<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
Commission File No. 0-5622
PUROFLOW INCORPORATED
--------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-1947195
- --------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
16559 Saticoy Street, Van Nuys, California 91406
- ------------------------------------------ ------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 756-1388
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par
Value $0.01
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant was approximately $6,219,955 as of March 20, 1997, based upon the
closing price on the NASDAQ Electronic Bulletin Board System reported for such
date. Shares of Common Stock held by each Officer and Director and by each
person who owns 5% or more of the outstanding Common Stock have been excluded in
that such person may under certain circumstances be deemed to be affiliates. The
determination of an affiliate status is not necessarily a conclusive
determination for other purposes.
Number of shares of Common Stock outstanding as of March 20, 1997: 7,108,521
The Registrant's Proxy Statement relating to the Annual Meeting of Stockholders
to be held on July 24, 1997 is hereby incorporated by reference into Part III of
this Form 10-K.
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PUROFLOW INCORPORATED
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. Business 1
ITEM 2. Properties 5
ITEM 3. Legal Proceedings 5
ITEM 4. Submission of Matters to Vote of Security Holders 6
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Shareholder Matters 7
ITEM 6. Selected Consolidated Financial Data 8
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
ITEM 8. Financial Statements and Supplementary Data 12
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 12
PART III
ITEM 10. Directors and Executive Officers of the Registrant 12
ITEM 11. Executive Compensation 12
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 12
ITEM 13. Certain Relationships and Related Transactions 12
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 13
Signatures 14
<PAGE>
PART I
ITEM 1. BUSINESS
Puroflow Incorporated (the "Registrant" or the "Company") designs and
manufactures specialized filtration devices. The Company's specialty high
performance filtration products are designed and manufactured to meet specific
customer needs. Used in automobile airbag inflators, aerospace, petrochemical
and a wide range of commercial and industrial applications, Puroflow's diversity
of products and customer base has contributed to its current financial vibrance.
Representing the state-of-the-art in filtration technology, each product
delivered achieves effectiveness of performance through a careful selection of
materials ranging from all welded titanium construction to epoxy assembled paper
elements.
The Company was incorporated in Delaware in 1961 and has its principal offices
located at 16559 Saticoy Street, Van Nuys, California, 91406. The Company's
telephone number is (818) 756-1388. Consolidated within a single, 50,000 square
foot facility, Puroflow is fully self contained within the engineer, test and
manufacturing disciplines.
AUTOMOTIVE AIRBAG FILTERS
The Company produces filters which are an integral part of conventional
pyrotechnic automotive airbag inflators. The primary functions of the airbag
filter is to cool and control the expansion of the hot gas into the inflating
bag and to prevent hot particles of combustion from entering the expanding bag.
The Company's filters are comprised of a unique blend of woven wire meshes and
random fiber materials.
An entire pyrotechnic airbag system includes the bag, the inflator (initiator,
filter and gas generant), the module for the steering wheel or dashboard, the
sensors, and the diagnostics. When the crash sensors (located in the front of
the vehicle) detect a rapid deceleration, equivalent to hitting a stationary
object at a predetermined speed, an electrical impulse is transmitted to the
initiator. The initiator triggers a chemical reaction of the airbag's gas
generant, which inflates the bag, forcing open the module's cover (located
either in the center of the steering wheel or in the dashboard on the
passenger-side). The inflation sequence is designed to take place in less than
one-tenth of a second without interfering with control of the car. After
inflation, the airbag automatically deflates in less than one second.
The Company has agreements to supply airbag filters on a purchase order basis to
two customers - ISI and Breed. The Company supplies airbag filters to ISI for
use in systems produced for Honda, General Motors, Mazda, and Mitsubishi.
Breed's customer base is comprised of Chrysler, Fiat, Ford of Australia, Jaguar,
and General Motors. Both ISI and Breed currently use Puroflow as their
exclusive filter supplier.
The Company designs, manufactures, and operates high precision machines to
fabricate airbag filters. They require minimal time for tooling changes between
production runs of different filter types. These methods permit greater
flexibility and lower unit costs without compromising the high reliability which
is essential for automotive airbag filters.
The Company is in the process of designing and developing new filters in
response to requests for proposals made by various inflator manufacturers, both
domestic and offshore, and has supplied pre-production qualification filters for
possible use in airbag systems to some of these manufacturers. The Company
intends to continue to enhance its technology and product development in order
to meet the changing needs of airbag manufacturers and their customers. The
Company is developing filters for the next generation azide and non-azide
passenger and side impact airbag applications.
MARKETING
The Company markets its airbag filters directly to airbag manufacturers through
its executive officers. The Company markets its commercial aerospace products
group through exclusive distributorships on assigned
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PMA applications. Typically, the terms of these distribution agreements provide
that the distributor will act as the exclusive distributor for specific parts
manufactured by the Company for a period between 3 to 5 years with minimum
monthly requirements for number and dollar amount of units purchased. The
purchase price of the parts is subject to mutual agreement of the parties and
may be adjusted to take into account inflation, market changes, changes in costs
of production and sales, and other factors. Such agreements may be terminated
by the Company if the distributor does not comply with these purchase
requirements or by either party if the other party is rendered insolvent. The
Company markets its high performance filters through manufacturers
representatives and, to a lesser extent, the Company's own sales force.
GOVERNMENT CONTRACTS
The Company has a number of direct contracts with the United States government.
Substantial sales of high performance filters are made to companies that are
prime contractors of the United States government. Sales to the United States
government accounted for approximately 7% of net sales for fiscal 1997 and 1996.
While separate figures are not maintained, the Company believes that when added
to sales to the United States government's prime contractors, government sales
accounted for approximately 29% of the Company's net sales during these periods.
COMPETITIVE CONDITIONS
A broad range of companies produce products or are capable of producing products
that compete with products manufactured by the Company in its various markets.
Many of these companies have significantly greater financial resources than the
Company. Morton International, Inc. ("MII") and other major domestic airbag
manufacturers produce their airbag filter components in-house, and TRW Vehicle
Safety Systems, Inc., a significant global manufacturer of airbag inflator
assemblies ("TRW"), produces passenger side airbag filters for its own use.
Other companies may choose to enter the automotive airbag filter market. There
is no assurance that the Company's airbag manufacturer customers will not
manufacture all their own filters or that the Company will be able to
effectively compete in the future against independent manufacturers of airbag
filters or of the Company's other products.
PRODUCT WARRANTIES
In all product lines, the Company provides standard commercial warranties,
consistent with its products and industry. Although claims under product
warranties have been minimal during the past five years, no assurance can be
given that such claims will not increase in the future.
RESEARCH AND DEVELOPMENT
In fiscal 1997 and fiscal 1996, the Company incurred research and development
expenditures of approximately $6,500 and $28,000, respectively. The Company
charges research and development expenditures to operations as a production
expense as such expenditures occur. The Company intends to expand research and
development activities in its core businesses, including passenger side,
advanced driver-side and side impact airbag filters and Parts Manufacturer
Approval for the commercial aerospace products group.
HIGH PERFORMANCE FILTERS
Since 1961, the Company has designed and manufactured, state-of-the-art,
precision filtration products for critical applications. Specializing in highly
reliable, all metallic filters of standard and custom design, the Company's
products range from filters in hydraulic, fuel and pneumatic systems to large
cryogenic and petrochemical filters. The Company also designs and manufactures
surface tension devices for propellant management in missiles and satellites
using porous metal, high-performance filter media and specialized gas tungsten
arc welding processes.
2
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The Company is a leading filter supplier for United States space applications,
including the Space Shuttle program, various commercial and military satellites,
launch vehicles and boosters, and ground support equipment. Certain of the
manufacturing, welding, cleaning and testing required by these applications are
performed in a laminar flow, class 10,000 clean room.
REPLACEMENT PARTS
The Company is a leading supplier of aftermarket filtration products used in jet
aircraft and turboshaft powered aircraft and helicopters. Utilizing highly
successful reverse engineering techniques, the Company produces "generic plain
wrap" filters for use in the aftermarket at a substantial reduction in cost to
the distributor and end user. The Company utilizes exclusive agreements with
its distributor base which assists them to dominate, on a part number base, a
particular market segment. The Company continues to market this product and
projects that it will contribute 45 percent of both sales and profit in FY 1998.
RAW MATERIALS AND SUPPLIES
The principal raw materials utilized by the Company in connection with its
filter operations include stainless steel and other manmade or natural products,
which are standard items available from a number of sources. Additionally, the
Company subcontracts out a significant portion of the fabricated or machine
parts required to produce components used in the Company's products, which it
designs and assembles. These services are rapidly available from a wide variety
of sources. The Company engineers, manufactures and assembles its products at
its facility in Van Nuys, California. This facility does not handle or store
hazardous substances and thus does not incur significant costs relating to
compliance with environmental laws.
PATENTS AND TRADEMARKS
Although management believes that patents and trademarks associated with the
Company's various product lines are of value to the Company, it does not
consider any of them to be essential to its business.
MAJOR CUSTOMERS
Sales to three customers identified below represented approximately 53% of net
sales during fiscal year 1997 and 60% of net sales during fiscal year 1996, and
83% during fiscal year 1995. For fiscal year 1997, 1996 and 1995, sales to
Breed Automotive Technologies, Inc. were $2,200,127, $2,047,315 and $2,666,281,
respectively. Sales to Inflation Systems Inc. were $1,438,355, $2,213,823 and
$4,470,337, respectively, and sales to Norcross Air, Inc. were $818,372,
$1,037,135 and $333,734, respectively. These customers purchased airbag filters
and filters for commercial and aerospace applications. The loss of any of these
customers would have a material adverse effect on the automotive airbag filter
or the high performance filter segments of the Company's business. During
fiscal 1997 no other customer accounted for more than 10% of net sales.
BACKLOG
As of February 28, 1997, and February 29, 1996, the Company had a backlog of
approximately $5,900,000 and $5,165,000, respectively. Approximately $3,600,000
of the Company's backlog at February 28, 1997 is scheduled to be shipped in the
current fiscal year. The backlog figures include firm purchase orders and, with
respect to airbag filters, six-month planning requirements prepared by the
Company's customers. As is generally the case in the automotive industry, the
Company's airbag filter customers provide the Company, on a monthly basis, with
firm commitment purchase orders for the upcoming three months and their best
estimate, for planning purposes, of their requirements for the following
six-month period. These rolling nine-month statements of firm commitment
purchase orders and planning requirements are revised and updated each month.
3
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The Company's customer purchase orders may be revised or canceled by the
customer, subject to reimbursement of certain costs in the case of cancellation
of scheduled shipments or other commitments. The Company's contracts (direct or
indirect), with respect to United States government agencies, are subject to
unilateral termination at the convenience of the government, subject only to the
reimbursement of certain costs plus a termination fee.
REGULATION
Demand for the Company's airbag filters was initially affected by federal
regulations requiring installation of airbags in passenger cars, light trucks,
and vans by model years 1998 and 1999, respectively, and which in the meantime
require installation of airbags or other passive frontal crash protective
systems. Consumer demand is now the leading force in the growth of this product
segment. Demand for the Company's commercial aerospace products group is
covered by the Federal Aviation Administration Regulations for National and
International Operations. While the Company believes that the trends in
automotive safety is toward increased regulation and are beneficial to the
Company, a decline in enforcement or compliance expenditures, a change in the
regulations, or an emerging technology that would deem airbags as obsolete,
could have a significant adverse effect on the demand for the products offered
by the Company.
United States government contracts and related customer orders subject the
Company to various laws and regulations governing United States government
contractors and subcontractors, generally which are more restrictive than for
non-government contractors. This includes subjecting the Company to examinations
by government auditors and investigators, from time to time, to insure
compliance and to review costs. Violations may result in costs disallowed, and
substantial civil or criminal liabilities (including, in severe cases, denial of
future contracts). The United States government may limit the competitive
bidding of any contract under a small business or minority set-aside, in which
bidding is limited to companies meeting the criteria for a small business or
minority business, respectively. The Company is currently qualified as a small
business concern, but not minority ownership, set-asides. To the extent bidding
may be so limited, the Company has an opportunity to benefit from the reduced
number of qualified bidders.
EMPLOYEES
At February 1, 1997, the Company had 75 full-time employees, including 3
employed in Sales and Marketing, 15 employed in Engineering and Quality Control,
and 50 employed in Production. The remaining employees are administrative and
support staff. No employees are represented by a collective bargaining unit.
Management considers its relationship with its employees to be excellent.
INSURANCE
The Company maintains general liability, automobile, aircraft products, product
liability, workers' compensation, and employer's liability insurance coverage.
The Company is engaged in various businesses which could expose it to claims for
injury, resulting from the failure of products sold by it. During the last
decade, the Company has had only one claim for injury filed as a result of an
Ultra Dynamics product installation, wherein the Distributor failed to service
the installation, and the Company was joined in the action. The Company has
product liability insurance, covering in such amounts and against such risk as
Management believes advisable, in light of the Company's business and the terms
and cost of such insurance. There is no assurance that claims will not arise in
the future in excess of such insurance or that the Company will maintain the
same level of insurance coverage.
4
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ITEM 2. PROPERTIES
The following table sets forth information as to the location and general
character of the facility of the Registrant:
<TABLE>
<CAPTION>
LOCATION PRINCIPAL USE APPROXIMATE SQ. FT. LEASE EXP. DATE
- -------------------- ------------------------------- ------------------- ---------------
- -------------------- ------------------------------- ------------------- ---------------
<S> <C> <C> <C>
16559 Saticoy Street Headquarters and manufacturing 50,000 August 30, 2000
Van Nuys, CA 91406 facility for airbag components,
government and aerospace
filtration.
</TABLE>
The Company's current sub-lease from Kaiser Aerospace & Electronics Corporation
includes the use of gas, electric, water, telephone service, real estate taxes
and parking at an annual rental of $291,000. The Company has an option to
extend the lease for 29 months until December 31, 2002, at an annual rental of
$312,000, inclusive of the above services.
ITEM 3. PENDING LEGAL PROCEEDINGS
1) On July 2, 1993, Ultra Dynamics, a former wholly owned subsidiary of the
Company was named as one of six co-defendants in a civil action filed by
Cynthia H. Meals in the Court of Common Pleas of Chester County,
Pennsylvania for unspecified damages resulting from improper maintenance of
a treatment system for drinking water. Ultra Dynamics is included as a co-
defendant because it supplied the equipment to a co-defendant distributor.
Ultra Dynamics has filed a cross-complaint against all co-defendants and
plaintiff.
2) Reliable Metallurgical Processes Inc. ("Reliable") commenced an action
against the Company and Michigan Dynamics Inc., a former wholly owned
subsidiary of the Company, in September 1995, in Los Angeles County
Superior Court for breach of contract, open account, and anticipatory
breach. The contract related to the performance by Reliable of heat-
treatment services which the Company believes Reliable did not perform
adequately. The plaintiff is seeking damages in the principal sum of
$133,821.37, interest at the rate of 18 percent per annum from net thirty
days after delivery of the goods, attorneys' fees and cost of litigation.
3) Jerome Pearlman d.b.a. J & F Enterprises, a former Director of the Company,
commenced an action in the Los Angeles County Superior Court in December
1995 for breach of an alleged promissory note for money borrowed. The
plaintiff claims that the Company has not repaid amounts due under the
alleged note which the Company disputes. The complaint seeks approximately
$73,000 in damages.
4) 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 in December 1995, against the Company and the Receiver
for possession and conversion of personal property. The complaint alleges
the Company is wrongfully in possession of a computer owned by the
plaintiff under an alleged capital lease, which claim the Company disputes.
The complaint seeks damages not to exceed $25,000.
5) 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 chief executive officer of the Company, which
note was executed in exchange for goods and services delivered by the
plaintiff. The Company disputes that any amounts are due under the note as
a result of Company's right of set-off. The judgment was obtained without
due notice to the Company. The
5
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Receiver 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 America Corporation. The confession of judgment was
vacated by order or the Circuit Court for Baltimore County on June 24,
1996. The Company filed an amended counterclaim and third party complaint
on August 12, 1996 against Memtec America Corporation and four former
employees of the Company now employed by Memtec America Corporation.
At January 31, 1997, an accrual in the amount of approximately $232,000 has been
recorded in anticipation of judgments which may result against the Company as a
result of the foregoing. Although the Company cannot determine the potential
liability which may result from the foregoing, it believes it will prevail in
its defenses, and does not expect that such litigation will have a material
adverse effect on its financial position or results of operation. See
"Financial Statements - Note 7".
The Company is not a party, nor are its properties subject to, any material
pending legal proceedings other than ordinary routine litigation incidental to
the Company's business and the matters described above.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Registrant did not submit any matters to a vote of security holders during
the fourth quarter of the fiscal year covered by this report.
6
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS, COMMON STOCK PRICE RANGE, AND DIVIDEND POLICY
The Common Stock of the Company is traded on the National Association of
Securities Dealers, Inc. Electronic Bulletin Board ("NASDAQ") System under the
symbol PURO.
The following table sets forth the high and low bid quotations for the Common
Stock for the periods indicated as reported by NASDAQ. These quotations
represent inter-dealer prices and do not include retail markups, markdowns or
commissions, and may not necessarily represent actual transactions.
High Low
-------- -------
-------- -------
Fiscal Year Ended January 31, 1996
1st Quarter . . . . . . . . . . . . . . . . . . . 23/32 21/32
2nd Quarter . . . . . . . . . . . . . . . . . . . 11/32 8/32
3rd Quarter . . . . . . . . . . . . . . . . . . . N/A N/A
4th Quarter . . . . . . . . . . . . . . . . . . . 1 3/8 5/8
Fiscal Year Ended January 31, 1997
1st Quarter . . . . . . . . . . . . . . . . . . . 1 3/8 1 3/8
2nd Quarter (Note 1). . . . . . . . . . . . . . . 1 5/8 1 3/8
3rd Quarter (Note 1) . . . . . . . . . . . . . . 1 1/4 1 1/4
4th Quarter . . . . . . . . . . . . . . . . . . . 1 15/16
Fiscal Year Ended January 31, 1998
Two Months Ending March 20, 1997. . . . . . . . . 31/32 7/8
(1) The Common Stock of the Company was delisted by NASDAQ on June 9,
1995, as a result of the Company not meeting the minimum capital
requirement. Trading in the Common Stock resumed on November 17,
1995, with a listing on the Bulletin Board System.
On March 20, 1997, the closing bid price for the Company's Common Stock on the
Bulletin Board System was $7/8 per share. As of March 20, 1997, the Company had
approximately 328 stockholders of record.
As a result of its current financial condition and prior operating loss, the
Company will not be in a position to pay cash dividends in the foreseeable
future.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
----------------------------------------------------
----------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA (1):
Net Sales $ 5,899 $ 5,908 $ 9,044 $ 8,816 $ 8,458
Cost of goods sold 6,155 5,137 7,644 5,957 5,888
-------- -------- -------- -------- --------
Gross profit (256) 771 1,400 2,859 2,570
Selling, general & administrative expense 2,057 1,313 1,629 1,443 1,446
-------- -------- -------- -------- --------
Operating income (loss) (2,313) (542) (229) 1,416 1,124
Other income (expense) 68 (282) (61)
Non recurring expenses (2) (213) (292) (253) (394)
-------- -------- -------- -------- --------
Income (loss) from continuing operations
before income taxes (2,245) (755) (521) 881 669
Provision (benefit for income taxes) (65) 6 6 6
-------- -------- -------- -------- --------
Income (loss) from continuing operations (2,180) (755) (527) 875 663
Income (loss) from discontinued operations (1) (494) 189 (1,845) 23 (0)
-------- -------- -------- -------- --------
Net income (loss) $ (2,674) $ (566) $ (2,372) $ 898 $ 663
Net income (loss) per common share:
From continuing operations $ (0.66) $ (0.20) $ (0.12) $ .19 $ .11
From discontinued operations (0.15) 0.05 (0.41) .11
-------- -------- -------- -------- --------
$ (0.81) $ (0.15) $ (0.53) $ .19 $ .11
WEIGHTED AVERAGE NUMBER OF SHARES: 3,290 3,724 4,509 4,632 6,107
<CAPTION>
YEAR ENDED JANUARY 31,
----------------------------------------------------
----------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(in thousands)
BALANCE SHEET DATA:
Working Capital $ 137 $ 823 $ (1,214) $ (13) $ 2,518
Total Assets 7,897 7,329 4,721 3,962 4,094
Long-Term Debt 53 108 71 (0) (0)
Stockholders' Equity 1,781 2,307 185 1,083 3,489
</TABLE>
(1) In November 1994, the Company sold its ultraviolet water product
subsidiary, Ultra Dynamics Corporation. This subsidiary has been accounted for
as a discontinued operation. In the year ended January 31, 1996, the Company
sold its valve product subsidiary, Decca Valves Corporation and shut down
operation of its Michigan Dynamics subsidiary. These two subsidiaries have been
accounted for as discontinued operations. The selected data related to the
years ended January 31, 1996 and 1995 have been adjusted to reflect the
discontinued operations, prior years have not been adjusted.
(2) Non-recurring expenses are comprised of a one-time fee of $89,834 charged
by the 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.
8
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ITEM 7. MANAGEMENT'S DISCUSSION, ANALYSIS OF FINANCIAL CONDITION, AND RESULTS
OF OPERATIONS
GENERAL
The Company was incorporated in Delaware in 1961, under the name Ultra Dynamics
Corporation, and was originally engaged in the water purification business.
In November 1968, the Company organized Puroflow Corporation to acquire all of
the assets and liabilities of a business established in 1961, under the name
Aerospace Components Corporation, and was primarily engaged in the manufacture
of high performance filters for the aerospace industry. In 1980, the Company
acquired Decca Valves Corporation, a corporation engaged in the manufacture of
fluid control valves. The Company changed its name to Puroflow Incorporated in
1983. The Company acts as the holding company, directly or indirectly, for
Puroflow Corporation and Michigan Dynamics, Inc.
In fiscal 1989, the Company began designing, testing and producing filters for
automotive airbag systems, primarily as an outgrowth of its expertise in
aerospace filtration. During September 1992, the Company disposed of its CPI
division, including CPI assets it had acquired from MDI in June 1992. During
November 1994, the Company settled the litigation with Glasco Ultraviolet
Systems Inc. and disposed of the operating assets of Ultra Dynamics Corporation,
its ultraviolet water products subsidiary. During June 1995, the Company
disposed of the inventory and intangible assets of Decca Valves Corporation. The
disposal of these assets have been accounted for as a discontinued operation.
(See Note 11 of the Notes to Consolidated Financial Statements.)
The Company's principal products consist of automotive airbag filters and high
performance filters. Net sales for each of these product lines for the fiscal
years ended January 31, 1995, 1996 and 1997 are as follows:
YEAR ENDED JANUARY 31,
----------------------------------
----------------------------------
(in thousands)
1995 1996 1997
-------- -------- --------
-------- -------- --------
Net Sales:
Airbag Filters $ 6,361 $ 4,175 $ 3,639
High Performance Filters 2,684 4,641 4,819
-------- -------- --------
TOTAL $ 9,045 $ 8,816 $ 8,458
-------- -------- --------
-------- -------- --------
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RESULTS OF OPERATIONS
The following table reflects the percentage relationship to net sales of certain
items included in the Company's statement of operations for each of the three
years in the period ended January 31, 1997.
YEAR ENDED JANUARY 31,
--------------------------------
--------------------------------
(in thousands)
1995 1996 1997
-------- -------- --------
-------- -------- --------
Net Sales: 100.0% 100.0% 100.0%
-------- -------- --------
Cost and expenses:
Cost of goods sold 84.6 67.5 69.6
Selling, general and administrative 18.0 16.4 17.1
Other (income) expense (0.2) (.1)
Non-recurring expenses 2.9 4.7
Interest expense 3.4 3.2 .8
-------- -------- --------
Income (loss) from continuing operations
before income taxes (5.8) 10.0 7.9
Provision for income taxes (.1) (.1) (.1)
Income (loss) from discontinued operations 20.3 0.3 -
-------- -------- --------
Net income (loss) (26.2)% 10.2% 7.8%
-------- -------- --------
-------- -------- --------
COMPARISON OF THE FISCAL YEARS ENDED JANUARY 31, 1997 AND 1996
Net sales in fiscal 1997 decreased 4.1%, compared to fiscal 1996, due primarily
to a decrease in sales of airbag filters from $4,175,000 to $3,639,000 resulting
from a continuance of customer supplied raw materials and price adjustments.
Sales of high performance filters increased in the current fiscal year to
$4,819,000 from $4,641,000, due primarily to continued concentration on
expanding the PMA program. The Company has obtained FAA approval for 40 part
numbers and there are 11 applications pending for parts qualification as of
January 31, 1997. The year-to-year decrease in sales was also due to a minimum
marketing effort by management during the receivership period which ended
August 22, 1996.
Gross profit as a percentage of net sales was 30.4% for fiscal 1997, compared to
32.5% in fiscal 1996. The reduction in gross profit was due to the increase in
material costs and price adjustments for airbag business.
For the fiscal year ended 1997 and 1996, selling, general and administrative
expenses were $1,446,000 and $1,443,000, respectively, due to continued cost
control of overhead despite payroll adjustment for annual salaries for employees
and year end bonuses for key personnel.
Interest expense decreased by $207,000 in fiscal 1997, due to elimination of
bank debt in the middle of fiscal 1997.
Non recurring expenses of $394,000 and $253,000 in fiscal 1997 and 1996,
respectively, was a direct result of the Receivership which was terminated on
August 22, 1996.
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 of approximately $2,728,000
for Federal Income Tax purposes and $1,852,000 for California State Income Tax
purposes at January 31, 1997. Such operating loss carryforwards expire from
2008 to 2011.
10
<PAGE>
COMPARISON OF THE FISCAL YEARS ENDED JANUARY 31, 1996 AND 1995
Net sales in fiscal 1996 decreased 2.5% compared to fiscal 1995. This is due
primarily to a decrease in sales of airbag filters from $6,361,000 to $4,175,000
due to a change in customer supplied raw material in the current year compared
to prior year practice of the Company supplying the raw material. Sales of high
performance filters, including the PMA program, increased in the current year to
$4,641,000 compared to $2,684,000 in the prior year. The Company sold their
valve business in June 1995.
The wide swing in the gross margins of 32.5% in fiscal 1996, compared to 15.4%
in fiscal 1995, is a result of a combination of factors. The Company
consolidated its manufacturing facilities in September 1995, with reduced rental
and manufacturing costs; increased prices in the PMA program line with cost
controls and manufacturing efficiencies; and increased margins in high-
performance filters. The gross margins in fiscal 1995 were affected by a
discontinuance of the MDI Dynapore product line, resulting in approximately
$1,000,000 inventory write-down, and high manufacturing and other costs incurred
during the program start-up phase of the PMA products due to the learning curve
and the time lag in securing qualification of the PMA products.
Selling, general and administrative expenses were $1,443,000 and $1,630,000 for
fiscal 1996 and 1995 respectively, a decrease of 11.5%, due primarily to
overhead cost controls and payroll reduction and benefits of the move to the new
facility.
Interest expense decreased to $279,000 in fiscal 1996 from $306,000 in fiscal
1995, due to the reduction of the principal balance outstanding. This occurred
despite an increase in the interest rate to 12% by the lending institution.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations from the placement of bank
financing, sale of Common Stock and, in profitable years, income from
operations. In fiscal 1997, cash provided by operating activities was $339,000,
consisting of $663,000 from net income, non-cash operating income and expenses
of $209,000 and an increase in inventories, prepaid expenses, and a reduction in
accounts payable and accrued expenses offset by a reduction in accounts
receivable.
The Company's working capital was $2,518,000 and $(13,000) as of January 31,
1997 and 1996 respectively. An improvement in the current ratio to 5.2 at
January 31, 1997 from 1.0 at January 31, 1996 provided for a change in the
Company's ability to pay its obligations.
Cash used in investing activities was used to purchase plant equipment of
$253,000, offset by collection on notes receivable of $63,000.
On March 26, 1996, the Company entered into an agreement with Toluca Pacific
Securities Corporation ("TPSC") 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 $1,742,900 of net proceeds,
including $1,300 of interest. The purchase price of the Common Stock was $.80
per share. From the gross proceeds, TPSC received a fee of $202,400. TPSC (or
its designees) also received 24-month options to purchase 177,100 common shares,
at a price of $.80 per share. Proceeds received by the Company were used to
retire bank debt and other pre-Receiver debt. Pursuant to the terms of a
Registration Rights Agreement, the Company is obligated to register the
Securities under the Securities Act.
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.
11
<PAGE>
Additionally, the Company entered into 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 (i) aggregate
net worth (plus subordinated debt, less any intangible assets and less any
amount due from shareholders, officers and affiliates of the Company) of not
less than $3,250,000, (ii) a ratio of current and non-current liabilities (less
subordinated debt) to net worth of not more than 0.50 to 1.00, (iii) working
capital of not less than $2,000,000, and (iv) debt service coverage ratio of not
less than 1.75 to 1.00. The Company is currently in compliance with the
foregoing covenants.
EFFECTS OF INFLATION ON BUSINESS
Management believes that inflation has not had a material effect on the
Company's operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this item is hereby incorporated by reference from
the Registrant's financial statements and independent auditors' report beginning
on page F-1 of this report on Form 10-K.
ITEM 9. DISAGREEMENT ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this item is hereby incorporated by reference from
the Registrant's definitive Proxy Statement under the captions "MANAGEMENT" and
"ELECTION OF DIRECTORS".
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item is hereby incorporated by reference from
the Registrant's definitive Proxy Statement under the captions "EXECUTIVE
COMPENSATION" and "NON-STATUTORY STOCK OPTIONS (NSO)."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item is hereby incorporated by reference from
the Registrant's definitive Proxy Statement under the captions "STOCK OPTIONS"
and "NON-STATUTORY STOCK OPTIONS (NSO)."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is hereby incorporated by reference from
the Registrant's definitive Proxy Statement under the caption "RELATED PARTY
TRANSACTIONS."
12
<PAGE>
PART IV
ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
The following financial statements (including notes thereto and the
Independent Auditors' Report with respect thereto), are filed as part
of this annual report on Form 10-K starting on page F-1 hereof:
Independent Auditors' Reports.
Consolidated Balance Sheets at January 31, 1997 and 1996.
Consolidated Statements of Operations for each of the three years
in the period ended January 31, 1997.
Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended January 31, 1997.
Consolidated Statements of Cash Flows for each of the three years
in the period ended January 31, 1997.
Notes to Consolidated Financial Statements.
(a) (2) EXHIBITS
Exhibits, including management contracts, compensatory plans and
arrangements required to be filed as part of this report, are
listed in the Exhibit Index, which follows the financial statements
and financial statement schedules.
(b) REPORTS ON FORM 8-K
On March 13, 1995, the Company filed a Form 8-K reporting the
commencement of litigation by Joseph B. Jasso for termination of
his employment contract. The Company has a vigorous defense to the
action for violation of his fiduciary obligation as a Director and
Chief Executive Officer. On May 12, 1995, the Company filed Form
8-K, reporting the appointment of a Receiver, pursuant to an order
of the Los Angeles Superior Court. On November 9, 1995, the
Company and the Receiver filed Form 8-K, reporting the commencement
of two actions by Jerome Pearlman, a former Director of the
Registrant for funds advanced, and for conversion of personal
property. The Receiver, on behalf of the Company, filed
cross-complaints in both actions for breach of fiduciary duties and
constructive trust, seeking a return of all funds paid to Plaintiff.
On November 18, 1995, the Company filed a Form 8-K reporting a
change in auditors to Rose, Snyder & Jacobs, CPA's, Burbank,
California for the fiscal year ended January 31, 1996, replacing
Deloitte & Touche. The change in auditors was based solely upon
cost reduction of audit fees, and not a result of any disagreement
with the former auditors on the scope and auditing or presentation
of financials.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
PUROFLOW INCORPORATED
By /s/ Michael H. Figoff April 28, 1997
------------------------------------------------
Michael H. Figoff
President/Chief Executive Officer
Director
Pursuant to the requirement of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
By /s/ Michael H. Figoff April 28, 1997
------------------------------------------------
Michael H. Figoff
President/Chief Executive Officer
Director
By /s/ Reuben M. Siwek April 28, 1997
------------------------------------------------
Reuben M. Siwek
Chairman of the Board
General Counsel
By /s/ Robert A. Smith April 28, 1997
------------------------------------------------
Robert A. Smith
Vice Chairman of the Board
By /s/ Tracy K. Pugmire April 28, 1997
------------------------------------------------
Dr. Tracy K. Pugmire
Director
By /s/ Leo S. Unger April 28, 1997
------------------------------------------------
Leo S. Unger
Director
14
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Puroflow Incorporated
We have audited the accompanying consolidated balance sheets of Puroflow
Incorporated (a Delaware corporation), and subsidiaries at January 31, 1997 and
1996, and the related statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Puroflow Incorporated and
Subsidiaries at January 31, 1997 and 1996, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
Rose, Snyder & Jacobs
A Corporation of Certified Public Accountants
Burbank, California
April 1, 1997
F-1
<PAGE>
PUROFLOW INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1997 AND 1996
1997 1996
----------- -----------
----------- -----------
ASSETS
CURRENT ASSETS:
Cash, Note 9 $ 164,415
Accounts receivable
Net of allowance for doubtful
accounts of $49,504
(January 31, 1997) and $140,000
(January 31, 1996), note 3 1,462,170 $ 1,548,495
Inventories 1,398,561 1,239,467
Current portion of note receivable, note 2 40,889 43,831
Prepaid expenses and deposits 57,595 33,700
----------- -----------
TOTAL CURRENT ASSETS 3,123,630 2,865,493
----------- -----------
PROPERTY AND EQUIPMENT - NOTE 3
Leasehold improvements 11,660
Machinery and equipment 2,988,092 2,880,343
Automobile 1,679
Tooling and dies 262,480 253,921
Construction in progress 143,542 20,000
----------- -----------
3,407,453 3,154,264
Less accumulated depreciation
and amortization 2,452,888 2,134,836
----------- -----------
NET PROPERTY AND EQUIPMENT 954,565 1,019,428
----------- -----------
NOTE RECEIVABLE, NOTE 2 60,276
OTHER ASSETS 16,750 16,750
----------- -----------
TOTAL ASSETS $ 4,094,945 $ 3,961,947
----------- -----------
----------- -----------
1997 1996
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft $ 59,363
Line of credit, note 3 235,857
Current portion of long-term debt
notes 4 & 7 $ 207,087 1,763,681
Accounts payable 212,397 582,393
Accrued expenses 186,395 237,472
----------- -----------
TOTAL CURRENT LIABILITIES 605,879 2,878,766
----------- -----------
LONG TERM DEBT, NOTE 4
----------- -----------
COMMITMENTS AND CONTINGENCIES, NOTE 7
STOCKHOLDERS' EQUITY, notes 5 and 10
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
issued and outstanding - 7,108,621 shares
at January 31, 1997 and 4,578,521 shares
at January 31, 1996 430,579 405,279
Additional paid-in capital 4,947,727 3,230,127
Accumulated deficit (1,889,240) (2,552,225)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY $ 3,483,066 $ 1,083,181
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 4,094,945 $ 3,961,947
----------- -----------
----------- -----------
See independent auditors' report and notes to financial statements.
F-2
<PAGE>
PUROFLOW INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31, 1997 1996 1995
----------- ----------- -----------
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 8,458,454 $ 8,815,889 $ 9,044,707
Cost of goods sold 5,888,825 5,957,007 7,644,422
----------- ----------- -----------
Gross profit 2,569,629 2,858,882 1,400,285
Selling, general and administrative expenses 1,445,626 1,442,926 1,630,032
----------- ----------- -----------
Operating income (loss) 1,124,003 1,415,956 (229,747)
Other income and (expense)
Other income (expense) 10,173 (2,895) 14,132
Interest expense (71,407) (279,237) (305,627)
Nonrecurring expenses (394,164) (253,085)
----------- ----------- -----------
Income (loss) from continuing
operations before tax 668,585 880,739 (521,242)
Income tax expense, note 6 5,600 5,600 5,600
----------- ----------- -----------
Income (loss) from continuing operations 662,985 875,139 (526,842)
Discontinued operations, note 13
Loss from operations (67,264) (1,845,314)
Gain from write-off of excess
reserves, note 11 235,404
Loss on sale of property and equipment (145,160)
----------- ----------- -----------
22,980 (1,845,314)
----------- ----------- -----------
Net income (loss) $ 662,985 $ 898,119 $(2,372,156)
----------- ----------- -----------
----------- ----------- -----------
Net income (loss) per common share:
Continuing operations $ 0.11 $ 0.19 $ (0.12)
Discontinued operations (0.41)
----------- ----------- -----------
Primary earnings per share $ 0.11 $ 0.19 $ (0.53)
----------- ----------- -----------
----------- ----------- -----------
Weighted average number of shares 6,107,812 4,631,740 4,508,621
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See independent auditors' report and notes to the financial statements.
F-3
<PAGE>
PUROFLOW INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON ADDITIONAL RETAINED
STOCK PAID-IN EARNINGS
PAR VALUE CAPITAL TOTAL TOTAL
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at January 31, 1994 $ 391,280 $ 2,994,126 $ (1,078,188) $ 2,307,218
Sale of common stock 13,999 236,001 250,000
Net loss (2,372,156) (2,372,156)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Balance at January 31, 1995 405,279 3,230,127 (3,450,344) 185,062
Net income 898,119 896,119
------------ ------------ ------------ ------------
Balance at January 31, 1996 405,279 3,230,127 (2,552,225) 1,083,181
Sale of common stock 25,300 1,717,600 1,742,900
Net income 662,985 662,985
------------ ------------ ------------ ------------
Balance at January 31, 1997 $ 430,579 $ 4,947,727 $ (1,889,240) $ 3,489,066
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See independent auditors' report and notes to financial statements.
F-4
<PAGE>
PUROFLOW INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31, 1997 1996 1995
----------- ----------- -----------
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 662,985 $ 898,119 $(2,372,156)
Adjustments to reconcile net income (loss) to net
cash provided by/used in operating activities:
Depreciation and amortization 318,052 340,103 365,934
Provision for losses on accounts receivable (20,000) 104,205 134,069
Inventory valuation allowance 35,150 59,000 999,305
Loss on sale of assets 157,057
Gain on vendor notes settlements (124,482)
Changes in operating assets and liabilities:
Accounts receivable 106,325 (386,550) 242,305
Inventories (194,244) 73,073 1,154,010
Prepaid expenses and other assets (23,895) 114,421 (83,328)
Accounts payable and accrued expenses (421,073) (46,962) 288,426
----------- ----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 338,818 1,312,466 728,565
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES (253,189) (131,336) (122,182)
Purchases of property and equipment
Proceeds from sale and assets 326,700
Payments received on notes receivable 63,218 23,906
Other assets (3,109)
NET CASH PROVIDED BY
----------- ----------- -----------
(USED IN) OPERATING ACTIVITIES (189,971) 219,270 (125,291)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft (59,363) 59,363 250,000
Proceeds from sale of common stock 1,742,900
Net borrowing (repayment) under line of credit (235,857) (574,146) 65,412
Principal payments on long-term debt (1,432,112) (1,095,262) (838,761)
Principal payments under capital lease obligations (26,346)
ADVANCES TO OFFICERS AND EMPLOYEES 3,868 1,941
----------- ----------- -----------
NET CASH (USED IN) FINANCING ACTIVITIES 15,568 (1,606,177) (547,754)
----------- ----------- -----------
Net increase (decrease) in cash 164,415 (74,441) 55,520
Cash at beginning of period -0- 74,441 18,921
----------- ----------- -----------
Cash at end of period $ 164,415 $ -0- $ 74,441
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See independent auditors' report and notes to the financial statements.
F-5
<PAGE>
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
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 therein 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.
RECEIVERSHIP
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
assumed jurisdiction over all the Company's assets, which were in the possession
of the Receiver's estate, and held for the benefit of all creditors and
shareholders. The Receiver was not obligated to pay liabilities that existed
prior to their appointment; however, the Receiver could elect to pay certain of
those liabilities with the leave of the Court.
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.
CONSOLIDATED SUBSIDIARIES
The consolidated financial statements include the accounts of the Company's
wholly-owned subsidiaries, Puroflow Corporation, Decca Valves Corporation,
Michigan Dynamics, Inc., and Ultra Dynamics Corporation. Material intercompany
transactions and balances have been eliminated. Only Puroflow Corporation is
presently active and the accounts of the other companies are included in
discontinued operations.
INVENTORIES
Inventories are stated at the lower of cost of market on a first-in, first-out
basis, and consists of the following items:
JANUARY 31, January 31,
1997 1996
----------- -----------
----------- -----------
Raw materials and purchased parts $ 729,740 $ 757,921
Work in progress 247,868 235,404
Finished goods 420,953 246,142
----------- -----------
Total $ 1,398,561 $ 1,239,467
----------- -----------
----------- -----------
See independent auditors' report.
F-6
<PAGE>
PROPERTY AND EQUIPMENT
Depreciation and amortization of property and equipment is computed using the
straight line method based upon the estimated useful lives of the assets, except
for leasehold improvements which are amortized over the shorter of the life of
the lease or the improvements. The estimated useful lives are as follows:
Classification Life
------------------------ ----------
------------------------ ----------
Machinery and equipment 5-15 years
Automobile 5 years
Tooling and dies 5 years
Leasehold improvements 5 years
REVENUE RECOGNITION
Revenues are recognized when finished products are shipped.
INCOME TAXES
The Company complies with Financial Accounting Standards No. 109, Accounting for
Income Taxes.
CASH FLOWS
For the purpose of the statement of cash flows, the Company considers cash
equivalents to include cash only and to exclude any near-cash short-term
investments.
ESTIMATES
Generally accepted accounting principles require that financial statements
include estimates by management in the valuation of certain assets and
liabilities. The Company's management estimates the reserve for doubtful
accounts, the reserve for obsolete inventory and the useful lives of property
and equipment. Management uses its historical record and knowledge of its
business in making these estimates.
RECLASSIFICATION
Certain amounts previously reported in the Company's January 31, 1996, and
January 31, 1995 financial statements have been reclassified to conform to the
presentation adopted in the year ended January 31, 1997. The most significant
reclassification is nonrecurring expenses for the year ended January 31, 1996.
Such reclassifications had no effect on the net profits or losses as previously
reported.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenditures are expensed as incurred and are
approximately as follows for the years ended January 31,:
1997 1996 1995
-------------- --------------- ----------------
-------------- --------------- ----------------
$ 6,500 $ 28,000 $ 381,000
-------------- --------------- ----------------
See independent auditors' report.
F-7
<PAGE>
NON-RECURRING EXPENSES
Non-recurring expenses are comprised of a one-time fee of $89,834 charged by the
Company's former bank for its costs related to the Receivership during August,
1996, and the monthly administrative fees charged by the Receiver during the
receivership period. Administrative fees were billed monthly by the Receiver
for its role as monitor for the bank of all of the Company's cash disbursements
and receipts and for its handling of all court reports, filings and related
Receivership matters. The Receivership Estate began on May 1, 1995 and ended
August 22, 1996.
EARNINGS PER SHARE
The computation of the net income (loss) per common share (primary) is based on
the weighted average number of common shares and common share equivalents
outstanding.
NOTE 2 - NOTE RECEIVABLE
JANUARY 31, JANUARY 31,
1997 1996
----------- -----------
----------- -----------
8 1/2% note receivable, monthly
principal and interest payments of
$4,250, secured by equipment of the
debtor, maturing in November, 1997 $ 40,889 $ 104,107
Less current portion 40,889 43,831
---------- ----------
$ -0- $ 60,276
---------- ----------
---------- ----------
NOTE 3 - LINE OF CREDIT
On November 5, 1993, the Company entered into a security and loan agreement with
its bank under which it could obtain credit up to 65% of certain accounts
receivable, but not in excess of $1,200,000, at prime plus 3 1/2%. This loan was
secured by accounts receivable, inventories and a first priority interest in all
unencumbered assets, and matured in June, 1996. In August, 1996, the
outstanding balance was repaid in full.
In August, 1996, 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 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.
See independent auditors' report.
F-8
<PAGE>
NOTE 4 - LONG-TERM DEBT
JANUARY 31, January 31,
1997 1996
----------- -----------
----------- -----------
Note payable to bank at prime rate plus 3 1/2%,
secured by all assets of the Company, matured
in June, 1996. $ $ 107,900
Note payable to bank at prime rate plus 3 1/2%,
secured by all assets of the Company, matured
in June, 1996. 971,297
Notes payable to vendors bearing no interest
maturing at various dates. These notes were
negotiated with vendors to convert accounts
payable balances into notes with terms varying
from three months to three years. All these
notes existed when the Receiver was appointed
on May 1, 1995. All the notes have been paid
in full or written-off, except for two which
are in dispute (see Note 7). $ $ 684,483
----------- -----------
207,087 1,763,680
Less current portion 207,087 1,763,680
----------- -----------
Long-term debt $ -0- $ -0-
----------- -----------
All the above bank debt was repaid in August, 1996 and replaced by the new loan
commitments (See Notes 3 and 12).
Interest paid in cash totaled as follows, for the years ended January 31,:
1997 1996 1995
----------- ----------- -----------
----------- ----------- -----------
$ 87,017 $ 263,627 $ 305,627
----------- ----------- -----------
NOTE 5 - STOCK OPTION PLANS
In the year ended January 31, 1996, the Company implemented stock option plans
which provide for the granting of options to certain officers and key employees
to purchase shares of its common stock within prescribed periods at prices that
vary from $0.25 to $0.75. The weighted average fair value of the options
granted was $0.87 per option. Fair value was determined by estimating the
future sale of the underlying stock and discounting the gain on the options
based on a risk free rate of return adjusted for equity risk. Share activity
under the Company's stock option plans is summarized below:
SHARES
----------
----------
Held at January 31, 1995 (outstanding and unexercised) -0-
Granted 359,000
Exercised -0-
Canceled or expired -0-
----------
Held at January 31, 1996 (outstanding and unexercised) 359,000
See independent auditors' report.
F-9
<PAGE>
Granted -0-
Exercised 100
Canceled or expired 9,000
-------------
Held at January 31, 1997 (outstanding and unexercised) 349,900
Shares exercisable, January 31, 1997 249,860
-------------
Shares available for future grants, end of period 266,000
-------------
-------------
Price range of options held, January 31, 1997 $.025- $ .075
Statement of Financial Accounting No. 123, "Accounting for Stock-Based
Compensation," requires companies to measure employee stock compensation plans
based on the fair value method of accounting. However, the statement allows the
alternative of continued use of Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees," with pro-forma disclosure of net
income earnings per share determined as if the fair value based method had been
applied in measuring compensation cost. The Company has elected the alternative
of continued use of APB No. 25. No pro-forma disclosure is presented because
the change in compensation cost is immaterial.
NOTE 6 - INCOME TAXES
The following is a reconciliation of the tax provision, computed by applying the
statutory federal income tax rates, and the income tax provision per the
financial statements for the years ended January 31,:
1997 1996
--------- ---------
--------- ---------
Income tax provision at 34% $ 227,319 $ 305,360
Meals and entertainment 2,048
Officer's life insurance 2,803
Excess book (tax) depreciation and amortization 30,707 (39,658)
Excess book loss on disposition 20,252
Change in allowance for doubtful accounts (30,769) (21,920)
Write-off of obsolete inventory (51,396) (338,358)
Reserve for legal matters 9,059 11,975
Other 2,608 11,440
State taxes for prior year (1,632)
Benefit of net operating loss carryforwards (190,747)
--------- ---------
Current federal tax benefit -0- (50,909)
Current State tax benefit -0- (12,106)
--------- ---------
Net current tax benefit -0- (63,015)
Unrecognized benefit of losses 63,015
Minimum California franchise tax 5,600 5,600
--------- ---------
Provision for income taxes $ 5,600 $ 5,600
--------- ---------
--------- ---------
See independent auditors' report.
F-10
<PAGE>
Deferred tax benefits reflect the impact of loss carryforwards and, temporary
differences between the assets and liabilities recorded for financial reporting
purposes and tax purposes. These differences are as follows:
1997 1996
---------- ----------
---------- ----------
Allowance for doubtful accounts $ 16,831 $ 60,620
Allowance for inventory obsolescence 78,426 165,332
Less valuation allowance (95,257) (225,952)
---------- ----------
Current $ -0- $ -0-
---------- ----------
---------- ----------
Tax loss carryforward 927,362 1,422,366
Depreciation and amortization (47,071) (41,741)
Reserve for legal matters 43,059 43,300
Less valuation allowance (923,350) (1,423,925)
---------- ----------
Non current $ -0- $ -0-
---------- ----------
---------- ----------
Realization of the deferred benefit is contingent upon future taxable earnings.
In accordance with SFAS No. 109, the valuation allowance is 100% of the benefit
based on the uncertainty that the Company will realize this benefit.
The Company estimates it had available net operating loss carryforwards of
approximately $2,728,000 for federal income tax purposes and $1,852,000 for
state income tax purposes at January 31, 1997. The Company's net operating loss
carryforwards expire from 2008 to 2011.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is committed to minimum lease payments on a non-cancelable operating
lease for its facility, which expires in August, 2000, as follows:
Twelve Months Ending January 31,
--------------------------------
--------------------------------
1998 $ 291,000
1999 291,000
2000 291,000
2001 169,750
2002 -0-
-----------
TOTAL $ 1,042,750
-----------
-----------
The leases with respect to the former location were terminated under the powers
of the Receiver.
Total rental expense under the facility lease (including expenses) is as follows
in the years ending January 31,:
1997 1996 1995
----------- ----------- -----------
----------- ----------- -----------
$ 305,000 $ 275,000 $ 410,000
----------- ----------- -----------
See independent auditors' report.
F-11
<PAGE>
CAPITAL LEASES
All of the Company's capital leases for machinery and equipment were terminated
under the powers of the Receiver during the year ended January 31, 1995. At
January 31, 1995, the obligation under capital leases was $51,366.
LEGAL MATTERS
The Company is party to various legal proceedings. Except as noted below, the
outcome of these proceedings and the potential liability cannot be determined;
however, the Company believes it will prevail in its defenses, and does not
expect that such litigation will have a material adverse effect on its financial
position or results of operations. Additionally, the Company has filed
counterclaims in some of the actions. At January 31, 1997 and January 31, 1996,
an accrual in the amount of approximately $242,000 and $332,000 has been
recorded in anticipation of certain judgments against the Company related to
these matters. $207,807 of the accrual remains in notes payable to vendors at
January 31, 1997 (see Note 4).
NOTE 8 - RELATED PARTY TRANSACTIONS
The Company is using the legal expertise of a lawyer who is a director of the
Company. Related legal expenses totaled $62,033, $42,284 and $80,625 for the
years ended January 31, 1997, 1996, and 1995, respectively. The amount due to
this director was $0 at January 31, 1997, and $27,500 at January 31, 1996.
NOTE 9 - CONCENTRATIONS
MAJOR CUSTOMER INFORMATION
Concentration of sales in the Company's three largest customers is as follows in
the years ending January 31,:
1997 1996 1995
----------- ----------- -----------
----------- ----------- -----------
Breed Automotive Technologies $ 2,200,127 $ 2,047,315 $ 2,666,281
Inflation Systems, Inc. 1,438,355 2,213,823 4,470,337
Norcross Air, Inc. 818,372 1,037,135 333,734
----------- ----------- -----------
$ 4,456,854 $ 5,298,273 $ 7,470,352
----------- ----------- -----------
----------- ----------- -----------
CONCENTRATION OF CREDIT RISK
Concentration of receivables due from the Company's three largest customers is
as follows at January 31,:
1997 1996
--------- ---------
--------- ---------
Breed Automotive Technologies $ 276,566 $ 118,340
Inflation Systems, Inc. 369,073 422,028
Norcross Air, Inc. 88,511 52,942
--------- ---------
$ 734,150 $ 593,310
--------- ---------
Breed Automotive Technologies and Inflation Systems, Inc. are U.S. based major
suppliers to the automobile industry. Norcross Air, Inc., is a U.S. based
distributor of spare parts to the airline industry. The Company grants trade
credit to these customers on an unsecured basis.
MAJOR SUPPLIERS
The Company is dependent on three suppliers for the majority of its material
needs for automotive airbag filter production.
See independent auditors' report.
F-12
<PAGE>
CASH IN BANK
At January 31, 1997, the Company had cash in a bank in excess of federally
insured limits by $28,695.
NOTE 10 - STOCKHOLDERS' EQUITY
During the year ended January 31, 1997, the Company sold 2,530,000 shares of
common stock and received $1,742,900 of net proceeds, including $1,300 of
interest. The purchase price of the common stock was $.80 per share. From the
gross proceeds, the underwriter received $202,400 as a fee. The Company
incurred $80,000 of legal, printing and accounting costs related to registration
of the shares. The underwriter also received a 24 month option to purchase
177,100 shares, at a price of $.80 per share. Proceeds received by the Company
have been used to retire bank debt (See Note 12) and other pre-Receiver debt.
During the year ended January 31, 1995, the Company issued 210,000 shares of
common stock, the net proceeds of which were $250,000.
NOTE 11 - FOURTH QUARTER ADJUSTMENTS
During the quarter ended January 31, 1996, the Company wrote-off all abandoned
fixed assets and recorded a gain on recovery of excess inventory reserves.
During the quarter ended January 31, 1995, the Company recorded an inventory
write-down of $1,000,000, resulting from the re-evaluation of inventory
requirements caused by the discontinuation of the Michigan Dynamics' Dynapore
product line.
NOTE 12 - 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.
NOTE 13 - DISCONTINUED OPERATIONS
On June 15, 1995, the Company sold certain inventory, equipment, trade name,
contracts and work in progress, of its wholly owned subsidiary, Decca Valves
Corporation, leading to a discontinuation of its related operations. The assets
were sold for a consideration of $305,000 cash. During the year ended January
31, 1996, the operations of its wholly owned subsidiary, Michigan Dynamics,
Inc., were also discontinued. The remaining assets of this subsidiary have been
transferred to Puroflow Corporation.
In November, 1994, the Company sold the operating assets of its ultraviolet
water purification products subsidiary, Ultra Dynamics, including inventories,
property and intangible assets for 234,629, consisting of $100,000 cash and a
note receivable of $134,629.
The disposition of these assets have been accounted for as discontinued
operations and accordingly, the operating results of the subsidiaries are
aggregated and reported as discontinued operation in the accompanying
consolidated statement of operations. The 1995 financial statements have been
restated to reflect the discontinued operations. Revenue applicable to the
discontinued operations were $326,509 for the year ended January 31, 1996 and
$2,615,540 for the year ended January 31, 1995.
NOTE 14 - VENDOR NOTE SETTLEMENTS
The Company paid $352,915 as settlement for $477,397 of vendor notes in the year
ended January 31, 1997.
See independent auditors' report.
F-13
<PAGE>
PUROFLOW INCORPORATED
INDEX TO EXHIBITS
This Index is filed in response to Item 14(a)(3), and the following documents
are filed as Exhibits in response to Item 14(c), as required by Item 601 of
Regulation S-K:
Exhibit
No. Description
- ------- -----------
3.1 Certificate of Incorporation*
3.2 Bylaws*
10.1 Asset Purchase Agreement dated September 29, 1992 between the
Company and Engineered Magnetics, Inc. for sale of the CPI
Division*****
10.2 Asset Purchase Agreement dated as of April 30, 1992 among the
Company, Michigan Dynamics, Inc. and consented and agreed to by Fuji
Filter Manufacturing Co. Ltd. and consented to by NBD Bank, N.A.**
10.3 Lease Agreement dated April 6, 1984 for premises at 1631 10th
Street, Santa Monica, California*
10.4 Lease Agreement dated August 1, 1985 for premises at 1648 10th
Street, Santa Monica, California*
10.5 Lease Agreement dated November 10, 1992 for premises at 1558 10th
Street, Santa Monica, California*****
10.6 Employment Agreement dated March 1, 1993 between the Company and
Joseph B. Jasso*****
10.7 Employment Agreement dated March 1, 1993 between the Company and
Michael H. Figoff*****
10.8 Employment Agreement dated February 14, 1991 between the Company and
Robert A. Smith*
10.9 1991 Key Employee Incentive Stock Option Plan*
10.10 Form of Stock Option Agreement under the 1991 Key Employee Incentive
Stock Option Plan*
10.11 Form of Directors Stock Option Agreement dated July 9, 1987*
10.12 Form of Directors Stock Option Agreement dated February 14, 1991*
10.13 Letter Agreement and related Note Payable to Imperial Bank dated
March 17, 1993*****
10.14 Note payable to Imperial Bank dated March 17, 1993*****
10.15 Security and Loan Agreement with Imperial Bank dated March 17,
1993*****
10.16 Letter dated May 14, 1993 waiving compliance with covenants
contained in the Credit Terms and Conditions Agreement with Imperial
Bank dated July 24, 1989*****
10.17 Lease dated January 13, 1992 between the Company and Jerome and
Faith Pearlman***
10.18 Settlement Agreement with Stroock & Stroock & Lavan, special counsel
to the Registrant, dated November 17, 1992****
<PAGE>
Exhibit
No. Description
- ------- -----------
10.19 Agreement between Registrant and Alpine Services Ltd. dated June 30,
1993 for the private placement of 1,000,000 Shares pursuant to
Regulation "S" of the Securities Act of 1933, as amended******
10.20 Note payable to Imperial Bank dated November 5, 1993*******
10.21 Note payable to Imperial Bank dated November 5, 1993*******
10.22 Security and Loan Agreement with Imperial Bank dated November 5,
1993*******
10.23 Stipulation for immediate appointment of Receiver on behalf of
Imperial Bank dated May 1, 1995********
10.24 Stipulation re First Amendment to Order Appointing Receiver dated
September 5, 1995********
10.25 First Amendment to Stipulation re First Amendment to Order
Appointing Receiver dated January 16, 1996********
10.26 Sublease dated July 27, 1995 between Kaiser Marquardt and the
Company with sublease guarantor Kaiser Aerospace and Electronics
********
22 Subsidiaries of the Company
- ------------------
* Incorporated by reference to the Company's Registration Statement on
Form S-1, filed with the Securities and Exchange Commission on
October 15, 1991, Registration No. 33-43228.
** Incorporated by reference to Amendment No. 1 to the Company's
Registration Statement on Form S-1, filed with the Securities and
Exchange Commission on May 14, 1992, Registration No. 33-43225.
*** Incorporated by reference to the Company's Form 10-K filed with the
Securities and Exchange Commission on April 29, 1992.
**** Incorporated by reference to the Company's Form 8-K filed with the
Securities and Exchange Commission on December 15, 1992.
***** Incorporated by reference to the Company's Form 10-K filed with the
Securities and Exchange Commission on May 15, 1993.
****** Incorporated by reference to the Company's Form 10-Q filed with the
Securities and Exchange Commission on September 10, 1993.
******* Incorporated by reference to the Company's Form 10-Q filed with the
Securities and Exchange Commission on December 12, 1993.
******** Incorporated by reference to the Company's Form 10-K filed with the
Securities and Exchange Commission on April 26, 1996.
<PAGE>
EXHIBIT 22
PUROFLOW INCORPORATED
SUBSIDIARIES OF THE COMPANY
State of Incorporation
----------------------
Puroflow Corporation New York
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 164,515
<SECURITIES> 0
<RECEIVABLES> 1,511,674
<ALLOWANCES> 49,504
<INVENTORY> 1,398
<CURRENT-ASSETS> 3,123,630
<PP&E> 3,407,453
<DEPRECIATION> 2,452,888
<TOTAL-ASSETS> 4,094,945
<CURRENT-LIABILITIES> 605,879
<BONDS> 0
0
0
<COMMON> 5,278,306
<OTHER-SE> (1,889,240)
<TOTAL-LIABILITY-AND-EQUITY> 4,094,945
<SALES> 8,458,454
<TOTAL-REVENUES> 8,458,454
<CGS> 5,888,825
<TOTAL-COSTS> 7,334,451
<OTHER-EXPENSES> 384,011
<LOSS-PROVISION> (20,000)
<INTEREST-EXPENSE> 71,407
<INCOME-PRETAX> 668,585
<INCOME-TAX> 5,600
<INCOME-CONTINUING> 662,985
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 662,985
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
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