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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 October 31, 1996 Commission File Number 0-5622
- -------------------------------------------------------------------------------
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 jurisdicition of (I.R.S. Employer identification No.)
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 7,108,521
- -------------------------------------------------------------------------------
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 / /
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ITEM 1. FINANCIAL INFORMATION
PUROFLOW INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
October 31, January 31,
1996 1996
----------- -----------
ASSETS
CURRENT ASSETS
Cash $ 163,799 $ --
Trade accounts receivable, net of allowance
for doubtful accounts of $49,504 at
October 31, 1996, and $140,000 at
January 31, 1996 1,486,266 1,548,495
Inventories 1,371,651 1,239,467
Note receivable, current portion 48,384 43,831
Prepaid expenses and other current assets 74,199 33,700
---------- ----------
Current assets 3,154,299 2,865,493
---------- ----------
PLANT & EQUIPMENT
Machinery & equipment 3,069,089 2,900,343
Tooling & dies 253,921 253,921
---------- ----------
Plan & equipment at cost 3,323,010 3,154,264
Less; accumulated depreciation (2,371,173) (2,134,836)
---------- ----------
Net plant & equipment 851,837 1,019,428
---------- ----------
OTHER ASSETS
Note receivable 4,220 80,276
Other assets 16,750 16,750
---------- ----------
TOTAL ASSETS $ 4,127,108 $ 3,961,947
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft $ 59,363
Current portion - long term debt 1,763,881
Line of credit 235,857
Accounts payable $ 676,263 582,393
Accrued expenses 171,629 237,472
---------- ----------
Current liabilities 847,892 2,878,766
---------- ----------
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
7,108,521 shares at October 31, 1996 and
4,578,521 shares at January 31, 1996 430,579 405,279
Additional paid-in capital 4,877,727 3,230,127
Accumulated deficit (2,129,092) (2,552,225)
---------- ----------
Total stockholders' equity 3,279,214 1,083,181
---------- ----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 4,127,106 $ 3,961,947
---------- ----------
---------- ----------
See accompanying notes to the consolidated financial statements.
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PUROFLOW INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
----------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
Net revenue $1,940,859 $2,471,605 $6,116,478 $6,953,234
Cost of goods sold 1,392,384 1,740,438 4,185,499 4,867,397
---------- ---------- ---------- ----------
Gross profit 548,475 731,167 1,930,979 2,085,837
Selling, general
and administrative
expense 323,041 290,188 1,042,698 1,193,330
---------- ---------- ---------- ----------
Operating income 225,434 440,979 888,281 892,507
Other income (expense) 6,042 845 6,042 (1,677)
Interest expense (8,380) (77,306) (71,407) (232,414)
Nonrecurring expenses (198,893) (97,557) (394,183) (137,737)
---------- ---------- ---------- ----------
Income from continuing
operations before taxes 24,203 266,961 428,733 520,679
Provision for income taxes 5,600 5,600
---------- ---------- ---------- ----------
NET INCOME $ 18,603 $ 266,961 $ 423,133 $ 520,679
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
PRIMARY EARNINGS PER
SHARE $ -- $ 0.06 $ 0.08 $ 0.11
Weighted average number
of shares 7,108,521 4,578,521 5,428,010 4,578,521
See accompanying notes to the consolidated financial statements.
2
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PUROFLOW INCORPORATED
CONSOLIDATED STATEMENTS CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED OCTOBER 31, 1996 1995
- ------------------------------------- --------- -----------
CASH AT BEGINNING OF PERIOD $ -- $ 74,441
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 423,133 520,679
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 236,337 305,758
Provision for losses on accounts receivable (20,000) 80,788
Loss on sale of plant and equipment 3,468
Changes in operating assets and liabilities:
Accounts receivable 72,229 (293,455)
Inventories (132,184) 327,242
Prepaid expenses and other current assets (40,499) 67,744
Accounts payable 93,870 266,356
Accrued expenses (65,843) 956
Other assets 47,659
--------- -----------
Net cash provided by operating activities 567,043 1,327,195
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (168,746) (61,714)
Proceeds from sale of assets 13,400
Payments received on notes receivable 51,503
--------- -----------
Net cash used in investing activities (117,243) (48,314)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft (59,363)
Net repayment under line of credit (235,857) (519,010)
Principal payments on long-term debt (1,763,681) (797,135)
Advances to officers and employees (179)
Proceeds from sale of common stock 1,772,900
--------- -----------
Net cash used in financing activities (286,001) (1,316,324)
--------- -----------
NET INCREASE (DECREASE) IN CASH 163,799 (37,443)
--------- -----------
CASH AT END OF PERIOD $ 163,799 $ 36,998
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--------- -----------
See accompanying notes to the consolidated financial statements.
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PUROFLOW INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
OCTOBER 31, 1996, JANUARY 31, 1996, AND OCTOBER 31, 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 throughout the world, most of which are
located in the United States.
The information presented for the three months, and nine months, ended
October 31, 1996 and 1995 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, 1996 Annual Report on Form 10-K.
The results of operations for the three months ended October 31, 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:
October 31, 1996 January 31, 1996
-------------------------------------
Raw materials and purchased parts $ 696,766 $ 757,921
Work in process 266,432 235,404
Finished goods and assemblies 408,453 246,142
-------------------------------------
Totals $1,371,651 $1,239,467
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NOTE 3 - STOCKHOLDERS EQUITY
On March 26, 1996, the Company entered into an agreement with an
investment banker to raise equity through a private placement
offering. On July 24, 1996, such offering was completed. The
Company sold 2,530,000 shares of common stock and received
$1,772,900 of net proceeds, including $1,300 of interest.
Additionally, $50,000 is being held in escrow, pending
registration of the common shares sold. The purchase price of
the common stock was $.80 per share. From the gross proceeds,
the underwriter received $202,400 as a fee. The underwriter also
received a 24 month option to purchase 177,100 common shares, at a
price of $.80 per share. Proceeds received by the Company have and
will be used to retire bank debt and other pre-Receiver debt. The
Company is obligated to register the securities within nine months
of the closing date of the offering.
NOTE 4 - 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 5 - CESSATION OF RECEIVERSHIP
On August 13, 1996, all bank debt owed by the Company was repaid. On
August 22, 1996, the Receivership Estate was terminated by order of the
Superior Court of the State of California and control of the Company
was returned to the Board of Directors and Management.
Additionally, the Company entered a new banking relationship. The Company
obtained a $750,000 revolving credit line. This credit line bears
interest at the rate of prime plus 1.5%, per annum, and is secured,
primarily, by the Company's accounts receivable and inventories. The
Company also obtained a $300,000, non-revolving, equipment acquisition
credit line, which bears interest at the rate of prime plus 1.75%, per
annum, and is secured by all of the Company's assets. Both of these
loans are cross-collateralized. The terms of these loan 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.
NOTE 6 - NONRECURRING EXPENSES
Nonrecurring expenses are comprised of a one-time legal fee of $89,834
charged by the Company's former bank during August, 1996, and the monthly
administrative fees charged by the Receiver during the receivership
period. The Receivership Estate began on May 1, 1995 and ended on
August 22, 1996. See also Note 5.
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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 three months and nine months ended
October 31, 1996 and 1995.
Three months Nine months
ended October 31, ended October 31,
1996 1995 1996 1995
------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost and expenses:
Cost of goods sold 71.7% 70.4% 68.4% 70.0%
Selling, general and
administrative 16.6% 11.7% 17.1% 17.2%
Other income (expense) 0.3% 0.1%
Interest expense (0.4)% (3.1)% (1.2)% (3.3)%
Nonrecurring expenses (10.3)% (4.0)% (6.4)% (2.0)%
Provision for income
taxes 0.3% 0.0% 0.1% 0.0%
---------------------------------------
Net income 1.0% 10.8% 6.9% 7.5%
---------------------------------------
---------------------------------------
Comparison of the three and nine months ended October 31, 1996 and 1995.
NET SALES
A comparison of the product groups is presented below:
Three months Nine months
ended October 31, ended October 31,
Product line 1996 1995 1996 1995
-------------------------------------------------------------------------
Government and Aerospace
Filtration Products $ 955,762 $1,470,818 $3,489,980 $3,767,197
Airbag 985,097 1,000,787 2,626,498 3,186,037
----------------------------------------------
Total net revenue $1,940,859 $2,471,605 $6,116,478 $6,953,234
----------------------------------------------
----------------------------------------------
Net sales of Government and Aerospace Filtration Products decreased by 35.0%
compared to the quarter ended October 31, 1995. For the nine months ended
October 31, 1996, such revenue decreased 7.4% over the prior year nine month
period. The Company's marketing effort has been minimal during the
receivership period. Additionally, the Company's business has been changing
from a high amount of
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government and aerospace to one of PMA parts. PMA parts are contracted out
over a period of up to five years into the future. The combined effect of
these trends has effected the current quarter. The backlog of Government and
Aerospace Filtration Products was $4,500,000 on October 31, 1996 as compared
to $2,989,000 on October 31, 1995.
Net sales of the airbag product line decreased by 1.6% compared to the
quarter ended October 31, 1995. Current quarter revenues of the airbag
product line were affected by price concessions demanded by the automotive
parts suppliers offset by higher units produced. For the nine months ended
October 31, 1996, such revenue decreased 17.6% compared to the prior year
nine month period. The dollar amount of this decrease was due to second
quarter product line changeovers and softening of demand.
COST OF SALES/GROSS PROFIT
Gross profit as a percentage of net sales was 28.3% and 29.6% for the three
months ended October 31, 1995 and 1996, respectively, as compared to 31.6%
and 30.0% for the nine months ended October 31, 1995 and 1996, respectively.
Gross profit percentage for the current quarter as compared to the prior
quarter has changed minimally with efficiency gains being offset by airbag
price concession. The increased gross profit margin for the nine month period
is 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 expenses were $323,041 and $290,188 for
the three months ended October 31, 1996 and 1995, or 16.6% and 11.7% of
revenue, respectively. For the nine months ended October 31, 1996, and 1995,
such expenses were $1,042,698 and $1,193,330, or 17.0% and 17.2% of revenue,
respectively. Increases were primarily attributable to legal settlements.
INTEREST EXPENSE
Interest expense decreased by $68,926 and $161,007 for the three months and
nine months ended October 31, 1996, as compared to 1995, due to reductions in
interest bearing debt.
PROVISION FOR INCOME TAXES
A provision for income taxes of $5,600 for minimum franchise taxes to the
state of California was recorded. No additional provision 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 California
state income tax purposes, at January 31, 1996. Such operating loss
carryforwards expire from 2008 to 2011.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $2,306,407 and $(360,116) as of October 31,
1996 and 1995, respectively. This provides for current ratios of
approximately 3.72 and .89 at October 31, 1996 and 1995, respectively.
On March 26, 1996, the Company entered into an agreement with an investment
banker to raise equity through a private placement offering. On July 24,
1996, such offering was completed. The Company
7
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sold 2,530,000 shares of common stock and received $1,772,900 of net proceeds,
including $1,300 of interest. Additionally, $50,000 is being held in escrow,
pending registration of the common shares sold. The purchase price of the
common stock was $.80 per share. From the gross proceeds,
the underwriter received $202,400 as a fee. The underwriter also received a
24 month option to purchase 177,100 common shares, at a price of $.80 per
share. Proceeds received by the Company have and will be used to retire bank
debt and other pre-Receiver debt. The Company is obligated to register the
securities within six months of the closing date of the offering.
On August 13, 1996, all bank debt owed by the Company was repaid. On August
22, 1996, the Receivership Estate was terminated by order of the Superior
Court of the State of California and control of the Company was returned to
the Board of Directors and Management.
Additionally, the Company entered a new banking relationship. The Company
obtained a $750,000 revolving credit line. This credit line bears interest at
the rate of prime plus 1.5%, per annum, and is secured, primarily, by the
Company's accounts receivable and inventories. The Company also obtained a
$300,000, non-revolving, equipment acquisition credit line, which bears
interest at the rate of prime plus 1.75%, per annum, and is secured by all of
the Company's assets. Both of these loans are cross-collateralized. The terms
of these loan 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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
1. A judgment was obtained by DSS Company against Ultra Dynamics
Corporation, a former subsidiary, in the amount of $16,087.50.
2. 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.
3. 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 has filed a cross-complaint alleging 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.
4. 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.
5. 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,
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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.
6. The confession of judgment obtained by Memtec America Corporation
against the Registrant on December 19, 1995, previously reported on
Form 10-K for the fiscal year ended January 31, 1996, was vacated
by order of the Circuit Court for Baltimore County on June 24, 1996.
The Registrant filed an amended counter-claim and third party complaint
on August 12, 1996 against Memtec and four former employees of the
Registrant now employed by Memtec. The counter-claim contains many
allegations against Memtec and the four former employees and seeks
substantial compensatory and punitive damages against Memtec and against
Joseph B. Jasso and Michael V. Perry, former Puroflow President &
CEO and Plant Manager, respectively.
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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
December 13, 1996 By: /s/ Michael H. Figoff
-----------------------
Michael H. Figoff
President
9
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