As filed with the Securities and Exchange Commission on January 13, 1997
Registration No. 333-_______
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PUROFLOW INCORPORATED
(Name of Small Business Issuer in its Charter)
Delaware 508599 13-1947195
(State or jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Identification No.)
Classification
Code Number)
16559 SATICOY STREET
VAN NUYS, CALIFORNIA 91406
(818) 756-1388
(Address and telephone number of principal
executive offices and principal place of business)
Michael H. Figoff, President Copies to:
16599 Saticoy Street Lawrence M. Braun, Esquire
Van Nuys, California 91406 James M. Rene, Esquire
(818) 756-1388 Sheppard, Mullin, Richter & Hampton LLP
(Name, address and telephone number 333 South Hope Street
of agent for service) Los Angeles, California 90071
(213) 620-1780
Approximate date of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.[ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.[ ]
Page 1 of 93
<PAGE>
CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Title of Maximum Maximum Amount
Each Class of Amount Offering Aggregate of Regis-
Securities to to be Price Per Offering tration
be Registered Registered Unit (1) Price (1) Fee
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Common Stock, $.01 par 2,530,000 $1.00 $2,530,000 $872.41
value shares(2)
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Placement Agents' 177,100 $0.001 $177.10 $0.06
Options to
Purchase Common Stock
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Common Stock Underlying 177,100 $1.00 $177,100 $61.07
Placement Agents' shares(2)
Options (3)
================================================================================
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c).
(2) Includes the registration for resale of the following: (i) 2,530,000 shares
of Common Stock issued in a private placement in July 1996 and (ii) 177,100
shares of Common Stock (subject to adjustment) issuable upon the exercise of
options issued to the Placement Agents in connection with the foregoing private
placement.
(3) Issuable upon exercise of options to purchase Common Stock issued to the
Placement Agents.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
EXHIBIT INDEX ON PAGE 60
Page 2 of 93
<PAGE>
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PUROFLOW INCORPORATED
-------------------
CROSS REFERENCE SHEET
Showing Location in Prospectus of Information
Required by Items of Form SB-2
-------------------
Form SB-2 Item Number and Caption Prospectus Caption
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1. Front of Registration Statement and Outside Front Cover Page
Outside Front Cover of Prospectus of Prospectus
2. Inside Front and Outside Back Cover Inside Front Cover Page of
Pages of Prospectus Prospectus; Outside Back
Cover Page of Prospectus;
Additional Information
3. Summary Information and Risk Factors Prospectus Summary; Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Security Holders Selling Security Holders and Plan
of Distribution
8. Plan of Distribution Selling Security Holders and Plan
of Distribution
9. Legal Proceedings Legal Proceedings
10. Directors, Executive Officers, Management
Promoters and Control Persons
11. Security Ownership of Certain Principal Stockholders
Beneficial Owners and Management
12. Description of Securities Dividend Policy; Capitalization;
Description of Capital Stock
13. Interest of Named Experts and Counsel Not Applicable
14. Disclosure of Commission Position on Management - Limitation of
Indemnification for Securities Act Directors' and Officers'
Liabilities Liability and Indemnification
15. Organization Within Last Five Years Related Party Transactions
Page 3 of 93
<PAGE>
16. Description of Business Prospectus Summary; Risk Factors;
Management's Discussion and
Analysis of Financial Condition
and Results of Operations;
Business
17. Management's Discussion and Analysis Management's Discussion and
or Plan of Operation Analysis of Financial Condition
and Results of Operations
18. Description of Property Business
19. Certain Relationship and Related Related Party Transactions
Transactions
20. Market for Common Equity and Related Outside Front Cover Page of
Stockholder Matters Prospectus; Dividend Policy;
Capitalization; Description of
Capital Stock; Principal
Stockholders
21. Executive Compensation Management
22. Financial Statements Financial Statements
23. Changes in and Disagreements With Changes in Accountants
Accountants on Accounting and
Financial Disclosure
Page 4 of 93
<PAGE>
SUBJECT TO COMPLETION, DATED ____________, 1997
PROSPECTUS
PUROFLOW INCORPORATED
2,707,100 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 177,100 shares of Common Stock issued to certain
persons associated with Toluca Pacific Securities Corporation, which acted as
placement agent in connection with the foregoing private placement
(collectively, "Placement Agents"), and (iii) 177,100 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 and the Placement
Agents, and will be sold from time to time by the Selling Security Holders and
the Placement Agents 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 and the Placement Agents 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 and the Placement Agents to the public without
restriction. The Selling Security Holders and the Placement Agents 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 January 10, 1997, the closing price of
the Common Stock as reported on the Bulletin Board System was $31/32.
The Securities offered hereby involves a high degree of risk.
See "Risk Factors" beginning on page 7.
---------------
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 ___________, 1997
Page 5 of 93
<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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission (File No. 0-5622)
pursuant to the Exchange Act are incorporated herein be reference:
(1) The Company's Annual Report on Form 10-K for the fiscal year ended
January 31, 1996;
(2) The Company's Quarterly Report on Form 10-Q for the quarter ended
April 30, 1996;
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<PAGE>
(3) The Company's Current Report on Form 8-K filed with the Commission on
July 12, 1996;
(4) The Company's Current Report on Form 8-K filed with the Commission on
July 18, 1996;
(5) The Company's Quarterly Report on Form 10-Q for the quarter ended
July 31, 1996;
(6) The Company's Current Report on Form 8-K filed with the Commission on
August 22, 1996;
(7) The Company's Current Report on Form 10-Q for the quarter ended
October 31, 1996; and
(8) All other documents filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus
and prior to the termination of the Offering of the Common Stock.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus and
the Registration Statement of which it is a part to the extent that a statement
contained herein or in any other subsequently filed document which also is
incorporated herein modifies or replaces such statement. Any statement so
modified or superseded shall not be deemed, in its unmodified form, to
constitute a part of this Prospectus or such Registration Statement.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (NOT INCLUDING EXHIBITS
TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE INCORPORATED BY REFERENCE IN SUCH
DOCUMENTS) ARE AVAILABLE WITHOUT CHARGE UPON WRITTEN OR ORAL REQUEST DIRECTED
TO: PUROFLOW INCORPORATED, 16559 SATICOY STREET, VAN NUYS, CA 91406, ATTENTION:
PRESIDENT, TELEPHONE: (818) 756-1388.
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Page 7 of 93
<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 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,
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Page 8 of 93
<PAGE>
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.
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, 177,100 Options to
purchase shares of Common Stock and
177,100 shares of Common Stock
underlying such Options held by the
Placement Agents. 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 9 of 93
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended January 31, October 31,
---------------------- -----------
1995 1996 1995 1996
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Consolidated Statements of Operations
Data:
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<F1> ........ $ (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
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
<FN>
<F1> 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.
</FN>
</TABLE>
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Page 10 of 93
<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
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Page 12 of 93
<PAGE>
Company's products obsolete or, at a minimum, compete with current airbag
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,
Inc. ("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 Regulations for National and
International Operations. While the Company believes that the trends in
automotive safety is toward increased regulation and are beneficial to the
Company, a decline in enforcement or compliance expenditures, a change in the
regulations, or an emerging technology that would deem airbags as obsolete,
could have a significant adverse effect on the demand for the products offered
by the Company.
United States government contracts and related customer orders subject the
Company to various laws and regulations governing United States government
contractors and subcontractors, generally which are more restrictive than for
non-government contractors. This includes subjecting the Company to examinations
by government auditors, and investigators, from time to time, to insure
compliance and 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 January 6, 1997, there are 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
-11-
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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.
-12-
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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.
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."
-13-
Page 17 of 93
<PAGE>
SELECTED FINANCIAL DATA
Nine Months Ended
Year Ended January 31, October 31,
---------------------- -----------
1995 1996 1995 1996
------ ------ ------ ------
(in thousands, except per share data)
(Unaudited) (Unaudited)
STATEMENTS OF OPERATIONS DATA(1):
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
(1) In November 1994, the Company sold its ultraviolet water product subsidiary,
Ultra Dynamics Corporation. The subsidiary has been accounted for as a
discontinued operation. In the year ended January 31, 1996, the Company sold
its valve product subsidiary, Decca Valves Corporation and shut down
operation of its Michigan Dynamics subsidiary. These two subsidiaries have
been accounted for as discontinued operations. The selected data related to
the years ended January 31, 1996 and 1995 and nine months ended October 31,
1996 and 1995 have been adjusted to reflect the discontinued operations.
-14-
Page 18 of 93
<PAGE>
(2) Nonrecurring expenses are comprised of a one-time legal 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.
SELLING SECURITY HOLDERS AND PLAN OF DISTRIBUTION
The Selling Security Holders and the Placement Agents 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 and the Placement Agents 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 and the Placement Agents 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 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
and the Placement Agents 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 or the Placement Agents. Sales of the
Securities by the Selling Security Holders and the Placement Agents, 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 or the Placement
Agents 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 and the Placement Agents 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 and the Placement
Agents, on the one hand, and the Company, on the other hand. Beneficial
ownership of the Securities by each Selling Security Holder and the Placement
Agents after the sale will depend on the number of Securities sold by each
Selling Security Holder and the Placement Agents. The Securities offered by the
Selling Security Holders and the Placement Agents are not being underwritten.
-15-
Page 19 of 93
<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
TOTALS: 2,707,100 2,707,100 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.
-16-
Page 20 of 93
<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.
-17-
Page 21 of 93
<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 ("PMA")
program, 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 Federal Aviation Administration PMA's and the
signing of exclusive distributorship agreements.
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
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.
-18-
Page 22 of 93
<PAGE>
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.
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
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.
-19-
Page 23 of 93
<PAGE>
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.
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.
-20-
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<PAGE>
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.
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 minimum working capital, net worth, and ratios of current assets
to current liabilities and debt to net worth.
Effects of Inflation on Business
- --------------------------------
Management believes that inflation has not had a material effect on the
Company's operations.
-21-
Page 25 of 93
<PAGE>
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.
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 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.
-22-
Page 26 of 93
<PAGE>
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.
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.
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.
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.
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<PAGE>
Major Customers
- ---------------
Sales to three customers represented approximately 60% of net sales during
fiscal year 1996 and 54% of net sales during the nine months ended October 31,
1996. These customers purchased airbag filters and filters for commercial and
aerospace applications. The loss of any of' these customers would have a
material adverse effect on the automotive airbag filter or the high performance
filter segments of the Company's business.
Backlog
- -------
As of October 31, 1996, February 29, 1996, and February 28, 1995, the
Company had a 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. 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.
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
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<PAGE>
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. 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. 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 Federal Aviation Administration Regulations for National and International
Operations. While the Company believes that the trends in automotive safety is
toward increased regulation and are beneficial to the Company, a decline in
enforcement or compliance expenditures, a change in the regulations, or an
emerging technology that would deem airbags as obsolete, could have a
significant adverse effect on the demand for the products offered by the
Company.
United States government contracts and related customer orders subject the
Company to various laws and regulations governing United States government
contractors and subcontractors, generally which are more restrictive than for
non-government contractors. This includes subjecting the Company to examinations
by government auditors, and investigators, from time to time, to insure
compliance and review costs. Violations may result in costs disallowed, and
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<PAGE>
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.
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:
Approximate
Location Principal Use Sq. Ft. Lease 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.
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<PAGE>
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. 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 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. 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 seeks damages not to exceed
$25,000.
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. 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.
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, executive officers and key employees of the Company are as
follows:
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<PAGE>
NAME AGE POSITIONS(S)
- ---- --- ------------
Michael H. Figoff 52 Chief Executive Officer,
President and
Director
Sandy Yoshisato 32 Corporate Secretary and Director
of Human Resources
Reuben M. Siwek 76 Chairman of the Board of Directors
Robert A. Smith 56 Vice Chairman of the Board of
Directors
Dr. Tracy K. Pugmire 65 Director
Leo S. Unger 78 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 has more than 30 years of experience in the
marketing and manufacture of aerospace and defense related products. Mr. Figoff
holds degrees in Business Administration and Marketing Management.
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.
Robert A. 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 formerly employed by ARDE
Inc., from 1985 through April 1991 as an Executive Vice President and Program
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<PAGE>
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 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
will add 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
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.
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<PAGE>
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 during the twelve-month
period ended January 31, 1996. No executive officer of the Company earned in
excess of $100,000 during this period.
Annual Compensation
-------------------------------------------
FISCAL ALL OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY OPTIONS COMPENSATION
- --------------------------- ---- ------ ------- ------------
Michael H. Figoff 1996 $105,213 100,000 $ 16,748
Chief Executive Officer and 1995 105,213 55,000 16,748
President 1994 92,695 13,493
Joseph B. Jasso 1996 -0-
Former Chief Executive Officer and 1995 96,596 17,420
President 1994 98,604 15,707
TOTAL 1996 $105,213 100,000 $ 16,748(1)
(1) Includes auto allowance, life insurance and disability premiums.
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
Beneficial Owner(1) Stock 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
Officers as a Group (6 persons) 513,555 6.9%
- ----------------------
* Less than 1%
(1) The address of each officer and director is c/o Puroflow
Incorporated, 16559 Saticoy Street, Van Nuys, California 91406.
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<PAGE>
(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.
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
(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 January 10, 1997, the closing price for the Company's Common Stock on
the Bulletin Board System was $31/32 per share. As of January 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."
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<PAGE>
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.
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.
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 principal
manufacturing and corporate offices of the Company from a company owned by a
former member of the Board of Directors. The Receiver terminated all payments
subsequent to his appointment and is now litigating all payments under an
alleged capital lease.
CHANGE IN ACCOUNTANTS
In its report on Form 8-K/A dated November 22, 1995 and filed with the
Commission and incorporated herein by this reference, 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
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<PAGE>
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.
/s/ Rose, Snyder & Jacobs
Rose, Snyder & Jacobs
A Corporation of Certified Public Accountants
Burbank, California
December 11, 1996
F-1
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<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 39 of 93
<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 1,763,681 1,965,897 2,787,543
Accounts payable $ 676,263 582,393 921,841 655,485
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 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 40 of 93
<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 41 of 93
<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 42 of 93
<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)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
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
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 28,027 (46,962) 267,313 288,426
----------- ----------- ----------- -----------
Net cash provided by operating
activities 567,043 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 (1,763,681) (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 used in financing activities (286,001) (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 $ -0- $ 36,998 $ 74,441
=========== =========== =========== ===========
</TABLE>
See independent auditors' report and notes to financial statements.
F - 6
Page 43 of 93
<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
========== ========== ========== ==========
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
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:
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
========= ========= ========= =========
F - 8
Page 45 of 93
<PAGE>
NONRECURRING EXPENSES
- ---------------------
Nonrecurring expenses are comprised of a one-time legal fee of $89,834 charged
by the Company's former bank during August, 1996, and the monthly administrative
fees charged by the Receiver during the receivership period. The Receivership
Estate began on May 1, 1995 and ended on August 22, 1996.
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 4,220 43,831 51,504 34,008
--------- --------- --------- ---------
$ 48,384 $ 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
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.
F - 9
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<PAGE>
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
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Note payable to bank at
prime 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 which are
reserved for in the Company's
legal accrual (See Note 7). 684,483 767,258 1,022,926
Other obligations 75,352 129,635
--------- --------- --------- ---------
1,763,680 2,061,808 2,858,943
Less current portion 1,763,680 1,965,897 2,787,543
--------- --------- --------- ---------
Long-term debt $ -0- $ -0- $ 95,911 $ 71,400
========= ========= ========= =========
All the above bank debt was repaid in August, 1996 and replaced by the new loan
commitments (See Notes 3 and 12).
F - 10
Page 47 of 93
<PAGE>
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 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:
Nine Months Year
Ended Ended
October 31, January 31,
1996 1996
----------- -----------
Held at beginning of year 359,000 0
Granted to 20 officers and key employees 0 359,000
Exercised 0 0
Canceled or expired 0 0
Held at end of year by 20 officers and key
employees 359,000 359,000
------- -------
Shares exercisable, end of period 252,280 225,600
------- -------
Shares available for future grants,
end of period 141,000 141,000
======= =======
Price range of options held, end of period $0.25 - $0.75 $0.25 - $0.75
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.
F - 11
Page 48 of 93
<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:
F - 12
Page 49 of 93
<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)
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-
========== ========== ========== ==========
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.
F - 13
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<PAGE>
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
========== ========== ========== ==========
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.
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.
F - 14
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<PAGE>
NOTE 9 - CONCENTRATIONS
MAJOR CUSTOMER INFORMATION
- --------------------------
Concentration of sales and accounts receivable to three major customers total 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)
Sales during: $ 3,299,273 $ 5,298,273 $ 3,942,378 $ 7,470,352
=========== =========== =========== ===========
Account receivable at $ 674,461 $ 593,310 $ 486,601 $ 746,631
=========== =========== =========== ===========
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.
F - 15
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<PAGE>
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.
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.
F - 16
Page 53 of 93
<PAGE>
No dealer, sales representative or any
other person has been authorized to give
any information or to make any repre-
sentations 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 Under-
writer. This Prospectus does not constitute
an offer to sell or a solicitation of an 2,707,100 Shares
offer to buy any securities other than
the shares of Common Stock to which it
relates or an offer to sell, or a PUROFLOW INCORPORATED
solicitation of an offer to buy, to any
person in any jurisdiction in which such Common Stock
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 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............. 4
Risk Factors................... 7
Dividend Policy................ 13 ----------------------------
Use of Proceeds................ 13
Selected Financial Data........ 14 PROSPECTUS
Selling Security Holders and
Plan of Distribution.......... 15 ----------------------------
Selling Security Holders....... 16
Management's Discussion and
Analysis of Financial Condition
and Results of Operations..... 17
Business....................... 22
Legal Proceedings.............. 27
Management..................... 27
Principal Stockholders......... 30
Price Range of Common Stock.... 31
Description of Capital Stock... 32 , 1997
Related Party Transactions..... 32
Change in Accountants.......... 32
Legal Matters.................. 33
Experts........................ 33
- -------------------------------
Until ________________, 1997 (25 days after
the date of this Prospectus), all dealers
effecting transactions in the Registered
Securities, whether or not participating in
this distribution, may be required to deliver
a Prospectus. This is in addition to the
obligation of dealers to deliver a Prospectus
when acting as Underwriters with respect to
their unsold allotments or subscriptions.
Page 54 of 93
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
- -------- -----------------------------------------
The Company's Certificate of Incorporation limits, to the maximum extent
permitted by Delaware law, the personal liability of directors for monetary
damages for breach of their fiduciary duties as a director. The Company's Bylaws
provided that the Company shall indemnify its officers and directors and may
indemnify its employees and other agents to the fullest extent permitted by
Delaware law.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify a director, officer, employee or agent made a party to
an action by reason of that fact that he or she was a director, officer employee
or agent of the corporation or was serving at the request of the corporation
against expenses actually and reasonably incurred by him or her in connection
with such action if he or she acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, the best interests of the
corporation and with respect to any criminal action, had no reasonable cause to
believe his or her conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been advised that in the
opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
Item 25. Other Expenses of Issuance and Distribution
- -------- -------------------------------------------
The estimated expenses payable by the Company in connection with the
distribution of the securities being registered are as follows:
Amount
------
SEC Registration Fee......................... $ 933.54
Accounting Fees and Expenses................. $38,000.00*
Legal Fees and Expenses...................... $20,000.00*
Miscellaneous Expenses....................... $ 5,000.00*
----------
Total $63,933.54*
==========
*Estimated
Item 26. Recent Sales of Unregistered Securities
- -------- ---------------------------------------
The Company has sold the following unregistered securities within the last
three years:
1. In July 1996, the Company issued 2,530,000 shares of Common Stock for
$1,772,900 cash to accredited investors. The issuance of such securities was
exempt from registration under the Securities Act of 1933 pursuant to Section
4(2) thereof and Regulation D promulgated thereunder.
II-1
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<PAGE>
2. In connection with the July 1996 private placement, the Company issued
to the Placement Agents in consideration of the efforts of the Placement Agents,
options to purchase 177,100 shares of Common Stock at a price (subject to
adjustment) of $0.80 per share. The issuance of such securities was exempt from
registration under the Securities Act of 1933 pursuant to Section 4(2) thereof.
Item 27. Exhibits.
- -------- ---------
Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation of the Company.
(Incorporated by reference to the Company's
Registration Statement on Form S-1, filed with
the Securities and Exchange Commission on October
15, 1991, Registration No. 33-43228).
3.2 Bylaws (Incorporated by reference to the Company's
Registration Statement on Form S-1, filed with the
Securities and Exchange Commission on October 15,
1991, Registration No. 33-43228).
4.1 Form of Placement Agent Purchase Option.
4.2 Form of Registration Rights Agreement.
5.1 Opinion of Sheppard, Mullin, Richter & Hampton
LLP.
10.1 1991 Key Employee Incentive Stock Option Plan.
(Incorporated by reference to the Company's
Registration Statement on Form S-1, filed with the
Securities and Exchange Commission on October 15,
1991, Registration No. 33-43228).
10.2 Sublease dated July 27, 1995 between Kaiser
Marquardt and the Company with sublease guarantor
Kaiser Aerospace and Electronics (Incorporated by
reference to exhibit 10.26 of the Company's Annual
Report on Form 10-K for the fiscal year ended
January 31, 1996 (File No. 0-5622)).
10.3 Employment Agreement dated March 11, 1993 between
the Company and Michael H. Figoff (Incorporated by
reference to the Company's Form 10-K filed with
the Securities and Exchange Commission on May 15,
1993).
10.4 Form of Directors Stock Option Agreement dated
July 9, 1987 (Incorporated by reference to the
Company's Registration Statement on Form S-1,
filed with the Securities and Exchange Commission
on October 15, 1991, Registration No. 33-43228).
II-2
Page 56 of 93
<PAGE>
10.5 Form of Directors Stock Option Agreement dated
February 14, 1991 (Incorporated by reference to
the Company's Registration Statement on Form S-1,
filed with the Securities and Exchange Commission
on October 15, 1991, Registration No. 33-43228).
21.1 Subsidiaries of the Company (Incorporated by
reference to exhibit 22 of the Company's Annual
Report on Form 10-K for the fiscal year ended
January 31, 1996 (File No. 0-5622)).
23.1 Consent of Sheppard, Mullin, Richter & Hampton LLP
(included in Exhibit 5.1).
23.2 Consent of Rose, Snyder & Jacobs.
24.1 Power of Attorney (included on page S-1).
Item 28. Undertakings.
- -------- -------------
(a) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers, and controlling persons
of the Company pursuant to the provisions described in Item 24, or otherwise,
the Company has been advised that in the opinion of the 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.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
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<PAGE>
(c) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement: (i) to include
any prospectus required by Section 10(a)(3) of the Securities Act; (ii) to
reflect in the prospectus any facts or events arising after the effective date
of the Registration Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the Registration Statement; and (iii) to include
any material information with respect to the plan of distribution not previously
disclosed in the Registration Statement or any material change to such
information in the Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof;
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the Offering.
II-4
Page 58 of 93
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Van Nuys, State of California, on January 13, 1997.
PUROFLOW INCORPORATED
By: /s/ Michael H. Figoff
--------------------------------
Michael H. Figoff
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael H. Figoff, his attorney-in-fact, with the
power of substitution, for him in any and all capacities, to sign any amendments
to this registration statement and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorney-in-fact, or
his substitute or substitutes, may do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
Signature Title Date
--------- ----- ----
/s/ Michael H. Figoff President, Chief Executive
- ------------------------ Officer and Director (principal
Michael H. Figoff executive officer, principal
financial officer, and principal
accounting officer) January 13, 1997
/s/ Reuben M. Siwek Chairman of the Board and
- ------------------------ General Counsel January 13, 1997
Reuben M. Siwek
/s/ Robert A. Smith Vice Chairman of the Board January 13, 1997
- ------------------------
Robert A. Smith
/s/ Dr. Tracy K. Pugmire Director January 13, 1997
- ------------------------
Dr. Tracy K. Pugmire
/s/ Leo S. Unger Director January 13, 1997
- ------------------------
Leo S. Unger
S-1
Page 59 of 93
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
- --------------------------------------------------------------------------------
4.1 Form of Placement Agent Purchase Option 61
4.2 Form of Registration Rights Agreement 80
5.1 Opinion of Sheppard, Mullin, Richter & Hampton
LLP 91
23.2 Consent of Rose, Snyder & Jacobs 93
Page 60 of 93
<PAGE>
EXHIBIT 4.1
-----------
THE REGISTERED HOLDER OF THIS PURCHASE OPTION BY ITS ACCEPTANCE HEREOF,
AGREES THAT IT WILL NOT SELL, ASSIGN, PLEDGE, HYPOTHECATE OR OTHERWISE
TRANSFER THIS PURCHASE OPTION EXCEPT AS HEREIN PROVIDED. VOID AFTER
5:00. P.M., NEW YORK TIME, July 18, 1998.
PLACEMENT AGENT PURCHASE OPTION
For the Purchase of Shares of Common Stock = _________
Name:_________________ SS# _________________
of
PUROFLOW INCORPORATED
(A Delaware Corporation)
PI-PAW July 18, 1996
1. Purchase Option.
THIS CERTIFIES THAT, for the sum of ten dollars ($10.00) the receipt
of which is hereby acknowledged by Puroflow Incorporated, a Delaware
corporation (the "Company"), Toluca Pacific Securities Corporation (the
"Holder"), as registered owner of this Purchase Option, is entitled, at any
time or from time to time at or after July 18, 1996 - and at or before 5:00
p.m., New York Time, July 18, 1998, but not thereafter, to subscribe for,
purchase and receive, in whole or in part, up to () shares of common stock
of the Company, $.01 par value (the "Common Stock"). If July 18, 1998 is a
day on which banking institutions are authorized by law to close, then this
Purchase Option may be exercised on the next succeeding day which is not
such a day in accordance with the terms herein. During the period ending
July 18, 1998 the Company agrees not to take any action that would
terminate the Purchase Option. This Purchase Option is initially
exercisable at an exercise price of $.80 per share so purchased; provided,
however, that upon the occurrence of any of the events specified in
Section 6 hereof, the rights granted by this Purchase Option, including the
exercise price per share and the number of shares of Common Stock to be
received upon such exercise, shall be adjusted as therein specified. The
term "Exercise Price" shall mean the initial exercise price or the adjusted
exercise price, depending on the context.
1
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<PAGE>
This Purchase Option is being issued to the Holder as the Placement
Agent in connection with the private placement (the "Offering") of shares
of Common Stock of the Company pursuant to the Company's Confidential
Private Placement Memorandum dated May 1, 1996 (the "Memorandum").
The holder(s) of this Purchase Option and any option issued upon the
transfer or assignment of this Purchase Option are referred to hereinafter
collectively as the Holder(s) of the Purchase Options or as the
"Holder(s)".
2. Exercise.
--------
2.1 EXERCISE FORM. In order to exercise this Purchase
Option, the exercise form attached hereto must be duly
executed and completed and delivered to the Company,
together with this Purchase Option and payment of the
Exercise Price for the Common Stock being purchased. To
the extent the subscription rights represented hereby
shall not be exercised at or before 5:00 p.m., New York
Time, on July 18, 1998 this Purchase Option shall become
and be void without further force or effect, and all
rights represented hereby shall cease and expire.
2.2 LEGEND. Each certificate for Common Stock purchased
under this Purchase Option shall bear a legend as follows
unless such Common Stock has been registered under the
Act and the issuance complies with any applicable state
securities laws:
"The securities represented by this certificate have
been acquired for investment and have not been
registered under the Securities Act of 1933, as
amended (the "Act"). The securities may not be sold,
assigned, pledged, hypothecated or otherwise
transferred except pursuant to an effective
registration statement under the Act and in
compliance with the applicable state securities
laws, or the Company receives an opinion of counsel,
satisfactory to the Company, that such registration
is not required and that the sale, assignment,
pledge, hypothecation or transfer is in compliance
with applicable state securities laws."
2
Page 62 of 93
<PAGE>
3. Transfer.
--------
3.1 TRANSFERABILITY. TPSC agrees as holders to not
transfer, sell, assign, pledge, hypothecate or otherwise
transfer this Purchase Option. Upon the closing of escrow
TPSC will provide the Company (Puroflow, Inc.) a list of
holder names that the options are to be allocated to and
transferred into those names respectively.
3.2 TRANSFER OF COMMON STOCK. The shares of Common Stock
underlying this Purchase Option, shall not be transferred
unless (i) pursuant to an exemption from registration
under the Act and in compliance with applicable state
securities laws, or (ii) the transfer is made pursuant to
an effective registration statement under the Act and in
compliance with applicable state securities laws.
4. New Purchase Options To Be Issued.
---------------------------------
4.1 PARTIAL EXERCISE OR TRANSFER. This Purchase Option
may be exercised or assigned in whole or in part. In the
event of the exercise or assignment hereof in part only,
upon surrender of this Purchase Option for cancellation,
together with the duly executed exercise or assignment
form, the Company shall cause to be delivered to the
Holder without charge a new Purchase Option of like tenor
to this Purchase Option in the name of the Holder
evidencing the right of the Holder to purchase the number
of shares of Common Stock purchasable hereunder as to
which this Purchase Option has not been exercised or
assigned.
4.2 LOST CERTIFICATE. Upon receipt by the Company of
evidence satisfactory to it of the loss, theft,
destruction or mutilation of this Purchase Option and of
reasonably satisfactory indemnification, the Company
shall execute and deliver a new Purchase Option of like
tenor and date. Any such new Purchase Option executed and
delivered as a result of such loss, theft, mutilation or
destruction shall constitute an additional contractual
obligation on the part of the Company.
3
Page 63 of 93
<PAGE>
5. Registration Rights.
-------------------
5.1 REQUIRED REGISTRATION.
5.1.1 GRANT OF RIGHT. The Company agrees to prepare and
file a registration statement (the "Registration Statement"), on Form S-1
(or Form SB-2, or other Form, if permitted by SEC rules and regulations),
with the Securities and Exchange Commission (the "SEC") no later than six
(6) months from the date of the first sale of the Company's securities in
the Offering. The Registration Statement shall include, among other things,
all shares of Common Stock of the Company sold in the Offering, this
Purchase Option and all the shares of Common Stock issuable upon exercise
of this Purchase Option. The Company further agrees that it shall cause
such Registration Statement to become effective and remain effective for a
period of twenty-four (24) months from the date the SEC declares such
Registration Statement effective. This Purchase Option and the shares of
Common Stock issuable upon exercise of this Purchase Option (shall
sometimes hereinafter be collectively referred to as the "Registrable
Securities"'). Should this registration or the effectiveness thereof be
delayed by the Company, the exercisability of the Purchase Options shall be
extended for a period of time equal to the delay in registering the
Registrable Securities caused by the Company.
5.1.2 TERMS. The Company shall bear all fees and
expenses attendant to registering the Registrable Securities, and the
Holder(s) shall pay any and all underwriting and broker/dealer discounts,
commissions and non-accountable expenses of any underwriter or broker/
dealer selected by the Holder(s) to sell the Registrable Securities. The
Company agrees to use its prompt best efforts to cause the filing required
herein to become effective and to qualify or register the Registrable
Securities in such States as are reasonable requested by the Holder(s);
provided, however, that in no event shall the Company be required to
register the Registrable Securities in more than ten (10) states or in
states in which such registration would cause the Company to be obligated
to qualify to do business in such State or execute a general consent to
service or process.
4
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<PAGE>
5.2 "PIGGY-BACK" REGISTRATION.
5.2.1 GRANT OF RIGHT. In addition to the required right
of registration, the Holder(s) of the Purchase Option shall have the right
for a period of twenty-four (24) months from the closing of the Offering,
to include the Registrable Securities as part of any other registration of
securities filed by the Company.
5.2.2 TERMS. The Company shall bear all fees and
expenses attendant to registering the Registrable Securities under the Act
and in those states selected by the Company for purposes of its offering,
but the Holder(s) shall pay any and all underwriting and broker-dealer
discounts, commissions and non-accountable expenses of any underwriter or
broker-dealer selected by Holder(s) to sell the Registrable Securities. The
Company shall qualify or register the Registrable Securities in such
additional states (but in no event more than ten (10) states) as are
reasonably requested by the Holder(s) and shall bear all costs and
expenses, including reasonable counsel fees and expenses, of the
qualification or registration of the Registrable Securities in such
additional states. In the event of such a proposed registration, the
Company shall furnish the then Holder(s) of the Registrable Securities with
not less than twenty-five days written notice prior to the proposed date of
filing of such registration statement. Such notice to the Holder(s) shall
continue to be given for each registration statement filed (during the
period in which the Purchase Option is exercisable) by the Company until
such time as all of the Registrable Securities have been registered. The
Holder(s) shall exercise the "piggy-back" rights provided for herein by
giving written notice, within fifteen days of the receipt of the Company's
notice of its intention to file a registration statement. The Company shall
cause any registration statement filed pursuant to the above "piggyback"
rights to remain effective for at least nine months from the date that the
Holder(s) of the Registrable Securities are first given the opportunity to
sell all of such securities. Upon effecting any sale of the Registrable
Securities, the Holders shall advise the Company in writing of the date of
such sale and the number of Registrable Securities sold.
5.3 GENERAL TERMS.
5.3.1 INDEMNIFICATION BY COMPANY. The Company shall
indemnify the Holder(s) of the Registrable Securities to be sold pursuant
to any registration statement hereunder and each person, if any, who
controls such Holder(s) within the meaning of Section 15 of the Act or
Section 20(a) of the Securities Exchange Act of 1934, as amended ("Exchange
Act"), and each underwriter (within the meaning of the Act) of such
Registrable Securities and each person, if any, who controls (within
5
Page 65 of 93
<PAGE>
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act)
such underwriter, against all loss, claim, damage, expense or liability
(including all reasonable attorneys' fees and other expenses reasonably
incurred in investigating, preparing or defending against any claim
whatsoever) to which any or all of them may become subject under the Act,
the Exchange Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon
(i) any untrue statement or alleged untrue statement of a material fact
contained (A) in such registration statement or an preliminary or final
prospectus constituting a part thereof or any amendment or supplement
thereto (collectively, the "Offering Documents"), or (B) in any blue sky
application or other document executed by the Company specifically for blue
sky purposes or based upon any other written information furnished by the
Company or on its behalf to any state or other jurisdiction in order to
qualify any or all of the Registrable Securities under the securities laws
thereof (any such application, document or information being hereinafter
called a "Blue Sky Application"), or (ii) the omission or alleged omission
by the Company to state in the Offering Documents or in any Blue Sky
Application a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading; and will reimburse the Holder(s), each
underwriter and each such controlling person for any legal or other
expenses reasonably incurred by each of them in connection with
investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the Company will not be liable in any case
to any one of the Holder(s) to the extent that any such loss, claim, damage
or liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in reliance upon and
in conformity with written information furnished to the Company by such
Holder for use in the preparation of the Offering Documents or any such
Blue Sky Application.
5.3.1.1 INDEMNIFICATION BY THE HOLDERS. Each of the
Holder(s) of the Registrable Securities to be sold pursuant to any
registration hereunder agrees, severally but not jointly, to indemnify and
hold harmless the Company and each person, if any, who controls the Company
within the meaning of the Act or the Exchange Act and each underwriter
(within the meaning of the Act) and each person, if any, who controls such
underwriter within the meaning of the Act or the Exchange Act against all
losses, claims, damages or liabilities (including all reasonable attorneys'
fees and other expenses reasonably incurred in investigating preparing or
defending against any claim whatsoever), to which each of them may
6
Page 66 of 93
<PAGE>
become subject, under the Act, the Exchange Act or otherwise insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of a material fact contained (A) in the Offering Documents, or
(B) in any Blue Sky Application, or (ii) the omission or alleged omission
to state in the Offering Documents or in any Blue Sky Application a
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, but in each case, only if and to the extent that such
untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon or in conformity with written
information furnished to the Company by such Holder specifically for use in
the preparation of the Offering Documents or any such Blue Sky Application;
and will reimburse the Company, each underwriter and each such controlling
person for any legal or other expenses reasonably incurred by each of them
in connection with investigating or defending any such loss, claim, damage,
liability or action provided that such loss, claim, damage or liability is
found ultimately to arise out of or be based upon the circumstances
described in this Subsection 5.3.1.1.
5.3.1.2 PROCEDURE. Promptly after receipt by an
indemnified party under this Section 5.3.1 of notice of the commencement of
any action, such indemnified party will, if a claim in respect thereof is
to be made against any indemnifying party under this Section 5.3.1, notify
in writing the indemnifying party of the commencement thereof; and the
omission so to notify the indemnifying party will relieve the indemnifying
party from any liability under this Section 5.4.1 as to the particular item
for which indemnification is then being sought, but not from any other
liability which it may have to any indemnified party. In case any such
action is brought against any indemnified part, and it notifies an
indemnifying party of the commencement thereof, the indemnifying party will
be entitled to participate therein, and to the extent that it may wish,
jointly with any other indemnifying party, similarly notified, to assume
the defense thereof, with counsel who shall be to the reasonable
satisfaction of such indemnified party, and after notice from the
indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party under this paragraph 5.3.1 for any legal or other
expenses subsequently incurred by such indemnified party in connection with
the defense thereof other than reasonable costs of investigation. Any such
indemnifying party shall not be liable to any such indemnified party on
account of any settlement of any claim or action effected without the
consent of such indemnifying party.
7
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<PAGE>
5.3.1.3 CONTRIBUTION. If the indemnification
provided for in this Section 5.3.1 is unavailable to any indemnified party
in respect to any losses, claims, damages, liabilities or expenses
referred to therein, then the indemnifying party, in lieu of indemnifying
such indemnified party, will contribute to the amount paid or payable by
such indemnified party, as a result of such losses, claims, damages,
liabilities or expenses in such proportion as is appropriate to reflect the
relative fault of the Company on the one hand, and of the Holder of the
Registrable Securities who seeks contribution or from whom contribution is
sought on the other hand, in connection with statements or omissions which
resulted in such losses, claims damages, liabilities or expenses as well as
any other relevant equitable considerations. The relative fault of the
Company on the one hand, and such Holder of the Registrable Securities on
the other hand, will be determined with reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
Company or the Holder, and their relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission.
5.3.1.4 EQUITABLE CONSIDERATIONS. The Company and
the Holder agree that it would not be just and equitable if contribution
pursuant to this Section 5.3.1 were determined by prorata allocation or by
any other method of allocation which does not take into account the
equitable considerations referred to in the immediately preceding
paragraph.
5.3.2 EXERCISE OF PURCHASE OPTION. Nothing contained in
this Purchase Option shall be construed as requiring the Holder(s) to
exercise their Purchase Option prior to or after the initial filing of any
registration statement or the effectiveness thereof.
5.3.3 Intentionally Deleted.
5.3.4 DOCUMENTS DELIVERED TO HOLDERS. The Company shall
furnish to each of the Holder(s) participating in any of the foregoing
offerings and to each underwriter of any such offering, if any, a signed
counterpart, addressed to each of such Holder(s) or underwriter, of (i) an
opinion of counsel to the Company, dated the effective date of such
registration statement (and, if such registration includes an underwritten
public offering, an opinion dated the date of the closing under any
underwriting agreement related thereto), and (ii) a "cold comfort" letter
8
Page 68 of 93
<PAGE>
dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, a letter dated the
date of the closing under the underwriting agreement) signed by the
independent public accountants who have issued a report on the Company's
financial statements included in such registration statement, in each case
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) and, in the case of such
accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issuer's
counsel and in accountants' letters delivered to underwriters in
underwritten public offerings of securities. The Company shall also deliver
promptly to each of the Holder(s) participating in the offering requesting
same the correspondence and memoranda described below and to the managing
underwriter copies of all correspondence between the Commission and the
Company, its counsel or auditors and all memoranda relating to discussions
with the Commission or its staff with respect to the registration statement
and permit each Holder and underwriter to do such investigation, upon
reasonable advance notice, with respect to information contained in or
omitted from the registration statement as it deems reasonably necessary to
comply with applicable securities laws or rules of the National Association
of Securities Dealers, Inc. ("NASD"). Such investigation shall include
access to books, records and properties and opportunities to discuss the
business of the Company with its officers and independent auditors, all to
such reasonable extent and at such reasonable times as any such Holder
shall reasonably request.
5.3.5 UNDERWRITING AGREEMENT. The Company shall enter
into an underwriting agreement with the managing underwriter(s) selected by
any Holder(s) whose Registrable Securities are being registered pursuant to
Section 5.1. Any such underwriters shall be reasonably satisfactory to the
Company. Such agreement shall be reasonably satisfactory in form and
substance to the Company, each Holder and such managing underwriter(s), and
shall contain such representations, warranties and covenants by the Company
and such other terms as are customarily contained in agreements of that
type. The Holder(s) shall be parties to any underwriting agreement relating
to an underwritten sale of their Registrable Securities and may, at their
option, require that any or all the representations, warranties and
covenants of the Company to or for the benefit of such underwriter(s) shall
also be made to and for the benefit of such Holder(s). Such Holder(s) shall
not be required to make any representations or warranties or to agreements
with the Company or the underwriter(s) except as they may relate to such
Holder(s), their Registrable Securities and their intended methods of
distribution.
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5.3.6 DOCUMENTS TO BE DELIVERED BY HOLDER(S). Each of
the Holder(s) participating in any of the foregoing offerings shall furnish
to the Company a completed and executed questionnaire provided by the
Company requesting information customarily sought of selling security
holders.
6. Adjustments to Exercise Price and Number of Securities.
------------------------------------------------------
6.1 COMPUTATION OF ADJUSTED EXERCISE PRICE. Except for and
exclusive of the issuance or sales referred to in Section 6.8 hereof and as
otherwise hereinafter provided, in case the Company shall at any time after
the date hereof issue or sell any shares of Common Stock including shares
held in the Company's treasury and shares of Common Stock issued upon the
exercise of any options, rights or warrants to subscribe for shares of
Common Stock and shares of Common Stock issued upon the direct or indirect
conversion or exchange of securities for shares of Common Stock, for a
consideration per share less than the Exercise Price in effect on the date
the Board of Directors authorized the issuance or sale of such shares (or,
if there was no such authorization, immediately prior to the issuance or
sale of such shares) or without consideration, then forthwith upon such
issuance or sale, the Exercise Price shall (until another such issuance or
sale) be reduced to the price (calculated to the nearest full cent) 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; provided however, that in no event shall the
Exercise Price be adjusted pursuant to this computation to an amount in
excess of the Exercise Price in effect immediately prior to such
computation, except in the case of a combination of outstanding shares of
Common Stock, as provided by Section 6.4 hereof or as a result of
readjustment pursuant to clause (v) of Section 6.3 hereof.
6.2 GENERAL RULES FOR COMPUTATION OF ADJUSTMENTS. For the
purposes of any computation to be made in accordance with Section 6.1, the
following provisions shall be applicable:
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6.2.1 CASH CONSIDERATION. In case of the issuance or
sale of shares of Common Stock for a consideration part or all of which
shall be cash, the amount of the cash consideration therefor shall be
deemed to be the amount of cash received by the Company for such shares
(or, if shares of Common Stock are offered by the Company for subscription,
the subscription price, or, if either of such securities shall be sold to
underwriters or dealers for public offering without a subscription
offering, the public offering price), before deducting therefrom any
compensation paid or discount allowed in the sale, underwriting or purchase
thereof by underwriters or dealers or others performing similar services,
or any expenses incurred in connection therewith.
6.2.2 OTHER THAN CASH CONSIDERATION. In case of the
issuance or sale (otherwise than as a dividend or other distribution on any
stock of the Company) of shares of Common Stock for a consideration part or
all of which shall be other than cash, the amount of the consideration
therefor other than cash shall be deemed to be the value of such
consideration as determined in good faith by the Board of Directors of the
Company.
6.2.3 SHARE DIVIDENDS. Shares of Common Stock issuable
by way of dividend or other distribution on any stock of the Company shall
be deemed to have been issued immediately after the opening of business on
the day following the record date for the determination of stockholders
entitled to receive such dividend or other distribution and shall be deemed
to have been issued without consideration.
6.2.4 RECLASSIFICATION. The reclassification of
securities of the Company other than shares of Common Stock into other
securities of the Company including shares of Common Stock shall be deemed
to involve the issuance of such shares of Common Stock for a consideration
other than cash immediately prior to the close of business on the record
date fixed for the determination of security holders entitled to receive
such shares, and the value of the consideration allocable to such shares of
Common Stock shall be determined as provided in Section 6.2.2.
6.2.5 OUTSTANDING SHARES. The number of shares of Common
Stock at any one time outstanding shall include the aggregate number of
shares issued or issuable (subject to readjustment upon the actual issuance
thereof) upon the exercise of any and all outstanding options, rights,
warrants to purchase shares of Common Stock and upon the conversion or
exchange of any and all outstanding securities convertible or exchangeable
into shares of Common Stock.
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6.3 OUTSTANDING RIGHTS, WARRANTS AND CONVERTIBLE AND
EXCHANGEABLE SECURITIES. In case the Company shall at any time after the
date hereof issue options, rights or warrants to subscribe for shares of
Common Stock, or issue any securities convertible into or exchangeable for
shares of Common Stock, for a consideration per share less than the
Exercise Price in effect on the date the Board of Directors authorized the
issuance or sale of such securities (or, if there was no such
authorization, immediately prior to the issuance of such options, rights or
warrants, or such convertible or exchangeable securities, or without
consideration), the Exercise Price in effect immediately prior to the
issuance of such options, rights or warrants, or such convertible or
exchangeable securities, as the case may be, shall be reduced to a price
determined by making a computation in accordance with the provisions of
Section 6.1 hereof, provided that:
(i) The aggregate maximum number of shares of Common
Stock, as the case may be, issuable under such options, rights
or warrants shall be deemed to be issued and outstanding at
the time such options, rights or warrants were issued, and
shall be deemed to be issued for a consideration equal to the
purchase price per share provided for in such options rights
or warrants at the time of issuance, plus the consideration,
if any, received by the Company for the issuance of such
options, rights or warrants.
(ii) The aggregate maximum number of shares of Common
Stock issuable upon conversion or exchange of any convertible
or exchangeable securities shall be deemed to be issued and
outstanding at the time of issuance of such securities, and
for a consideration equal to the consideration received by the
Company for the issuance of such securities, plus the
consideration, if any, receivable by the Company upon the
conversion or exchange thereof.
(iii) If any change shall occur in the exercise price
per share provided for in any of the options, rights, or
warrants referred to in clause (i) of Section 6.3, or in the
price per share at which the securities referred to in clause
(ii) of Section 6.3 are convertible or exchangeable, such
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options, rights, or warrants or conversion or exchange
rights, as the case may be, shall be deemed to have expired or
terminated on the date when such price change became effective
in respect of shares not theretofore issued pursuant to the
exercise or conversion or exchange thereof, and the Company
shall be deemed to have issued upon such date new options,
rights or warrants or convertible or exchangeable securities
at the new price in respect of the number of shares issuable
upon the exercise of such options, rights or warrants or the
conversion or exchange of such convertible or exchangeable
securities.
(iv) Except as provided in clause (i) above, no
further adjustment of the Exercise Price shall be made upon
the actual issuance of the Common Stock upon the exercise of
such options, rights or warrants, or the conversion or
exchange of such convertible or exchangeable securities.
(v) On the expiration of any option, right or warrant
or on the termination of any right to convert or exchange any
convertible or exchangeable security for which an adjustment
to the Exercise Price was made upon the issuance or sale
pursuant to this Section 6.3, the Exercise Price shall
forthwith be readjusted to such amount as would have been
obtained had the adjustment made upon the granting or issuance
of such rights, options or warrants or convertible or
exchangeable security been made upon the basis of the issuance
or sale of only the number of shares of Common Stock actually
issued upon the exercise of such options, rights of warrants
or upon the conversion or exchange of such convertible or
exchangeable security.
6.4 SUBDIVISION AND COMBINATION. In case the Company shall at
any time subdivide or combine the outstanding shares of Common Stock, the
Exercise Price shall forthwith be proportionately decreased in the case of
subdivision or increased in the case of combination.
6.5 ADJUSTMENT IN NUMBER OF SHARES. Upon each adjustment of the
Exercise Price pursuant to the provisions of this Section 6, the number of
shares of Common Stock issuable upon the exercise of this Purchase Option
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shall be adjusted to the nearest full number obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number
of shares of Common Stock issuable upon exercise of this Purchase Option
immediately prior to such adjustment and dividing the product so obtained
by the adjusted Exercise Price.
6.6 DEFINITION OF COMMON STOCK. For the purpose of this
Purchase Option, the term "Common Stocks" shall mean (i) the class of stock
designated as Common Stock in the Certificate of Incorporation of the
Company as amended through the date hereof, or (ii) any other class of
stock resulting from successive changes or reclassifications of such Common
Stock consisting solely of changes in par value, or from par value to no
par value, or from no par value to par value. In the event that the Company
shall after the date hereof issue securities with greater or superior
voting rights than the shares of Common Stock outstanding as of the date
hereof, the Holder, at its option, may receive upon exercise of any
Purchase Option either shares of Common Stock or a like number of such
securities with greater or superior voting rights.
6.7 MERGER OR CONSOLIDATION. In case of any consolidation of
the Company with, or merger of the Company with, or merger of the Company
into, another corporation (other than a consolidation or merger which does
not result in any reclassification or change of the outstanding Common
Stock), the corporation formed by such consolidation or merger shall
execute and deliver to the Holder a supplemental Purchase Option providing
that the holder of each Purchase Option then outstanding or to be
outstanding shall have the right thereafter (until the stated expiration of
such Purchase Option) to receive, upon exercise of such Purchase Option,
the kind and amount of shares of stock and other securities and property
receivable upon such consolidation or merger, by a holder of the number of
shares of Common Stock of the Company for which such Purchase Option might
have been exercised immediately prior to such consolidation, merger, sale
or transfer. Such supplemental Purchase Option shall provide for
adjustments which shall be identical to the adjustments provided in Section
6. The above provision of this Section shall similarly apply to successive
consolidations or mergers.
6.8 NO ADJUSTMENT OF EXERCISE PRICE IN CERTAIN CASES. No
adjustment of the Exercise Price shall be made:
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(i) With respect to the shares of Common Stock
issuable upon the exercise of (A) this Purchase Option; (B)
currently granted options under the Company's stock option
plans now in effect.
(ii) Upon the issuance or sale of shares of Common
Stock upon the exercise of options, rights or warrants, or
upon the conversion or exchange of convertible or exchangeable
securities, in any case where the Exercise Price was adjusted
at the time of issuance of such options, rights or warrants,
or convertible or exchangeable securities, as contemplated by
Section 6.3 hereof.
(iii) If the amount of said adjustment shall be less
than two cents ($.02) per Share, provided, however, that in
such case, any adjustment that would otherwise be required
then to be made shall be carried forward and shall be made at
the time of and together with the next subsequent adjustment
which, together with any adjustment so carried forward, shall
amount to at least ten cents ($.02) Per Share.
6.9 NON-CASH DIVIDENDS AND OTHER DISTRIBUTIONS. In the event
that the Company shall at anytime prior to the exercise of all Purchase
Options declare a dividend (other than a dividend consisting solely of
shares of Common Stock, other securities of the Company or the payment of
cash dividends) or otherwise distribute to its stockholders any assets,
property rights, evidences of indebtedness, securities (other than shares
of Common Stock), whether issued by the Company or by another or any other
thing of value, the Holder(s) of the unexercised Purchase Options shall
thereafter be entitled, in addition to the shares of Common Stock or other
securities and property receivable upon the exercise thereof, to receive,
upon the exercise of such Purchase Options, the same property, assets,
rights, evidences of indebtedness, securities or any other thing of value
that they would have been entitled to receive at the time of such dividend
or distribution as if the Purchase Options had been exercised immediately
prior to such dividend or distribution. At the time of any such dividend or
distribution, the Company shall make appropriate reserves to ensure the
timely performance of the provisions of this Section 6.9.
6.10 ELIMINATION OF FRACTIONAL INTERESTS. The Company shall not
be required to issue certificates representing fractions of shares of
Common Stock upon exercise of the Purchase Option, nor shall it be required
to issue script or pay cash in lieu of any fractional interests, it being
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the intent of the parties that all fractional interests shall be eliminated
by rounding any fraction up or down to the nearest whole number of shares
of Common Stock or other securities, properties or rights.
6.11 MARKET PRICE PER SHARE. For the purposes of this Purchase
Option, the term "Market Price" at any date shall be deemed to be (i) the
last reported sale price, or, in case no such reported sale takes place on
such day, the average of the last reported sale prices for the last three
trading days, in either case as officially reported by the national
securities exchange on which the Common Stock is principally trading, or,
if the Common Stock is not listed or admitted to trading on any national
securities exchange or if any such exchange on which the Common Stock is
listed is not its principal trading market, then by the National
Association of Securities Dealers, Inc. ("NASD"), if the Common Stock is
principally traded on the NASDAQ National Market System ("NASDAQ/NMS"),
(ii) if the Common stock is not principally traded on either a national
securities exchange or NASDAQ/NMS then the average bid quotation on such
day as furnished by the NASD through the National Association of Securities
Dealers, Inc.'s Automated Quotation System ("NASDAQ") or (iii) if the
Common Stock is not quoted on NASDAQ, as determined in good faith by
resolution of the Board of Directors of the Company, based on the best
information available to it.
7. Reservation And Listing.
-----------------------
The Company shall at all times reserve and keep available out
of its authorized shares of Common Stock, solely for the purpose of
issuance upon exercise of the Purchase Options, such number of shares of
Common Stock or other securities, properties or rights as shall be issuable
upon the exercise thereof. The Company covenants and agrees that, upon
exercise of the Purchase Options and payment of the Exercise Price
therefor, all shares of Common Stock and other securities issuable upon
such exercise shall be duly and validly issued, fully paid and
non-assessable and not subject to preemptive rights of any stockholder. As
long as the Purchase Options shall be outstanding, the Company shall use
its best efforts to cause all (i) shares of Common Stock issuable upon
exercise of the Purchase Options to be listed (subject to official notice
of issuance) on all securities exchanges (or, if applicable, qualified for
quotation on NASDAQ) on which the Common Stock of the Company may then be
listed and/or qualified for quotation; and during any period of time in
which such shares of Common Stock issuable upon exercise of the Purchase
Options are not so listed and/or qualified for quotation, the period of
time which the Purchase Options may be exercised shall be extended for a
corresponding period of time.
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8. Certain Notice Requirements.
---------------------------
8.1 HOLDER'S RIGHT TO RECEIVE NOTICE. Nothing herein shall be
construed as conferring upon the Holders the right to vote or consent or to
receive notice as a stockholder for the election of directors or any other
matter, or as having any rights whatsoever as a stockholder of the Company.
If however, at any time prior to the expiration of the Purchase Options and
their exercise, any of the events described in Section 8.2 shall occur,
then, in one or more of said events, the Company shall give written notice
of such event at least fifteen days prior to the date fixed as a record
date or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, conversion or
exchange of securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall
specify such record date or the date of the closing of the transfer books,
as the case may be.
8.2 EVENTS REQUIRING NOTICE. The Company shall be required to
give the notice described in Section 8 upon one or more of the following
events: (i) if the Company shall take a record of the holders of its shares
of Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or
distribution payable otherwise than out of retained earnings, as indicated
by the accounting treatment of such dividend or distribution on the books
of the Company or (ii) the Company shall offer to all the holders of its
Common Stock any additional shares of capital stock of the Company or
securities convertible into exchangeable for shares of capital stock of the
Company, or any option, right or warrant to subscribe therefor, or (iii) a
dissolution, liquidation or winding up of the Company (other than in
connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business shall be proposed.
8.3 NOTICE OF CHANGE IN EXERCISE PRICE. The Company shall, promptly
after an event requiring a change in the Exercise Price pursuant to Section 6
hereof, send notice to the Holders of such event and change ("Price Notice").
The Price Notice shall describe the event causing the change and the method of
calculating same and shall be certified as being true and accurate by the
Company's President and Chief Financial Officer.
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8.4 TRANSMITTAL OF NOTICES. All notices, requests, consents and
other communications under this Purchase Option shall be in writing and
shall be deemed to have been duly made when hand delivered, or mailed by
express mail or private courier service: (i) If to the registered Holder of
the Purchase Option, to the address of such Holder as shown on the books of
the Company, or (ii) if to the Company, to following address or to such
other address as the Company designate by notice to the Holders: Puroflow
Incorporated, 16559 Saticoy Street, Van Nuys, California 91406.
9. Miscellaneous.
-------------
9.1 AMENDMENTS. Any amendment or modification shall require the
written consent signed by the party against whom enforcement of the
modification or amendment is sought.
9.2 HEADINGS. The headings contained herein are for the sole
purpose of convenience of reference, and shall not in any way limit or
affect the meaning or interpretation of any of the terms or provisions of
this Purchase Option.
9.3 ENTIRE AGREEMENT. This Purchase Option (together with the
other agreements and documents being delivered pursuant to or in connection
with this Purchase Option) constitutes the entire agreement of the parties
hereto with respect to the subject matter hereof and supersedes all prior
agreements and understandings of the parties, oral and written, with
respect to the subject matter hereof.
9.4 BINDING EFFECT. This Purchase Option shall inure solely to
the benefit of and shall be binding upon, the Holder and the Company and
their permitted assignees, respective successors, legal representatives and
assigns, and no other person shall have or be construed to have any legal
or equitable right, remedy or claim under or in respect of or by virtue of
this Purchase Option or any provisions herein contained.
9.5 GOVERNING LAW; SUBMISSION TO JURISDICTION VENUE. This
Purchase Option shall be governed by and construed and enforced in
accordance with the laws of the State of California, without giving effect
to conflict of laws principles thereof or the actual domiciles of the
parties. The Company and the Holder hereby agree that any action,
proceeding or claim against either of them arising out of, or relating in
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any way to this Purchase Option shall be brought and enforced in any of the
courts of the State of California, in California, or in the United States
District Court, and irrevocable submits to such jurisdiction. The company
and the Holder hereby waive any objection to such jurisdiction and that
such courts represent an inconvenient forum. Any process or summons to be
served upon the Company or the Holder may be served by transmitting a copy
thereof by registered or certified mail, return receipt requested, postage
prepaid, addressed to it at the address set forth in Section 8 hereof with
respect to the Company and to the Holder at the following address: c/o
Toluca Pacific Securities Corporation, 3500 West Olive Avenue, Suite 1190
Burbank, California 91505, or such other address as the Holder may so
notify the Company. Such mailing shall be deemed personal service and shall
be legal and binding upon the Company and the Holder in any action,
preceding or claim.
9.6 WAIVER, ETC. The Failure of the Company or the Holder to at
any time enforce any of the provisions of this Purchase Option shall not be
deemed or construed to be a waiver of any such provision, nor to in any way
affect the validity of this Purchase Option or any provision hereof or the
right of the Company or any Holder to thereafter enforce each and every
provision of this Purchase Option. No waiver of any breach, non-compliance
or non-fulfillment of any of the provisions of this Purchase Option shall
be effective unless set forth in a written instrument executed by the party
or parties against whom or which enforcement of such waiver is sought; and
no waiver of any such breach, non-compliance or non-fulfillment shall be
construed or deemed to be a waiver of any other subsequent breach,
non-compliance or non-fulfillment.
9.7 ABSOLUTE OWNER. The Company may deem and treat the
registered holder of this Purchase Option as the absolute owner of the
Purchase Option (notwithstanding and notations of ownership or writing
hereon made by anyone) for all purposes and shall not be affected by any
notice to the contrary.
IN WITNESS WHEREOF, the Company has caused this Purchase Option
to be signed by its duly authorized officer as of the 30th day of October,
1996.
PUROFLOW INCORPORATED
By:___________________________
Michael H. Figoff, President
ATTEST:
_______________________________
Sandy Yoshisato, Secretary
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EXHIBIT 4.2
-----------
REGISTRATION RIGHTS AGREEMENT
-----------------------------
THIS REGISTRATION RIGHTS AGREEMENT, dated as of June 3, 1996 by and
between PUROFLOW INCORPORATED, a Delaware corporation (the "Company"), and
person whose name appears on the signature page attached hereto (the
"Holder").
WHEREAS, pursuant to a Private Placement Memorandum dated May 1, 1996
(the "Memorandum"), the Company has offered (the "Offering"), through
Toluca Pacific Securities Corporation (the "Placement Agent"), for sale
shares of its common stock, $.01 par Value (the "Common Stock"), on a
"best efforts 2,500,000 share maximum - 1,200,000 share minimum" basis
(collectively the "Shares");
WHEREAS, in order to induce the Holder to purchase the Shares, the
Company and the Holder have agreed to enter into this Agreement; and
WHEREAS, it is intended by the Company and the Holder that this
Agreement shall become effective immediately upon the acquisition by the
Holder of the Shares;
NOW, THEREFORE, in consideration of the premises, promises and the
mutual covenants contained herein and in the Subscription Agreement, the
Company hereby agrees as follows:
REGISTRATION RIGHTS.
1. REGISTRATION RIGHTS.
(a) GRANT OF REQUIRED REGISTRATION RIGHT. The Company
agrees to prepare and file a registration statement (the
"Registration Statement"), on Form S-1 (or Form SB-2, or other Form,
if permitted) with the Securities and Exchange Commission (the "SEC")
no later than six (6) months from the date of the last sale of the
Shares in the Offering. The Registration Statement shall include,
among other things, all Shares sold in the Offering, a warrant (the
"PA Warrant"), granted by the Company to the Placement Agent and all
the shares of Common Stock issuable upon exercise thereof (the "PA
Shares"). The Company further agrees that it shall cause such
Registration Statement to become effective and remain effective for a
period of twelve (12) months from the date SEC declares such
Registration Statement effective. The Shares, the PA Warrant and the
PA Shares shall collectively be referred to herein as the
"Registrable Securities". Should this registration or the
effectiveness thereof be delayed by the Company, the exercisability
of the Purchase Options shall be extended for a period of time equal
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to the delay in registering the Registrable Securities caused by the
Company. Moreover, the Company agrees that from the net proceeds
raised in the Offering, it shall at the closing of the Offering
deposit $50,000.00 of such proceeds into a segregated account F/B/O
PUROFLOW INCORPORATED SHARE SUBSCRIBERS mutually acceptable to the
Placement Agent and the Company. The $50,000.00 shall be released
automatically to TPSC F/B/O Puroflow Inc., Share Subscribers
(including the Holder), if the Company has not filed the
Registration Statement with the SEC by the target date, such funds
shall then be used solely in connection with the preparation and
filing of a registration statement covering the Shares, in the event
such funds are released from the special account to TPSC including
the holder, the Company further agrees that it shall take all
necessary or advisable expeditiously to assist the Holders in causing
such registration statement to be filed and become and remain
effective, including, but not limited to, signing all documents
(including the registration statement) to effect such action.
(b) TERMS. The Company shall bear all fees and expenses
attendant to registering the Registrable Securities, and the
Holder(s) shall pay any and all underwriting and broker-dealer
discounts, commissions and non-accountable expenses of any
underwriter or broker-dealer selected by the Holder(s) to sell the
Registrable Securities. The Company agrees to use its prompt best
efforts to cause the filing required herein to become effective and
to qualify or register the Registrable Securities in such States as
are reasonably requested by the Holder(s) (but in no event more than
ten (10) states); provided, however, that in no event shall the
Company be required to register the Registrable Securities in a state
in which such registration would cause the Company to be obligated to
qualify to do business in such State or execute a general consent to
service or process.
(c) "PIGGYBACK REGISTRATION". If the Company at any time
after the date of this Agreement proposes to register any of its
securities under the Securities Act of 1933, as amended (the "1933
Act") (other than in connection with a merger or pursuant to Form S-8
or other comparable form), and any shares sold in the offering to the
Holders are at such time not registered for sale under the Act, the
Company shall include all such shares in such registration statement
if such registration statement does not related to any underwritten
public offering. If such registration statement relates to an
underwritten public offering, the Company shall request that the
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managing underwriter (if any) of such underwritten offering include
the Shares in the registration, statement for the underwritten
offering in such registration. If such managing underwriter agrees to
include the Registrable Securities in the registration statement
relating to the underwritten offering, the Company shall at such time
give prompt written notice to all Holders of its intention to effect
such registration and of such Holders, right under such proposed
registration, and upon the request of any such Holder delivered to
the Company within twenty (20) days after giving such notice (which
request shall specify the Registrable Securities intended to be
disposed of by such Holder), the Company shall include such
Registrable Securities held by such Holder requested to be included
in such registration; provided, however, that:
(i) If, at any time after giving such written
notice of the Company's intention to register any of the
Holders' Registrable Securities and prior to the effective date
of the registration statement filed in connection with such
registration, the Company shall determine for any reason not to
file the registration statement wherein the Registrable
Securities are being registered or to delay the registration of
such Registrable Securities, at its sole election, the Company
may give written notice of such determination to each Holder
and thereupon shall be relieved of its obligation to register
any Registrable Securities issued or issuable in connection
with such registration (but not from its obligation to pay
registration expenses in connection therewith or to register
the Registrable securities in a subsequent registration); and
in the case of a determination to delay a registration, the
Company shall thereupon be permitted to delay registering any
Registrable Securities for the same period as the delay in
respect of securities being registered for the Company's own
account.
(ii) If the managing underwriter in such
underwritten offering shall advise the Company that it declines
to include a portion or all of the Registrable Securities
requested by the Holders to be included in the registration
statement, then distribution of all or a specified portion of
the Registrable Securities shall be excluded from such
registration statement (in case of an exclusion as to a portion
of the Registrable Securities, such portion to be excluded
shall be allocated among such holders and any affiliates of the
Company including securities to be registered in such
underwritten offering in proportion to the respective number of
Registrable Securities and other securities requested to be
registered by each such Holder and affiliate). In such event
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the Company shall give the applicable Holders prompt notice of
the number of Registrable securities excluded from such
registration at the request of the managing underwriter. No
such exclusion shall reduce the securities being offered by the
Company for its own account to be included in such registration
statement.
(d) COOPERATION WITH COMPANY. The Holder will cooperate
with the Company in all respects in connection with this Agreement,
including, timely supplying all information reasonably requested by
the Company and executing and returning all documents reasonably
requested in connection with the registration and sale of the
Registrable Securities.
2. REGISTRATION PROCEDURES. If and whenever the Company is required
by any of the provisions of this Agreement to use its best efforts to
effect the registration of any of the Registrable Securities under the 1933
Act, the Company shall as expeditiously as possible:
(a) prepare and file with the Securities and Exchange
Commission (the "Commission") a registration statement and shall use
its best efforts to cause such registration statement to become
effective and remain effective until all the Registrable Securities
are sold or become capable of being publicly sold without
registration under the 1933 Act;
(b) prepare and file with the Commission such amendments
and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such
registration statement effective and to comply with the provisions of
the 1933 Act with respect to the sale or other disposition of all
securities covered by such registration statement (including
prospectus supplements with respect to the sales of securities from
time to time in connection with a registration statement pursuant to
Rule 415 of the Commission);
(c) furnish to the Holders such numbers of copies of a
summary prospectus or other prospectus, including a preliminary
prospectus or any amendment or supplement to any prospectus, in
conformity with the requirements of the 1933 Act, and such other
documents, as the Holders may reasonably request in order to
facilitate the public sale or other disposition of the securities
owned by the Holders;
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(d) use its best efforts to register and qualify the
securities covered by such registration statement under such other
securities or blue sky laws of such jurisdictions as the Holders
shall reasonably request, and do any and all other acts and things
which may be necessary or advisable to enable such Holders to
consummate the public sale or other disposition in such jurisdictions
of the securities owned by such Holders, except that the Company
shall not for any such purpose be required to qualify to do business
as a foreign corporation in any jurisdiction wherein it is not so
qualified, to file therein any general consent to service of process
or to be subject to any escrow or other similar conditions;
(e) use its best efforts to list such securities on any
securities exchange on which any securities of the Company is then
listed, if the listing of such securities is then permitted under the
rules of such exchange;
(f) enter into and perform its obligations under an
underwriting agreement, if the offering is an underwritten offering,
in usual and customary form, with the managing underwriter or
underwriters of such underwritten offering;
(g) notify the Holder of Registrable Securities covered by
such registration statement, at any time when a prospectus relating
thereto covered by such registration statement is required to be
delivered under the 1933 Act, of the happening of any event of which
it has knowledge as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements,
therein not misleading in the light of the circumstances then
existing; and
(h) take such other actions as shall be reasonably
requested by any Holders to facilitate the registration and sale of
the Registrable Securities; provided, however, that the Company shall
not be obligated to take any actions not specifically required
elsewhere herein which in the aggregate would cost in excess of
$1,000.
3. EXCLUSION OF CERTAIN SECURITIES IN REGISTRATION STATEMENT; NO
OTHER REGISTRATION STATEMENTS. The Company hereby represents, warrants and
agrees that (i) other than the Registrable Securities it shall not allow or
permit any other Securities of the Company to be included in the
Registration Statement, and (ii) for a period of twelve (12) months from
the date the SEC declares the Registration Statement effective, the
5
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Company shall not file any, other Registration Statement with the SEC
without the prior permission from the Placement Agent.
4. EXPENSES. All expenses incurred in any registration of the
Holder's Registrable Securities under this Agreement shall be paid by the
Company, including, without limitation, printing expenses, fees and
disbursements of counsel for the Company, expenses of any audits to which
the Company shall agree or which shall be necessary to comply with
governmental requirements in connection with any such registration, all
registration and filing fees for the Holders', limited to no more than ten
(10) states, Registrable Securities under federal and state securities
laws, and expenses of complying with the securities or blue sky laws of any
jurisdictions pursuant to Section 2(d); provided, however, the Company
shall not be liable for (a) any discounts or commissions to any
underwriter; (b) any stock transfer taxes incurred with respect to
Registrable Securities sold in the Offering or (c) the fees and expenses of
counsel for any Holder, provided that the Company will pay the costs and
expenses of Company counsel when the Company's counsel is representing any
or all selling security holders.
5. INDEMNIFICATION. In the event any Registrable Securities are
included in a registration statement pursuant to this Agreement:
(a) COMPANY INDEMNITY. Without limitation of any other
indemnity provided to any Holder, either in connection with the
offering or otherwise, to the extent permitted by law, the Company
shall indemnify and hold harmless each Holder, the affiliates,
officers, directors and partners of each Holder, any underwriter (as
defined in the 1933 Act) for such Holder, and each person, if any,
who controls such Holder or underwriter (within the meaning of the
1933 Act or the Securities Exchange Act of 1934 (the "Exchange Act"),
against any losses, claims, damages or liabilities (joint or
several) to which they may become subject under the 1933 Act, the
Exchange Act or other federal or state law, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon any of the following statements, omissions
or violations (collectively a "VIOLATION"): (i) any untrue statement
or alleged untrue statement of a material fact contained in such
registration statement including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements
thereto, (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading, (iii) any violation or alleged violation
by the Company of the 1933 Act, the Exchange Act, or any state
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securities law or any rule or regulation promulgated under the 1933
Act, the Exchange Act or any state securities law, and in each case,
the Company shall reimburse the Holder, affiliate, officer or
director or partner, underwriter or controlling person for any legal
or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the Company shall not be liable to
any Holder in any such case for any such loss, claim, damage,
liability or action to the extent that it arises out of or is based
upon a Violation which occurs in reliance upon and in conformity with
written information furnished expressly for use in connection with
such registration by the Holder or any other officer, director or
controlling person thereof.
(b) HOLDER INDEMNITY. The Holder shall indemnify and hold
harmless the Company, its affiliates, its counsel, officers,
directors, shareholders and representatives, any underwriter (as
defined in the 1933 Act) and each person, if any, who controls the
Company or the underwriter (within the meaning of the 1933 Act or the
Exchange Act), against any losses, claims, damages, or liabilities
(joint or several) to which they may become subject under the 1933
Act, the Exchange Act or any state securities law, and in each case
the Holder shall reimburse the Company, affiliate, officer or
director or shareholder, underwriter or controlling person for any
legal or other expenses reasonably incurred by them in connection
with investigating or defending any such loss, claim, damage,
liability or action; insofar as such losses, claims, damages or
liabilities (or actions and respect thereof) arise out of or are
based upon a violation which occurs in reliance upon and in
conformity with written information furnished expressly, by such
Holder or any other officer, director or controlling person thereof
to the Company in connection with the registration of Registrable
Securities. Notwithstanding the above, the Holder's indemnification
shall be limited to the dollar value of the securities being
registered for the account of the Holder.
(c) NOTICE; RIGHT TO DEFEND. Promptly after receipt by an
indemnified party under this Section 5 of notice of the commencement
of any action (including any governmental action), such indemnified
party shall, if a claim in respect thereof is to be made against any
indemnifying party under this Section 5, deliver to the indemnifying
party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in and if the
indemnifying party agrees in writing that it will be responsible for
any costs, expenses, judgments, damages and losses incurred by the
indemnified party with respect to such claim, jointly with any
7
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other indemnifying party similarly noticed, to assume the defense
thereof with counsel mutually satisfactory to the parties; provided,
however, that an indemnified party shall have the right to retain its
own counsel in combination with other parties who have entered into
substantially identical agreements, with the fees and expenses to be
paid by the indemnifying party, if the indemnified party based upon
advice of counsel reasonably believes that representation of such
indemnified party by the counsel retained by the indemnifying party
would be inappropriate due to actual or potential differing interests
between such indemnified party and any other party represented by
such counsel in such proceeding. The failure to deliver written
notice to the indemnifying party within a reasonable time of the
commencement of any such action shall relieve such indemnifying party
of any liability to the indemnified party under this Agreement only
if and to the extent that such failure is prejudicial to its ability
to defend such action, and the omission so to deliver written notice
to the indemnifying party will not relieve it of any liability that
it may have to any indemnified party otherwise than under this
Agreement. There can be no settlement without the indemnifying
party's prior consent.
(d) CONTRIBUTION. If the indemnification provided for in
this Agreement is held by a court of competent jurisdiction to be
unavailable to an indemnified party with respect to any loss,
liability, claim, damage or expense referred to therein, then the
indemnifying party, in lieu of indemnifying such indemnified party
thereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage
or expense in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and of the
indemnified party on the other hand in connection with the statements
or omissions which resulted in such loss, liability, claim, damage or
expense as well as any other relevant equitable considerations. The
relevant fault of the indemnifying party and the indemnified party
shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission
to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. Notwithstanding the
foregoing, the amount the Holder shall be obligated to contribute
pursuant to the Agreement shall be limited to an amount equal, to the
proceeds to the Holder of the Registrable Securities sold pursuant to
the registration statement which gives rise to such obligation to
contribute (less the aggregate amount of any damages which the
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Holder has otherwise been required to pay in respect of such loss,
claim, damage, liability or action, or any substantially similar
loss, claim, damage, liability or action arising from the sale of
such Registrable Securities).
(e) SURVIVAL OF INDEMNITY. The indemnification provided by
this Agreement shall be a continuing right to indemnification and
shall survive the registration and sale of any Registrable Securities
by any person entitled to indemnification hereunder and the
expiration or termination of this Agreement.
6. REMEDIES.
(a) TIME IS OF THE ESSENCE. The Company agrees that time
is of the essence of each of the covenants contained herein and that,
in the event of a dispute hereunder, this Agreement is to be
interpreted and construed in a manner that will enable the Holder to
sell its Registrable Securities as quickly as possible after such
Holders have indicated to the Company that they desire their
Registrable Securities to be registered. Any delay on the part of the
Company not expressly permitted under this Agreement, shall be deemed
a material breach of this Agreement.
(b) REMEDIES UPON DEFAULT OR DELAY. The Company
acknowledges the breach of any part of this Agreement may cause
irreparable harm to the Holder and that monetary damages alone may be
inadequate. The Company therefore agrees that the Holder shall be
entitled to injunctive relief or such other applicable remedy as a
court of competent jurisdiction may provide. Nothing contained herein
will be construed to limit a Holder's right to any remedies at law,
including recovery of damages for breach of any part of this
Agreement.
7. NOTICES.
(a) All communications under this Agreement shall be in
writing and shall be mailed by certified mail return receipt
requested, postage prepaid, or telegraphed or telexed with
confirmation of receipt or delivered by hand or by overnight delivery
service,
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(i) If to the Company, at:
Puroflow Incorporated
16559 Saticoy Street
Van Nuys, California 91406
Attention: Michael H. Figoff
or at such other address as it may have furnished in writing
to the Holder of Registrable Securities at the time outstanding, or
(ii) if to the Holder of any Registrable Securities,
to the address of such Holder as it appears in the stock ledger
of the Company.
(b) Any notice so addressed, when mailed by certified mail
return receipt requested shall be deemed to be given three days,
after so mailed, when telegraphed or telexed shall be deemed to be
given when transmitted, or when delivered by hand or overnight
delivery service shall be deemed to be given when delivered.
8. SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, this Agreement shall inure to the benefit of and be binding upon the
successors and permitted assigns of the Company and the Holder.
9. AMENDMENT; WAIVER AND TERMINATION. This Agreement may be amended,
and the observance of any term of this Agreement may be waived, but only
with the written consent of the company and the Holder. No delay on the
part of any party in the exercise of any right, power or remedy shall
operate as a waiver thereof, nor shall any single or partial exercise by
any party of any right, power or remedy preclude any other or further
exercise thereof, or the exercise of any other right, power or remedy.
Upon the conversion of the Warrants offered in the offering into identical
warrants as are included in any registration statement pursuant to
Paragraph 1(a) hereof, this Agreement shall terminate and be null and void.
Thereafter, the Warrants shall be governed by the public warrant agreement
relating to such warrants.
10. COUNTERPARTS. One or more counterparts of this Agreement may be
signed by the Parties, each of which shall be an original but all of which
together shall constitute one and the same instrument.
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11. GOVERNING LAW. This Agreement shall be construed in accordance
with and governed by the internal laws of the State of California, without
giving effect to conflicts of law principles.
12. INVALIDITY OF PROVISIONS. If any provision of this Agreement is
or becomes invalid, illegal or unenforceable. in any respect, the validity,
legality and enforceability of the remaining provisions contained herein
shall not be affected thereby.
13. HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not be deemed to alter or affect the meaning or
interpretation of any provisions hereof.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as
of the date first set forth above.
PUROFLOW INCORPORATED
By:__________________________ ______________________________
Name: Signature of Holder
Position:
______________________________
Print Name of Holder
______________________________
______________________________
Print Address of Holder
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EXHIBIT 5.1
-----------
SHEPPARD, MULLIN, RICHTER & HAMPTON LLP
A Limited Liability Partnership
Including Professional Corporations
Attorneys at Law
333 South Hope Street, Forty-Eighth Floor
Los Angeles, California 90071
Telephone (213) 620-1780
-----
Facsimile (213) 620-1398
-----
January 13, 1997
Puroflow Incorporated
16559 Saticoy Street
Van Nuys, California 91406
Re: REGISTRATION STATEMENT ON FORM SB-2
Ladies and Gentlemen:
We have acted as counsel for Puroflow Incorporated, a Delaware
corporation ("Company"), and in such capacity have examined the Company's
Registration Statement on Form SB-2 ( the "Registration Statement"), filed
by the Company with the Securities and Exchange Commission ("Commission")
under the Securities Act of 1933, as amended ("Act"), relating to the
proposed public offering by certain security holders of the Company of (i)
up to 2,530,000 shares of Common Stock, $.01 par value per share ("Common
Stock"), of the Company ("Company Shares"), (ii) Placement Agents' Options
to purchase up to 177,100 shares of the Company's Common Stock ("Options"),
and (iii) the shares of Common Stock underlying the Options ("Option
Shares").
As counsel for the Company and for purposes of this opinion, we
have made those examinations and investigations of legal and factual
matters we deemed advisable and have examined originals or copies,
certified or otherwise identified to our satisfaction as true copies of the
originals, of those corporate records, certificates, documents and other
instruments which, in our judgment, we considered necessary or appropriate
to enable us to render the opinion expressed below including the Company's
Certificate of Incorporation, as amended to date, the Company's Bylaws, as
amended to date, proceedings of the Company's Board of Directors and other
corporate proceedings relating to the organization of the Company and the
authorization and issuance of the Company Shares, the Options, and the
Option Shares. We have assumed the genuineness and authorization of all
Page 91 of 93
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Puroflow Incorporated
January 13, 1997
Page 2
signatures and the conformity to the originals of all copies submitted to
us or inspected by us as certified, conformed or photostatic copies.
Further, we have assumed the due execution and delivery of certificates
representing the Company Shares, the Options, and the Option Shares.
Based upon the foregoing, and relying solely thereon, we are of
the opinion that:
1. The Company Shares and the Options are duly authorized,
validly issued, fully paid and nonassessable.
2. The Option Shares are duly authorized, and will be, when
issued, delivered and paid for in the manner and upon the terms
contemplated by the Options, validly issued, fully paid and nonassessable.
We hereby consent to the use of this opinion as an exhibit to
the Registration Statement and to the reference to our name under the
caption "Legal Matters" in the Prospectus included in the Registration
Statement. In giving this consent we do not hereby admit that we are in the
category of persons whose consent is required under Section 7 of the Act or
the rules and regulations of the Commission thereunder.
Sincerely,
/s/ Sheppard, Mullin, Richter & Hampton LLP
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EXHIBIT 23.2
------------
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in this Registration Statement on Form SB-2 of
our report dated December 11, 1996, relating to the consolidated financial
statements of Puroflow Incorporated (a Delaware corporation), and
Subsidiaries, and to the reference to our Firm under the heading "Experts"
in the Prospectus.
/s/ Rose, Snyder & Jacobs
Rose, Snyder & Jacobs
Burbank, California
January 10, 1997
Page 93 of 93
