking statements below.
Overview
Flanders 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. Our focus has
evolved from expansion through acquisition to increasing the quality and
efficiency of our high-volume replacement filtration products, and using these
benefits to compete more effectively in the marketplace. We also design and
manufacture much of our own production equipment and also produce glass-based
media for many of our air filtration products. Historical results of operations
do not reflect any future operating efficiencies and improvements from
integrating and consolidating the acquired businesses into our operations. As a
result, historical results of operations for the periods presented should be
evaluated specifically against these objectives. There can be no guarantee that
we will be able to achieve these objectives and gains in efficiency.
Results of Operations for the Three Months Ended September 30, 2001 Compared to
September 30, 2000
The following table summarizes our results of operations as a percentage of net
sales for the three months ended September 30, 2001 and 2000.
Three Months Ended
September 30,
-----------------------------------------
2001 2000
------------------- -------------------
(000's omitted)
Net sales $ 49,862 100.0% $ 50,422 100.0%
Gross profit 10,888 21.8 7,022 13.9
Operating expenses 8,789 17.6 9,514 18.9
Operating income (loss) from continuing ops 2,099 4.2 (2,492) (4.9)
Provision for income taxes 697 1.4 (1,080) (2.1)
Earnings (loss) from continuing operations 746 1.5 (1,845) (3.7)
Loss from discontinued operations - - (364) (0.7)
Net earnings (loss) 746 1.5 (2,209) (4.4)
Net sales: Net sales for the third quarter of 2001 decreased by $560,000, or
1.1%, to $49,862,000 from $50,422,000 for the third quarter of 2000. Our sales
to retailers dropped sharply and unexpectedly during the last part of September
2001. Sales were also negatively impacted during the quarter by an estimated
$1,800,000 by the elimination of our unprofitable tubing insulation product line
in May 2001.
Gross Profit: Gross profit for the third quarter of 2001 increased by
$3,866,000, or 55.1%, to $10,888,000, which represented 21.8% of net sales, from
$7,022,000, which represented 13.9% of net sales, for the third quarter of 2000.
During the third quarter of 2000, we recorded one-time charges of $4,275,000, of
which $4,037,000 reduced gross profit. Without these charges, gross profit for
the third quarter of 2001 decreased by $171,000, or 1.5%, from pro forma
$11,059,000, which represented 21.9% of net sales during the third quarter of
2001. Gross profit as a percentage of net sales, excluding one-time charges, was
basically unchanged between the two periods.
Page 10
Operating expenses: Operating expenses for the third quarter of 2001 decreased
by $725,000, or 7.6%, to $8,789,000, representing 17.6% of net sales, from
$9,514,000, representing 18.9% of net sales, for the third quarter of 2000.
During the third quarter of 2000, we recorded one-time charges of which $238,000
were recorded as operating expenses. Without these charges, operating expenses
for the third quarter of 2001 decreased by $487,000 or 5.3%, from pro forma
$9,276,000, representing 18.4% of net sales. The decrease in operating expenses
was caused by our ongoing programs to reduce overhead by eliminating redundant
personnel and functions at our subsidiaries.
Provision for income taxes: Our income tax provision for the third quarter of
2001 and 2000 consisted of a blended state and federal tax rate, excluding the
effect of nondeductible expenses consisting primarily of amortization of
goodwill of approximately $900,000 per year, of approximately 40%.
Results of Operations for the Nine Months Ended September 30, 2001 Compared to
September 30, 2000
The following table summarizes our results of operations as a percentage of net
sales for the nine months ended September 30, 2001 and 2000.
Nine Months Ended
September 30,
-----------------------------------------
2001 2000
------------------- -------------------
(000's omitted)
Net sales $146,869 100.0% $144,555 100.0%
Gross profit 32,387 22.1 31,107 21.5
Operating expenses 26,988 18.4 28,079 19.4
Operating income from continuing operations 5,399 3.7 3,028 2.1
Provision for income taxes 1,898 1.3 1,127 0.8
Earnings from continuing operations 2,173 1.5 1,015 0.7
Loss from discontinued operations (212) (0.1) (921) (0.6)
Net earnings 1,960 1.3 94 0.1
Net sales: Net sales for the first nine months of 2001 increased by $2,314,000,
or 1.6%, to $146,869,000 from $144,555,000 for the first nine months of 2000.
This increase represents the attraction of additional core business and the
capture of additional market share from competitors in a contracting market,
partially balanced by the elimination of our tubing insulation product line in
May 2001.
Gross Profit: Gross profit for the first nine months of 2001 increased by
$1,280,000, or 4.1%, to $32,387,000, which represented 22.1% of net sales, from
$31,107,000, which represented 21.5% of net sales, for the first nine months of
2000. During the third quarter of 2000, we recorded one-time charges of
$4,275,000, of which $4,037,000 reduced gross profit. Excluding these charges,
gross profit for the first nine months of 2001 decreased by $2,757,000, or 7.8%,
from pro forma $35,144,000, which represented 24.3% of net sales. The decrease
in pro forma gross profit was principally attributable to:
* Expanded facilities in Tijuana, which were brought partially online during
the quarter, experienced additional expenses associated with completing
expansions, reorganizing production schedules, hiring and training
additional laborers, and other inefficiencies typical of expanded
manufacturing operations, including duplicate staffing at our San Diego and
Nevada facilities. Results for the first quarter of 2001 do not include any
benefit from the associated reductions in force, which were completed in
March and April 2001.
* Increased price competition for several major retail accounts.
* Increased inbound freight costs for raw materials associated with fuel
price increases and fuel surcharges.
Page 11
Operating expenses: Operating expenses for the first nine months of 2001
decreased by $1,091,000, or 3.9%, to $26,988,000, representing 18.4% of net
sales, from $28,079,000, representing 19.4% of net sales, for the first nine
months of 2000. Excluding $238,000 of one-time charges recorded in 2000,
operating expenses decreased $853,000, or 3.1%, from $27,841,000 during the
first nine months of 2000. The decrease in operating expenses was caused
primarily by our ongoing programs to reduce overhead by eliminating redundant
personnel and functions at our subsidiaries.
Loss from discontinued operations: In December 1999, we adopted a formal plan to
close Airseal West, a wholly-owned subsidiary, and sell its various assets and
product lines to unrelated third parties. Closure of all production associated
with the discontinued assets was completed during the second quarter of 2001.
The assets to be sold consist primarily of inventories, designs and other
intellectual properties. Operating losses from Airseal West were approximately
$212,000 and $921,000, net of income tax benefit, for the first nine months of
2001 and 2000, respectively.
Provision for income taxes: Our income tax provision for the first nine months
of 2001 and 2000 consisted of a blended state and federal tax rate, excluding
the effect of nondeductible expenses consisting primarily of amortization of
goodwill of approximately $900,000 per year, of approximately 40%.
Liquidity and Capital Resources
Our working capital was $18,945,000 at September 30, 2001, compared to
$13,644,000 at December 31, 2000. This includes cash and cash equivalents of
$3,814,000, at September 30, 2001 and $1,333,000 at December 31, 2000. The major
cause of the increase in working capital was the reduction in long-term debt
through payments and the increase in cash through operating activities.
Our trade receivables decreased $249,000, or 0.7%, to $33,232,000 at September
30, 2001, from $33,481,000 at December 31, 2000. Days sales outstanding, the
ratio of receivables to average daily sales during the prior three months was 61
days at September 30, 2001, compared to 62 days at December 31, 2000. These
ratios for days sales outstanding typically vary between 60 and 70 days,
depending on timing differences in shipments and payments received.
Our continuing operations provided $5,637,000 of cash during the third quarter
of 2001 compared to providing $2,694,000 during the third quarter of 2000.
Historically, our business is seasonal, with our second and third quarters
having higher sales than our first and fourth quarters. We attempt to moderate
swings in labor requirements and product shortages due to this seasonal variance
by increasing inventories in the first quarter and first part of the second
quarter. Larger inventories reduce the likelihood of stock shortages during our
busy season and help smooth out our labor requirements. In general, we expect
operations to consume cash, or generate substantially less cash than earnings
before taxes, depreciation and amortization, during our first and second
quarters because of increases in inventory and trade accounts receivable. Our
financing activities from continuing operations consumed $673,000 of cash during
the third quarter of 2001, primarily consisting of net payments on debt. Our
investing activities from continuing operations consumed $1,603,000 of cash
during the third quarter of 2001, primarily used to purchase property and
equipment.
On February 9, 2000, we completed the extension of our $45,000,000 revolving
credit facility with a bank. The credit facility consists of a $30 million
working capital facility and a $15 million line of credit to support issuances
of letters of credit. Outstanding balances on the working capital facility bear
interest, at the option of the Company, at either (a) the "prime" rate of
interest publicly announced by the bank, which was 6.0% at September 30, 2001,
or (b) the "LIBOR" rate as reported by the Wall Street Journal, which was 2.65%
at September 30, 2001, plus an amount equal to 1.0% to 2.5%, depending on the
ratio of total liabilities of the Company to its tangible net worth.
In connection with our lines of credit agreements and a note payable to a
regional development authority and bank, we agreed to certain restrictive
covenants which include, among other things, not paying dividends and
maintenance of certain financial ratios at all times including a minimum current
ratio, minimum tangible net worth, a maximum ratio of total liabilities to
tangible net worth and a minimum fixed charge coverage ratio. At times during
2000 and
Page 12
2001, including at December 31, 2000, we were in violation of certain of these
financial loan covenants. We have received waivers for these violations and
signed an agreement to amend the credit agreement which modifies required
financial ratios and other loan covenants. The amendment also reduces the amount
available for issuing letters of credit to $10 million.
As of September 30, 2001, the Company had used approximately $28,700,000 of the
working capital facility and had issued $9,400,000 of letters of credit against
the line of credit, leaving approximately $1.3 million available for future
borrowings and $0.6 million available for future letters of credit. Unless this
credit facility is renewed, it will expire in June 2002.
Continuing expansion may require substantial capital investment for the
manufacture of filtration products. Although we have 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 acceptable terms. Failure to obtain sufficient
capital could materially adversely impact our growth strategy.
In 1998, the Board of Directors authorized the repurchase of up to two million
shares of our common stock, which repurchase was completed in September 2000. On
September 22, 2000, the Board of Directors authorized the repurchase of up to an
additional two million shares of common stock. As of November 8, 2001,
approximately 575,000 shares had been repurchased under this authorization.
These shares may be acquired in the open market or through negotiated
transactions. These repurchases may be made from time to time, depending on
market conditions, share price and other factors. These repurchases are to be
used primarily to satisfy our obligations under stock option and purchase plans
or any other authorized incentive plans, or for issuance pursuant to future
equity financing.
Outlook
We recently announced that we had adapted our biocontainment products for use as
part of a system for hardening government buildings, commercial office complexes
and public venues against airborne bioweapons such as anthrax and smallpox.
There is currently a tremendous amount of interest in these products, but we do
not know whether this interest will be sustained for a long period of time, or
whether this interest will actually produce significant sales of these products.
Any significant trend towards requiring hardening of these types of facilities
against airborne bioweapons could have a significant impact on our business.
We are currently introducing new products for the retail marketplace, primarily
our Airia indoor air cleaners and WholeHouse residential air cleaning systems.
In contrast to our standard retail filters, the bulk of which sell for unit
prices between $0.50 and $10, these new products will sell for substantially
more (between $200 and $5,000, with replacement packs ranging from $3 to $15 per
month). These are new products which are substantially different in features,
appearance and performance from competing products. We have no actual market
data on how successful they will be, and hence have no way of estimating their
impact on the financial results of the Company. Any sales of these units in
significant quantities will require additional financial resources, either
through equity or financing, to meet working capital requirements for production
and sale of these products.
We believe there is currently a gradually increasing public awareness of the
issues surrounding indoor air quality and that this trend will continue for the
next several years. We also believe there is an increase in public concern
regarding the effects of indoor air quality on employee productivity, as well as
an increase in interest by standards-making bodies in creating specifications
and techniques for detecting, defining and solving indoor air quality problems.
Our most common products, in terms of both unit and dollar volume, are
residential throw-away spun glass 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 products with higher value products. Our higher
value products include our NaturalAire higher-efficiency filters for residential
use, with associated sales prices typically over $5.00 each. Any such trend
would have a beneficial effect on our business. If our residential air cleaners
are successful, we believe replacement filter sales, and the
Page 13
increased awareness of indoor air quality engendered by the simple presence of
the air cleaners, will help to create and/or accelerate this trend.
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, our penetration of this market has been
relatively small. We believe our ability to offer a "one stop" supply of air
filtration products to HVAC distributors and wholesalers may increase our share
of this market. We also believe that our recently developed modular air handlers
and environmental tobacco smoke systems will enable us to expand sales to these
customers. We intend our new products to serve as high profile entrants with
distributors and manufacturers' representatives, who can then be motivated to
carry our complete product line.
This Outlook section, and other portions of this document, include certain
"forward-looking statements" within the meaning of that term in Section 27A of
the Securities Act of 1933, and Section 21E of the Securities Exchange Act of
1934, including, among others, those statements preceded by, following or
including the words "believe," "expect," "intend," "anticipate" or similar
expressions. These forward-looking statements are based largely on the current
expectations of management and are subject to a number of assumptions, risks and
uncertainties. Our actual results could differ materially from these
forward-looking statements. Important factors to consider in evaluating such
forward-looking statements include those discussed below under the heading
"Factors That May Affect Future Results" as well as:
* the shortage of reliable market data regarding the air filtration market,
* changes in external competitive market factors or in our internal budgeting
process which might impact trends in our results of operations,
* anticipated working capital or other cash requirements,
* changes in our business strategy or an inability to execute our strategy
due to unanticipated changes in the market,
* product obsolescence due to the development of new technologies, and
* various competitive factors that may prevent us from competing successfully
in the marketplace.
In light of these risks and uncertainties, there can be no assurance that the
events contemplated by the forward-looking statements contained in this Form
10-Q will in fact occur.
Factors That May Affect Future Results
Failure to Manage Future Growth Could Adversely Impact Our Business Due to the
Strain on Our Management, Financial and Other Resources
If our business continues to grow, the additional growth will place burdens on
management to manage such growth while maintaining profitability. We have no
guarantee that we will be able to do so. Due to our recent acquisitions and
expansions, our net sales increased by approximately 405% from 1995 through
2000, (a compound annual growth rate of 32%). We may not continue to expand at
this rate. Our ability to compete effectively and manage future growth depends
on our ability to:
* recruit, train and manage our work force, particularly in the areas of
corporate management, accounting, research and development and operations,
* manage production and inventory levels to meet product demand,
* manage and improve production quality,
* expand both the range of customers and the geographic scope of our customer
base, and
* improve financial and management controls, reporting systems and
procedures.
Any failure to manage growth effectively could have a material adverse effect on
our business, financial condition and results of operations.
Any Delay in Procuring Financing for New Products or Failure to Adequately
Ramp-Up Production Capacity to Meet Demand Could Adversely Impact Our Business
Due to Strain on Financial Resources.
During 2001 we are introducing new products which, if successfully
mass-marketed, will require large amounts of additional financing and/or
capital. This financing may need to be available on short notice. Any failure to
obtain such financing, or delay in financing, could cause the failure of the new
products due to inability to deliver on time,
Page 14
and could adversely impact relationships with current major accounts. In
addition, delays in an untried supply chain, new production chains, and other
delays common to the launch of a new product line could also adversely impact
the success of the products, as well as current relationships with major
accounts.
Our Plan to Centralize Overhead Functions May Not Produce the Anticipated
Benefits to Our Operating Results
We are currently implementing plans to centralize and eliminate duplication of
efforts between our subsidiaries in the following areas:
* purchasing,
* production planning,
* shipping coordination,
* marketing,
* accounting,
* personnel management,
* risk management, and
* benefit plan administration.
We have no assurance that cutting overhead in this fashion will have the
anticipated benefits to our operating results. Additionally, we have no
assurance that these reorganizations will not significantly disrupt the
operations of the affected subsidiaries.
The preceding discussion should be read in conjunction with our annual report on
Form 10-K, which also includes additional "Factors That May Affect Future
Results" which are still applicable during the current period. Because of the
foregoing factors, as well as other variables affecting our 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various market risks, including changes in foreign currency
exchange rates and interest rate risks. Market risk is the potential loss
arising from adverse change in market rates and prices, such as foreign currency
exchange and interest rates. For us, these exposures are primarily related to
the sale of product to foreign customers and changes in interest rates.
The fair value of our total debt at September 30, 2001 was approximately
$51,140,000. We have entered into an interest rate swap agreement related to
$8,500,000 of this amount, related to two outstanding Industrial Revenue Bonds.
These swap agreements are hedges which have the effect of fixing the interest
rate of these two IRB's at 5.14% per annum. Market risk for the remaining
$42,640,000 was estimated as the potential decrease (increase) in future
earnings and cash flows resulting from a hypothetical 10% increase (decrease) in
our estimated weighted average borrowing rate at September 30, 2001. Although
most of the interest on our debt is indexed to a market rate, there would be no
material effect on the future earnings or cash flows related to our total debt
for such a hypothetical change.
Our financial position is not materially affected by fluctuations in currencies
against the U.S. dollar, since assets held outside the United States are
negligible. Our sensitivity analysis of the effects of changes in foreign
currency exchange rates does not factor in a potential change in sales levels of
local currencies, as the preponderance of our foreign sales occur over short
periods of time or are demarcated in U.S. dollars.
We do not have any derivatives or other financial instruments for trading or
speculative purposes.
Page 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
We are involved in a dispute with a former benefit plan administrator
(U.S. District Court, Middle District of Florida, Tampa Division, Case
No. CIV 1971-T-17-F, Liberty Mutual v. Flanders Corporation et al).
Liberty Mutual was the Workers' Compensation administrator and stop-loss
insurer for some of the Company's subsidiaries. They have alleged that
they are owed insurance premiums, claims reimbursement and
administrative fees. We have counter-sued, claiming that Liberty Mutual
was negligent in its duties as administrator of our claims, that it made
payments on our behalf which were specifically disallowed, that they
refused to follow instructions given to them by us, that they failed to
meet minimal acceptable standards for administering claims, and that
such failures constituted a material dereliction of their
responsibilities as administrator, as well as other claims related to
malfeasance and negligence. The amount and probability of any settlement
or award related to this litigation is unknown at this time. Among the
issues being considered is the matter of currently unresolved workers'
compensation claims whose estimate of potential loss may change as a
result of this litigation. While management believes it has reserved an
adequate amount for settlement of these claims, there is no guarantee
that the Company's actual liability will not exceed its current
estimate. Accordingly, these matters, if resolved in a manner different
from management's estimate, could have a material adverse effect on the
operating results or cash flows in any one future accounting period.
Additionally, from time to time, we are a party to various legal
proceedings incidental to our business. None of these proceedings are
material to our business, operations or financial condition.
In the opinion of management, although the outcome of any legal
proceeding cannot be predicted with certainty, the ultimate liability of
the Company in connection with its legal proceedings will not have a
material adverse effect on the Company's financial position, but could
be material to the results of operations in any one future accounting
period.
Item 2. Changes in Securities and the Use of Proceeds - None.
Item 3. Defaults Upon Senior Securities - None.
Item 4. Submission of Matters to a Vote of Security Holders - None.
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
3.1 Articles of Incorporation for Flanders Corporation, filed with the Form
8-A dated March 8, 1996, incorporated herein by reference.
3.2 Bylaws of Flanders Corporation, filed with the Form 8-A dated March 8,
1996, incorporated herein by reference.
Page 16
10.1 Indemnification Agreement between Flanders Corporation, Steven K. Clark,
Robert Amerson and Thomas Allan, filed with the Form 10-K dated December
31, 1995, and incorporated herein by reference.
10.2 Stock Purchase Agreement between Flanders Corporation and the
Shareholders of Eco-Air Products, Inc. dated May 7, 1998, filed with
the Form 8-K dated June 30, 1998, and incorporated herein by reference.
10.3 Amendment dated May 20, 1998 to Stock Purchase Agreement by and between
the Registrant and the Shareholders of Eco-Air Products, Inc. dated May
7, 1998, filed with the Form 8-K dated June 30, 1998, and incorporated
herein by reference.
10.4 Promissory Note from Precisionaire, Inc. to SunTrust Bank, Tampa Bay,
in the amount of $2,134,524 dated August 28, 1997, filed with the Form
S-1 dated September 15, 1997 (Reg No. 333-33635), and incorporated
herein by reference.
10.5 Assumption Agreement between POF Realty, Precisionaire, Inc., Polk
County Industrial Development Authority and SunTrust Bank, dated August
1, 1997, filed with the Form S-1 dated September 15, 1997 (Reg No.
333-33635), and incorporated herein by reference.
10.6 Mortgage Deed and Security Agreement between Precisionaire, Inc. and
Sun Trust Bank, Tampa Bay dated August 28, 1997, filed with the Form
S-1 dated September 15, 1997 (Reg No. 333-33635), and incorporated
herein by reference.
10.7 Credit Agreement between Flanders Corporation, SunTrust Bank, Tampa Bay
and Zions First National Bank, dated November 10, 1997, filed with the
Form 10-K dated December 31, 1997, and incorporated herein by reference.
10.8 Loan Agreement between Will-Kankakee Regional Development Authority and
Flanders Corporation dated December 15, 1997, filed with the Form 10-K
dated December 31, 1997, and incorporated herein by reference.
10.9 Letter of Credit Agreement between Flanders Corporation and SunTrust
Bank, Tampa Bay, dated April 1, 1998, filed with the Form 10-Q dated
March 31, 1998, and incorporated herein by reference.
10.10 Credit Agreement between Flanders Corporation, SunTrust Equitable
Securities Corporation and SunTrust Bank, dated February 9, 2000, filed
with the Form 10-K dated December 31, 1999, and incorporated herein by
reference.
10.11 Loan Agreement between Flanders Corporation and the Johnston County
Industrial Facilities and Pollution Control Financing Authority, dated
April 1, 1998, filed with the Form 10-Q dated March 31, 1998, and
incorporated herein by reference.
10.12 Loan Agreement between Flanders Corporation and the Johnston County
Industrial Facilities and Pollution Control Financing Authority, dated
March 1, 2000, filed with the Form 10-K dated December 31, 1999, and
incorporated herein by reference.
10.13 Flanders Corporation 1996 Director Option Plan, filed with the Form
10-K dated December 31, 1995, and incorporated herein by reference.
10.14 Employment Agreement between Elite Acquisitions, Inc., Flanders
Filters, Inc., and Steven K. Clark, filed with the Form 10-K dated
December 31, 1995, and incorporated herein by reference.
10.15 Amendment to Employment Agreement between Elite Acquisitions, Inc.,
Flanders Filters, Inc., and Steven K. Clark, filed with the Form S-1
dated October 21, 1996 (Reg. No. 333-14655), and incorporated herein
by reference.
10.16 Amendment to Employment Agreement between Elite Acquisitions, Inc.,
Flanders Filters, Inc., and Steven K. Clark, filed with the Form 10-K
dated December 31, 1997, and incorporated herein by reference.
Page 17
10.17 Amendment to Employment Agreement between Elite Acquisitions, Inc.,
Flanders Filters, Inc., and Steven K. Clark, filed with Form 10-K dated
December 31, 1999, and incorporated herein by reference.
10.18 Employment Agreement between Elite Acquisitions, Inc., Flanders
Filters, Inc. and Robert R. Amerson, filed with the Form 10-K dated
December 31, 1995, and incorporated herein by reference.
10.19 Amendment to Employment Agreement between Elite Acquisitions, Inc.,
Flanders Filters, Inc., and Robert R. Amerson, filed with the Form S-1
dated October 21, 1996 (Reg. No. 333-14655), and incorporated herein by
reference.
10.20 Amendment to Employment Agreement between Elite Acquisitions, Inc.,
Flanders Filters, Inc., and Robert R. Amerson, filed with the Form 10-K
dated December 31, 1997, and incorporated herein by reference.
10.21 Amendment to Employment Agreement between Elite Acquisitions, Inc.,
Flanders Filters, Inc., and Robert R. Amerson, filed with Form 10-K
dated December 31, 1999, and incorporated herein by reference.
10.22 Stock Option Agreement between Flanders Corporation and Robert R.
Amerson dated February 22, 1996, filed with the Form S-8 dated July 21,
1997, and incorporated herein by reference.
10.23 Amendment to Stock Option Agreement between Flanders Corporation and
Robert R. Amerson dated December 22, 1999, filed with the Form 10-K
dated December 31, 1999, and incorporated herein by reference.
10.24 Stock Option Agreement between Flanders Corporation and Robert R.
Amerson dated June 3, 1996, filed with the Form S-8 dated July 21,
1997, and incorporated herein by reference.
10.25 Stock Option Agreement between Flanders Corporation and Steven K. Clark
dated February 22, 1996, filed with the Form S-8 dated July 21, 1997,
and incorporated herein by reference.
10.26 Amendment to Stock Option Agreement between Flanders Corporation and
Steven K. Clark dated December 22, 1999, filed with the Form 10-K dated
December 31, 1999, and incorporated herein by reference.
10.27 Stock Option Agreement between Flanders Corporation and Steven K. Clark
dated June 3, 1996, filed with the Form S-8 dated July 21, 1997, and
incorporated herein by reference.
10.28 Note Agreement between Steven K. Clark and Flanders Corporation, dated
April 24, 1999, filed with the Form 10-K dated December 31, 1999, and
incorporated herein by reference.
10.29 Note Agreement between Robert R. Amerson and Flanders Corporation,
dated April 24, 1999, filed with the Form 10-K dated December 31, 1999,
and incorporated herein by reference.
(b) Reports on Form 8-K - None
Page 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated this 16th day of November, 2001.
FLANDERS CORPORATION
By: /s/ Robert R. Amerson
Robert R. Amerson
President, Chief Executive Officer and
Director
By: /s/ Steven K. Clark
Steven K. Clark
Chief Operating Officer, Vice President/
Chief Financial Officer, Principal
Accounting Officer and Director
Page 19