PROSPECTUS
PUROFLOW INCORPORATED
2,807,100 SHARES
COMMON STOCK, $.01 PAR VALUE
This Prospectus relates to (i) 2,530,000 shares of Common Stock, $.01
par value ("Common Stock") of Puroflow Incorporated, a Delaware corporation (the
"Company"), heretofore issued to certain persons listed as the Selling Security
Holders in a private placement consummated in July 1996, (ii) options ("Options"
and together with the shares of Common Stock underlying such Options, the
"Securities") to purchase 277,100 shares of Common Stock issued to certain
persons associated with Toluca Pacific Securities Corporation, which acted as
placement agent (collectively, "Placement Agents"), and a consultant
("Optionholder"), in connection with the foregoing private placement, and (iii)
277,100 shares of Common Stock (subject to adjustment) issuable upon exercise of
the Options. See "Selling Security Holders and Plan of Distribution." The
Securities are being offered for the respective accounts of the Selling Security
Holders, the Placement Agents and the Optionholder, and will be sold from time
to time by the Selling Security Holders, the Placement Agents and the
Optionholder in the national over-the-counter market or otherwise at their
prevailing prices, or in negotiated transactions. The Company will receive no
proceeds from the sale of the Securities.
The Securities offered hereby were acquired by the Selling Security
Holders, the Placement Agents and the Optionholder from the Company in private
transactions and are "restricted securities" under the Securities Act of 1933,
as amended (the "Securities Act"). This Prospectus has been prepared for the
purpose of registering the Securities under the Securities Act to allow for
future sales by the Selling Security Holders, the Placement Agents and the
Optionholder to the public without restriction. The Selling Security Holders,
the Placement Agents and the Optionholder may be deemed to be "underwriters"
within the meaning of the Securities Act. Any commissions received by a broker
or dealer in connection with resales of the Securities may be deemed to be
underwriting commissions or discounts under the Securities Act. See "Selling
Security Holders and Plan of Distribution."
The Common Stock of the Company is traded on the National Association
of Securities Dealers, Inc. Electronic Bulletin Board System (the "Bulletin
Board System") under the symbol "PURO." On March 6, 1997, the closing price
of the Common Stock as reported on the Bulletin Board System was $7/8.
THE SECURITIES OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 6.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is March 7, 1997
Page 1 of 53
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission (the "Commission"). These securities may not
be sold nor may offers to buy be accepted prior to the time the registration
statement becomes effective. This Prospectus shall not constitute an offer to
sell or the solicitation of an offer to buy nor shall there be any sale of these
securities in any state in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such state.
---------------
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the Commission.
Reports, proxy statements and other information filed by the Company with the
Commission may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the following Regional Offices of the Commission: 75 Park Place, New
York, New York 10007; and the Northwest Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60621; and copies of such material may be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.
Judiciary Plaza, Washington, D.C. 20549 at prescribed rates. The Commission also
maintains an Internet Web site that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the Commission at http://www.sec.gov.
The Company intends to distribute to its stockholders annual reports
containing audited financial statements with a report thereon by independent
certified public accountants after the end of each fiscal year. In addition, the
Company will furnish to its stockholders quarterly reports for the first three
quarters of each fiscal year containing unaudited financial and other
information after the end of each fiscal quarter, upon written request to the
secretary of the Company.
The Company has filed with the Commission a registration statement on
Form SB-2 (together with all amendments and exhibits, herein referred to as the
"Registration Statement") under the Securities Act. This Prospectus does not
contain all the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement.
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<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. FOR A DISCUSSION OF CERTAIN FACTORS TO BE
CONSIDERED IN EVALUATING AN INVESTMENT IN THE SECURITIES OFFERED HEREBY, SEE
"RISK FACTORS."
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. The Company's products are used in
automobile airbag inflators, aerospace, petrochemical and a wide range of
commercial and industrial applications. The Company believes its products are
state-of-the-art in filtration technology, and the Company believes each such
product achieves effectiveness of performance through a careful selection of
materials ranging from all welded titanium construction to epoxy assembled paper
elements.
The Company produces filters which are an integral part of conventional
pyrotechnic automotive airbag inflators. The primary functions of the airbag
filter is to control the expansion of the hot gas into the inflating bag, to
prevent hot particles of combustion from entering the expanding bag, and to cool
the hot expanding gas. The Company's filters are comprised of a blend of woven
wire meshes and random fiber materials.
The Company also designs, manufactures and operates high precision
machines for its own use to fabricate airbag filters. Because such machines
require minimal time for tooling changes between production runs of different
filter types, the Company believes that these methods result in greater
flexibility and lower unit costs without compromising the high reliability which
the Company believes is essential for automotive airbag filters.
The Company designs, develops and produces new filters in response to
requests for proposals made by various airbag inflator manufacturers, both
domestic and foreign. 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. No assurance can be given when, if ever, such products will be
available for commercial sale, or whether such products will be successful.
The Company also designs and manufactures 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, and 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.
The Company supplies filters for United States space applications,
including the Space Shuttle program, various commercial and military satellites,
launch vehicles and boosters, and ground support equipment. The Company, through
its "Michigan Dynamics" brand, supplies lightweight airframe fuel filters for
helicopters and sells these products to the United States Army, Bell Helicopter
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<PAGE>
and several offshore helicopter manufacturers. The Company is also exploring new
applications with McDonnell Douglas Helicopter and Sikorsky Helicopter. The
Company's discussions, however, are preliminary discussions only, and no
assurance can be given, when, if ever, any agreement can be reached with any of
such parties, or if reached that any ensuring agreement would be on terms
favorable to the Company.
The Company also supplies aftermarket filtration products used in jet
aircraft and turboshaft powered aircraft and helicopters. Utilizing reverse
engineering techniques, the Company produces "generic plain wrap" filters for
use in the aftermarket. The Company has, and tries to obtain, exclusive
agreements with its distributors for a particular market segment.
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.
THE OFFERING
Securities Offered.................2,530,000 shares of Common Stock held by
the Selling Security Holders, 277,100
Options to purchase shares of Common
Stock and 277,100 shares of Common
Stock underlying such Options held by the
Placement Agents and the Optionholder.
See "Selling Security Holders and Plan of
Distribution."
Risk Factors.......................The securities offered hereby involve a high
degree of risk. See "Risk Factors."
Bulletin Board System Symbol.......PURO
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<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
Year Ended January 31, October 31,
---------------------- -----------
1995 1996 1995 1996
---- ---- ---- ----
(Unaudited) (Unaudited)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
<S> <C> <C> <C> <C>
Net sales............................. $ 9,044,707 $8,815,889 $6,626,725 $6,116,478
Gross profit.......................... 1,400,285 2,858,882 2,080,528 1,930,979
Income (loss) from continuing operations
before taxes (521,242) 880,739 593,542 428,733
Net income (loss) from continuing operations (526,842) $ 875,139 $ 587,942 $ 423,133
Net income (loss) $(2,372,156) $ 898,119 520,678 $ 423,133
=========== ========== ========== ==========
Earnings (loss) per share(1) $ (0.53) $ 0.19 $ 0.11 0.07
=========== ========== ========== ==========
Weighted average common and dilutive
common equivalent shares outstanding 4,508,521 4,631,740 4,578,521 5,678,651
</TABLE>
October 31, 1996
CONSOLIDATED BALANCE SHEET DATA:
Cash....................................................... $ 163,799
Current assets............................................. 3,154,299
Current liabilities........................................ 847,892
Working capital............................................ 2,306,407
Total assets............................................... 4,127,106
Total debt................................................. 0
Stockholders' investment................................... 3,279,214
(1) 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.
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<PAGE>
RISK FACTORS
An investment in the Securities being offered hereby involves a high
degree of risk. In addition to the other information in this Prospectus, the
following risk factors should be considered in evaluating the Company and its
business before purchasing the Securities offered hereby.
RECENT SUBSTANTIAL LOSSES; NO ASSURANCE OF FUTURE PROFITABILITY
As recently as the fiscal years ended January 31, 1995 and 1994, the
Company incurred substantial losses of $2,372,156 and $565,926, respectively. In
its efforts to return to profitability, the Company sold off three divisions to
focus on its traditional strength in high performance filtration. In November
1994, the Company sold its ultraviolet water product subsidiary, Ultra Dynamics
Corporation. In the year ended January 31, 1996, the Company sold its valve
product subsidiary, Decca Valves Corporation and shut down operations of its
Michigan Dynamics subsidiary. There is no assurance that the Company's efforts
and strategy will result in profitable operations in the future.
RECENT TERMINATION OF RECEIVERSHIP RESULTING FROM DEFAULT IN CREDIT AGREEMENT;
POTENTIAL DEFAULT
The Company was a party to a credit agreement (the "Credit Agreement")
with Imperial Bank (the "Bank"). The terms of the Credit Agreement included
certain restrictive covenants including maintenance of minimum working capital,
net worth and ratios of current assets to current liabilities and debt to net
worth. As a result of the Company's default of certain such covenants, the Bank
filed a lawsuit against the Company in 1995 in the Superior Court of California.
As a result of such lawsuit, on May 1, 1995, the Superior Court of California
appointed and the Company entered into a stipulation for the establishment of a
receivership (the "Receivership") and the appointment of a receiver (the
"Receiver"). The Receiver then assumed jurisdiction over all of the Company's
assets and operated the Company with the assistance of existing management until
August 22, 1996 when the Receivership was terminated by order of the Superior
Court of California and control of the Company was returned to the Board of
Directors and management. The Company has obtained a new $750,000 revolving bank
credit line and a $300,000 non-revolving, equipment acquisition credit line. The
terms of both 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. There is no assurance that the
Company will not default under any of such restrictive covenants. Any such
default could have a material adverse effect on the Company and its operations.
LITIGATION
As set forth under "Legal Proceedings," the Company is a party to
various legal proceedings. At October 31, 1996, the Company had a reserve
recorded of $232,000 in anticipation of certain judgments against the Company
and may record additional accruals. 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. However, there can be
no assurance that the Company will prevail in its defenses. In the event that
one or more of such cases is decided against the Company, the effect of such
decisions could have a material adverse effect upon the Company and its
financial position and results of operations.
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<PAGE>
DEPENDENCE ON THE AUTOMOTIVE INDUSTRY
As a supplier to the automotive industry, the Company's business is
dependent on many factors including the level of domestic vehicle sales, which
are cyclical and dependent on, among other things, the economy, consumer
spending, potential work stoppages, adverse weather conditions, potential
problems with obtaining supplies and other risks of production. In addition, the
Company's business is subject to the seasonal characteristics of the automotive
industry in which there are seasonal shutdowns in the third and fourth calendar
quarters of each year, which typically result in lower shipments of airbag
filters during these quarters. Reduced growth or contraction in the automotive
industry may have a material adverse effect on the Company's future operating
results.
PRICING OF AUTOMOTIVE FILTERS
The continued sale of the Company's airbag filters is conditioned upon,
among other things, the Company's prices remaining competitive. The Company
anticipates that there will be continued downward pressure on the price of its
products over the next several years as a result of competition and slackening
demand by automakers. As the Company's volume of sales of airbag filters has
increased, the price per unit has decreased and is expected to continue to
decrease. If the unit price declines in the future are not accompanied by
corresponding decreases in production costs, the Company's profit margin may be
adversely affected. The Company's future profitability will depend on, among
other things, its ability to continue to improve its manufacturing efficiencies
and maintain a cost structure that will enable the Company to offer competitive
prices. The Company anticipates that it will continue to incur capital
expenditures to accomplish these objectives. There is no assurance that the
Company will have the resources to meet such objectives. The inability of the
Company to offer competitive prices for its products would have a material
adverse effect on its business.
PRODUCT LIABILITY
The Company maintains general liability, automobile, 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. 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 in the future.
DEPENDENCE ON THE AUTOMOTIVE AIRBAG BUSINESS AND CUSTOMER CONCENTRATION
The Company's sale of airbag filters is dependent upon the continued
increased demand for automotive airbag systems. Sales of airbag filters
accounted for approximately 50% of net sales during fiscal 1996 and
approximately 43% of net sales during the nine months ended October 31, 1996.
There is no assurance that airbag systems will continue to be the commercially
preferred system for supplemental passenger restraints. In addition, new
technologies for airbags (such as hybrid inflation of inert gases rather than
pyrotechnic ignition) may be developed which, if successful, could render the
Company's products obsolete or, at a minimum, compete with current airbag
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<PAGE>
systems. In recent years, substantially all of the Company's airbag filters
manufactured have been sold to certain manufacturers on a purchase order basis,
although the Company has supplied prototype filters to other manufacturers and
is in the process of qualifying its airbag filters for a third automotive airbag
systems manufacturer. Additionally, while the Company is in the process of
designing and developing new filters for possible use in advanced driver and
passenger side airbags, the Company presently has no commitment from third
parties to purchase such filters.
COMPETITION
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 compete
effectively in the future against independent manufacturers of airbag filters or
of the Company's other products.
DEFENSE INDUSTRY AND GOVERNMENT SPENDING
The Company has been supplying components for United States defense and
space programs for over 30 years. Sales by the Company under contracts directly
with the government accounted for approximately 9% of net sales in the nine
months ended October 31, 1996. In addition, in many cases the Company's
contracts are with prime or second-tier contractors to the United States
government, and, while the Company is not able to track the end-user of its
products in all cases, it estimates that approximately 29% of net sales during
these periods were directly or indirectly to the United States government. While
the Company is not dependent on any particular program, reliance upon defense
and government space programs has certain inherent risks. 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. In
addition, recent changes in governmental policies and political developments are
expected to lead to a significant overall decrease in defense spending. These
policy developments have impacted and are expected to continue to affect the
Company, including new programs which otherwise might have utilized the
Company's high performance filters. The Company intends to focus on commercial
applications of such products and the continued supply of replacement parts to
the government.
GOVERNMENT REGULATION; LIMITED NUMBER OF PERSONS ELIGIBLE TO PARTICIPATE IN
GOVERNMENT CONTRACT BIDDING
Demand for the Company's airbag filters is affected by federal safety
regulations requiring the installation of' passive restraint systems in certain
vehicles by certain dates. Although the Company believes that automotive safety
requirements will not be relaxed, an extension of compliance deadlines or other
regulatory changes could have an adverse effect on the demand for the Company's
products.
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<PAGE>
Moreover, demand for the Company's airbag filters was initially
affected by federal regulations requiring installation of airbags in passenger
cars, light trucks, and vans. Consumer demand is now the leading force in the
growth of this product segment. Demand for the Company's commercial aerospace
products is affected by the Federal Aviation Administration ("FAA") Regulations
for National and International Operations. While the Company believes that the
trends in automotive safety are 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 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 for small
business, 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. No assurance can be given, however, that in the future the
government will not expand the number of persons eligible to bid for such
business or choose to open such bidding to a larger array of persons, which
could have a material adverse effect upon the Company.
DEPENDENCE UPON KEY PERSONNEL
The Company's success depends to a significant degree upon the
continued contributions of its management team, including Michael H. Figoff, and
technical, marketing and sales personnel. While the Company has entered into an
employment agreement with Mr. Figoff, the Company's employees may voluntarily
terminate their employment with the Company at any time. Competition for
qualified employees and personnel in the filtration devices industry is intense
and, from time to time, there are a limited number of persons with knowledge of
and experience in particular sectors of the filtration devices industry. The
Company's success also will depend on its ability to attract and retain
qualified management, marketing, technical and sales executives and personnel.
The process of locating such personnel with the combination of skills and
attributes required to carry out the Company's strategies is often lengthy. The
loss of the services of key personnel, or the inability to attract additional
qualified personnel, could have a material adverse effect on the Company's
results of operations, development efforts and ability to expand. There can be
no assurance that the Company will be successful in attracting and retaining
such executives and personnel. Any such event could have a material adverse
effect on the Company. See "Management."
SHARES ELIGIBLE FOR FUTURE SALES AND OUTSTANDING STOCK OPTIONS
As of March 6, 1997, there were 7,108,521 shares of Common Stock
outstanding of which 2,530,000 shares are "restricted securities" as defined
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<PAGE>
under Rule 144 under the Securities Act. Sales of substantial amounts of Common
Stock in the public market could adversely affect the prevailing market price of
the Common Stock and could impair the Company's ability to raise capital through
the sale of its equity securities. In addition, as of October 31, 1996, the
Company had granted stock options to purchase in the aggregate 359,000 shares of
its Common Stock at exercise prices ranging from $.25 to $.75, and under its
Stock Option Plan, the Company has an additional 141,000 shares available for
issuance pursuant to stock options. The exercise of currently outstanding
options in the future would increase the number of shares of Common Stock
outstanding and could have a dilutive effect on the Common Stock and prevent the
Company from raising additional financing if required.
NO CASH DIVIDENDS
The holders of Common Stock are entitled to receive dividends when, as
and if declared by the Board of Directors, out of funds legally available
therefor. To date, the Company has not paid any cash dividends. The Board does
not intend to declare any cash dividends in the foreseeable future, but instead
intends to retain all earnings, if any, for use in the Company's business
operations.
ISSUANCE OF PREFERRED STOCK
The Company's Certificate of Incorporation permits its directors to
designate the terms of and issue shares of Preferred Stock. The issuance of
shares of Preferred Stock by the Board of Directors could adversely affect the
rights of holders of Common Stock by, among other matters, establishing
preferential dividends, liquidation rights and voting power. Although the
Company has no present intention to issue shares of Preferred Stock, the
issuance thereof might render it more difficult, and therefore discourage, an
unsolicited takeover proposal such as a tender offer, proxy contest or the
removal of incumbent management, even if such actions would be in the best
interest of the Company's stockholders.
COMMON STOCK NOT ELIGIBLE FOR NASDAQ SMALLCAP MARKET SYSTEM; LIMITED TRADING
MARKET FOR COMMON STOCK
The Company does not meet the qualifications to have its Common Stock
approved for quotation on the NASDAQ SmallCap Market system (the "NASDAQ
System"). There can be no assurance when, if ever, the Company will qualify for
the NASDAQ System. The Company's Common Stock was delisted from trading on the
NASDAQ System on June 9, 1995 as a result of the Company's failure to meet
minimum capital requirements of $1,000,000. Since such time, the Company's
Common Stock has traded, and continues to trade, on the Bulletin Board System,
and reported by the National Quotation Service (Pink Sheets) under the symbol
"PURO." The Company's Common Stock is thinly and sporadically traded and no
assurance can be given a larger market will ever develop, or if developed, that
it will be maintained. As a result, an investor in the shares of Common Stock
offered hereby may not be able to dispose of its shares on favorable terms, or
to obtain accurate quotations as to the value of its shares.
RISKS OF LOW-PRICED SECURITIES
Because the Company's Common Stock is not approved for quotation on the
NASDAQ System, the Common Stock is subject to rules under the Exchange Act which
impose additional sales practice requirements on broker-dealers who sell such
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<PAGE>
securities to persons other than established clients and "accredited investors".
For transactions covered by such rules, a broker-dealer must make a special
suitability determination of the purchaser and have received the purchaser's
written consent to the transaction prior to the sale. Consequently, such rules
may affect the ability of broker-dealers to sell the Company's Common Stock and
the ability of purchasers in this offering to sell any of their respective
shares acquired in this offering in any secondary market that may develop for
such Common Stock.
The Commission has enacted rules that define a "penny stock" to be any
equity security that has a price of less than $5 per share or an exercise price
of less than $5 per share, subject to certain exceptions, including, securities
listed on the NASDAQ System or on designated exchanges. For any transaction
involving a penny stock, unless exempt, the rules require the delivery, prior to
any transaction in a penny stock, of a disclosure statement prepared by the
Commission relating to the penny stock market. Disclosure also has to be made
about the risks of investing in penny stocks in both public offerings and in
secondary trading, and about commissions payable to both the broker-dealer and
the registered representative, current quotations for the securities and the
rights and remedies available to an investor in cases of fraud in penny stock
transactions. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Because the Company's shares of Common Stock are
not listed on the NASDAQ System, or are not otherwise exempt from the provisions
of the Commission's "penny stock" rules, such rules may also affect the ability
of broker-dealers to sell the Company's securities and the ability of purchasers
in this offering to sell any of their shares acquired hereby in any secondary
market that may develop.
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS
This Prospectus contains certain forward-looking statements, including
among others (i) anticipated trends in the Company's financial condition and
results of operations; (ii) the Company's business strategy for expanding its
presence in the specialized filtration devices industry; and (iii) the Company's
ability to distinguish itself from its current and future competitors. These
forward-looking statements are based largely on the Company's current
expectations and are subject to a number of risks and uncertainties. Actual
results could differ materially from these forward-looking statements. In
addition to the other risks described elsewhere in this "Risk Factors"
discussion, important factors to consider in evaluating such forward-looking
statements include (i) changes in external competitive market factors or in the
Company's internal budgeting process which might impact trends in the Company's
results of operations; (ii) unanticipated working capital or other cash
requirements; (iii) changes in the Company's business strategy or an inability
to execute its strategy due to unanticipated change in the specialized
filtration devices industry; and (iv) various competitive factors that may
prevent the Company from competing successfully in the marketplace. In light of
these risks and uncertainties, many of which are described in greater detail
elsewhere in this "Risk Factors" discussion, there can be no assurance that the
events predicted in forward-looking statements contained in this Prospectus will
in fact transpire.
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<PAGE>
DIVIDEND POLICY
Since its inception, the Company has not paid any dividends on its
Common Stock. The Company intends to retain future earnings, if any, that may be
generated from the Company's operations to help finance the operations and
expansion of the Company and, accordingly, does not plan, for the reasonably
foreseeable future, to pay dividends to holders of the Common Stock. Any
decision as to the future payment of dividends will depend on the results of
operations and financial position of the Company and such other factors as the
Company's Board of Directors, in its discretion, deems relevant. As of the date
of this Prospectus, there are no contractual limitations on the Company's
ability to pay dividends.
USE OF PROCEEDS
All of the Securities offered hereby are being offered by the Selling
Security Holders and the Placement Agents. The Company will not receive any of
the proceeds from the sale of the Securities. See "Selling Security Holders and
Plan of Distribution."
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<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended January 31, Nine Months Ended October 31,
1995 1996 1995 1996
------ ------ ------ ------
STATEMENTS OF OPERATIONS DATA (1): (in thousands, except per share data)
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 9,045 $ 8,816 $ 6,627 $ 6,116
Cost of goods sold 7,645 5,957 4,546 4,185
-------- --------- ---------- --------
Gross profit 1,400 2,859 2,081 1,931
Selling, general & administrative expense 1,630 1,443 1,115 1,043
-------- --------- ---------- -------
Operating income (loss) (230) 1,416 966 888
Other income (expense) 14 (3) (2) 6
Interest expense (305) (279) (232) (71)
Nonrecurring expenses(2) - (253) (138) (394)
-------- --------- ---------- --------
Income (loss) from continuing
operations before income taxes (521) 881 594 429
Income tax expense 6 6 6 6
-------- --------- ---------- ---------
Income (loss) from continuing operations (527) 875 588 423
Income (loss) from discontinued operations (1,845) 23 (67) -
-------- --------- ---------- ---------
Net income (loss) $(2,372) $ 898 $ 521 $ 423
======== ========= ========== =========
Net income (loss) per common share:
From continuing operations $ (0.12) $ 0.19 $ 0.13 $ 0.07
From discontinued operations (0.41) 0.00 (0.02) -
-------- -------- --------- ---------
Primary earnings per share $ (0.53) $ 0.19 $ 0.11 $ 0.07
========= ======== ========= =========
Weighted average number of shares 4,509 4,632 4,579 5,679
BALANCE SHEET DATA:
Working Capital $(1,214) $ (13) $ (360) $ 2,306
Total Assets 4,721 3,962 4,193 4,127
Long-Term Debt 71 - 96 -
Stockholders' Equity 185 1,083 706 3,279
</TABLE>
(1) In November 1994, the Company sold its ultraviolet water product subsidiary,
Ultra Dynamics Corporation. The Company had originally reported a loss from
discontinued operations of $542,930 for this subsidiary in the fiscal year
ended January 31, 1995. In the year ended January 31, 1996, the Company sold
the assets of its valve product subsidiary, Decca Valves Corporation, for
$305,000 in cash 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 year ended January 31, 1995 was
adjusted to reflect these additional discontinued operations.
(2) Nonrecurring 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.
-13-
Page 13 of 53
<PAGE>
SELLING SECURITY HOLDERS AND PLAN OF DISTRIBUTION
The Selling Security Holders, the Placement Agents and the Optionholder
have advised the Company that sales of the Securities may be effected from time
to time in transactions (which may include block transactions) in the
over-the-counter market, in negotiated transactions, through the writing of
options on the shares or a combination of such methods of sale, at fixed prices
that may be changed, at market prices prevailing at the time of sale, or at
negotiated prices. The Selling Security Holders, the Placement Agents and the
Optionholder may effect such transactions by selling the Securities directly to
purchasers or through broker-dealers that may act as agents or principals. Such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the Selling Security Holders, the Placement Agents and the
Optionholder and/or the purchasers of securities for which such broker-dealers
may act as agents or to whom they sell as principals, or both (which
compensation as to a particular broker-dealer might be in excess of customary
commissions).
The Selling Security Holders, the Placement Agents, and the
Optionholder and any broker-dealers that act in connection with the sale of the
Securities as principals may be deemed to be "underwriters" within the meaning
of Section 2(11) of the Securities Act and any commission received by them and
any profit on the resale of the securities and/or as principals might be deemed
to be underwriting discounts and commissions under the Securities Act. The
Selling Security Holders, the Placement Agents and the Optionholder may agree to
indemnify any agent, dealer or broker-dealer that participates in transactions
involving sales of the Securities against certain liabilities, including
liabilities arising under the Securities Act. The Company will not receive any
proceeds from sales of the Securities by the Selling Security Holders, the
Placement Agents or the Optionholder. Sales of the Securities by the Selling
Security Holders, the Placement Agents and the Optionholder, or even the
potential of such sales, would likely have an adverse effect on the market price
of the Common Stock.
The can be no assurance that the Selling Security Holders, the
Placement Agents or the Optionholder will be able to sell some or all of the
Securities listed for sale herein. See "Risk Factors."
The following table sets forth certain information with respect to the
Selling Security Holders, the Placement Agents and the Optionholder for whom the
Company is registering the Securities for sale to the public. The Company will
not receive any of the proceeds from the sale of the Securities. There are no
material relationships between any of the Selling Security Holders, the
Placement Agents or the Optionholder, on the one hand, and the Company, on the
other hand. Beneficial ownership of the Securities by each Selling Security
Holder, the Placement Agents and the Optionholder after the sale will depend on
the number of Securities sold by each Selling Security Holder, the Placement
Agents and the Optionholder. The Securities offered by the Selling Security
Holders, the Placement Agents and the Optionholder are not being underwritten.
-14-
Page 14 of 53
<PAGE>
SELLING SECURITY HOLDERS
Number
of Shares Number Beneficial
Beneficially of Shares Ownership
Name of Selling Owned Prior Being After
Stockholder to Offering Offered Offering
- --------------- ------------- --------- ----------
Milton Koffman 62,500 62,500 0
Dr. Eugene Snowden 62,500 62,500 0
Dr. Eugene Snowden KEOGH 62,500 62,500 0
Jack McLeod 50,000 50,000 0
Andre W. Iseli 62,500 62,500 0
Ron Berger 30,000 30,000 0
Timary K. Koller/Richard E. Koller 15,625 15,625 0
William Hurd 30,000 30,000 0
Delaware Charter Guarantee &
Trust FBO: Ronald I. Heller; IRA 312,500 312,500 0
Bette Nagelberg 312,500 312,500 0
Lyonshare Venture Capital/
Alan R. Lyons, Managing Ptnr. 250,000 250,000 0
Vestal Venture Capital/
Alan R. Lyons, Managing Ptnr. 100,000 100,000 0
Alan Jablon 25,000 25,000 0
Edda Brown 15,000 15,000 0
Peter Blowitz(1) 40,000 40,000 0
Camden Research Corp. 30,000 30,000 0
Marlin M. Merhab 15,000 15,000 0
John P. Konop 15,000 15,000 0
Boston Safe Deposit Trust Co. FFC:
Virginia Retirement System 625,000 625,000 0
Joy A. Svenson 30,000 30,000 0
Victoria R. Miller 15,000 15,000 0
James A. Cavaricci 300,000 300,000 0
Conrad S. Haythorne & Elaine E.
Haythorne Trustees FBO Elaine E.
Haythorne Trust D/T/D 11/23/93 15,000 15,000 0
Manhattan Group Funding 64,375 64,375 0
Howard Falco(1) 13,190 13,190 0
Patrick Sheedy(1) 15,000 15,000 0
Ron Heller(1) 20,300 20,300 0
Rick Smith(1) 10,500 10,500 0
Cynthia Keefover(1) 40,000 40,000 0
Paul Fiorini(1) 68,110 68,110 0
Coffin-KCSA(1) 100,000 100,000 0
TOTALS: 2,807,100 2,807,100 0
(1) The securities being offered by such securityholder includes Options to
purchase shares of Common Stock and the shares of Common Stock underlying
such Options.
-15-
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
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 Chemical Process Industry ("CPI") division, including CPI assets it had
acquired from Michigan Dynamics Inc. ("MDI") in June 1992. During November 1994,
the Company settled 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 Valve Corporation and shut down its MDI
subsidiary. The Company still markets certain filters under the MDI brand name.
The disposal of these assets have been accounted for as a discontinued
operation.
The Company's principal products consist of automotive airbag filters
and high performance filters. Net sales for each of these products lines for the
fiscal years ended January 31, 1995 and 1996 and for the nine month periods
ended October 31, 1995 and 1996 are as follows:
Nine Months Ended
Year Ended January 31, October 31,
---------------------- -----------
1995 1996 1995 1996
---- ---- ---- ----
(in thousands)
Net Sales:
Airbag Filters $ 6,361 $ 4,175 $ 3,186 $ 2,627
High Performance Filters 2,684 4,641 3,441 3,489
------- ------- ------- -------
Total $ 9,045 $ 8,816 $ 6,627 $ 6,116
======= ======= ======= =======
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 two years ended January 31, 1996 and 1995.
-16-
Page 16 of 53
<PAGE>
Year Ended
January 31,
-----------
1995 1996
---- ----
Net Sales 100.0% 100.0%
Cost and expenses:
Costs of goods sold 84.6% 67.5%
Selling, general & administrative 18.0% 16.4%
Other (income) expense (0.2%) 0.0%
Interest expense 3.4% 3.2%
Non-recurring expense 0.0% 2.9%
------ -----
Income (loss) from continuing
operations before income taxes (5.8%) 10.0%
Provision for income taxes (0.1%) (0.1%)
-------- -------
Income (loss) from discontinued
operations (20.3%) 0.3%
------- -----
Net income (loss) (26.2%) 10.2%
======= ======
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 Parts Manufacturing Authority program
("PMA") administered by the FAA, increased in the current year to $4,641,000
compared to $2,684,000 in the prior year.
The Company supplied the airbag filters on an exclusive basis to two
customers, who in turn sell airbags to various automobile manufacturers
(including Honda, General Motors, Mazda, Mitsubishi, Chrysler, Fiat, Ford of
Australia and Jaguar). Several other major inflator manufacturers indicated an
interest in the Company's R&D program for developing passenger and side impact
non-azide programs. The increased sales of high performance filters is due
primarily to the developing market for parts manufactured under PMA and the
signing of exclusive distributorship agreements. Under PMA, the Company submits
an application to the FAA which contains a proposal by the Company to
manufacture a specified part, the fabrication of which is subject to regulation
by the FAA. Following manufacture, the part is distributed by a distributor with
whom the Company has entered into an exclusive distribution agreement. The
Company is not authorized to manufacture the part until it has obtained PMA
certification. As noted above, parts manufactured by the Company under PMA
represent an increasing proportion of the Company's business and the Company
anticipates that this trend will continue.
The variation 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, and increased
margins in high-performance filters with cost controls and manufacturing
-17-
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<PAGE>
efficiencies. The gross margins in fiscal 1995 were affected by 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. Because the Company has gained experience
with the application process associated with PMA, it is more familiar with the
requirements of PMA and, as such, is able to anticipate the documentation and
other information which is required to be submitted to the FAA in order to
obtain FAA approval. As a result, the Company is more efficient in handling the
processing of PMA submissions and consequently expends less time and expense in
the PMA approval process.
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, the move to the new facility, and
head-count reduction from 102 employees to 72 employees.
Interest expense decreased to $279,000 in fiscal 1996 from $305,000 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, operating cash
flows. In fiscal 1996, cash provided by operating activities was $1,312,000,
consisting of $898,000 from income, non-cash operating expenses of $660,000, and
a reduction in inventories and prepaid expense and other assets, offset by an
increase in accounts receivable, and reduction of accounts payable and accrued
expense.
Cash provided by investing activities was primarily from proceeds from
sale of property and equipment. Cash provided by operations and investing
activities was used to reduce bank debt by $1,669,000.
The Company's debt at January 31, 1996 was $1,764,000, consisting of
line of credit and notes payable to the bank of $1,080,000 and notes payable to
vendors of $684,000 representing a reduction in debt of $1,669,000 from January
31, 1995.
In addition, the Company had a revolving line of credit with its bank,
under which it could borrow up to the lesser of $1,200,000 or 65% of eligible
accounts receivable. Outstanding balances accrued interest at the bank's prime
rate plus 3.5% (12% at January 31, 1996). This line was secured by the Company's
accounts receivable, inventories and a first priority interest in all
unencumbered assets. The Company had an outstanding balance of $236,000 under
this agreement at January 31, 1996.
The terms of the credit agreements contained certain restrictive
covenants including maintenance of minimum working capital, net worth and ratios
of current assets to current liabilities and debt to net worth. The Company was
in default on various loan covenants. As a result, on May 1, 1995, the Company
entered into a stipulation for the immediate appointment of a Receiver. The
appointment was based upon the default of the Company on its obligations under
these agreements with the Bank. The Receiver then assumed jurisdiction over all
of the Company's assets and operated the Company with the assistance of existing
-18-
Page 18 of 53
<PAGE>
management until August 22, 1996 when the Receivership was terminated by order
of the Superior Court of California and control of the Company was returned to
the Board of Directors and management.
The Company has obtained a new $750,000 revolving bank credit line and
a $300,000 non-revolving equipment acquisition credit line.
COMPARISON OF THE NINE MONTHS ENDED OCTOBER 31, 1996 AND 1995
The following table reflects the percentage relationship to net sales
of certain items included in the Company's statement of operations for the nine
months ended October 31, 1996 and 1995.
Nine Months
Ended October 31,
1995 1996
---- ----
Net sales 100.0% 100.0%
Costs and expenses:
Cost of goods sold 68.6% 68.4%
Selling, general & administrative 16.8% 17.1%
Other income (expense) 0.0% (0.1)%
Interest expense 3.5% 1.2%
Non-recurring expenses 2.1% 6.4%
------ ------
Income (loss) from continuing
operations before income taxes 9.0% 7.0%
Provision for income taxes (0.1)% (0.1)%
Income (loss) from discontinued
operations (1.0)% 0.0%
------- ------
Net income (loss) 7.9% 6.9%
======= =======
NET SALES
A comparison of the product lines is presented below:
Nine months
Ended October 31,
1995 1996
---- ----
(in thousands)
Airbag Filters $3,186 $2,626
High Performance Filters 3,441 3,490
------- -------
Total net revenue $6,627 $6,116
====== ======
For the nine months ended October 31, 1996, net sales of High
Performance Filter products increased 1.4% over the prior year nine month
period. The small increase was despite the Company's minimal marketing effort
during the receivership period. Additionally, the Company's business has been
changing from a high amount of government and aerospace contracts to one of PMA
parts. PMA parts are contracted out over a period of up to five years into the
future. The backlog of High Performance Filter products was $4,500,000 on
October 31, 1996 as compared to $2,989,000 on October 31, 1995.
-19-
Page 19 of 53
<PAGE>
For the nine months ended October 31, 1996, net sales of the airbag
product line decreased 17.6% compared to the prior year nine month period. The
dollar amount of this decrease was due to second quarter product line
changeovers and softening of demand.
Gross profit as a percentage of net sales was 31.6% and 31.4% for the
nine months ended October 31, 1996 and 1995, respectively. The increased gross
profit margin for the nine month period is due to consolidation of manufacturing
facilities during the third quarter of the prior year. This allowed management
to reduce costs of manufacturing overhead and personnel.
For the nine months ended October 31, 1996 and 1995, selling, general
and administrative expenses were $1,043,000 and $1,115,000, respectively.
Decreases were primarily due to better cost controls and the full impact of the
facility consolidation in the third quarter of fiscal 1996.
Interest expense decreased by $161,000 for the nine months ended
October 31, 1996, as compared to 1995, due to reductions in interest bearing
debt.
Nonrecurring expenses of $394,000 were a direct result of the
Receivership which ended 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
$2,351,000 for federal income tax purposes, and $2,626,000 for California state
income tax purposes, at January 31, 1996. Such operating loss carryforwards
expire from 2008 to 2011.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $2,306,000 and $(360,000) as of
October 31, 1996 and 1995, respectively. This provides for current ratios of
approximately 3.72 and .89 at October 31, 1996 and 1995, respectively.
On March 26, 1996, the Company entered into an agreement with 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 $1,772,900 of net proceeds,
including $1,300 of interest. Additionally, $50,000 is being held in escrow,
pending the filing of this registration statement. 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.
-20-
Page 20 of 53
<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.
RECENT DEVELOPMENTS
On February 24, 1997, the Company announced unaudited results for its
fiscal year ended January 31, 1997. Net income was reported at $662,985, or
$.11 per share, compared with $898,110 or $.19 per share in the prior fiscal
year. The decrease in net income in the Company's fiscal year ended January 31,
1997 as compared to the prior fiscal year was attributable primarily to an
overall softening in sales in the airbag market as a whole and pricing
concessions demanded by the Company's airbag customers. Sales totaled $8.46
million in fiscal 1997 compared with $8.8 million for the prior year. As of
the time of the announcement, current backlog of firm orders was at a record
high of $5.9 million. Of this amount, the aerospace component of the backlog
represented $4.9 million, and the airbag backlog was $1.0 million. The
unaudited financial information included herein was prepared in accordance
with generally accepted accounting principles ("GAAP"). In the opinion of
management of the Company, such unaudited financial information includes all
adjustments consisting only of normal recurring accruals necessary for a fair
presentation. An audit may reveal material adjustments to the amounts shown in
such unaudited information. Certain information and footnote disclosures,
normally included in financial information prepared in accordance with GAAP
have been omitted pursuant to Commission rules and regulations; nevertheless,
the Company believes that such information is adequate to make the information
presented not misleading. Such unaudited financial information should be read
in conjunction with the audited financial statements and notes thereto included
herein.
BUSINESS
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. The Company's products are used
in automobile airbag inflators, aerospace, petrochemical and a wide range of
commercial and industrial applications. The Company believes its products are
state-of-the-art in filtration technology, and the Company believes each such
product achieves effectiveness of performance through a careful selection of
materials ranging from all welded titanium construction to epoxy assembled
paper elements.
-21-
Page 21 of 53
<PAGE>
The Company produces filters which are an integral part of conventional
pyrotechnic automotive airbag inflators. The primary functions of the airbag
filter is to control the expansion of the hot gas into the inflating bag, to
prevent hot particles of combustion from entering the expanding bag, and to cool
the hot expanding gas. The Company's filters are comprised of a 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 also designs, manufactures and operates high precision
machines for its own use to fabricate airbag filters. Because such machines
require minimal time for tooling changes between production runs of different
filter types, the Company believes that these methods result in greater
flexibility and lower unit costs without compromising the high reliability which
the Company believes is essential for automotive airbag filters.
The Company designs, develops and produces new filters in response to
requests for proposals made by various airbag inflator manufacturers, both
domestic and foreign. 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. No assurance can be given when, if ever, such products will be
available for commercial sale, or whether such products will be successful.
The Company also designs and manufactures 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, and 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.
The Company supplies filters for United States space applications,
including the Space Shuttle program, various commercial and military satellites,
launch vehicles and boosters, and ground support equipment. The Company, through
its "Michigan Dynamics" brand supplies lightweight airframe fuel filters for
helicopters and sells these products to the United States Army, Bell Helicopter
and several offshore helicopter manufacturers. The Company is also exploring new
applications with McDonnell Douglas Helicopter and Sikorsky Helicopter. The
Company's discussions, however, are preliminary discussions only, and no
assurance can be given, when, if ever, any agreement can be reached with any of
such parties, or if reached that any ensuring agreement would be on terms
favorable to the Company.
-22-
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<PAGE>
The Company also supplies aftermarket filtration products used in jet
aircraft and turboshaft powered aircraft and helicopters. Utilizing reverse
engineering techniques, the Company produces "generic plain wrap" filters for
use in the aftermarket. The Company has, and tries to obtain, exclusive
agreements with its distributors for its commercial aerospace products for
assigned PMA Applications. See "--Marketing".
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.
RECENT TERMINATION OF RECEIVERSHIP RESULTING FROM DEFAULT IN CREDIT AGREEMENT
The terms of the Credit Agreement with the Bank included certain
restrictive covenants including maintenance of minimum working capital, net
worth and ratios of current assets to current liabilities and debt to net worth.
As a result of the Company's default of certain such covenants, the Bank filed a
lawsuit against the Company in 1995 in the Superior Court of California. As a
result of such lawsuit, on May 1, 1995, the Superior Court of California
appointed and the Company entered into a stipulation for the immediate
appointment of the Receiver. The Receiver then assumed jurisdiction over all of
the Company's assets and operated the Company with the assistance of existing
management until August 22, 1996 when the Receivership Estate was terminated by
order of the Superior Court and control of the Company was returned to the Board
of Directors and management.
RAW MATERIALS AND SUPPLIES
The principal raw materials utilized by the Company in connection with
its filter operations include stainless steel and other man-made 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. The Company believes that 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 applicable
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 the three customers identified below represented approximately
60% of net sales during fiscal year 1996 and 54% of net sales during the nine
months ended October 31, 1996. For fiscal year 1996 and the nine months ended
October 31, 1996, sales to Breed Automotive Technologies, Inc. were $2,047,315
and $1,652,490, sales to Inflation Systems, Inc. were $2,213,823 and $974,009,
and sales to Norcross Air, Inc. were $1,037,135 and $672,774, respectively.
These customers purchased airbag filters and filters for commercial and
aerospace applications. The loss of any of' these customers would have a
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Page 23 of 53
<PAGE>
material adverse effect on the automotive airbag filter or the high performance
filter segments of the Company's business.
BACKLOG
As of October 31, 1996, February 29, 1996, and February 28, 1995, the
Company had a firm order backlog of approximately $5,555,000, $5,489,000 and
$5,165,000, respectively. 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.
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.
MARKETING
The Company markets its airbag filters directly to airbag manufacturers
through its executive offices. The Company markets its commercial aerospace
products through exclusive distributorships on assigned 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, and 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 1996 and 1995 and approximately 9% for the nine months ended October 31,
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 for fiscal 1996
and 16% for fiscal 1995.
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<PAGE>
COMPETITIVE CONDITIONS
The business of manufacturing automotive airbag filters and high
performance filters is highly competitive and, with respect to high performance
filters, the industry is highly fragmented. The Company believes there are
currently three principal manufacturers of airbag filters in the United States:
Morton International, Inc. ("MII"), which manufactures the filter component of
its own airbag system; National-Standard Company and the Company. Both MII and
TRW have greater financial capabilities and personnel than the Company.
Additional companies are attempting to enter the automotive airbag filter
market; however, there are substantial monetary, time, costs and quality issues
associated with product qualification, as well as development and start-up. No
assurance can be given that the Company will be able to compete in its industry
or that any airbag manufacturer which purchases the Company's products will not
choose to produce airbag filters internally in the future or to use a different
supplier.
The Company believes that the primary competitive factors in its
business are performance and price in the case of high performance filters, and
airbag filters, which are now subject to commodity pricing. While the Company
believes its prices are competitive, it does not position itself as the lowest
price supplier in all of its markets. The Company relies on the quality of its
products and customer service in order to compete with companies which in many
cases have substantially greater resources.
PRODUCT WARRANTIES
In all product lines, the Company provides standard commercial
warranties, consistent with its products and industry and typically with a
duration of twelve months. Although claims under product warranties have been
minimal during the past five years, no assurance can be given such claims will
not increase in the future.
RESEARCH AND DEVELOPMENT
In fiscal 1996 and fiscal 1995 and for the nine month periods ended
October 31, 1996 and 1995, the Company incurred research and development
expenditures of approximately $28,000, $381,000, $4,000 and $23,000,
respectively. Research and development expenditures were significantly curtailed
during fiscal 1996 while the Company was in receivership. 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 Manufacturing Authority for
the commercial aerospace products group.
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. Consumer demand is now the leading force in the growth of this
product segment. Demand for the Company's commercial aerospace products is
affected by the FAA Regulations for National and International Operations. While
the Company believes that the trends in automotive safety is toward increased
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<PAGE>
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 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 for small
business, 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. No assurance can be given, however, that in the future the
government will not expand the number of persons eligible to bid for such
business or choose to open such bidding to a larger array of persons, which
could have a material adverse effect upon the Company.
The Company's products produced under PMA are subject to substantial
oversight by the FAA, including review and approval by the FAA of proposals by
the Company to produce aircraft parts. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Comparison of the Fiscal
Years Ended January 31, 1996 and 1995."
EMPLOYEES
At January 3, 1997, the Company had 71 full-time employees, including 4
employed in sales and marketing, 13 employed in engineering and quality control,
and 41 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 good.
INSURANCE
The Company maintains general liability, automobile, 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.
PROPERTIES
The following table sets forth information as to the location and
general character of the facility of the Company:
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<PAGE>
Approximate Lease
Location Principal Use Sq. Ft. Exp. Date
- -------- ------------- ------- ---------
16559 Saticoy Street Headquarters and 50,000 August 30, 2000
Van Nuys, CA 91406 manufacturing facility
for airbag components,
government and
aerospace filtration
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. The Company believes its facilities
are adequate for its current needs and that suitable additional or substitute
space will be available as needed.
LEGAL PROCEEDINGS
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.
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 and attorneys' fees and
cost of litigation.
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.
J&F Management Inc., controlled by Jerome Pearlman, a former director
of the Company, 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.
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<PAGE>
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 the Company's
right of set-off. The judgment was obtained without due notice to the Company.
The 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 of 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 October 31, 1996, 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.
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors (each of whom is elected on an annual basis), executive officers
and key employees of the Company are as follows:
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<PAGE>
NAME AGE POSITIONS(S)
- ---- --- ------------
Michael H. Figoff 53 Chief Executive Officer, President and
Director
Sandy Yoshisato 33 Corporate Secretary and Director of Human
Resources
Reuben M. Siwek 77 Chairman of the Board of Directors
Robert A. Smith 57 Vice Chairman of the Board of Directors
Dr. Tracy K. Pugmire 66 Director
Leo S. Unger 79 Director
Michael H. Figoff is the President and Chief Executive Officer of the
Company. Mr. Figoff joined the Company in November 1988 as the Director of
Marketing, leaving his position as Director of Marketing for a division of
Ferranti International. In 1993, Mr. Figoff was elected a director and appointed
Executive Vice President of the Company. Mr. Figoff was appointed President of
the Company in February 1995 and in May 1995 was appointed President and Chief
Executive Officer. Mr. Figoff became a director in January 1993. Mr. Figoff has
more than 30 years of experience in the marketing and manufacture of aerospace
and defense related products. Mr. Figoff holds a B.S. Degree in Business
Administration with a minor in marketing.
Sandy Yoshisato joined the Company as its Corporate Secretary on July
1991. Ms. Yoshisato was promoted to Director of Human Resources of the Company
on May 15, 1995.
Reuben M. Siwek, Esq. was elected to the Board of Directors in March
1982. Mr. Siwek is a practicing attorney in the State of New York for more than
46 years. Mr. Siwek received his Bachelor Degree in Business Administration from
St. Johns University in January 1943 and his Juris Doctor from St. Johns
University in November 1949. He holds a C.P.A. Certificate from the State of New
York issued in November 1943.
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<PAGE>
Robert A. Smith was elected to the Board of Directors in July 1994. Mr.
Smith received his B.S. Degree in Mechanical Engineering from Polytechnic
Institute of Brooklyn and a Masters in Business Administration from UCLA. His
continuing education included Harvard's Advanced Management Program and UCLA's
Executive Program. He is currently President of Haskel International Inc.'s
Industrial Products Group. Prior positions included President of Engineered
Filtration Company from October 1992 to January 1994, President of Puroflow
Corporation from February 1991 to October 1992, and President of RTS Systems
Incorporated from May 1988 to February 1991 when the Company was acquired by
Telex Communications Inc. Mr. Smith served as President of Purolator
Technologies Inc. from 1980 to 1988, and served HR Textron Inc. from 1964 to
1980 where he was General Manager of the Filter Division. He started his career
with Pall Corporation in 1960 as a design and applications engineer and was
there until 1964. Mr. Smith is a Certified Professional Manager with extensive
engineering, marketing and general management experience in the filter industry.
Dr. Tracy Kent Pugmire, Ph.D. in Chemistry, was elected to the Board of
Directors in April 1991. Dr. Pugmire was formerly employed by ARDE Inc., from
1985 through April 1991 as an Executive Vice President and Program Manager for
the development of auxiliary and emergency gas supply systems for Space Station
Freedom. Dr. Pugmire was employed as a Program Manager by Technion Inc. from
1981 to 1985, and prior thereto spent thirteen years with AVCO Company, an
aerospace company, with responsibility in all areas of propulsion engines and
system development, vehicle integration and flight operation. Dr. Pugmire's
formal education was in the fields of Engineering Physics and Physical
Chemistry.
Leo S. Unger was elected to the Board of Directors in March 1995. Mr.
Unger received his BA Degree in Math and Chemistry in 1940 from Drake University
in Iowa. Mr. Unger served with distinction in the United States Marine Corps
from 1940 to 1958, retiring with the rank of Lt. Colonel. Mr. Unger established
his executive and marketing abilities in 1953 as a Manufacturers Representative
when he created Leo Unger & Associates and various wholly owned subsidiaries
engaged in the importation of fishing tackle and small screw machine parts for
distribution through wholesale distributors in the United States. He served as
President from 1953 through 1985 when he retired. Mr. Unger brings his executive
organized marketing skills to the Board and its management team.
DIRECTORS' COMPENSATION
The Company's directors do not currently receive any cash compensation
for service on the Board of Directors or any committee thereof, but directors
may be reimbursed for certain expenses in connection with attendance at Board of
Directors and committee meetings.
LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY AND INDEMNIFICATION
Pursuant to Section 145 of the Delaware General Corporation Law, the
Company's Certificate of Incorporation, as amended, provides that the Company
shall, to the fullest extent permitted by law, indemnify all directors,
officers, incorporators, employees and agents of the Company against liability
for certain of their acts. The Company's Certificate of Incorporation also
provides that, with certain exceptions, no director of the Company will be
liable to the Company for monetary damages as a result of certain breaches of
fiduciary duties as a director. Exceptions to this include a breach of the
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<PAGE>
director's duty of loyalty, acts or omissions not in good faith or which involve
intentional misconduct or knowing violation of law, improper declaration of
dividends and transactions from which the director derived an improper personal
benefit.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to any arrangement, provisions or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by the director, officer or controlling person of the Company
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
EXECUTIVE COMPENSATION
The table below presents the compensation of the Company's chief
executive officer and former chief executive officer (each, a "Named Executive
Officer") for services rendered to the Company in all capacities for the periods
shown. No other executive officer of the Company earned in excess of $100,000
during this period.
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------------------
FISCAL ALL OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY OPTIONS COMPENSATION
- --------------------------- ---- ------ ------- ------------
<S> <C> <C> <C> <C>
Michael H. Figoff 1997 $150,000 -0- $ 16,748
Chief Executive Officer and 1996 105,213 100,000 16,748
President 1995 105,213 55,000 16,748
Joseph B. Jasso 1997 -0- -0- -0-
Former Chief Executive Officer and 1996 -0- -0- -0-
President 1995 96,596 -0- 17,420
TOTAL 1997 $ 150,000 -0- $ 16,748<F1>
<FN>
<F1> Includes auto allowance, life insurance and disability premiums.
</TABLE>
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information as to the number of shares
of Common Stock beneficially owned as of the date of this Prospectus by (i) each
beneficial owner of more than five percent of the Company's outstanding Common
Stock, (ii) each current Named Executive Officer and director and (iii) all
current executive officers and directors of the Company as a group. All shares
are owned both of record and beneficially unless otherwise indicated.
Name and Address of Number And Percentage of Shares of Common Stock
Beneficial Owner(1) Beneficially Owned(2)
- ------------------- ---------------------
Shares Owned Percentage Owned
------------ ----------------
Michael H. Figoff 157,000(3) 2.1%
Sandy Yoshisato 10,000(3) *
Reuben M. Siwek 143,750(3) 1.9%
Robert A. Smith 34,000(3) *
Dr. Tracy K. Pugmire 43,555(3) *
Leo S. Unger 126,000(3) 1.7%
Virginia Retirement System 625,000 8.5%
George Solymar 450,650 6.0%
All Directors and Executive 514,305 6.9%
Officers as a Group (6 persons)
- ----------------------
* Less than 1%
(1) The address of each officer and director is c/o Puroflow Incorporated,
16559 Saticoy Street, Van Nuys, California 91406.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Except as indicated by
footnote, and subject to community property laws where applicable, the
persons named in the table above have sole voting and investment power
with respect to all shares of Common stock shown as beneficially owned
by them.
(3) Includes as to Mr. Figoff, Ms. Yoshisato, Messrs. Siwek, Smith, Pugmire
and Unger options exercisable within 60 days to purchase 155,000,
10,000, 50,000, 30,000, 30,000, and 15,000 shares, respectively.
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<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock of the Company is traded on the Bulletin Board 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 the NASDAQ System and the
Bulletin Board System, as applicable. 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, 1995
1st Quarter.............................. 1 1/2 1
2nd Quarter.............................. 1 5/16 1 1/16
3rd Quarter.............................. 1 5/16 13/16
4th Quarter.............................. 1 3/16 23/32
Fiscal Year Ended January 31, 1996
1st Quarter.............................. 23/32 21/32
2nd Quarter (1).......................... 11/32 8/32
3rd Quarter (1).......................... N/A N/A
4th Quarter ............................. 1 3/8 5/8
Fiscal Year Ending January 31, 1997
1st Quarter.............................. 1 3/8 1 3/8
2nd Quarter.............................. 1 5/8 1 3/8
3rd Quarter.............................. 1 1/4 1 1/4
4th Quarter.............................. 1 15/16
(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 6, 1997, the closing price for the Company's Common Stock
on the Bulletin Board System was $7/8 per share. As of March 6, 1997, the
Company had approximately 3,600 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. See "Dividend Policy."
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 12,000,000 shares of
Common Stock, $.01 par value per share, and 500,000 shares of Preferred Stock.
As of the date of this Prospectus, there were 7,108,521 shares of Common Stock
issued and outstanding, held of record by approximately 3,600 stockholders.
There are no shares of Preferred Stock issued and outstanding.
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<PAGE>
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. The holders of outstanding shares
of Common Stock are entitled to receive dividends out of assets legally
available therefor at such times and in such amounts as the Board of Directors
may, from time to time, determine. See "Dividend Policy." The Common Stock is
not entitled to preemptive rights and is not subject to redemption. In the event
of liquidation, dissolution or winding-up of the Company, the holders of the
Common Stock shall be entitled to receive pro rata all of the remaining assets
of the Company available for distribution to its stockholders. All outstanding
shares of Common stock are validly issued, fully paid and nonassessable.
OPTIONS
Holders of the Options may initially exercise such Options at an
exercise price of $0.80 per share (the "Exercise Price"). Except for certain
exempted issuances or sales of its Common Stock, if the Company issues or sells
any shares of its Common Stock for a consideration per share less than the
Exercise Price, the Exercise Price shall be reduced to the price equal to the
quotient derived by dividing (i) an amount equal to the sum of (x) the number of
shares of Common Stock outstanding immediately prior to such issuance or sale
multiplied by the Exercise Price in effect immediately prior to such issuance or
sale, plus (y) the aggregate of the amount of all consideration, if any,
received by the Company upon such issuance or sale, by (ii) the number of shares
of Common Stock outstanding immediately after such issuance or sale. The Options
expire at or before 5:00 p.m., New York Time, July 18, 1998. The Options expire
on July 18, 1998.
RELATED PARTY TRANSACTIONS
Reuben M. Siwek, Chairman of the Board of the Company, renders legal
services to the Company. The Company incurred expenses of approximately $42,284
and $80,625 during fiscal years 1996 and 1995, respectively, for legal services
rendered by Mr. Siwek.
The Company incurred expenses of approximately $68,155 and $150,000
during fiscal years 1996 and 1995, respectively for rental of the former
principal manufacturing and corporate offices of the Company from a company
owned by a former member of the Board of Directors. The Company has moved from
such facilities and all payments relating to the rental of such offices have
been terminated. The Receiver also terminated all payments under an alleged
capital lease of computer equipment by a former director of the Company. As a
result of the termination of the payments relating to such computer equipment,
the Company is involved in a lawsuit brought by the former director seeking
damages not to exceed $25,000. See "Legal Proceedings." There is currently no
litigation with respect to the termination of rental payments relating to the
Company's former premises. Upon termination of the Receivership, the Receiver
no longer exercises any authority over the affairs of the Company (although
the Receiver is representing the Company in the litigation with the Company's
former director).
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<PAGE>
CHANGE IN ACCOUNTANTS
In its report on Form 8-K/A dated November 22, 1995 and filed with the
Commission, the Company reported that it changed its auditors from Deloitte &
Touche LLP ("D&T") to Rose, Snyder & Jacobs, CPA's, Burbank, California for
the fiscal year ended January 31, 1996.
D&T audited the financial statements for the Company for the fiscal year ended
January 31, 1995 (the "1995 Financial Statements") and issued a modified report
as to uncertainty as a going concern. Upon informing D&T that it intended to
file the Registration Statement of which this Prospectus forms a part, the
Company was advised by D&T that D&T would not provide its consent to the filing
of the 1995 Financial Statements. The Company believes D&T's refusal to provide
such consent may be related to a prior fee dispute between D&T and the Company.
D&T has not advised the Company, nor does the Company have any reason to
believe, that D&T's refusal to consent to the filing of the 1995 Financial
Statements is related in any manner to any disagreement with D&T as to
accounting principles or practices, financial statement disclosure or auditing
scope or procedure relating to the 1995 Financial Statements. In addition, the
Company is not aware of any facts that would cause D&T to withdraw its report on
the 1995 Financial Statements or, if reissued, to modify the report with respect
to the opinion expressed or the scope of the audit.
LEGAL MATTERS
The legality of the issuance of the shares of Common Stock offered
hereby will be passed upon for the Company by Sheppard, Mullin, Richter &
Hampton LLP, Los Angeles, California.
EXPERTS
The consolidated financial statements of the Company as of October 31,
1996 and January 31, 1996 and for the nine months and year ended, respectively,
have been included herein and in the registration statement in reliance upon the
report of Rose, Snyder & Jacobs, independent certified public accountants,
appearing elsewhere herein, and upon the authority of such firm as experts in
accounting and auditing.
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<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 October 31, 1996 and
January 31, 1996, and the related statements of operations, stockholders'
equity, and cash flows for the nine months and year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
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 October 31, 1996 and January 31, 1996, and the results of its
operations and its cash flows for the nine months and year then ended in
conformity with generally accepted accounting principles.
Rose, Snyder & Jacobs
A Corporation of Certified Public Accountants
Burbank, California
December 11, 1996
F - 1
Page 36 of 53
<PAGE>
PUROFLOW INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
ASSETS
<CAPTION>
October 31, January 31, October 31, January 31,
1996 1996 1995 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash, note 9 $ 163,799 $ -- $ 36,998 $ 74,441
Accounts receivable
Net of allowance for doubtful
accounts of $49,504 (October 31,
1996), $140,000 (January 31,
1996), $162,803 (October 31,
1995) and $204,469 (January 31,
1995), note 3 1,496,266 1,548,495 1,478,817 1,266,150
Advances to officers and employees -- -- 4,047 3,868
Inventories, note 3 1,371,651 1,239,467 1,418,995 1,746,237
Current portion of note receivable, note 2 48,384 43,831 51,504 34,008
Prepaid expenses and deposits 74,199 33,700 40,554 125,794
---------- ---------- ---------- ----------
TOTAL CURRENT ASSETS 3,154,299 2,865,493 3,030,915 3,250,498
---------- ---------- ---------- ----------
PROPERTY AND EQUIPMENT, note 3
Leasehold improvements 11,660 -- 203,733 203,733
Machinery and equipment 2,913,897 2,880,343 2,839,284 2,873,215
Automobile 7,500 7,500
Tooling and dies 253,921 253,921 274,282 274,282
Construction in progress 143,532 20,000 -- --
---------- ---------- ---------- ----------
3,323,010 3,154,264 3,324,799 3,358,730
Less accumulated depreciation
and amortization 2,371,173 2,134,836 2,248,455 2,021,474
---------- ---------- ---------- ----------
NET PROPERTY AND EQUIPMENT 951,837 1,019,428 1,076,344 1,337,256
---------- ---------- ---------- ----------
NOTE RECEIVABLE, note 2 4,220 60,276 52,603 94,005
---------- ---------- ---------- ----------
OTHER ASSETS 16,750 16,750 32,820 39,077
---------- ---------- ---------- ----------
TOTAL ASSETS $4,127,106 $3,961,947 $4,192,682 $4,720,836
========== ========== ========== ==========
</TABLE>
See independent auditors' report and notes to financial statements.
F - 2
Page 37 of 53
<PAGE>
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
October 31, January 31, October 31, January 31,
1996 1996 1995 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CURRENT LIABILITIES
Bank overdraft $ -- $ 59,363 $ -- $ --
Line of credit, note 3 -- 235,857 290,993 810,003
Current portion of long-term debt,
notes 4 and 12 207,087 1,763,681 1,965,897 2,787,543
Accounts payable 469,176 582,393 921,841 655,485
Accrued expenses 171,629 237,472 212,300 211,343
---------- ---------- ---------- ----------
TOTAL CURRENT LIABILITIES 847,892 2,878,766 3,391,031 4,464,374
---------- ---------- ---------- ----------
LONG-TERM DEBT, note 4 -- -- 95,911 71,400
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 - 7,108,521 shares
at October 31, 1996 and 4,578,521 shares
at January 31, 1996, October 31, 1995
and January 31, 1995, notes 5 and 10 430,579 405,279 405,279 405,279
Additional paid-in capital 4,977,727 3,230,127 3,230,127 3,230,127
Accumulated deficit (2,129,092) (2,552,225) (2,929,666) (3,450,344)
---------- ---------- ---------- ----------
TOTAL STOCKHOLDERS' EQUITY 3,279,214 1,083,181 705,740 185,062
---------- ---------- ---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 4,127,106 $ 3,961,947 $ 4,192,682 $4,720,836
=========== =========== =========== ==========
</TABLE>
See independent auditors' report and notes to financial statements.
F - 3
Page 38 of 53
<PAGE>
<TABLE>
PUROFLOW INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Nine Months Nine Months
Ended Year Ended Ended Year Ended
October 31, January 31, October 31, January 31,
1996 1996 1995 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Sales $ 6,116,478 $ 8,815,889 $ 6,626,725 $ 9,044,707
Cost of goods sold 4,185,499 5,957,007 4,546,197 7,644,422
----------- ----------- ----------- -----------
Gross profit 1,930,979 2,858,882 2,080,528 1,400,285
Selling, general and
administrative expense 1,042,698 1,442,926 1,115,157 1,630,032
----------- ----------- ----------- -----------
Operating income (loss) 888,281 1,415,956 965,371 (229,747)
Other income and (expense)
Other income (expense) 6,042 (2,895) (1,678) 14,132
Interest expense (71,407) (279,237) (232,414) (305,627)
Nonrecurring expenses, note 1 (394,183) (253,085) (137,737) --
----------- ----------- ----------- -----------
Income (loss) from continuing
operations before tax 428,733 880,739 593,542 (521,242)
Income tax expense, note 6 5,600 5,600 5,600 5,600
----------- ----------- ----------- -----------
Income (loss) from continuing
operations 423,133 875,139 587,942 (526,842)
Discontinued operations, note 13
Loss from operations -- (67,264) (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 (67,264) (1,845,314)
----------- ----------- ----------- -----------
Net income (loss) $ 423,133 $ 898,119 $ 520,678 $(2,372,156)
=========== =========== =========== ===========
Net income (loss) per common share
Continuing operations $ 0.07 $ 0.19 $ 0.13 $ (0.12)
Discontinued operations (0.02) (0.41)
----------- ----------- ----------- -----------
Earnings per share, note 1 $ 0.07 $ 0.19 $ 0.11 $ (0.53)
=========== =========== =========== ===========
Weighted average number of shares 5,678,651 4,631,740 4,578,521 4,508,521
=========== =========== =========== ===========
</TABLE>
See independent auditors' report and notes to financial statements.
F - 4
Page 39 of 53
<PAGE>
<TABLE>
PUROFLOW INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
Common Additional
Stock Paid-in Accumulated
Par Value Capital Deficit Total
--------- ------- ------- -----
<S> <C> <C> <C> <C>
Balance at January 31, 1994 $ 391,280 $ 2,994,126 $(1,078,188) $ 2,307,218
Net loss -- -- (2,372,156) (2,372,156)
Sale of common stock 13,999 236,001 -- 250,000
----------- ----------- ----------- -----------
Balance at January 31, 1995 405,279 3,230,127 (3,450,344) 185,062
Net income -- -- 898,119 898,119
----------- ----------- ----------- -----------
Balance at January 31, 1996 405,279 3,230,127 (2,552,225) 1,083,181
Sale of common stock 25,300 1,747,600 1,772,900
Net income -- -- 423,133 423,133
----------- ----------- ----------- -----------
Balance at October 31, 1996 $ 430,579 $ 4,977,727 $(2,129,092) $ 3,279,214
=========== =========== =========== ===========
</TABLE>
See independent auditors' report and notes to financial statements.
F - 5
Page 40 of 53
<PAGE>
<TABLE>
PUROFLOW INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Nine Months Nine Months
Ended Year Ended Ended Year Ended
October 31, January 31, October 31, January 31,
1996 1996 1995 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net income (loss) $ 423,133 $ 898,119 $ 520,678 $(2,372,156)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 236,337 340,103 305,758 365,934
Provision for losses on accounts receivable (20,000) 104,205 80,788 134,069
Inventory valuation allowance 35,150 59,000 -- 999,305
Loss on sale of assets 157,057 3,468 --
Gain on vendor note settlements (124,482) -- -- --
Changes in operating assets and liabilities:
Accounts receivable 72,229 (386,550) (293,455) 242,305
Inventories (167,334) 73,073 22,242 1,154,010
Prepaid expenses and other assets (40,499) 114,421 91,497 (83,328)
Accounts payable and accrued expenses (179,060) (46,962) 267,313 288,426
----------- ----------- ----------- -----------
Net cash provided by operating activities 235,474 1,312,466 998,289 728,565
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (168,746) (131,336) (61,714) (122,182)
Proceeds from sale of assets -- 326,700 318,400 --
Payments received on note receivable 51,503 23,906 23,906 --
Other assets -- -- -- (3,109)
----------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities (117,243) 219,270 280,592 (125,291)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft (59,363) 59,363 -- 250,000
Proceeds from sale of common stock 1,772,900 -- -- --
Net borrowing (repayments) under credit line (235,857) (574,146) (519,010) 65,412
Principal payments on long-term debt (1,432,112) (1,095,262) (797,135) (838,761)
Principal payments under capital lease obligations -- -- -- (26,346)
Advances to officers and employees -- 3,868 (179) 1,941
----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities 45,568 (1,606,177) (1,316,324) (547,754)
----------- ----------- ----------- -----------
Net increase (decrease) in cash 163,799 (74,441) (37,443) 55,520
Cash at beginning of period -- 74,441 74,441 18,921
----------- ----------- ----------- -----------
Cash at end of period $ 163,799 $ -- $ 36,998 $ 74,441
=========== =========== =========== ===========
</TABLE>
See independent auditors' report and notes to financial statements.
F - 6
Page 41 of 53
<PAGE>
PUROFLOW INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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") specialize 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 within 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 had
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 elected 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.
INVENTORIES
Inventories are stated at the lower of cost of market on a first-in, first-out
basis, and consist of the following items:
Nine Months Nine Months
Ended Year Ended Ended Year Ended
October 31, January 31, October 31, January 31,
1996 1996 1995 1995
---- ---- ---- ----
(Unaudited)(Unaudited)
Raw materials and purchased parts $ 696,766 $ 757,921 $ 626,941 $ 818,187
Work in progress 266,432 235,404 370,488 503,033
Finished goods 408,453 246,142 421,566 425,017
---------- ---------- ---------- ----------
Total $1,371,651 $1,239,467 $1,418,995 $1,746,237
========== ========== ========== ==========
See independent auditors' report and notes to financial statements.
F - 7
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<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 the 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, October
31, 1995, and January 31, 1995 financial statements have been reclassified to
conform to the presentation adopted for the nine months ended October 31, 1996.
The most significant reclassification is nonrecurring expenses for the year
ended January 31, 1996 and the nine months ended October 31, 1995. 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:
See independent auditors' report and notes to financial statements.
F - 8
Page 43 of 53
<PAGE>
Nine Months Nine Months
Ended Year Ended Ended Year Ended
October 31, January 31, October 31, January 31,
1996 1996 1995 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
$ 4,000 $ 28,000 $ 23,000 $ 381,000
=========== =========== =========== ===========
NONRECURRING EXPENSES
Nonrecurring 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 by the Receiver monthly for
its role as monitor for the bank of all 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 on
August 22, 1996.
EARNINGS PER SHARE
The computation of the net income (loss) per common share is based on the
weighted average number of common shares and common share equivalents
outstanding.
NOTE 2 - NOTE RECEIVABLE
Nine Months Nine Months
Ended Year Ended Ended Year Ended
October 31, January 31, October 31, January 31,
1996 1996 1995 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
8 1/2% note receivable, $ 52,604 $ 104,107 $ 104,107 $ 128,013
monthly principal and
interest payments of
$4,250, secured by equipment
of the debtor, maturing in
November, 1997
Less current portion 48,384 43,831 51,504 34,008
--------- --------- --------- ---------
$ 4,220 $ 60,276 $ 52,603 $ 94,005
========= ========= ========= =========
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
See independent auditors' report and notes to financial statements.
F - 9
Page 44 of 53
<PAGE>
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 which bears interest at the rate of
prime plus 1.5% per annum, and is secured, primarily, by the Company's accounts
receivable and inventories. The Company also obtained a $300,000, non-revolving,
equipment acquisition credit line, which bears interest at the rate of prime
plus 1.75%, per annum, and is secured by all of the Company's assets. Both of
these loans are cross-collateralized. The terms of these loan agreements contain
certain restrictive covenants, including maintenance of minimum working capital,
net worth, and ratios of current assets to current liabilities and debt to net
worth.
NOTE 4 - LONG-TERM DEBT Nine Months Nine Months
Ended Year Ended Ended Year Ended
October 31, January 31, October 31, January 31,
1996 1996 1995 1995
---- ---- ---- ----
Note payable to bank at prime (Unaudited) (Unaudited)
rate plus 3 1/2%, secured by
all the assets of the Company,
maturing in June, 1996. The
Company made monthly interest
payments and principal
payments from time to time
depending on the surplus
of cash flow available. $ -- $ 107,900 $ 147,900 $ 537,500
Note payable to bank at prime
rate plus 3 1/2%, secured by
all the assets of the Company,
maturing in June, 1996. -- 971,297 1,071,298 1,168,882
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 in dispute reflected
here and reserved for in the
Company's legal accrual
(See Notes 7 and 14) 207,087 684,484 767,258 1,022,926
Other obligations -- -- 75,352 129,635
--------- --------- --------- ---------
207,087 1,763,681 2,061,808 2,858,943
Less current portion 207,087 1,763,681 1,965,897 2,787,543
--------- --------- --------- ---------
Long-term debt $ -0- $ -0- $ 95,911 $ 71,400
========= ========= ========= =========
See independent auditors' report and notes to financial statements.
F - 10
Page 45 of 53
<PAGE>
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:
Nine Months Nine Months
Ended Year Ended Ended Year Ended
October 31, January 31, October 31, January 31,
1996 1996 1995 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
$ 87,017 $ 263,627 $ 218,797 $ 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, directors 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 value 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) -
Granted 359,000
Exercised -
Canceled or expired -
--------
Held at January 31, 1996* (outstanding and unexercised) 359,000
Granted -
Exercised -
Canceled or expired -------
Held at October 31, 1996 (outstanding and unexercised) 359,000
Shares exercisable, October 31, 1996 252,280
=======
Shares available for future grants, end of period 141,000
=======
Price range of options held, October 31, 1996 $.025-$.075
Statement of Financial Accounting Standards 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.
See independent auditors' report and notes to financial statements.
F - 11
Page 46 of 53
<PAGE>
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:
Nine Months Nine Months
Ended Year Ended Ended Year Ended
October 31, January 31, October 31, January 31,
1996 1996 1995 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
Income tax provision at 34% $ 145,769 $ 305,360 $ 177,031 $(806,533)
Excess book (tax) depreciation
and amortization 15,743 (39,658)
Excess book loss on disposition 20,252
Change in allowance for
doubtful accounts (30,769) (21,920)
Write-off of obsolete
inventory (42,827) (338,358)
Reserve for legal matters 11,975
Other 3,510 11,440
Use of net operating loss
carryforward (91,426) (177,031)
-------- -------- -------- --------
Current federal tax benefit -0- (50,909) -0- (806,533)
Current state tax benefit -0- (12,106) -0- -0-
-------- -------- -------- --------
Net current tax benefit -0- (63,015) -0- (806,533)
Unrecognized benefit of losses 63,015 806,533
Minimum franchise tax 5,600 5,600 5,600 5,600
-------- -------- -------- --------
Provision for income taxes $ 5,600 $ 5,600 $ 5,600 $ 5,600
======== ======== ======== ========
Deferred tax benefits reflect the impact of loss carryforwards, temporary
differences between the assets and liabilities recorded for financial reporting
purposes and tax purposes. These differences are as follows:
Nine Months Nine Months
Ended Year Ended Ended Year Ended
October 31, January 31, October 31, January 31,
1996 1996 1995 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
Allowance for doubtful
accounts $ 21,435 $ 60,620 $ 70,494 $ 81,788
Allowance for inventory
obsolescence 110,789 165,332 338,606 538,800
Less valuation allowance (132,224) (225,952) (409,100) (620,588)
--------- --------- --------- ---------
Current $ -0- $ -0- $ -0- $ -0-
========= ========= ========= =========
See independent auditors' report and notes to financial statements.
F - 12
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<PAGE>
Tax loss carryforward $1,245,103 $1,422,366 $1,362,138 $1,376,992
Depreciation and
amortization (42,992) (41,741) 29,833 (168,951)
Reserve for legal matters 85,558 43,300
Less valuation allowance (1,287,669) (1,423,925) (1,391,971) (1,208,041)
---------- ---------- ---------- ----------
Non current $ -0- $ -0- $ -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 of the Company to realize this benefit.
The Company estimates it had available net operating loss carryforwards of
approximately $3,019,000 for federal income tax purposes and $2,351,000 for
state income tax purposes at October 31, 1996.
The Company had available net operating loss carryforwards of approximately
$3,288,000 for federal income tax purposes, and $2,626,000 for state income tax
purposes, at January 31, 1996. 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 October 31,
1997 $ 291,000
1998 291,000
1999 291,000
2000 242,500
2001 -0-
-----------
TOTAL $ 1,115,500
===========
The leases with respect to the former location were terminated under the powers
of the Receiver.
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Total rental expense under facility lease as follows:
Nine Months Nine Months
Ended Year Ended Ended Year Ended
October 31, January 31, October 31, January 31,
1996 1996 1995 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
$ 227,000 $ 275,000 $ 217,000 $ 410,000
========== ========== ========== ==========
See independent auditors' report and notes to financial statements.
F - 13
Page 48 of 53
<PAGE>
CAPITAL LEASES
All 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 October 31, 1996 and January 31, 1996,
an accrual in the amount of approximately $232,000 and $332,000 has been
recorded in anticipation of certain judgments against the Company related to
these matters. $207,087 of the accrual remains in notes payable to vendors(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 $52,784, $42,284, $28,268 and $80,625
for the nine months ended October 31, 1996, the year ended January 31, 1996, the
nine months ended October 31, 1995 and the year ended January 31, 1995,
respectively. The amount due to this director was $0 at October 31, 1996 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:
Nine Months Nine Months
Ended Year Ended Ended Year Ended
October 31, January 31, October 31, January 31,
1996 1996 1995 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
Breed Automotive
Technologies $ 1,652,490 $ 2,047,315 $ 1,426,460 $ 2,666,281
Inflation Systems, Inc. 974,009 2,213,823 1,759,627 4,470,337
Norcross Air, Inc. 672,774 1,037,135 756,291 333,734
========== ========== ========== ==========
$ 3,299,273 $ 5,298,273 $ 3,942,378 $ 7,470,352
Concentration of Credit Risk
- ----------------------------
Concentration of receivables due from the Company's three largest customers is
as follows:
See independent auditors' report and notes to financial statements.
F - 14
Page 49 of 53
<PAGE>
October 31, January 31, October 31, January 31,
1996 1996 1995 1995
---- ---- ---- ----
Breed Automotive
Technologies $215,904 $118,340 $230,847 $219,718
Inflation Systems, Inc. 382,058 422,028 214,599 526,437
Norcross Air, Inc. 76,499 52,942 41,155 476
======== ======== ======== ========
$674,461 $593,310 $486,601 $746,631
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.
CASH IN BANK
At October 31, 1996, the Company had cash in a bank which exceeded federally
insured limits by $25,331.
NOTE 10 - STOCKHOLDERS' EQUITY
During the quarter ended July 31, 1996, the Company sold 2,530,000 shares of
common stock and received $1,772,900 of net proceeds, including $1,300 of
interest. Additionally, $50,000 is being held in escrow, pending registration of
the common shares sold. The purchase price of the common stock was $.80 per
share. From the gross proceeds, the underwriter received $202,400 as a fee. The
underwriter also received a 24 month option to purchase 177,100 common shares,
at a price of $.80 per share. Proceeds received by the Company have been used to
retire bank debt (See Note 12) and other pre-Receiver debt. The Company is
obligated to register the securities within six months of the closing date of
the offering.
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 owned 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.
See independent auditors' report and notes to financial statements.
F - 15
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<PAGE>
NOTE 13 - DISCONTINUED OPERATIONS
On June 15, 1995, the Company sold certain inventory, equipment, trade name,
contracts and work in process, 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
segregated and reported as discontinued operation in the accompanying
consolidated statements of operations. The prior year's financial statements
have been restated to reflect the discontinued operations. Revenues applicable
to the discontinued operations were $326,509 for the year ended January 31, 1996
and the nine months ended October 31, 1995 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 nine
months ended October 31, 1996.
See independent auditors' report and notes to financial statements.
F - 16
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<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH
THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR
ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY SECURITIES OTHER THAN THE 2,807,100 Common Shares
SHARES OF COMMON STOCK TO WHICH IT RELATES OR AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO 277,100 Options to
BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH Purchase Common Shares
SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE PUROFLOW INCORPORATED
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
Page
Prospectus Summary............. 3
Risk Factors................... 6
Dividend Policy................ 11
Use of Proceeds................ 11
Selected Financial Data........ 12
Selling Security Holders
and Plan of Distribution...... 13
Selling Security Holders....... 14 -------------------------------------
Management's Discussion and
Analysis of Financial PROSPECTUS
Condition and Results -------------------------------------
of Operations................. 15
Recent Developments............ 20
Business....................... 20
Legal Proceedings.............. 25
Management..................... 26
Principal Stockholders......... 28
Price Range of Common Stock.... 29
Description of Capital Stock... 30
Related Party Transactions..... 30
Change in Accountants.......... 31 March 7, 1997
Legal Matters.................. 31
Experts........................ 31
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