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Conformed Copy
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED July 31, 1995 COMMISSION FILE NUMBER 0-5622
PUROFLOW INCORPORATED
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(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
DELAWARE 13-1947195
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
16559 SATICOY STREET, VAN NUYS,CALIFORNIA 91406-1739
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(Address of executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 756-1388
Securities registered pursuant to Section 12(g) of the Act:
Common Stock Shares Outstanding
COMMON STOCK, $0.06-2/3 PAR VALUE 4,578,521
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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 [ ]
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PUROFLOW INCORPORATED
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
July 31, 1995 January 31, 1995
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $14,587 $74,441
Accounts receivable
Trade, net of allowance for doubtful
accounts of $106,569 at July 31, 1995
and $204,469 at January 31, 1995 1,649,111 1,266,150
Advances to officers and employees 4,768 3,868
Inventories 1,452,076 1,746,237
Prepaid expenses and other 84,142 159,802
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Total current assets 3,204,684 3,250,498
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PROPERTY AND EQUIPMENT - NET 1,129,069 1,337,256
OTHER ASSETS 81,004 133,082
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TOTAL ASSETS $4,414,757 $4,720,836
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July 31, 1995 January 31, 1995
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $683,046 $810,003
Accounts payable 955,479 655,485
Accrued expenses 205,801 211,343
Current portion of long-term debt 2,086,650 2,787,543
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Total current liabilities 3,930,976 4,464,374
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LONG-TERM DEBT 52,444 71,400
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.10 per share
Authorized - 500,000 shares.
Issue - None
Common stock, par value $.06-2/3 per share
Authorized - 6,000,000 shares:
Outstanding 4,578,521 at July 31, 1995
and January 31, 1995 405,279 405,279
Additional paid in capital 3,230,127 3,230,127
Accumulated deficit (3,204,069) (3,450,344)
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TOTAL STOCKHOLDERS' EQUITY 431,337 185,062
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TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $4,414,757 $4,720,836
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See accompanying notes to the consolidated financial statements.
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PUROFLOW INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
1995 1994 1995 1994
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<S> <C> <C> <C> <C>
Net sales $ 2,584,454 $ 2,400,142 $ 4,481,629 $ 4,927,443
Cost of goods sold 1,767,251 1,635,375 3,126,959 4,365,382
------------ ------------ ------------ ------------
Gross profit / (loss) 817,203 764,767 1,354,670 562,061
Selling, general and
administrative expense 452,373 554,284 943,322 943,559
------------ ------------ ------------ ------------
Operating income / (loss) 364,830 210,483 411,348 (381,498)
Other income and expense:
Other income (3,227) (7,529) (2,522) (537)
Interest expense (67,910) (82,899) (155,109) (155,392)
------------ ------------ ------------ ------------
Income (loss) from continuing operations
before provision for income taxes: 293,693 120,055 253,717 (537,427)
Provision (benefit) for income taxes: --- --- --- ---
------------ ------------ ------------ ------------
Net income (loss) from
continuing operations: 293,693 120,055 253,717 (537,427)
Loss from discontinued operations (6,280) (127,915) (7,443) (101,129)
------------ ------------ ------------ ------------
Net income (loss) $ 287,413 $ (7,860) $ 246,274 $ (638,556)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Continuing operations 0.06 0.03 .06 (.12)
Discontinued operations 0.00 (0.03) .00 (.02)
------------ ------------ ------------ ------------
Net income (loss) per common share 0.06 0.00 .06 (.14)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average number of shares $ 4,578,521 $ 4,508,521 $ 4,578,521 $ 4,438,521
</TABLE>
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PUROFLOW INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For The Six Months Ended
July 31, 1995
1995 1994
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 246,274 $ (638,556)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) continuing operations:
Depreciation and amortization 191,623 185,601
Provision for losses on accounts receivable 31,700 3,249
Changes in operating assets and liabilities:
Accounts receivable (414,661) 118,209
Inventories (785) 216,577
Prepaid expenses and other 85,175 (61,172)
Accounts payable and accrued expenses 294,452 206,469
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Net cash provided by (used in) operating activities 433,778 30,377
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CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of property and equipment 311,511 (85,330)
Other assets 42,563 (4,282)
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Net cash provided by (used in) investing activities 354,074 (89,612)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock $ 250,000
Net borrowings (repayments) under line of credit (126,957) 207,294
Borrowings (repayments) of long-term debt (719,849) (350,504)
Advances to officers and employees (900) (2,423)
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Net cash provided by (used in) financing activities (847,706) 104,367
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NET INCREASE (DECREASE) IN CASH (59,854) 45,132
Cash at beginning of period 74,441 18,921
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Cash at end of period $ 14,587 $ 64,053
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Supplemental disclosures of cash flow information:
Interest paid $ 80,528 $ 153,837
</TABLE>
See accompanying notes to the consolidated financial statements.
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PUROFLOW INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1995 AND JANUARY 31, 1995
(DOLLARS IN THOUSANDS)
NOTE A - BASIS OF PRESENTATION
The information presented for the six months ended July 31, 1995 and 1994
has not been audited by independent accountants, but includes all
adjustments (consisting of normal recurring accruals) which are, in the
opinion of management, necessary to a fair statement of the results for
such periods.
The consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's January 31, 1995 Annual Report on Form 10-K.
The results of operations for the six months ended July 31, 1995 are not
necessarily indicative of the results to be expected for the year ended
January 31, 1996.
NOTE B - INVENTORIES
Inventories consist of the following:
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<CAPTION>
JULY 31, January 31,
1995 1995
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<S> <C> <C>
Raw materials and purchased parts $ 683 $ 818
Work in process 477 503
Finished goods and assemblies 292 425
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Total $ 1,452 $ 1,746
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NOTE C - NET INCOME PER SHARE
The computation of net income (loss) per common share is based on the
weighted average number of shares outstanding, including the effect of
common stock equivalents (common stock options) when dilutive.
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NOTE D - RECEIVERSHIP
On May 1, 1995, the Company entered into a stipulation for the immediate
appointment of a receiver. The appointment resulted from a lawsuit filed
by the Company's bank due to the Company's default on its obligations under
various credit agreements with the bank. The receiver has assumed
jurisdiction over all of the Company's assets which are indefinitely in the
possession of the receivership estate, and held by the receiver for the
benefit of all creditors and shareholders. At present, the receiver is
working with the Company's management in operating the business.
The term of the Company's current credit facilities runs through December
31, 1995. The Company currently is also exploring various other types of
financing as may be available and appropriate.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS IN THOUSANDS)
RESULTS OF OPERATIONS
The Company's principal products consist of high performance filters and
automotive airbag filters. The following table reflects the percentage
relationship to net sales of certain items included in the Company's statement
of operations for the quarters ended July 31, 1995 and 1994.
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<CAPTION>
Quarter Ended July 31,
1995 1994
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<S> <C> <C>
Net sales 100.0% 100.0%
Cost and expenses:
Cost of goods sold 68.5 68.1
Selling, general, and administrative 17.6 23.4
Interest expense - net 2.6 3.5
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Income (loss) from continuing operations 11.3 5.0
Income (loss) from discontinued operations (0.2) (5.3)
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Net Income (loss) 11.1% ( 0.3)%
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</TABLE>
Comparison of quarters ended July 31, 1995 and 1994.
NET SALES
Net sales were $2,584 for the quarter ended July 31, 1995. This was an increase
of $184, or 7.7% over net sales of $2,400 for the quarter ending July 31, 1994.
High performance filters increased by $167 due primarily to the increase in
emphasis on customer follow-up and customer service. Airbag filters increased
by $17, as a result of continued customer demand, as opposed to the $711 decline
for the 1st quarter.
COST OF SALES/GROSS PROFIT
Gross profit (loss) as a percentage of net sales was 31.5% for the second
quarter ended July 31, 1995 as compared to 31.9% for the second quarter ending
July 31, 1994. This is essentially unchanged.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense for the quarter ended July 31, 1995
decreased to $452 (17.6% of net sales), as compared to $554 (23.4% of net
sales) for the quarter ending July 31, 1994. This decrease was primarily
attributable to reductions in salary, commission and bad debt expense.
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OTHER INCOME AND EXPENSE
Interest expense decreased $15 for the quarter ending July 31, 1995 as compared
to the quarter ending July 31, 1994. This is due to the reduction of the
Company's interest bearing debt.
PROVISION FOR INCOME TAXES
No provision for income taxes is necessary due to the Company's net operating
loss carry forwards in excess of $2,000,000 federal and $600,000 State of
California.
LOSS FROM DISCONTINUED OPERATIONS
The loss from discontinued operations reflect the results from operations of the
Company's water purification products subsidiary which was sold on November 9,
1994, and the Company's valve products subsidiary which was sold on June 15,
1995.
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 1995, working capital was $(726) versus $(1,214) at January 31,
1995. The Company's current ratio was 0.8 at July 31, 1995 and 0.7 at January
31, 1995.
The Company's debt at July 31, 1995 was $2,822 consisting of notes payable to
the Company's bank totaling $1,962, loans from its stockholders of $69,
capitalized lease obligations of $41 and notes payable to vendors of $750.
Principal under the Company's term loans accrues interest at the bank's prime
rate plus 3.5% (at July 31, 1995) and is secured by accounts receivable,
inventories, equipment purchased with the loan proceeds and all other
unencumbered assets of the Company.
In addition, the Company has a revolving line of credit with its bank under
which it may borrow up to the lesser of $1,200 or 65% of eligible accounts
receivable. Outstanding balances accrue interest at the bank's prime rate plus
3.5% (12.25% at July 31, 1995). This line is collateralized by the Company's
accounts receivable, inventories and a first priority interest in all
unencumbered assets. The Company had an outstanding balance of $683 under this
agreement at July 31, 1995. There are no additional borrowings available under
the line of credit.
The terms of the credit agreements contain certain restrictive covenants.
Currently, the Company is in default of various loan covenants; as a result, on
May 1, 1995, the Company entered into a stipulation for the immediate
appointment of a receiver. The appointment was based upon the default of the
Company on its obligations under these agreements with its bank. The receiver
has assumed jurisdiction over substantially all of the assets of the Company.
The receiver continues to operate the Company with the assistance of existing
management.
The Company has negotiated with its bank to obtain extensions of its line of
credit and term loans which expire December 31, 1995. The Company may seek
additional equity which could have a dilutive effect on the Company's current
shareholders.
The Company's continuation as a going concern is dependent upon its ability to
obtain ongoing long-term financing, generate sufficient cash flow to meet its
obligations on a timely basis and continue its current profitable operations.
The Company continues to take steps to
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reduce its operating expenses. Management believes changes to date have
substantially contributed in the Company's return to profitable operation There
can be no assurances however, that the Company will be able to successfully
maintain its profitable operations, obtain long-term financing arrangements or
generate sufficient cash flow to meet its future obligations on a timely basis.
In the event the Company is unable to do so, the Company may be forced to pursue
other options, including reorganization under applicable laws.
PART II - OTHER INFORMATION
ITEM L. LEGAL PROCEEDINGS
1) Puroflow Incorporated vs. George Solymar. Registrant seeks
recovery of $46,000 plus interest from 1989 for conversion of
Corporate funds by defendant for personal obligations. George
Solymar commenced an action for alleged breach of an oral
agreement of employment, alleging oral continuance of a written
contract dated back to 1969. There is no merit to the claim, nor
do the Registrant's records support the defendant's claim. Both
actions have been consolidated for trial in September, 1995.
2) Joseph B. Jasso and Martha Jasso commenced action against Puroflow
Incorporated and all Members of the Board for breach of an
employment contract. The Board of Directors authorized the
Registrant to cross-claim for breach of fiduciary duties,
misfeasance and malfeasance as a former Director and Chief
Executive Officer.
3) DSS Company vs. Ultra Dynamics Corporation, a wholly owned
subsidiary, for breach of alleged purchase order of $30,000.
Ultra Dynamics claims it does not owe plaintiff any sums because
the plaintiff changed the terms of the warranty which were not
acceptable to the defendant, and the purchase order was not
accepted by the defendant. Plaintiff alleges damages of $15,000
in discovery proceedings. Registrant believes that there is no
merit to this action, and that it will ultimately be dismissed.
4) Cynthia Meals vs. M. Rowena Willis, et al. represents a civil
action commenced in Court of Common Pleas of Chester County,
Pennsylvania for unspecified damages resulting from improper
maintenance of a treatment system for drinking water. Ultra
Dynamics Corporation is included as one of six codefendants as a
supplier of the equipment to a codefendant distributor. Ultra
Dynamics has filed a cross complaint against all codefendants and
plaintiff. Registrant believed that there is absolutely no merit
to this action against Ultra, and the action will ultimately be
dismissed on motion.
5) Registrant previously reported the award of a judgment in favor of
Micro-Numerics, Inc. for $34,398.26 plus interest and costs. The
Judgment Creditor has made a total levy of $43,939.56 for the
unpaid judgment which remains unsatisfied.
6) Imperial Bank commenced an action against Puroflow Incorporated
for breach of the loan and security agreements, due to alleged
default of
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certain loan covenants. This caused a Receiver to be installed.
7) Tenth and Colorado Associates, Ltd. commenced action against
Puroflow Incorporated for unlawful detainer related to Puroflow's
occupation of a building located in Santa Monica which previously
housed Registrants Airbag and Michigan Dynamics operations.
Registrant vacated and the action was converted to a breach of
lease action. Registrant believes that it has valid legal
defenses to this claim, and that it will ultimately be dismissed.
The Company is not a party to any other material pending suits or
legal actions, and is not aware of any material claims that are
threatened.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULT 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
Form 8-K filed March 13, 1995:
On or about March 3, 1995, Joseph B. Jasso, former President and
C.E.O. of the Registrant commenced an action in the Superior Court of
the State of California, County of Los Angeles for breach of
Employment Contract and other allegations against the Registrant and
all members of the Board of Directors. The Company intends to
vigorously oppose this action on the grounds of violation of his
fiduciary obligations as a Director and Chief Executive Officer to
Stockholders and Management of the Company.
Form 8-K filed May 12, 1995:
Registrant and its wholly subsidiaries have entered into a stipulation
effective May 1, 1995 with Imperial Bank under its collateral loan
security agreement for the appointment of a Receiver. Michael D.
Myers was appointed Receiver on
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May 1, 1995 pursuant to the order of the Honorable Diane Wayne, Judge
of the Superior Court of the State of California for the County of Los
Angeles, Case No. BC126904 to assume jurisdiction over substantially
all of the assets of Registrant's business but subject to the
supervision and order of the Court.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed and on its behalf by the
undersigned thereto, duly authorized.
PUROFLOW INCORPORATED
By /s/ Michael H. Figoff
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Michael H. Figoff
President
By /s/ James Duncan
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James Duncan
Controller
Date: September 15, 1995
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