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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 THE QUARTER ENDED APRIL 30, 1996 COMMISSION FILE NUMBER 0-5622
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PUROFLOW INCORPORATED
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(Exact name of registrant as specified in its charter)
DELAWARE 13-1947195
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(State or other jurisdiction (I.R.S. Employer identification No.)
of incorporation or organization)
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, $.01 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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ITEM 1. FINANCIAL INFORMATION
PUROFLOW INCORPORATED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
APRIL 30, JANUARY 31,
DESCRIPTION 1996 1996
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ASSETS
CURRENT ASSETS
Cash $ 12,512 $ -
Trade accounts receivable, net of allowance for
doubtful accounts of $150,000 at April 30,
1996, and $140,000 at January 31, 1996. 1,316,943 1,548,495
Inventories 1,383,047 1,239,467
Note receivable, current portion 46,377 43,831
Prepaid expenses and other current assets 169,011 33,700
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Current assets 2,927,890 2,865,493
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PLANT & EQUIPMENT
Machinery & equipment 2,906,152 2,900,343
Tooling & dies 253,921 253,921
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Plant & equipment at cost 3,160,073 3,154,264
Less: accumulated depreciation (2,220,091) (2,134,836)
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Net plant & equipment 939,982 1,019,428
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OTHER ASSETS
Note receivable 28,924 60,276
Other assets 16,750 16,750
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TOTAL ASSETS $ 3,913,546 $ 3,961,947
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft $ 59,363
Current portion - long term debt $ 1,714,059 1,763,681
Line of credit 235,857
Accounts payable 680,626 582,393
Accrued expenses 222,218 237,472
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Current liabilities 2,616,903 2,878,766
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STOCKHOLDERS' EQUITY
Preferred stock, par value $.10 per share
Authorized, 500,000 shares; issued, none.
Common stock, par value $.01 per share.
Authorized, 12,000,000 shares; Outstanding
4,578,521 shares at April 30, 1996 and
January 31, 1996. 405,279 405,279
Additional paid-in capital 3,230,127 3,230,127
Accumulated deficit (2,338,763) (2,552,225)
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Total stockholders' equity 1,296,643 1,083,181
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TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 3,913,546 $ 3,961,947
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See accompanying notes to the consolidated financial statements.
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PUROFLOW INCORPORATED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
FOR THE THREE MONTHS ENDED APRIL 30, 1996 1995
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Net revenue $ 2,166,708 $ 1,812,463
Cost of goods sold 1,445,221 1,369,250
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Gross profit 721,487 443,213
Selling, general and administrative expense 471,923 481,777
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Operating income (loss) 249,564 (38,564)
Interest expense 36,102 86,350
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Income (loss) from continuing operations
before taxes 213,462 (124,914)
Provision for income taxes
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Income (loss) from continuing operations 213,462 (124,914)
Income from discontinued operations 83,774
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NET INCOME (LOSS) $ 213,462 $ (41,140)
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Net income (loss) per common share:
Continuing operations $ 0.05 $ (0.03)
Discontinued operations - 0.02
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PRIMARY EARNINGS PER SHARE $ 0.05 $ (0.01)
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See accompanying notes to the consolidated financial statements.
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PUROFLOW INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED APRIL 30, 1996 1995
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CASH AT BEGINNING OF PERIOD $ - $ 74,441
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 213,462 (41,140)
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 85,255 93,444
Provision for losses on accounts
receivable 10,000 (8,949)
Changes in operating assets and liabilities:
Accounts receivable 221,552 198,724
Inventories (143,580) (242,411)
Prepaid expenses and other current assets (135,311) 94,464
Other assets 71
Accounts payable 98,233 275,043
Accrued expenses (15,254) (34,691)
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Net cash provided by operating activities 334,357 334,555
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (5,809)
Proceeds from sale of assets 322
Payments received on notes receivable 28,806 10,030
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Net cash provided by investing activities 22,997 10,352
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CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft (59,363)
Net repayment under line of credit (235,857) (20,461)
Principal payments on long-term debt (49,622) (305,164)
Advances to officers and employees (1,399)
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Net cash used in financing activities (344,842) (327,024)
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NET INCREASE IN CASH 12,512 17,883
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CASH AT END OF PERIOD $ 12,512 $ 92,324
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See accompanying notes to the consolidated financial statements.
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PUROFLOW INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
APRIL 30, 1996, JANUARY 31, 1996, AND APRIL 30, 1995
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Puroflow Incorporated was organized on May 15, 1961 under the laws of the
State of Delaware. Puroflow Incorporated, and its wholly owned
subsidiaries (together referred herein as the "Company") specializes
primarily in designing and manufacturing automotive airbag filters and high
performance filters. The Company is located in Van Nuys, California, and
does business with customers thoughout the world, most of which are located
in the United States.
On May 1, 1995, the Superior Court of California appointed a Receiver as a
result of a lawsuit filed by the Company's bank. The Company was in
default of its obligations under various credit agreements with the bank.
The Receiver has assumed jurisdiction over all of the Company's assets,
which are now in the possession of the Receiver's estate, and held for the
benefit of all creditors and shareholders. The Receiver is not obligated
to pay liabilities that existed prior to his appointment; however, the
receiver is working with the Company's management in operating the
business.
The information presented for the three months ended April 30, 1996 and
1995 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 income from discontinued operations reflect the results
from operations of the Company's valve and industrial filters products
subsidiaries which were sold or discontinued during the year ended January
31, 1996.
The consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's January 31, 1996 Annual Report on Form 10-K.
The results of operations for the three months ended April 30, 1996 are not
necessarily indicative of the results to be expected for the year ended
January 31, 1997.
NOTE 2 - INVENTORIES
Inventories consist of the following:
April 30, 1996 January 31, 1996
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Raw materials and purchased parts $718,785 $757,921
Work in process 267,184 235,404
Finished goods and assemblies 397,078 246,142
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Totals $1,383,047 $1,239,467
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NOTE 3 - 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.
NOTE 4 - SUBSEQUENT EVENT
On March 26, 1996, the Company entered into an agreement with an investment
banker to raise equity through a private placement offering. The plan is
to sell shares of the Company's common stock with a 1,200,000 share
minimum, and 2,500,000 share maximum. The purchase price is set at $.80
per share. The Company will be entitled to 90% of the net proceeds, with
the remainder being commissions and expenses. The agent is entitled to a
24 month option to purchase 7% of the amount of shares sold, at an
exercisable price of $.80 per share. The net proceeds of the offering will
be used to reduce bank debt by $500,000, with the remainder for general
corporate purposes. The Company plans to register the securities within
six months of the closing of the offering. There can be no assurance that
this offering can be completed successfully.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 April 30, 1996 and 1995.
Quarters ended April 30,
1996 1995
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Net sales 100.0% 100.0%
Cost and expenses:
Cost of goods sold 66.7% 75.5%
Selling, general, and administrative 21.8% 26.6%
Interest expense, net 1.7% 4.8%
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Income (loss) from continuing operations 9.9% (6.9%)
Income from discontinued operations 4.3%
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Net income (loss) 9.9% (2.3%)
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Comparison of quarters ended April 30, 1996 and 1995.
NET SALES
Net sales for the quarter ended April 30, 1996 increased 19.5% over the quarter
ended April 30, 1995, with revenues of $2,166,708 and $1,812,463 respectively.
Net sales of Government and Aerospace Filtration Products increased by $356,852
due to the continuing acceptance of the Company's PMA program. The airbag
product line showed virtually no revenue difference with a slight decrease of
$2,433.
COST OF SALES/GROSS PROFIT
Gross profit as a percentage of net sales was 33.3% for the quarter ended April
30, 1996 as compared to 24.5% for the quarter ended April 30, 1995. The
increased gross profit margin was due to consolidation of manufacturing
facilities during the third quarter of the prior year. This allowed management
to reduce costs of manufacturing overhead and personnel, while increasing
productive capacity.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense was $471,923, or 21.8% of revenue,
for the quarter ended April 30, 1996. In the quarter ended April 30, 1995, such
expenses were $481,777, or 26.6% of revenue. This decrease was primarily
attributable to reductions in administrative personnel due to the sale and
closing of unprofitable subsidiaries and product lines.
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INTEREST EXPENSE
Interest expense decreased $50,248 for the quarter ended April 30, 1996, as
compared to the quarter ended April 30, 1995, due primarily to reduction in
principal debt to Imperial Bank.
PROVISION FOR INCOME TAXES
No provision for income taxes is necessary due to the Company's federal net
operating loss carryforwards in excess of $3,342,000 for federal income tax
purposes, and $2,709,000 for state income tax purposes, at January 31, 1996.
Such operating loss carryforwards expire from 2008 to 2011.
INCOME FROM DISCONTINUED OPERATIONS
The income from discontinued operations reflect the results from operations of
the Company's valve and industrial filters products subsidiaries which were sold
or discontinued during the year ended January 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $310,987 and $(1,152,898) as of April 30, 1996
and 1995, respectively. This equates to current ratios of approximately 1.12
and .74 at April 30, 1996 and 1995, respectively.
The Company's debt at April 30, 1996 was $1,714,059 consisting of notes payable
to the Company's bank totaling $1,019,197 and notes payable to vendors of
$694,862.
Principal under the Company's term loans accrues interest at the bank's prime
rate plus 3.5% (11.75% at April 30, 1996) 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 $1,200,000 or 65% of eligible accounts
receivable. Outstanding balances accrue interest at the bank's prime rate plus
3.5% (11.75% at April 30, 1996). This line is collateralized by the Company's
accounts receivable, inventories and a first priority interest in all
unencumbered assets. On April 30, 1996, the Company had no outstanding balance
under this agreement. Future cash advances under the line are limited in amount
by the terms and conditions of the line as expressed above. There are no
additional borrowings available under the line of credit.
The terms of the credit agreements contain certain restrictive covenants,
including maintenance of minimum working capital, net worth, and ratios of
current assets to current liabilities and debt to net worth. 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 recently negotiated with the bank to obtain extensions of their
credit and term loans until December 31, 1996.
On March 26, 1996, the Company entered into an agreement with an investment
banker to raise equity through a private placement offering. The plan is to
sell shares of the Company's common stock with a
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1,200,000 share minimum, and 2,500,000 share maximum. The purchase price is set
at $.80 per share. The Company will be entitled to 90% of the net proceeds,
with the remainder being commissions and expenses. The agent is entitled to a
24 month option to purchase 7% of the amount of shares sold, at an exercisable
price of $.80 per share. The net proceeds of the offering will be used to
reduce bank debt by $500,000, with the remainder for general corporate purposes.
The Company plans to register the securities within six months of the closing of
the offering. There can be no assurance that this offering can be completed
successfully.
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. The Receiver has taken over
the active pursuit of this litigation, with all discovery completed
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 on Form 10-Q for the quarter ended October
31, 1994, 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 various loan and security agreements. A Receiver was installed by order
of the Los Angeles County Superior Court, and the Receiver remains in
control of the Registrant.
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, California, which previously housed
Registrants Airbag and Michigan Dynamics operations. Registrant vacated
and
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Plaintiff has attempted to convert the action 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. This action is being vigorously opposed and the
Registrant believes it has 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.
9. Jerome Pearlman d.b.a. J&F Enterprises, a former Director of the
Registrant, commenced an action in the Los Angeles County Supreme Court,
for breach of an alleged promissory note. The Registrant will vigorously
defend by filing a cross-complaint against Plaintiff for breach of
fiduciary duty and constructive trust, seeking a return of all funds paid
to Plaintiff plus interest.
10. J&F Management, Inc., controlled by Jerome Pearlman, a former Director of
the Registrant, commenced an action in Municipal Court of Santa Monica
Judicial District against the Registrant, and the Court appointed Receiver
for possession and conversion of personal property. Defendants have
vigorously defended the action by filing a motion to disqualify Plaintiff's
Counsel, a demurrer to the complaint, and a cross-complaint seeking
recision of the contract and restitution to Defendant of all funds paid to
the Plaintiff pursuant to contract for a breach of Pearlman's fiduciary
duties to the Registrant.
11. Memtec America Corporation obtained a confession of judgment from the
Circuit Court for Baltimore County, Maryland, on December 19, 1995, against
the Company for approximately $220,000, based upon the execution of a
promissory note by a former CEO of Puroflow. The judgment was obtained
without due notice to the Company. The Receiver has retained Counsel in
Baltimore, Maryland, for the purpose of setting aside the confession of
Judgment, and to assert a number of counter-claims against Memtec, in the
event the Court permits the reopening of the Order, and setting aside of
the Judgment.
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.
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ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
SIGNATURE
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
May 14, 1996 By: /s/ Michael H. Figoff
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Michael H. Figoff
President
10
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<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> APR-30-1996
<CASH> 12,512
<SECURITIES> 0
<RECEIVABLES> 1,466,943
<ALLOWANCES> 150,000
<INVENTORY> 1,383,047
<CURRENT-ASSETS> 2,927,890
<PP&E> 3,160,073
<DEPRECIATION> 2,220,091
<TOTAL-ASSETS> 3,913,546
<CURRENT-LIABILITIES> 2,616,903
<BONDS> 0
0
0
<COMMON> 3,635,406
<OTHER-SE> (2,338,763)
<TOTAL-LIABILITY-AND-EQUITY> 3,913,546
<SALES> 2,166,708
<TOTAL-REVENUES> 2,166,708
<CGS> 1,445,221
<TOTAL-COSTS> 1,445,221
<OTHER-EXPENSES> 471,923
<LOSS-PROVISION> 10,000
<INTEREST-EXPENSE> 36,102
<INCOME-PRETAX> 213,462
<INCOME-TAX> 0
<INCOME-CONTINUING> 213,462
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