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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED APRIL 30, 1997 COMMISSION FILE NUMBER 0-5622
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PUROFLOW INCORPORATED
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(Exact name of registrant as specified in its charter)
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<CAPTION>
<S><C>
DELAWARE 13-1947195
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(State or other jurisdiction of incorporation (I.R.S. Employer identification No.)
or organization)
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16559 SATICOY STREET, VAN NUYS, CALIFORNIA 91406-1739
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(Address of executive offices) (ZIP Code)
Registrant's telephone number, including area code: (818) 756-1388
Securities registered pursuant to Section 12(g) of the Act:
Common Stock Shares outstanding
COMMON STOCK, $.01 PAR VALUE 7,108,821
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
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PUROFLOW INCORPORATED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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<CAPTION>
APRIL 30, JANUARY 31,
1997 1997
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<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 180,008 $ 164,415
Accounts receivable
Net of allowance for doubtful accounts of
$49,504 at April 30, 1997 and January 31, 1997 1,634,708 1,462,170
Inventories 1,445,564 1,398,561
Note receivable, current portion 28,924 40,889
Prepaid expenses and other current assets 75,074 57,595
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TOTAL CURRENT ASSETS 3,364,278 3,123,630
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PROPERTY & EQUIPMENT
Leasehold improvements 24,551 11,660
Machinery and equipment 3,056,181 2,988,092
Automobile 1,679 1,679
Tooling and dies 275,405 262,480
Construction in progress 143,542 143,542
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3,501,358 3,407,453
Less accumulated depreciation
and amortization 2,517,895 2,452,888
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NET PROPERTY AND EQUIPMENT 983,463 954,565
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DEFERRED TAXES 51,000
OTHER ASSETS 16,750 16,750
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TOTAL ASSETS $ 4,415,491 $ 4,094,945
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long term debt $ 207,087 $ 207,087
Accounts payable 310,135 212,397
Accrued expenses 156,007 186,395
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TOTAL CURRENT LIABILITIES 673,229 605,879
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, par value $.10 per share
authorized - 500,000 shares
issued none
Common stock, par value $.01 per share
authorized - 12,000,000 shares
issued and outstanding - 7,108,821 shares
at April 30, 1997
shares at January 31, 1997 430,579 430,579
Additional paid-in capital 4,947,727 4,947,727
Accumulated deficit (1,636,044) (1,889,240)
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TOTAL STOCKHOLDERS' EQUITY 3,742,262 3,489,066
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $4,415,491 $ 4,094,945
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See accompanying notes to the consolidated financial statements.
1
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PUROFLOW INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATION
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED
APRIL 30,
1997 1996
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<S> <C> <C>
Net revenue $2,349,632 $2,166,708
Cost of goods sold 1,737,016 1,445,221
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Gross profit 612,616 721,487
Selling, general
and administrative expense 412,769 400,700
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Operating income 199,847 320,787
Interest expense - (36,102)
Non recurring expense - (71,223)
Other income 2,349 -
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Income before taxes 202,196 213,462
Provision for income taxes (51,000) -
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NET INCOME $ 253,196 $ 213,462
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NET INCOME PER COMMON SHARE
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Basic earnings per share $ 0.04 $ 0.05
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Diluted earnings per share $ 0.03 $ 0.04
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See accompanying notes to the consolidated financial statements.
2
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PUROFLOW INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<CAPTION>
FOR THE THREE MONTHS ENDED APRIL 30, 1997 1996
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<S> <C> <C>
CASH AT BEGINNING OF PERIOD $ 164,415 $ -
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 253,196 213,462
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 65,007 85,255
Provision for losses on accounts receivable - 10,000
Inventory valuation allowance (25,300)
Changes in operating assets and liabilities:
Accounts receivable (172,538) 221,552
Inventories (21,703) (143,580)
Prepaid expenses and other current assets (17,479) (135,311)
Deferred taxes (51,000)
Accounts payable 97,738 98,233
Accrued expenses (30,388) (15,254)
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Net cash provided by operating activities 97,533 334,357
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (93,905) (5,809)
Payments received on notes receivable 11,965 28,806
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Net cash provided by investing activities (81,940) 22,997
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CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft - (59,363)
Net repayment under line of credit - (235,857)
Principal payments on long-term debt - (49,622)
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Net cash used in financing activities - (344,842)
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NET INCREASE IN CASH 15,593 12,512
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CASH AT END OF PERIOD $ 180,008 $ 12,512
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See accompanying notes to the consolidated financial statements.
3
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PUROFLOW INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
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<CAPTION>
COMMON ADDITIONAL RETAINED
STOCK PAID-IN EARNINGS
FOR THE THREE MONTHS ENDED APRIL 30, 1997 PAR VALUE CAPITAL TOTAL
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<S> <C> <C> <C> <C>
Balance at January 31, 1997 $ 430,579 $ 4,947,727 $ (1,889,240) $ 3,489,066
Net income - - 253,196 253,196
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Balance at April 30, 1997 $ 430,579 $ 4,947,727 $ (1,636,044) $ 3,742,262
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See independent auditors' report and notes to financial statements.
4
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PUROFLOW INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
(UNAUDITED)
APRIL 30, 1997, JANUARY 31, 1997, AND APRIL 30, 1996
NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION
The consolidated balance sheet at the end of the preceding fiscal year has been
derived from the audited consolidated balance sheet contained in the Company's
annual report on Form 10-K for the fiscal year ended January 31, 1997 (The "Form
10-K") and is presented for comparative purposes. All other financial statements
are unaudited. In the opinion of management, all adjustments which include only
normal recurring adjustments necessary to present fairly the financial position,
results of operations and changes in financial positions for all periods
presented have been made. The results of operations for interim periods are not
necessarily indicative of the operating results for the full year.
Footnote disclosures normally included in financial statements prepared in
accordance with the generally accepted accounting principles have been omitted
in accordance with the published rules and regulations of the Securities and
Exchange Commission.
NOTE 2 - INVENTORIES
Inventories consist of the following:
APRIL 30, JANUARY 31,
1997 1997
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Raw materials and purchased parts 774,176 729,740
Work in process 296,470 247,868
Finished goods and assemblies 374,918 420,953
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Totals $ 1,445,564 $ 1,398,561
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NOTE 3 - STOCKHOLDERS EQUITY
On March 26, 1996, the Company entered into an agreement with an investment
banker to raise equity through a private placement offering. On July 24, 1996,
such offering was completed. The Company sold 2,530,000 shares of common stock
and received $1,742,900 of net proceeds, including $1,300 of interest. The
purchase price of the common stock was $.80 per share. From the gross proceeds,
the underwriter received $202,400 as a fee. The underwriter also received a 24
month option to purchase 177,100 common shares, at a price of $.80 per share.
Proceeds received by the Company are used to retire bank debt and other
pre-Receiver debt. The Company registered the securities on March 7, 1997.
5
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NOTE 4 - NET INCOME PER SHARE
Reconciliation of basic and diluted earnings per share:
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INCOME SHARES PER-SHARE
AMOUNT
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3 MONTHS ENDED APRIL 30, 1997
Basic earnings per share $ 253,196 7,108,821 $ .04
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Effect of Diluted Securities
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Stock options 151,628
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Diluted earnings per share $ 253,196 7,260,449 $ .03
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3 MONTHS ENDED APRIL 30, 1996
Basic earnings per share $ 213,462 4,578,521 $ .05
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Effect of Diluted Securities
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Stock Options 245,878
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Diluted earnings per share $ 213,462 4,824,399 $ .04
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Basic earnings per share is based on the weighted average number of shares
outstanding. Diluted earnings per share include the effect of common stock
equivalents when dilutive.
NOTE 5 - CESSATION OF RECEIVERSHIP
On August 13, 1996, all bank debt owed by the Company was repaid. On August 22,
1996, the Receivership Estate was terminated by order of the Superior Court of
the State of California and control of the Company was returned to the Board of
Directors and Management.
Additionally, the Company entered a new banking relationship. The Company
obtained a $750,000 revolving credit line. This credit line bears interest at
the rate of prime plus 1.5%, per annum, and is secured, primarily, by the
Company's accounts receivable and inventories. The Company also obtained a
$300,000, non-revolving, equipment acquisition credit line, which bears interest
at the rate of prime plus 1.75%, per annum, and is secured by all of the
Company's assets. Both of these loans are cross-collateralized. The terms of
these loan agreements contain certain restrictive covenants, including
maintenance of minimum working capital, net worth, and ratios of current assets
to current liabilities and debt to net worth.
NOTE 6 - NONRECURRING EXPENSES
Nonrecurring expenses are 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.
NOTE 7 - INCOME TAXES
Income tax benefits recognized represents the benefit of income tax loss
carryforwards.
6
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LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1997, the Company had cash available of $180,008, compared to
$164,415 on January 31, 1997, was free of bank debt and it had a current ratio
of 5.00 to 1 at April 30, 1997, compared to 5.16 to 1 on January 31, 1997.
OPERATING ACTIVITIES
Operations provided $97,533 of cash flow in three months ended April 30, 1997
versus $334,357 in the three months ended April 30, 1996. The lower cash flow
from operations results from the increase in accounts receivable reflecting
higher sales in the current quarter than the previous year's quarter.
INVESTING ACTIVITIES
The Company invested $93,905 in new capital equipment in the current quarter
predominantly for equipment for a new type of airbag filter.
FINANCING ACTIVITIES
The Company has unused revolving credit line of $750,000 which bears interest at
the rate of prime plus 1.5% per annum, secured by the Company's accounts
receivable and inventory. The Company also has a non-revolving equipment
acquisition loan of $300,000 which bears interest at prime rate plus 1.75% per
annum. The Company is in compliance with all covenants under its loan agreement
with the Bank.
RESULTS OF OPERATIONS FOR QUARTER ENDED APRIL 30, 1997
REVENUES
Sales were $2,349,632 in 1997, compared to $2,166,708 in 1996, representing an
increase of $182,924 or 8.7%, due primarily to increased shipments of high
performance filters.
GROSS PROFIT
Gross profit as a percentage of sales was 26% in April 1997, compared to 33% in
April 1996, representing a decrease of 7% due to increased cost of materials and
labor in producing airbag filters and charges of increased R & D on a new type
of airbag filters.
OPERATING INCOME
Operating income was $199,847 in April 1997 compared to $320,787 in April 1996,
a decrease of $120,727 due to the lower margins on airbag filters and the impact
of the cost of new product development.
INTEREST CHARGES
Interest on bank loans were $36,102 in 1996 and completely eliminated in 1997.
7
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INCOME TAXES
A tax benefit of $51,000 was recognized as a result of income tax loss
carryforwards.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
1. Reliable Metallurgical Processes Inc. commenced an action against Puroflow
Corporation and Michigan Dynamics Inc. in September, 1995 in Los Angeles
County Superior Court for breach of contract, open account, and
anticipatory breach. This action is being vigorously opposed and the
Registrant has filed a cross-complaint alleging for failure to properly
perform the alleged Contract, ultra vires acts in consummation of original
Agreement, and breach of fiduciary obligation by a former Director and
Officer of Registrant who were also Officers and Directors of the
Plaintiff.
2. Jerome Pearlman d.b.a. J&F Enterprises, a former Director of the
Registrant, commenced an action in the Los Angeles County Supreme Court,
for breach of an alleged promissory note. The Registrant will vigorously
defend by filing a cross-complaint against Plaintiff for breach of
fiduciary duty and constructive trust, seeking a return of all funds paid
to Plaintiff plus interest.
3. J&F Management, Inc., controlled by Jerome Pearlman, a former Director
of the Registrant, commenced an action in Municipal Court of Santa
Monica Judicial District against the Registrant, and the Court
appointed Receiver for possession and conversion of personal property.
Defendants have vigorously defended the action by filing a motion to
disqualify Plaintiff's Counsel, a demurrer to the complaint, and a
cross-complaint seeking recision of the contract and restitution to
Defendant of all funds paid to the Plaintiff pursuant to contract for a
breach of Pearlman's fiduciary duties to the Registrant.
4. The confession of judgment obtained by Memtec America Corporation
against the Registrant on December 19, 1995, previously reported on
Form 10-K for the fiscal year ended January 31, 1996, was vacated by
order of the Circuit Court for Baltimore County on June 24, 1996. The
Registrant filed an amended counter-claim and third party complaint on
August 12, 1996 against Memtec and four former employees of the
Registrant now employed by Memtec. The counter-claim contains many
allegations against Memtec and the four former employees and seeks
substantial compensatory and punitive damages against Memtec and
against Joseph B. Jasso and Michael V. Perry, former Puroflow President
& CEO and Plant Manager, respectively.
The Company is not a party to any other material pending suits of legal actions,
and is not aware of any material claims that are threatened.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
8
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed and on its behalf by the
undersigned thereto, duly authorized.
PUROFLOW INCORPORATED
May 29, 1997 By: /s/ Michael H. Figoff
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Michael H. Figoff
President/Chief Executive Officer
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1997
<PERIOD-END> APR-30-1997
<CASH> 180,008
<SECURITIES> 0
<RECEIVABLES> 1,713,136
<ALLOWANCES> 49,504
<INVENTORY> 1,445,564
<CURRENT-ASSETS> 3,364,278
<PP&E> 3,501,358
<DEPRECIATION> 2,517,895
<TOTAL-ASSETS> 4,415,491
<CURRENT-LIABILITIES> 673,229
<BONDS> 0
0
0
<COMMON> 5,378,306
<OTHER-SE> (1,636,044)
<TOTAL-LIABILITY-AND-EQUITY> 4,415,491
<SALES> 2,349,632
<TOTAL-REVENUES> 2,349,632
<CGS> 1,737,016
<TOTAL-COSTS> 2,149,785
<OTHER-EXPENSES> (2,349)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 202,196
<INCOME-TAX> (51,000)
<INCOME-CONTINUING> 253,196
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 253,196
<EPS-PRIMARY> .04
<EPS-DILUTED> .03
</TABLE>
