SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
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 May 6, 2002.
26,033,153 shares common stock, par value $.001 per share
(Title of Class)
FLANDERS CORPORATION
FORM 10-Q
FOR QUARTER ENDED MARCH 31, 2002
PART I - FINANCIAL INFORMATION Page
Item 1 -
Financial Statements
Consolidated Condensed Balance Sheets for March 31,
2002 (unaudited) and December 31, 2001 3
Consolidated Condensed Statements of Earnings (unaudited)
for the three months ended March 31, 2002 and 2001 4
Consolidated Condensed Statements of Stockholders' Equity
for the three months ended March 31, 2002 (unaudited)
and the year ended December 31, 2001 5
Consolidated Condensed Statements of Cash Flows (unaudited)
for the three months ended March 31, 2002 and 2001 6
Notes to Consolidated Condensed Financial Statements 7
Item 2 -
Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3 -
Quantitative and Qualitative Disclosures About Market Risk 15
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 17
Item 2 - Changes in Securities and Use of Proceeds 17
Item 3 - Defaults Upon Senior Securities 17
Item 4 - Submission of Matters to a Vote of Security Holders 17
Item 5 - Other Information 17
Item 6 - Exhibits and Reports on Form 8-K 17
SIGNATURES 20
Page 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, December 31,
ASSETS 2002 2001
------ ------------- -------------
(unaudited)
Current assets
Cash and cash equivalents $ 2,964,280 $ 3,877,785
Receivables:
Trade, less allowance for doubtful accounts:
3/31/2002 $1,554,780; 12/31/2001 $1,531,650 29,984,466 29,995,949
Other 461,601 483,941
Inventories (Note B) 30,556,431 31,391,365
Deferred taxes 1,988,324 1,994,964
Other current assets 5,096,943 4,633,848
------------- -------------
Total current assets 71,052,045 72,377,852
Related party receivables 488,086 549,350
Other assets 2,766,079 2,715,855
Intangible assets, less accumulated amortization:
3/31/2002 $3,670,924; 12/31/2001 $3,670,891 28,332,274 28,332,307
Property and equipment, less accumulated depreciation:
3/31/2002 $ 35,218,091; 12/31/2001 $33,515,344 75,457,934 76,279,734
------------- -------------
$178,096,418 $180,255,098
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt
and capital leases $ 31,709,919 $ 32,599,894
Accounts payable 13,918,053 15,726,086
Accrued expenses 9,073,488 9,449,073
------------- -------------
Total current liabilities 54,701,460 57,775,053
Long-term capital lease obligations, less
current maturities 3,110,992 3,173,502
Long-term debt, less current maturities 16,657,759 16,271,430
Long-term liabilities, other 941,989 1,089,983
Deferred taxes 5,113,341 5,065,762
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 26,033 26,033
Additional paid-in capital 90,331,524 90,331,524
Notes receivable (8,421,766) (8,325,978)
Accumulated other comprehensive loss (565,193) (653,990)
Retained earnings 16,200,279 15,501,779
------------- -------------
97,570,877 96,879,368
------------- -------------
$178,096,418 $180,255,098
============= =============
See Notes to Consolidated Condensed Financial Statements
Page 3
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(unaudited)
Three Months Ended
March 31,
----------------------------
2002 2001
------------ ------------
Net sales $42,454,191 $47,089,772
Cost of goods sold 33,273,387 35,712,450
------------ ------------
Gross profit 9,180,804 11,377,322
Operating expenses 6,983,127 9,514,533
------------ ------------
Operating income from continuing
operations 2,197,677 1,862,789
Nonoperating expenses from continuing
operations, net (940,886) (247,596)
------------ ------------
Earnings from continuing operations
before income taxes 1,256,791 1,615,193
Provision for income taxes 558,291 735,077
------------ ------------
Earnings from continuing operations 698,500 880,116
Loss from operations of discontinued subsidiary,
(including tax benefit of $80,935 for the
three months ended March 31, 2001) - (121,403)
------------ ------------
Net earnings $ 698,500 $ 758,713
============ ============
Earnings per share from continuing operations
Basic $ 0.03 $ 0.03
============ ============
Diluted $ 0.03 $ 0.03
============ ============
Loss per share from discontinued operations
Basic $ - $ (0.00)
============ ============
Diluted $ - $ (0.00)
============ ============
Net earnings per share
Basic $ 0.03 $ 0.03
============ ============
Diluted $ 0.03 $ 0.03
============ ============
Weighted average common shares outstanding
Basic 26,033,153 26,037,433
============ ============
Diluted 26,037,001 26,037,433
============ ============
See Notes to Consolidated Condensed Financial Statements
Page 4
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
Accum-
Additional ulated Other
Common Paid-In Notes Compre- Retained
Stock Capital Receivable hensive Loss Earnings Total
-------- ------------- ------------- ------------ ------------- --------------
Balance, January 1, 2001 $26,380 $ 90,898,258 $ (7,891,208) $ - $ 15,117,854 $ 98,151,284
Interest on notes receivable
secured by common shares - - (434,770) - - (434,770)
Purchase and retirement of
354,000 shares of common stock (354) (585,527) - - - (585,881)
Issuance of 7,520 shares of
common stock upon exercise of
options 7 18,793 - - - 18,800
Comprehensive income (loss)
Net earnings - - - - 383,925 383,925
Transition adjustment - - - (579,273) - (579,273)
Net loss on cash flow hedges - - - (74,717) - (74,717)
--------------
Total comprehensive loss (270,065)
-------- ------------- ------------- ------------ ------------- --------------
Balance, December 31, 2001 26,033 90,331,524 (8,325,978) (653,990) 15,501,779 96,879,368
Interest on notes receivable
secured by common shares
(unaudited) - - (95,788) - - (95,788)
Comprehensive income (loss)
Net earnings (unaudited) - - - - 698,500 698,500
Net income on cash flow
hedges (unaudited) - - - 88,797 - 88,797
--------------
Total comprehensive income
(unaudited) 787,297
-------- ------------- ------------- ------------ ------------- --------------
Balance, March 31, 2002
(unaudited) $26,033 $ 90,331,524 $ (8,421,766) $ (565,193) $ 16,200,279 $ 97,570,877
======== ============= ============= ============ ============= ==============
See Notes to Consolidated Condensed Financial Statements
Page 5
FLANDERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
----------------------------
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by continuing operations $ 522,526 $ 1,945,555
Net cash used in discontinued operations - (121,403)
------------ ------------
Net cash provided by operating activities 522,526 1,824,152
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (880,948) (2,344,758)
Net advances on notes receivable 36,083 (539,204)
Net increase in other assets (25,010) (13,704)
------------ ------------
Net cash used in investing activities
of continuing operations (869,875) (2,897,666)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase and retirement of common stock - (585,881)
Net proceeds (payments) from revolving
credit agreement (283,686) 3,197,693
Principal payments on long-term borrowings (282,470) (356,458)
------------ ------------
Net cash provided by (used in) financing
activities (566,156) 2,255,354
------------ ------------
Net increase (decrease) in cash and
cash equivalents (913,505) 1,181,840
CASH AND CASH EQUIVALENTS
Beginning of period 3,877,785 1,333,128
------------ ------------
End of period $ 2,964,280 $ 2,514,968
============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes $ - $ -
============ ============
Interest $ 1,441,814 $ 732,796
============ ============
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:
The Company designs, manufactures and sells air filters and related products. It
is focused on providing complete environmental control systems for end users
ranging from controlling contaminants in residences and commercial office
buildings through specialized manufacturing environments for semiconductors and
pharmaceuticals. The Company also designs and manufactures much of its own
production equipment to automate processes to decrease labor costs associated
with its standard products. The Company also produces glass-based air filter
media for many of its products. The vast majority of the Company's current
revenues 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.
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 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, 2001.
In the opinion of management the interim statements include all adjustments
(consisting only of normal recurring adjustments) necessary to summarize fairly
the Company's financial position, results of operations, and cash flows. The
results of operations and cash flows for the three months ended March 31, 2002
may not be indicative of the results that may be expected for the year ending
December 31, 2002.
Goodwill:
As of January 1, 2002, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS
142 changes the accounting for goodwill from an amortization method to an
impairment-only approach. Thus, effective January 1, 2002, the Company has
ceased amortization of goodwill, including goodwill recorded in past business
combinations. The Company does not have any intangible assets with indeterminate
lives other than goodwill.
In connection with the transitional goodwill impairment evaluation, SFAS 142
requires the Company to perform an assessment of whether there is an indication
that goodwill is impaired as of January 1, 2002. To accomplish this the Company
must identify its reporting units and determine the carrying value of each
reporting unit by assigning the assets and liabilities, including the existing
goodwill and intangible assets, to those reporting units as of the date of
adoption. The Company will then have until June 30, 2002, to determine the fair
value of each reporting unit and compare it to the reporting unit's carrying
amount. To the extent a reporting unit's carrying amount exceeds its fair value,
an indication exists that the reporting unit's goodwill may be impaired and the
Company must perform the second step of the transitional impairment test.
In the second step, the Company must compare the implied fair value of the
reporting unit's goodwill, determined by allocating the reporting unit's fair
value to all of its assets (recognized and unrecognized) and liabilities in a
manner similar to a purchase price allocation, to its carrying amount, both of
which would be measured as of January 1, 2002. This second step is required to
be completed as soon as possible, but no later than December 31, 2002. Any
transitional impairment loss will be recognized as a cumulative effect of a
change in accounting principle in the Company's statement of operations.
Page 7
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note A. Nature of Business and Interim Financial Statements - continued
The following table reconciles the Company's net earnings for the three months
ended March 31, 2002 and 2001 adjusted to exclude goodwill amortization pursuant
to SFAS 142 to amounts previously reported:
Three Months Ended
3/31/2002 3/31/2001
------------ ------------
Net earnings
Reported net earnings $ 698,500 $ 758,713
Add back: Goodwill amortization - 215,005
------------ ------------
Adjusted net earnings $ 698,500 $ 973,718
============ ============
Earnings per share - basic
Reported net earnings $ 0.03 $ 0.03
Goodwill amortization - 0.01
------------ ------------
Adjusted net earnings $ 0.03 $ 0.04
============ ============
Earnings per share - diluted
Reported net earnings $ 0.03 $ 0.03
Goodwill amortization - 0.01
------------ ------------
Adjusted net earnings $ 0.03 $ 0.04
============ ============
Other comprehensive income (loss):
Other comprehensive income (loss) is defined as the change in equity during a
period, from transactions and other events not included in net earnings,
excluding changes resulting from investments by owners (e.g., supplement stock
offerings) and distributions to owners (e.g., dividends).
As of March 31, 2002, accumulated comprehensive income (loss) consisted of the
following:
Balance at December 31, 2001 $ (653,990)
Net change during the period related
to cash flow hedges 88,797
------------
Balance at March 31, 2002 $ (565,193)
============
Accounts receivable:
The majority of the Company's accounts receivable are due from large retail,
wholesale, construction and other companies. Credit is extended based on
evaluation of the customers' financial condition. Accounts receivable terms are
within normal time frames for the respective industries. The Company maintains
allowances for doubtful accounts for estimated losses, which are reviewed
regularly by management. The estimated losses are based on the aging of accounts
receivable balances and historical write-off experience, net of recoveries. If
the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
Page 8
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note A. Nature of Business and Interim Financial Statements - continued
Derivative financial instruments:
The Company has two interest rate swap agreements to hedge against the potential
impact on earnings from increases in market interest rates of two variable rate
bonds. Under the interest rate swap agreements, the Company receives or makes
payments on a monthly basis, based on the differential between 5.14% and a tax
exempt interest rate as determined by a remarketing agent. These interest rate
swap agreements are accounted for as a cash flow hedge in accordance with SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133) as amended by SFAS 138, "Accounting for Certain Derivative Instruments and
Hedging Activities -- an Amendment to FASB Statement No. 133." The tax effected
fair market value of the interest rate swap of $565,193 at March 31, 2002 is
included in other comprehensive loss. The interest rate swap contracts expire in
2013 and 2015.
Note B. Inventories
Inventories consist of the following at March 31, 2002 and December 31, 2001:
3/31/02 12/31/01
------------- -------------
Finished goods $ 14,631,832 $ 14,530,664
Work in progress 3,022,670 3,287,288
Raw materials 14,037,168 14,723,048
------------- -------------
31,691,670 32,541,000
Less allowances 1,135,239 1,149,635
------------- -------------
$ 30,556,431 $ 31,391,365
============= =============
Note C. Stock Options and Warrants
The following table summarizes the activity related to all Company stock options
and warrants for the three months ended March 31, 2002 and the year ended
December 31, 2001:
Weighted Average
Exercise Price Exercise Price
per Share per Share
Stock ----------------------------- -----------------
Warrants Options Warrants Options Warrants Options
-------------------- ----------------------------- -----------------
Outstanding at January 1, 2001 540,000 4,725,720 $8.40 - 14.73 $2.50 - 9.50 $ 10.04 $ 3.66
Granted - 2,110,000 - 1.88 - 7.50 - 7.25
Exercised - (7,520) - 2.50 - 2.50
Canceled or expired - (2,129,900) - 2.50 - 9.50 - 7.37
--------------------
Outstanding at December 31, 2001 540,000 4,698,300 8.40 - 14.73 1.88 - 8.50 10.04 4.89
Granted - 105,000 - 1.74 - 2.36 - 1.77
Exercised - - - - - -
Canceled or expired (140,000) (169,550) - 2.05 - 8.50 14.73 4.71
Outstanding at March 31, 2002 400,000 4,633,750 $ 8.40 $1.74 - 7.50 $ 8.40 $ 4.82
====================
Exercisable at March 31, 2002 400,000 4,583,750 $ 8.40 $1.74 - 7.50 $ 8.40 $ 4.83
====================
The warrants and options expire at various dates ranging from June 2002 through
December 2008.
Page 9
FLANDERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note D. 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 claims administrator, that
it made payments on the Company's behalf which were specifically disallowed,
that they refused to follow instructions given to them by the Company, 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 the future.
From time to time, the Company is a party as plaintiff or defendant to various
legal proceedings related to 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 10
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" and our audited financial statements and the related
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in our report on Form 10-K for the year ended December 31,
2001. 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 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 produce glass-based media for many of our
air filtration products.
Critical Accounting Policies
The following discussion and analysis is based upon our consolidated condensed
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation
of our financial statements requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses during the
periods reported, and assets and liabilities at the relevant balance sheet
dates. Note A of the Notes to Consolidated Financial Statements in our Annual
Report on Form 10-K for the year ended December 31, 2001 describes the
significant accounting policies used in preparation of the Consolidated
Condensed Financial Statements. Estimates are used when accounting for certain
items such as revenues, allowances for returns, early payment discounts,
customer discounts, doubtful accounts, employee compensation programs,
depreciation and amortization periods, taxes, inventory values, insurance
programs, and valuations of investments, goodwill, other intangible assets and
long-lived assets. We base our estimates on historical experience, where
applicable, and other assumptions that we believe are reasonable under the
circumstances. Actual results may differ from our estimates under different
assumptions or conditions.
We believe that the following critical accounting policies reflect our more
significant judgments and estimates used in preparation of our consolidated
financial statements. We maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make payments due to us.
We base our estimates on the aging of our accounts receivable balances and our
historical write-off experience, net of recoveries. If the financial condition
of one or more of our customers were to deteriorate, additional allowances may
be required. We value our inventories at the lower of cost or market. We write
down inventory balances for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of the inventory and the estimated
market value based upon assumptions about future demand and market conditions.
If actual market conditions are less favorable than those projected by
management, if there are changes in customer buying patterns, or if new
technology or products are developed that compete with our existing inventory,
additional inventory write-downs may be required. Our insurance costs are
developed by management evaluation of the likelihood and probable amount of
potential claims based on historical experience and evaluation of each claim.
Changes in the key assumptions may occur in the future, which would result in
changes to related insurance costs. We also have recorded goodwill and
intangible assets related to previous acquisitions. We assess impairment charges
to these assets when we determine that the carrying value of the assets is
greater than the fair value of the assets. Poor operating performance of the
business activities related to goodwill, other intangible assets, or long-lived
assets could result in future cash flows of these assets declining below
carrying values.
Page 11
Results of Operations for Three Months Ended March 31, 2002 Compared to March
31, 2001
The following table summarizes our results of operations as a percentage of net
sales for the three months ended March 31, 2002 and 2001.
Three Months Ended
September 30,
-----------------------------------------
2002 2001
------------------- -------------------
(000's omitted)
Net sales $ 42,454 100.0% $ 47,090 100.0%
Gross profit 9,181 21.6 11,377 24.2
Operating expenses 6,983 16.4 9,515 20.2
Operating income from continuing
operations 2,198 5.2 1,863 4.0
Provision for income taxes 558 1.3 735 1.6
Earnings from continuing operations 699 1.6 880 1.9
Loss from discontinued operations - - (121) (0.3)
Net earnings 699 1.6 759 1.6
Net sales: Net sales for the first quarter of 2002 decreased by $4,636,000, or
9.8%, to $42,454,000 from $47,090,000 for the first quarter of 2001. This
decrease in net sales was due to the continuation of an unexpectedly soft market
that began in the fourth quarter of 2001, primarily in our replacement business
for standard industrial and residential replacement filters, which we believe is
caused by a deferral of standard HVAC system maintenance by a large number of
end users. The shortfall does not appear to be caused by a loss of market share
or loss of any significant number of customers. Other public companies in our
industry have reported revenues from air filters to be down 8 - 10% as well.
Gross Profit: Gross profit for the first quarter of 2002 decreased by
$2,196,000, or 19.3%, to $9,181,000, which represented 21.6% of net sales, from
$11,377,000, which represented 24.2% of net sales, for the first quarter of
2001. The decrease in gross profit percentage was principally attributable to
the spreading of fixed costs, such as facility depreciation, utilities, and
plant administrative salaries over a smaller base of revenues.
Operating expenses: Operating expenses for the first quarter of 2002 decreased
by $2,532,000, or 26.6%, to $6,983,000, representing 16.4% of net sales, from
$9,515,000, representing 20.2% of net sales, for the first quarter of 2001. The
decrease in operating expenses was caused by a decrease in sales-related
expenses associated with decreased revenues, a decrease of approximately
$215,000 of amortization of goodwill expenses caused by the Company's adoption
of SFAS 142 effective January 1, 2002, reductions in administrative staffing,
and the Company's 10% salary reduction.
Provision for income taxes: Our income tax provision for the first quarter of
2002 and 2001 consisted of a blended state and federal tax rate, excluding
nondeductible expenses such as amortization of goodwill of approximately
$225,000 during the first quarter of 2001, of approximately 40%.
Liquidity and Capital Resources
Our working capital was approximately $16,351,000 at March 31, 2002, compared to
approximately $14,603,000 at December 31, 2001. This includes cash and cash
equivalents of $2,964,000, at March 31, 2002 and $3,878,000 at December 31,
2001.
Our trade receivables decreased $12,000, or 0.0%, to $29,984,000 at March 31,
2002, from $29,996,000 at December 31, 2001. Days sales outstanding, the ratio
of receivables to average daily sales during the prior three months was 64 days
at March 31, 2002 and December 31, 2001. These ratios for days sales outstanding
typically vary between 60 and 70 days, depending on timing differences in
shipments and payments received.
Page 12
Our continuing operations generated $523,000 and $1,946,000 of cash during the
first quarters of 2002 and 2001, respectively. 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 used $566,000 of cash during the first quarter of 2002,
primarily consisting of payments on debt. Our investing activities from
continuing operations consumed $870,000 of cash during the first quarter of
2002, primarily used to purchase property and equipment.
We currently have a $30 million working capital credit facility from two banks,
amended effective April 4, 2002. As of March 31, 2002, we had used approximately
$29.3 million of the $30 million working capital facility. The working capital
credit facility bears interest at LIBOR, which was 2.45% at March 31, 2002, plus
3.5%. At times during 2000 and 2001, including at December 31, 2001, the Company
was in violation of certain of financial loan covenants. The amendment extends
the current credit facility and modifies required financial ratios, other loan
covenants, and waives prior loan covenant violations. The agreement to amend and
extend the working capital credit facility calls for the facility to expire
August 30, 2002, and is subject to documentation acceptable to both the banks
and the Company. The working capital credit facility is collateralized by the
pledge of all common stock of the subsidiaries owned by the Company and other
assets of the Company.
In connection with the amended working capital credit facility 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,
not repurchasing its stock, 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. Unless this credit facility is renewed, it will expire in August
2002. Failure to negotiate an extension to this credit facility, enter into a
replacement facility, or obtain additional equity will materially adversely
impact our business and operations.
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 through open market or negotiated
transactions. Further repurchases under this program are restricted under our
current line of credit agreement. As of March 6, 2002, approximately 575,000
shares had been repurchased in the open market under this authorization.
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 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
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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.
Sales of air filtration products for semiconductor facilities, historically a
major market, are expected to be slow again during 2002, with most analysts
pushing recovery for this sector out to at least 2003. The current weak economy
is also expected to have a dampening effect on sales of air filtration products
across all product lines and end-user categories. As long as the current
weakness in the economy continues, in individual market segments or the
marketplace as a whole, our results will be negatively affected.
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 increased awareness
of indoor air quality engendered by the simple presence of the air cleaners,
will help to create and/or accelerate this trend.
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 acquisitions and expansions, our
net sales increased by approximately 400% from 1995 through 2001, (a compound
annual growth rate of 25%). 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,
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* 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 2002 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, and could adversely impact
relationships with current major accounts. In addition, delays in an untried
supply chain, new production chains, mass manufacturing difficulties with new
products, 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 Flanders, these exposures are primarily related
to the sale of product to foreign customers and changes in interest rates. We do
not have any derivatives or other financial instruments for trading or
speculative purposes.
The fair value of the Company's total long-term debt, including capital leases,
at March 31, 2002 was approximately $52,421,000. Market risk was estimated as
the potential decrease (increase) in future earnings and cash flows resulting
from a hypothetical 10% increase (decrease) in the Company's estimated weighted
average borrowing rate at March 31,
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2002. Although most of the interest on the Company's debt is indexed to a market
rate, there would be no material effect on the future earnings or cash flows
related to the Company's total debt for such a hypothetical change.
We have only a limited involvement with derivative financial instruments. We
have two interest rate swap agreements to hedge against the potential impact on
earnings from increases in market interest rates of two variable rate bonds.
Under the interest rate swap agreements, we receive or make payments on a
monthly basis, based on the differential between 5.14% and a tax exempt interest
rate as determined by a remarketing agent. These agreements are accounted for as
a cash flow hedge in accordance with SFAS 133 and SFAS 138. Gains or losses
related to ineffectiveness of the cash flow hedge are included in net income
during the appropriate period related to hedge ineffectiveness. The tax effected
fair market value of the interest rate swap of $565,000 is included in other
comprehensive income. The interest rate swap contracts expire in 2013 and 2015.
The Company's financial position is not materially affected by fluctuations in
currencies against the U.S. dollar, since assets held outside the United States
are negligible. Risks due to changes in foreign currency exchange rates are
negligible, as the preponderance of our foreign sales occur over short periods
of time or are demarcated in U.S. dollars.
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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.
(b) Reports on Form 8-K - None
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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 9th day of May, 2002.
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
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