<PAGE>
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 OCTOBER 31, 1995 COMMISSION FILE NUMBER 0-5622
PUROFLOW INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 13-1947195
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16559 SATICOY STREET, VAN NUYS, CALIFORNIA 91406-1739
- ----------------------------------------------- ---------------
(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, $0.01 PAR VALUE 4,578,521
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 [ ]
<PAGE>
ITEM 1. FINANCIAL INFORMATION
Puroflow Incorporated
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
OCTOBER 31, 1995 JANUARY 31, 1995
---------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 36,998 $ 74,441
Accounts receivable
Trade, net of allowance for doubtful
accounts of $162,803 at October 31, 1995
and $204,469 at January 31, 1995 1,478,817 1,266,150
Advances to officers and employees 4,047 3,868
Inventories 1,418,995 1,746,237
Prepaid expenses and other 92,058 159,802
---------------- ----------------
Total current assets 3,030,915 3,250,498
---------------- ----------------
PROPERTY AND EQUIPMENT - NET 1,076,344 1,337,256
OTHER ASSETS 85,423 133,082
---------------- ----------------
TOTAL ASSETS $4,192,682 $4,720,836
---------------- ----------------
---------------- ----------------
<CAPTION>
OCTOBER 31, 1995 JANUARY 31, 1995
---------------- ----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 290,993 $ 810,003
Accounts payable 921,841 655,485
Accrued expenses 212,300 211,343
Current portion of long-term debt 1,965,897 2,787,543
---------------- ----------------
Total current liabilities 3,391,031 4,464,374
---------------- ----------------
LONG-TERM DEBT 95,911 71,400
---------------- ----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.10 per share
Authorized - 500,000 shares:
Issue - None
Common stock, par value $.01 per share
Authorized - 12,000,000 shares:
Outstanding 4,578,521 at October 31, 1995
and January 31, 1995 405,279 405,279
Additional paid in capital 3,230,127 3,230,127
Accumulated deficit (2,929,666) (3,450,344)
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 705,740 185,062
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $4,192,682 $4,720,836
---------------- ----------------
---------------- ----------------
</TABLE>
See accompanying notes to the consolidated financial statements.
1
<PAGE>
ITEM 1. FINANCIAL INFORMATION
Puroflow Incorporated
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
1995 1994 1995 1994
---------- ---------- ---------- ----------
(restated) (restated)
<S> <C> <C> <C> <C>
Net sales $2,471,605 $2,902,172 $6,953,234 $8,103,239
Cost of goods sold 1,740,438 2,269,676 4,867,397 6,795,705
---------- ---------- ---------- ----------
Gross profit 731,167 632,496 2,085,837 1,307,534
Selling, general and
administrative expense 387,744 483,162 1,331,067 1,437,872
---------- ---------- ---------- ----------
Operating income/(loss) 343,423 149,334 754,770 (130,338)
Other income and expense:
Other income (expense) 845 (17,612) (1,677) (18,149)
Interest expense (77,306) (85,205) (232,414) (241,031)
---------- ---------- ---------- ----------
Income (loss) from continuing operations
before provision for income taxes: 266,962 46,517 520,679 (389,518)
Provision for income taxes: -- -- -- --
---------- ---------- ---------- ----------
Income (loss) from
continuing operations: 266,962 46,517 520,679 (389,518)
Loss from discontinued operations -- (132,353) -- (334,873)
---------- ---------- ---------- ----------
Net income (loss) $ 266,962 $ (85,836) $ 520,679 $ (724,391)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Continuing operations 0.06 0.01 0.11 (0.09)
Discontinued operations -- (0.03) -- (0.07)
---------- ---------- ---------- ----------
Net income (loss) per common share $ 0.06 $ (0.02) $ 0.11 $ (0.16)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average number of shares 4,578,521 4,578,521 4,578,521 4,485,188
</TABLE>
See accompanying notes to the consolidated financial statements.
2
<PAGE>
Puroflow Incorporated
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED OCTOBER 31,
1995 1994
------------ ----------
(restated)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 520,679 $(724,391)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) continuing operations:
Depreciation and amortization 305,758 277,296
Provision for losses on accounts receivable 80,788 31,757
Loss on sale of property and equipment 3,468 --
Changes in operating assets and liabilities:
Accounts receivable (293,455) 55,651
Inventories 327,242 391,534
Prepaid expenses and other 67,744 (32,613)
Accounts payable and accrued expenses 267,312 96,354
Other assets 47,659 --
------------ ----------
Net cash (provided by) operating activities 1,327,195 95,588
------------ ----------
Cash flows from investing activities:
Purchases of property and equipment (61,714) (92,557)
Proceeds from sale of property and equipment 13,400 --
Other assets -- 1,718
------------ ----------
Net cash used in investing activities (48,314) (90,839)
------------ ----------
Cash flows from financing activities:
Proceeds from sale of common stock $ -- $ 250,000
Net borrowings (repayments) under line of credit (519,010) 408,063
Net borrowings (repayments) of long-term debt (797,135) (541,346)
Advances to officers and employees (179) (2,423)
------------ ----------
Net cash (used in) provided by financing activities (1,316,324) 114,294
------------ ----------
Net (decrease) increase in cash (37,443) 119,043
Cash at beginning of period 74,441 18,921
------------ ----------
Cash at end of period $ 36,998 $ 137,964
------------ ----------
------------ ----------
Supplemental disclosures of cash flow information:
Interest paid in cash $ 232,414 $ 230,727
</TABLE>
See accompanying notes to the consolidated financial statements.
3
<PAGE>
PUROFLOW INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995 AND JANUARY 31, 1995
(DOLLARS IN THOUSANDS)
NOTE A - BASIS OF PRESENTATION
The information presented for the nine months ended October 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 nine months ended October 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:
OCTOBER 31, JANUARY 31,
1995 1995
----------- -----------
Raw materials and purchased parts $ 667 $ 818
Work in process 403 503
Finished goods and assemblies 348 425
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TOTAL $1,418 $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.
4
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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.
5
<PAGE>
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 October 31, 1995 and 1994.
QUARTER ENDED OCTOBER 31,
1995 1994
-------- --------
(restated)
Net sales 100.0% 100.0%
Cost and expenses:
Costs of goods sold 70.4 78.2
Selling, general, and administrative 15.7 16.6
Interest expense - net 3.1 3.5
----- -----
Income (loss) from continuing operations 10.8 1.7
Income (loss) from discontinued operations -0- (4.6)
----- -----
Net Income (loss) 10.8% (2.9)%
----- -----
----- -----
Comparison of quarters ended October 31, 1995 and 1994.
NET SALES
Net sales were $2,472 for the quarter ended October 31, 1995 compared to
$2,902 for the same period ended October 31, 1994. The decrease in sales of
$430 was due primarily to the disposition of Ultra Dynamics, Decca Valves,
and the Dynapore product line of Michigan Dynamics which was not reflected in
sales in the quarter ended October 31, 1995. The Airbag product line showed
a decrease of $558 resulting from customer supplied components which were
deducted from the sales price. Net sales of Government and Aerospace
Filtration Products increased by $765 which more than off-set the reduction
of the Airbag division.
COST OF SALES/GROSS PROFIT
Gross profit as a percentage of net sales was 29.6% for the quarter ended
October 31, 1995 as compared to 21% for the quarter ended October 31, 1994.
The increased gross profit was due to consolidation of manufacturing
facilities which increased productive capacity with a decrease in
manufacturing overhead and personnel.
6
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense for the quarter ended October 31,
1995 decreased to $388 (15.7% of net sales), as compared to $483 (16.6% of
net sales) for the quarter ended October 31, 1994. This decrease was
primarily attributable to reductions in salary and commission.
Interest expense decreased $8 for the quarter ended October 31, 1995 due
primarily to a reduction in principal debt to Imperial Bank.
The following table reflects the percentage relationship to net sales of
certain items included in the Company's statement of operations for the nine
months ended October 31, 1995 and 1994.
NINE MONTHS ENDED OCTOBER 31,
1995 1994
-------- --------
(restated)
Net sales 100.0% 100.0%
Cost and expenses:
Costs of goods sold 70.0 83.9
Selling, general, and administrative 19.1 17.7
Interest and other expense - net 3.3 3.2
------- -------
Income from continuing operations before
provision for income taxes 7.6 (4.8)
Net loss from discontinued operations -0- (4.1)
------- -------
Net Income 7.6% (8.9)%
------- -------
------- -------
COMPARISON OF NINE MONTHS ENDED OCTOBER 31, 1995 AND 1994
Net sales for the nine months ended October 31, 1995 was $6,953 compared to
$8,103 for the comparable period ended October 31, 1994. The decrease in
sales of $1,150 was due primarily to the discontinuance of sales in Ultra
Dynamics, Decca Valves and the Dynapore product line which accounted for
$1,251 of the net sales decrease. The sales of Government and Aerospace
Filtration increased $1,440 and Airbag Filter division sales were reduced by
$1,277 resulting from customer supplied component material deducted from
sales.
The Company's gross profit as a percentage of net sales was 30% for the nine
months ended October 31, 1995 compared to 16.1% for the nine months ended
October 31, 1994. The increase in gross profit was due to a consolidation of
manufacturing facilities in August 1995 resulting in increased production and
reduction in manufacturing overhead and personnel. The start-up and
engineering costs associated with the FAA parts manufactured approval product
line was materially reduced in the current nine month period resulting from
processing efficiencies and lead time of approvals.
7
<PAGE>
Selling, General and Administrative expenses were $1,331 for the nine months
ended October 31, 1995 compared to $1,437 in the comparable previous period.
The reduction in this expense category was due to reduced selling and
manufacturing costs, reduction in administrative payroll off-set by increased
legal expenses due to Receivership.
Interest expense decreased $9 for the nine month period due primarily to a
reduction in principal bank loan.
PROVISION FOR INCOME TAXES
No provision for income taxes is necessary due to the Company's net operating
loss carry forwards in excess of $3,440,000 federal as of January 31, 1995.
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 October 31, 1995, working capital was $(360) versus $(1,214) at January
31, 1995. The Company's current ratio was .09 at October 31, 1995 and 0.7 at
January 31, 1995.
The Company's debt at October 31, 1995 was $2,062 consisting of notes payable
to the Company's bank totaling $1,219, loans from its stockholders of $69,
capitalized lease obligations of $41 and notes payable to vendors of $733.
Principal under the Company's term loans accrues interest at the bank's prime
rate plus 3.5% (at October 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 October 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 $290 under this
agreement at October 31, 1995. There are no additional borrowings available
under the line of credit.
The terms of the credit agreements contain certain restrictive covenants.
Previously, the Company was 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 receiver, in concert with the
current management, continue to operate the Company.
The Company will continue to negotiate with the 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.
8
<PAGE>
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 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 1. 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 crossclaim 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.
9
<PAGE>
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 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.
8) Reliable Metallurgical Processes Inc. commenced an action
against Puroflow Corporation and Michigan Dynamics Inc. in
September, 1995 in Los Angeles County Superior Court for breach
of contract, open account, and anticipatory breach. The
Receiver, on behalf of the Defendants, will vigorously oppose
the action, and he believes the Registrants have valid legal
defenses to this action including damages for failure to
properly perform the alleged Contract, ultra vires acts in
consummation of original Agreement, and breach of fiduciary
obligation by a former Director and Officer of Registrant who
were also Officers and Directors of the Plaintiff.
The Company is not a party to any other material pending suits of
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.
10
<PAGE>
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 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.
Form 8-K filed November 22, 1995:
Registrant reported that the Board of Directors and Michael D.
Myers, Receiver for Imperial Bank approved the appointment of Rose,
Snyder & Jacobs, CPA, as independent auditors for fiscal year ending
January 31, 1996, replacing Deloitte & Touche L.L.P. Deloitte &
Touche has not advised the Registrant that there have been any
disagreements on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure of any
reportable events.
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
--------------------------------------
MICHAEL H. FIGOFF
PRESIDENT/CHIEF EXECUTIVE OFFICER
BY /S/ JAMES F. DUNCAN
---------------------------------------
JAMES F. DUNCAN, CPA, MBA
CONTROLLER
December 12, 1995
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
3 MONTHS AND 9 MONTHS ENDED 10-31-95 OF PUROFLOW INCORPORATED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-START> FEB-01-1995
<PERIOD-END> OCT-31-1995
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 3,635
0
0
<OTHER-SE> (2,929)
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 6,953
<CGS> 6,198
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 521
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 521
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
