<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JULY 31, 1997 COMMISSION FILE NUMBER 0-5622
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PUROFLOW INCORPORATED
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(Exact name of registrant as specified in its charter)
DELAWARE 13-1947195
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(State or other jurisdiction 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 7,108,821
- --------------------------------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
<PAGE>
PUROFLOW INCORPORATED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JULY 31, JANUARY 31,
1997 1997
------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 440,416 $ 164,415
Accounts receivable
Net of allowance for doubtful accounts of
$50,000 at July 31, 1997 and January 31, 1997 1,450,710 1,462,170
Inventories 1,308,765 1,398,561
Note receivable, current portion 16,703 40,889
Prepaid expenses and other current assets 69,336 57,595
------------ ------------
TOTAL CURRENT ASSETS 3,285,930 3,123,630
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PROPERTY & EQUIPMENT
Leasehold improvements 25,320 11,660
Machinery and equipment 3,326,462 2,988,092
Automobile 1,679 1,679
Tooling and dies 284,490 262,480
Construction in progress 20,197 143,542
------------ ------------
3,658,148 3,407,453
Less accumulated depreciation
and amortization 2,587,650 2,452,888
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NET PROPERTY AND EQUIPMENT 1,070,498 954,565
------------ ------------
DEFERRED TAXES
OTHER ASSETS 118,750 16,750
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TOTAL ASSETS $ 4,475,178 $ 4,094,945
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long term debt $ 207,080 $ 207,087
Accounts payable 161,889 212,397
Accrued expenses 170,980 186,395
------------ ------------
TOTAL CURRENT LIABILITIES 539,949 605,879
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COMMITMENTS AND CONTINGENCIES
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
issued and outstanding - 7,108,821 shares
at July 31, 1997
shares at January 31, 1997 430,579 430,579
Additional paid-in capital 4,947,727 4,947,727
Accumulated deficit (1,443,077) (1,889,240)
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TOTAL STOCKHOLDERS' EQUITY 3,935,229 3,489,066
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 4,475,178 $ 4,094,945
------------ ------------
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See accompanying notes to the consolidated financial statments.
1
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PUROFLOW INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATION
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31, JULY 31,
1997 1996 1997 1996
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net revenue $ 2,251,959 $ 2,008,911 $ 4,601,591 $ 4,175,619
Cost of goods sold 1,663,446 1,347,894 3,400,462 2,793,115
------------ ------------ ------------ -------------
Gross profit 588,513 661,017 1,201,129 1,382,504
Selling, general
and administrative expense 449,427 443,024 862,196 914,947
------------ ------------ ------------ -------------
Operating income 139,086 217,993 338,933 467,557
Interest expense - 26,925 - 63,027
Other income 4,281 - 6,630 -
------------ ------------ ------------ -------------
Income from continuing
operations before taxes 143,367 191,068 345,563 404,530
Provision for income taxes (49,600) - (100,600) -
------------ ------------ ------------ -------------
Loss from discontinued operations - - - -
------------ ------------ ------------ -------------
192,967 191,068 446,163 404,530
NET INCOME $ 192,967 $ 191,068 $ 446,163 $ 404,530
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Net income (loss) per common share:
Basic earnings per share $ 0.03 $ 0.05 $ 0.06 $ 0.09
Diluted earnings per share $ 0.03 $ 0.04 $ 0.06 $ 0.08
Weighted average number of shares 7,237,558 4,771,021 7,253,030 4,675,829
</TABLE>
See accompanying notes to the consolidated financial statements.
2
<PAGE>
PUROFLOW INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JULY 31, 1997 1996
---------- -----------
<S> <C> <C>
CASH AT BEGINNING OF PERIOD $ 164,415 $ -
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) 446,163 404,530
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 134,762 171,291
Provision for losses on accounts receivable 496 10,000
Inventory valuation allowance 56,591 -
Changes in operating assets and liabilities:
Accounts receivable 10,964 273,393
Inventories 33,205 (88,887)
Prepaid expenses and other current assets (11,741) (31,245)
Deferred taxes (102,000) -
Accounts payable (50,508) (165,032)
Accrued expenses (15,422) (104,564)
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Net cash provided by operating activities 502,510 469,486
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (250,695) (31,668)
Payments received on notes receivable 24,186 40,034
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Net cash provided by investing activities (226,509) 8,366
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CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft - (59,363)
Net repayment under line of credit - (235,857)
Principal payments on long-term debt - (878,946)
Proceeds from sale of common stock - 1,772,900
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Net cash used in financing activities - 598,734
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NET INCREASE IN CASH 276,001 1,076,586
CASH AT END OF PERIOD $ 440,416 $ 1,076,586
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</TABLE>
See accompanying notes to the consolidated financial statements.
3
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PUROFLOW INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON ADDITIONAL RETAINED
STOCK PAID-IN EARNINGS
FOR THE SIX MONTHS ENDED JULY 31, 1997 PAR VALUE CAPITAL TOTAL
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at January 31, 1997 $ 430,579 $ 4,947,727 $ (1,889,240) $ 3,489,066
Net income - - 446,163 446,163
---------- ------------ ------------ ------------
Balance at July 31, 1997 $ 430,579 $ 4,947,727 $ 1,443,077 $ 3,935,229
---------- ------------ ------------ ------------
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</TABLE>
See Independent auditors' report and notes to financial statements.
4
<PAGE>
PUROFLOW INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
(UNAUDITED)
JULY 31, 1997, JANUARY 31, 1997, AND JULY 31, 1996
NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION
The consolidated balance sheet at the end of the preceding fiscal year has been
derived from the audited consolidated balance sheet contained in the Company's
annual report on Form 10-K for the fiscal year ended January 31, 1997 (The "Form
10-K") and is presented for comparative purposes. All other financial statements
are unaudited. In the opinion of management, all adjustments which include only
normal recurring adjustments necessary to present fairly the financial position,
results of operations and changes in financial positions for all periods
presented have been made. The results of operations for interim periods are not
necessarily indicative of the operating results for the full year.
Footnote disclosures normally included in financial statements prepared in
accordance with the generally accepted accounting principles have been omitted
in accordance with the published rules and regulations of the Securities and
Exchange Commission.
NOTE 2 - INVENTORIES
Inventories consist of the following:
JULY 31, JANUARY 31,
1997 1997
-------------- --------------
Raw materials and purchased parts $ 625,006 $ 729,740
Work in process 287,416 247,868
Finished goods and assemblies 396,341 420,953
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Totals $ 1,308,763 $ 1,398,561
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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 $1,742,900 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 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 are used to retire bank debt and other
pre-Receiver debt. The Company registered the securities on March 7, 1997.
5
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NOTE 4 - NET INCOME PER SHARE
Reconciliation of basic and diluted earnings per share:
PER-SHARE
INCOME SHARES AMOUNT
--------- --------- ----------
6 MONTHS ENDED JULY 31, 1997
Basic earnings per share $446,163 7,108,621 $ .06
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-----
EFFECT OF DILUTED SECURITIES
Stock options 144,409
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Diluted earnings per share
$446,163 7,253,030 $ .06
--------- --------- -----
--------- --------- -----
6 MONTHS ENDED JULY 31, 1996
Basic earnings per share $404,530 4,675,820 $ .09
-----
-----
EFFECT OF DILUTED SECURITIES
Stock Options 245,878
--------- ---------
Diluted earnings per share $404,530 4,921,698 $ .08
--------- --------- -----
--------- --------- -----
Basic earnings per share is based on the weighted average number of shares
outstanding. Diluted earnings per share include the effect of common stock
equivalents 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.
The Company entered a new banking relationship and extended the agreement on
July 14, 1997 for one year. The Company obtained a $750,000 revolving credit
line. This credit line bears interest at the rate of prime plus 1%, 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 - INCOME TAXES
Income tax benefits recognized represents the benefit of income tax loss
carryforwards.
6
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1997, the Company had cash available of $440,416, compared to
$164,415 on January 31, 1997, was free of bank debt and it had a current ratio
of 6.09 to 1 at July 31, 1997, compared to 5.16 to 1 on January 31, 1997.
OPERATING ACTIVITIES
Operations provided $502,510 of cash flow in six months ended July 31, 1997
versus $469,486 in the six months ended July 31, 1996. The higher cash flow
from operations was due primarily to deferred tax credits.
INVESTING ACTIVITIES
The Company invested $156,790 in new capital equipment in the current quarter
predominantly for equipment for a new type of airbag filter.
FINANCING ACTIVITIES
The Company has unused revolving credit line of $750,000 which bears interest at
the rate of prime plus 1% per annum, secured by the Company's accounts
receivable and inventory. The Company also has a non-revolving equipment
acquisition loan of $300,000 which bears interest at prime rate plus 1.75% per
annum. The Company is in compliance with all covenants under its loan agreement
with the Bank.
RESULTS OF OPERATIONS FOR QUARTER ENDED JULY 31, 1997
REVENUES
Sales were $2,251,959 in 1997, compared to $2,008,911 in 1996, representing an
increase of $243,048 or 12%, due primarily to increased shipments of high
performance filters.
GROSS PROFIT
Gross profit as a percentage of sales was 26% in July 1997, compared to 33% in
July 1996, representing a decrease of 7% due to increased cost of materials and
labor in producing airbag filters and charges of increased R & D on a new type
of airbag filters.
OPERATING INCOME
Operating income was $192,967 in July 1997 compared to $191,068 in July 1996
with higher margin in high performance filter offset by the lower margins on
airbag filters and the impact of the cost of new product development.
INTEREST CHARGES
Interest on bank loans were $36,102 in 1996 and completely eliminated in 1997.
7
<PAGE>
INCOME TAXES
A tax benefit of $100,600 was recognized as a result of income tax loss
carryforwards.
PART ll - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
1. 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.
2. 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.
3. J&F Management, Inc., controlled by Jerome Pearlman, a former Director of
the Registrant, commenced an action in Municipal Court of Santa Monica
Judicial District against the Registrant, and the Court appointed Receiver
for possession and conversion of personal property. Defendants have
vigorously defended the action by filing a motion to disqualify Plaintiff's
Counsel, a demurrer to the complaint, and a cross-complaint seeking
recision of the contract and restitution to Defendant of all funds paid to
the Plaintiff pursuant to contract for a breach of Pearlman's fiduciary
duties to the Registrant.
4. 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.
8
<PAGE>
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Form 8-K filed July 21, 1997 on extension of bank agreement for one
year.
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
Sept. 4, 1997 By: /s/ Michael H. Figoff
----------------------------------------
Michael H. Figoff
President/Chief Executive Officer
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> MAY-01-1997
<PERIOD-END> JUL-31-1997
<CASH> 440,416
<SECURITIES> 0
<RECEIVABLES> 1,517,413
<ALLOWANCES> 50,000
<INVENTORY> 1,308,765
<CURRENT-ASSETS> 3,285,930
<PP&E> 3,658,148
<DEPRECIATION> 2,587,650
<TOTAL-ASSETS> 4,475,178
<CURRENT-LIABILITIES> 539,949
<BONDS> 0
0
0
<COMMON> 5,378,306
<OTHER-SE> (1,443,077)
<TOTAL-LIABILITY-AND-EQUITY> 4,475,178
<SALES> 4,601,591
<TOTAL-REVENUES> 4,601,591
<CGS> 3,400,462
<TOTAL-COSTS> 4,262,658
<OTHER-EXPENSES> (6,629)
<LOSS-PROVISION> 496
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 345,563
<INCOME-TAX> (100,600)
<INCOME-CONTINUING> 446,163
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 446,163
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
