<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 14 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
For the fiscal year ended January 31, 1996 Commission File No. 0-5622
PUROFLOW INCORPORATED
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-1947195
- ---------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
16559 Saticoy Street, Van Nuys, California 91406
- ------------------------------------------ -----------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 756-1388
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par
Value $0.01
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
On March 29, 1991, the aggregate market value based on the average bid and asked
price of the voting stock held by nonaffiliates of the Registrant was
$4,700,895.
Number of shares of Common Stock outstanding as of March 29, 1996 :
4,578,521.
The Registrant's Proxy Statement relating to the Annual Meeting of Stockholders
to be held on July 11, 1996 is hereby incorporated by reference into Part III of
this Form 10-K.
<PAGE>
EXPLANATORY NOTE: The purpose of this Form 10-K/A is to amend Item 8 of the
registrant's Form 10-K for the fiscal year ended January 31, 1996 to include
the Independent Auditors' Reports which were unintentionally omitted in the
original filing of such Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this item is hereby incorporated by reference
from the Registrant's financial statements and independent auditors' reports
beginning on page 15 of this report on Form 10-K.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Puroflow Incorporated
We have audited the accompanying balance sheet of Puroflow Incorporated and
subsidiaries at January 31, 1996, and the related statement of operations,
stockholders' equity and cash flows for the 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.
The 1995 financial statements were audited by other auditors whose report
dated May 25, 1995, on those statements included an explanatory paragraph
describing conditions that raised substantial doubt about the Company's
ability to continue as a going concern.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 in the first paragraph
above present fairly, in all material respects, the financial position of
Puroflow Incorporated and subsidiaries at January 31, 1996, and the related
statements of operations, stockholders' equity and cash flows for the year
then ended, in conformity with generally accepted accounting principles.
Rose, Snyder & Jacobs
A Corporation of Certified Public Accountants
Burbank, California
March 28, 1996
15
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Puroflow Incorporated:
We have audited the accompanying consolidated balance sheets of Puroflow
Incorporated and its subsidiaries as of January 31, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended January 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Puroflow Incorporated and its
subsidiaries as of January 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period
ended January 31, 1995 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statement have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company incurred a net loss of
$2,372,156, $565,926 and $2,674,174 for the years ended January 31, 1995,
1994 and 1993, respectively, and has a working capital deficiency of
$1,213,876 at January 31, 1995. Additionally, on May 1, 1995, the Company
entered into a stipulation for the appointment of a receiver resulting from
a lawsuit filed by the Company's bank due to the Company's default on its
obligations under various credit agreements with the bank. Hence, the Company
continues to be without an adequate long-term financial arrangement. The
Company's continuation as a going concern is dependent upon its ability to
satisfactorily resolve the litigation with its bank, obtain a long-term
financing arrangement, generate sufficient cash flow to meet its obligations
on a timely basis and ultimately return to profitable operations. The absence
of the foregoing raises a substantial doubt about the Company's ability to
continue as a going concern. Management's plans concerning these matters are
also discussed in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ DELOITTE & TOUCHE LLP
- -----------------------------------
Los Angeles, California
May 25, 1995
16
<PAGE>
PUROFLOW INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ $ 74,441
Accounts receivable
Net of allowance for doubtful
accounts of $140,000 in 1996
and $204,469 in 1995 1,548,495 1,266,150
Advances to officers and employees 3,868
Inventories, note 1 1,239,467 1,746,237
Prepaid expenses and deposits 33,700 125,794
Current portion of note receivable 43,831 34,008
-------------- -------------
TOTAL CURRENT ASSETS 2,865,493 3,250,498
-------------- -------------
PROPERTY AND EQUIPMENT - at cost,
note 1
Leasehold improvements 203,733
Machinery and equipment 2,900,343 2,873,215
Automobile 7,500
Tooling and dies 253,921 274,282
-------------- -------------
3,154,264 3,358,730
Less accumulated depreciation
and amortization 2,134,836 2,021,474
-------------- -------------
NET PROPERTY AND EQUIPMENT 1,019,428 1,337,256
-------------- -------------
NOTE RECEIVABLE, note 2 60,276 94,005
-------------- -------------
OTHER ASSETS 16,750 39,077
-------------- -------------
TOTAL ASSETS $ 3,961,947 $ 4,720,836
-------------- -------------
-------------- -------------
1996 1995
-------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft $ 59,363 $
Line of credit, note 3 235,857 810,003
Accounts payable 582,393 655,485
Accrued expenses 237,472 211,343
Current portion of promissory notes, note 4 1,763,681 2,787,543
-------------- -------------
TOTAL CURRENT LIABILITIES 2,878,766 4,464,374
-------------- -------------
PROMISSORY NOTES, note 4 71,400
-------------- -------------
COMMITMENTS AND CONTINGENCIES note 7
STOCKHOLDERS' EQUITY, notes 5, 10, and 13
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.
Outstanding 4,578,521 shares at
January 31, 1996 and 1995 405,279 405,279
Additional paid-in capital 3,230,127 3,230,127
Accumulated deficit (2,552,225) (3,450,344)
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY 1,083,181 185,062
-------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 3,961,947 $ 4,720,836
-------------- -------------
-------------- -------------
</TABLE>
See independent auditors' report and notes to financial statements
F-1
<PAGE>
PUROFLOW INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended January 31, 1996 1995 1994
------------ ------------ -------------
<S> <C> <C> <C>
Net sales $ 8,815,889 $ 9,044,707 $ 5,907,949
Cost of goods sold 5,957,007 7,644,422 5,137,042
------------ ------------ -------------
Gross profit 2,858,882 1,400,285 770,907
Selling, general and administrative expense 1,701,611 1,635,632 1,312,605
------------ ------------ -------------
Operating income (loss) 1,157,271 (235,347) (541,698)
Other income and (expense)
Other income (expense) (2,895) 14,132 133,197
Interest expense (279,237) (305,627) (346,424)
------------ ------------ -------------
Income (loss) from continuing operations before taxes 875,139 (526,842) (754,925)
------------ ------------ -------------
Provision for income taxes, notes 1 and 6
------------ ------------ -------------
Income (loss) from continuing operations 875,139 (526,842) (754,925)
Discontinued operations, note 12
Income (loss) from operations 168,140 (1,845,314) 188,999
Loss on sale of property and equipment (145,160)
------------ ------------ -------------
22,980 (1,845,314) 188,999
------------ ------------ -------------
Net income (loss) $ 898,119 $ (2,372,156) $ (565,926)
------------ ------------ -------------
------------ ------------ -------------
Net income (loss) per common share:
Continuing operations $ 0.19 $ (0.12) $ (0.20)
Discontinued operations (0.41) 0.05
------------ ------------ -------------
Primary earnings per share, note 1 $ 0.19 $ (0.53) $ (0.15)
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
See independent auditors' report and notes to the financial statements
F-2
<PAGE>
PUROFLOW INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED JANUARY 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
Common Additional Retained
stock paid-in earnings
par value capital total Total
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Balance at January 31, 1993 $ 321,625 $ 1,971,581 $ (512,262) $ 1,780,944
Net loss (565,926) (565,926)
Sale of common stock 69,655 1,022,545 1,092,200
--------------- --------------- --------------- ---------------
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
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
</TABLE>
See independent auditors' report and notes to financial statements
F-3
<PAGE>
PUROFLOW INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended January 31, 1996 1995 1994
---------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 898,119 $(2,372,156) $ (565,926)
Adjustments to reconcile net income (loss) to net cash
provided by/used in operating activities:
Depreciation and amortization 340,103 365,934 356,913
Provision for losses on accounts receivable 104,205 134,069 9,058
Inventory valuation allowance 59,000 999,305 17,695
Loss on sale of assets 157,057 15,784
Changes in operating assets and liabilities:
Accounts receivable (386,550) 242,305 118,682
Inventories 73,073 1,154,010 (589,353)
Prepaid expenses and other assets 114,421 (83,328) (533)
Income taxes receivable 718,852
Accounts payable and accrued expenses (46,962) 288,426 (160,653)
Deferred income taxes (27,692)
---------- ----------- -----------
Net cash provided by (used in) operating activities 1,312,466 728,565 (107,173)
---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (131,336) (122,182) (279,974)
Proceeds from sale of assets 326,700
Payments received on notes receivable 23,906 6,616
Other assets (9,725) 39,517
---------- ----------- -----------
Net cash provided by (used in) investing activities 219,270 (125,291) (240,457)
---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft 59,363 250,000 1,092,200
Proceeds from sale of common stock
Proceeds from issuance of long-term debt 865,143
Net borrowing (repayments) under line of credit (574,146) 65,412 (739,715)
Principal payments on long-term debt (1,095,262) (838,761) (1,011,086)
Principal payments under capital lease obligations (26,346) (20,233)
Advances to officers and employees 3,868 1,941 (278)
---------- ----------- -----------
Net cash provided by (used in) financing activities (1,606,177) (547,754) 186,031
---------- ----------- -----------
NET DECREASE IN CASH (74,441) 55,520 (161,599)
CASH AT BEGINNING OF YEAR 74,441 18,921 180,520
---------- ----------- -----------
CASH AT END OF YEAR
$ - $ 74,441 $ 18,921
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
See independent auditors' report and notes to the financial statements
F-4
<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") specializes primarily in designing and
manufacturing automotive airbag filters and high performance filters. The
Company is located in Van Nuys, California, and does business with customers
throughout the world, most of which are located within the United States.
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 has
assumed jurisdiction over all of the Company's assets, which are now in the
possession of the Receiver's estate, and held for the benefit of all creditors
and shareholders. The Receiver is not obligated to pay liabilities that existed
prior to his appointment; however, the Receiver may elect to pay certain of
those liabilities with the leave of the Court. The Receiver is presently
working with the Company's management in operating the business.
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.
INVENTORIES
Inventories are stated at the lower of cost of market on a first-in, first-out
basis, and consists of the following items:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Raw materials and purchased parts $ 757,921 $ 818,187
Work in process 235,404 503,033
Finished goods 246,142 425,017
-------------- --------------
Total $1,239,467 $ 1,746,237
-------------- --------------
-------------- --------------
</TABLE>
PROPERTY AND EQUIPMENT
Depreciation and amortization of property and equipment is computed using the
straight line method based
See independent auditors' report
F-5
<PAGE>
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 Improvement 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, the useful lives of property and
equipment and the reserve for contingencies. Management uses its historical
record and knowledge of its business in making these estimates.
RECLASSIFICATION
Certain amounts previously reported in the Company's 1995 and 1994 financial
statements have been reclassified to conform to the presentation adopted during
1996. Such reclassifications had no effect on the net losses as previously
reported.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenditures are expenses as incurred and totaled
approximately $28,000, $381,000 and $207,000 for the years ended January 31,
1996, 1995, and 1994, respectively.
EARNINGS PER SHARE
The computation of the net income (loss) per common share (primary) is based on
the weighted average number of common shares and common share equivalents
outstanding. The weighted average shares outstanding were 4,631,740,
4,508,521, and 3,724,271 during the years ended January 31, 1996, 1995, and
1994, respectively.
See independent auditors' report
F-6
<PAGE>
NOTE 2 - NOTE RECEIVABLE
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
8 1/2 % note receivable, $ 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 43,831 34,008
-------------- --------------
$ 60,276 $ 94,005
-------------- --------------
-------------- --------------
</TABLE>
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 is
secured by accounts receivable, inventories and a first priority interest in all
unencumbered assets, and matures in June, 1996.
During the fiscal year, the Company defaulted on its loans, resulting in the
appointment of a Receiver (See Note 4). All collections of accounts and
inventory proceeds shall be applied to the Company's loan account. Any credit
given by the bank upon receipt of said proceeds is conditional credit subject to
final collection. Outstanding balances under this line of credit were $235,857
and $810,003 at January 31, 1996 and 1995, respectively.
NOTE 4 - PROMISSORY NOTES
<TABLE>
<S> <C> <C>
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 is making monthly interest
payments and principal
payments are being made from time to time
depending on the
surplus cash flow available. $ 107,900 $ 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 1,168,882
Note payable to vendors bearing no interest
maturing at various dates, through
December, 1997. 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. 684,483 1,022,926
Other obligations 129,635
----------- ------------
1,763,680 2,858,943
Less current portion 1,763,680 2,787,543
----------- -----------
$ -0- $71,400
----------- -----------
----------- -----------
</TABLE>
See independent auditors' report
F-7
<PAGE>
The Company is in breach of its covenants under the terms of its bank
agreements. As discussed in Note 1, a Receiver is now in possession of the
assets of the Company for the benefit of creditors. Accordingly, all amounts
are classified as current.
Under the first amendment to the stipulation appointing a Receiver dated August
31, 1995, the bank extended its forbearance period to June 15, 1996. Under the
agreement beginning on January 1, 1996, the Company is required to make
principal payments of at least $20,000 per month on the notes payable to the
bank. On February 16, 1996, the bank, in order to facilitate the Company's
efforts to consummate a private placement, extended the forbearance period to
December 31, 1996, and agreed to reduce the interest rate for the line of credit
by 1/4%. In consideration, the Company agreed to make a $500,000 principal
payment on notes payable to the bank from the proceeds of the planned private
placement offering (Note 13).
For the year ended January 31, 1996, 1995, and 1994, interest paid in cash
totaled $263,627, $305,627, and $346,424, respectively.
NOTE 5 - STOCK OPTION PLANS
In 1995, 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 period at prices that vary from $0.25 to
$0.75. Share activity during 1995 under the Company's stock option plans is
summarized below:
<TABLE>
<S> <C>
Held at beginning of year 0
Granted to 20 officers and key employees 359,000
Exercised 0
Canceled or expired 0
Held at end of year by 20 officers
and key employees
359,000
------------
Shares exercisable, end of year 225,600
------------
Shares available for future grants, end of year 141,000
------------
------------
Price range of options held, end of year $0.25 to $0.75
</TABLE>
Statement of Financial Accounting No. 123, "Accounting for Stock-Based
Compensation", requires companies to measure employee stock compensation plans
based on the fair value method of accounting. However, the statement allows the
alternative of continued use of Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees", with pro-forma disclosure of net
income earnings per share determined as if the fair value based method had been
applied in measuring compensation cost. The Company will adopt the standard in
the year ended January 31, 1997, and expects to elect the continued use of APB
No. 25. Pro-forma disclosure is expected to be immaterial.
See independent auditors' report
F-8
<PAGE>
NOTE 6 - INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
Years Ended January 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Current payable:
Federal $ -0- $ -0- $ 27,692
State -0-
-------- -------- --------
-0- -0- 27,692
Deferred -0- -0- (27,692)
-------- -------- --------
Provision for income taxes $ -0- $ -0- $ -0-
-------- -------- --------
-------- -------- --------
</TABLE>
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:
<TABLE>
<CAPTION>
Years Ended January 31,
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Income tax provision at 34% $ 305,360 $(806,533) $(192,415)
Excess tax depreciation and
amortization (39,658)
Excess book loss on disposition 20,252
Change in allowance for doubtful accounts (21,920)
Write-off of obsolete inventory (338,358)
Reserve for legal matters 11,975
Other 11,440
--------- --------- ---------
Current federal tax benefit (50,909) (806,533) (192,415)
Current state tax benefit (12,106)
--------- --------- ---------
Net current tax benefit (63,015) (806,533) (192,415)
Unrecognized benefit of losses 63,015 806,533 192,415
--------- --------- ---------
Provision for Income Taxes $ -0- $ -0- $ -0-
--------- --------- ---------
--------- ----------- -----------
</TABLE>
See independent auditors' report
F-9
<PAGE>
Deferred tax benefits at January 31, 1996 and 1995 reflects 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:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Allowance for doubtful accounts $ 60,620 $ 81,788
Allowance for inventory obsolescence 165,332 538,800
Less valuation allowance (225,952) (620,588)
------------ ------------
Current $ -0- $ -0-
------------ ------------
------------ ------------
Tax loss carryforward $ 1,422,366 $ 1,376,992
Depreciation and amortization (41,741) (168,951)
Reserve for legal matters 43,300
Less valuation allowance (1,423,925) (1,208,041)
------------ ------------
Non current $ -0- $ -0-
------------ ------------
------------ ------------
</TABLE>
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 had available net operating loss carryforwards of approximately
$3,342,000 for federal income tax purposes, and $2,709,000 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 facilities, which expires in August 2000, as follows:
<TABLE>
<CAPTION>
Year Ending January 31,
-----------------------
<S> <C>
1997 $ 291,000
1998 291,000
1999 291,000
2000 291,000
2001 169,750
-----------
TOTAL $1,333,750
-----------
-----------
</TABLE>
The leases with respect to the former location were terminated under the powers
of the Receiver.
See independent auditors' report
F-10
<PAGE>
Total rental expense under facilities leases was approximately $275,000,
$410,000 and $421,000 for the years ended January 31, 1996, 1995, and 1994,
respectively.
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, 1996. At January
31, 1995, the obligation under capital leases was $51,366.
LEGAL MATTERS
On May 1, 1995, the Company was placed into Receivership as a result of a
lawsuit initiated by the Company's bank, following a breach of the borrowings
covenants. At January 31, 1996, and 1995, the total outstanding balance owed to
the bank was $1,315,054 and $2,516,385, respectively. It is the opinion of the
Company that the dispute will be resolved by continuing cooperation.
The Company is also party to various legal proceedings. The outcome of these
proceedings 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. An accrual
in the amount of $100,000 has been recorded for the year ended January 31, 1996,
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 $42,284, $80,625, and $77,750 for the
years ended January 31, 1996, 1995, and 1994. The amount due to this director
was $27,500 at January 31, 1996.
NOTE 9 - MAJOR CUSTOMERS INFORMATION
Sales to three major customers during the years ended January 31, 1996 and 1995
totaled approximately $5,298,273 and $7,470,352, respectively. The amount due
from these customers, included in accounts receivable, was approximately
$593,310 and $746,631 at January 31, 1996 and 1995, respectively.
NOTE 10 - STOCKHOLDERS' EQUITY
During the year ended January 31, 1995, the Company issued 210,000 shares of
common stock, the net proceeds of which were $250,000.
During the year ended January 31, 1994, the Company issued 1,044,300 shares of
common stock, the net proceeds of which were $1,092,200.
NOTE 11 - FOURTH QUARTER ADJUSTMENTS
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.
See independent auditors' report
F-11
<PAGE>
During the quarter ended January 31, 1994, the Company recorded inventory
write-downs of $160,000 resulting from the re-evaluation of inventory
requirements due to lower current and forecasted sales volume of certain
products. In addition, a book to physical inventory adjustment of $508,000
was recorded resulting from the January 31, 1994 physical inventory count.
NOTE 12 - 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 operations 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, $2,615,540, and $3,868,347 for the
years ended January 31, 1996, 1995, and 1994, respectively.
NOTE 13 - SUBSEQUENT EVENT
On March 26, 1996, the Company entered into an agreement with an investment
banker to raise equity through a private placement offering. The plan is to
sell shares of the Company's common stock with a 1,200,000 share minimum, and
2,500,000 share maximum. The purchase price is set at $0.80 per share. The
Company will be entitled to 90% of the net proceeds, with the remainder being
commissions and expenses. The agent is entitled to a 24 month option to
purchase 7% of the amount of shares sold, at an exercisable price of $0.80 per
share. The net proceeds of the offering will be used to reduce bank debt by
$500,000, with the remainder for general corporate purposes. The Company plans
to register the securities within six months of the closing of the offering.
There can be no assurance that this offer can be completed successfully.
See independent auditors' report
F-12
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PUROFLOW INCORPORATED
By: /s/ Michael H. Figoff
---------------------------------
Michael H. Figoff
Date: February 27, 1997 Chief Executive Officer and
President
