<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JULY 31, 1998 COMMISSION FILE NUMBER 0-5622
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PUROFLOW INCORPORATED
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(Exact name of registrant as specified in its charter)
DELAWARE 13-1947195
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(State or other jurisdiction of incorporation I.R.S. Employer
or organization) identification No.)
16559 SATICOY STREET, VAN NUYS, CALIFORNIA 91406-1739
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(Address of executive offices) (ZIP Code)
Registrant's telephone number, including area code: (818) 756-1388
Securities registered pursuant to Section 12(g) of the Act:
Common Stock Shares outstanding
COMMON STOCK, $.01 PAR VALUE 7,108,821
- -------------------------------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
<PAGE>
PUROFLOW INCORPORATED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1998 1998
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<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 343,904 $ 361,523
Accounts receivable
Net of allowance for doubtful accounts of
$26,271 at July 31, 1998 and $50,000 at July 31, 1997 1,670,227 1,602,267
Advances to Officers & Employees 2,982 -
Inventories 1,825,375 1,566,865
Deferred Tax Benefit 4,350 -
Note receivable, current portion - -
Prepaid expenses and other current assets 60,260 76,331
----------- -----------
TOTAL CURRENT ASSETS 3,907,098 3,606,986
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PROPERTY & EQUIPMENT
Leasehold improvements 34,541 26,980
Machinery and equipment 3,555,317 3,491,625
Automobile 1,679 1,679
Tooling and dies 311,153 303,399
Construction in progress 46,155 44,977
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3,948,845 3,868,660
Less accumulated depreciation
and amortization 2,913,550 2,750,092
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NET PROPERTY AND EQUIPMENT 1,035,295 1,118,568
----------- -----------
DEFERRED TAXES
OTHER ASSETS 422,750 320,750
----------- -----------
TOTAL ASSETS $ 5,365,143 $ 5,046,304
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long term debt $ 60,000 $ 168,034
Accounts payable 469,126 467,131
Accrued expenses 198,573 430,112
----------- -----------
TOTAL CURRENT LIABILITIES 727,699 1,065,277
Long - Term Debt 328,734 -
----------- -----------
TOTAL LIABILITIES 1,056,433 1,065,277
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, par value $.10 per share
authorized - 500,000 shares
issued none
Common stock, par value $.01 per share authorized - 12,000,000
shares issued and outstanding - 7,108,821 shares
at July 31, 1997
shares at January 31, 1997 430,579 430,579
Additional paid-in capital 4,947,727 4,947,727
Accumulated deficit (1,069,596) (1,397,279)
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TOTAL STOCKHOLDERS' EQUITY 4,308,710 3,981,027
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 5,365,143 $ 5,046,304
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to the consolidated financial statements.
1
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PUROFLOW INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATION
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31, JULY 31,
1998 1997 1998 1997
------------- ------------ ------------ --------------------
<S> <C> <C> <C> <C>
Net revenue $ 2,209,044 $ 2,251,959 $ 4,305,328 $ 4,601,591
Cost of goods sold 1,505,788 1,663,446 2,999,370 3,400,462
----------- ----------- ----------- -----------
Gross profit 703,256 588,513 1,305,958 1,201,129
Selling, general
and administrative expense 604,511 449,427 1,074,968 862,196
----------- ----------- ----------- -----------
Operating income 98,745 139,086 230,990 338,933
Interest expense (6,105) - (7,179) -
Other income 2,812 4,281 6,223 6,630
----------- ----------- ----------- -----------
Income from continuing
operations before taxes 95,452 143,367 230,034 345,563
Provision for income taxes (46,650) (49,600) (97,650) (100,600)
----------- ----------- ----------- -----------
Loss from discontinued operations - - - -
----------- ----------- ----------- -----------
142,102 192,967 327,684 446,163
NET INCOME $ 142,102 $ 192,967 $ 327,684 $ 446,163
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
Net income (loss) per common share:
Basic earnings per share $ 0.02 $ 0.03 $ 0.05 $ 0.06
Diluted earnings per share $ 0.02 $ 0.03 $ 0.05 $ 0.06
Weighted average number of shares 7,215,764 7,237,558 7,215,764 7,253,030
</TABLE>
See accompanying notes to the consolidated financial statements.
2
<PAGE>
PUROFLOW INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JULY 31, 1998 1997
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<S> <C> <C>
CASH AT BEGINNING OF PERIOD $ 361,523 $ 164,415
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) 327,683 446,163
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 163,458 134,762
Provision for losses on accounts receivable 2,748 496
Inventory valuation allowance - 56,591
Changes in operating assets and liabilities:
Advances to Officers & Employees (2,482)
Accounts receivable (71,208) 10,964
Inventories (258,509) 33,205
Prepaid expenses and other current assets 16,070 (11,741)
Deferred Tax Benefit (4,350)
Deferred taxes (102,000) (102,000)
Accounts payable and accrued expenses (229,543) (65,930)
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Net cash provided by operating activities (158,133) 502,510
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (80,185) (250,695)
Payments received on notes receivable - 24,186
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Net cash provided by investing activities (80,185) (226,509)
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CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft - -
Net repayment under line of credit - -
Current Portion - Long Term debt 60,000 -
Principal new long term debt 160,700 -
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Net cash used in financing activities 220,700 -
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NET INCREASE IN CASH (17,618) 276,001
CASH AT END OF PERIOD $ 343,905 $ 440,416
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to the consolidated financial statements.
3
<PAGE>
PUROFLOW INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON ADDITIONAL RETAINED
STOCK PAID-IN EARNINGS
FOR THE SIX MONTHS ENDED JULY 31, 1998 PAR VALUE CAPITAL TOTAL
--------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at January 31, 1998 $430,579 $4,947,727 $(1,397,279) $3,981,027
Net income - - 327,684 327,684
-------- ---------- ----------- -------------
Balance at July 31, 1998 $430,579 $4,947,727 $(1,069,595) $4,308,711
-------- ---------- ----------- -----------
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</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE>
PUROFLOW INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
(UNAUDITED)
JULY 31, 1998, JANUARY 31, 1998, AND JULY 31, 1997
NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION
The consolidated balance sheet at the end of the preceding fiscal year has
been derived from the audited consolidated balance sheet contained in the
Company's annual report on Form 10-K for the fiscal year ended January 31,
1998 (The "Form 10-KSB") and is presented for comparative purposes. All other
financial statements are unaudited. In the opinion of management, all
adjustments which include only normal recurring adjustments necessary to
present fairly the financial position, results of operations and changes in
financial positions for all periods presented, have been made. The results of
operations for interim periods are not necessarily indicative of the
operating results for the full year.
Footnote disclosures normally included in financial statements prepared in
accordance with the generally accepted accounting principles have been
omitted in accordance with the published rules and regulations of the
Securities and Exchange Commission.
NOTE 2 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1998 1998
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<S> <C> <C>
Raw materials and purchased parts $ 884,288 $ 766,222
Work in process 589,950 472,656
Finished goods and assemblies 351,137 327,987
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Totals $1,825,375 $1,566,865
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</TABLE>
NOTE 3 - STOCKHOLDERS EQUITY
On March 26, 1996, the Company entered into an agreement with an investment
banker to raise equity through a private placement offering. On July 24,
1996, such offering was completed. The Company sold 2,530,000 shares of
common stock and received $1,742,900 of net proceeds, including $1,300 of
interest. The purchase price of the common stock was $.80 per share. From the
gross proceeds, the underwriter received $202,400 as a fee. The underwriter
also received a 24 month option to purchase 177,100 common shares, at a price
of $.80 per share which expired unexercised. Proceeds received by the Company
are used to retire bank debt and other pre-Receiver debt. The Company
registered the securities on March 7, 1997.
5
<PAGE>
NOTE 4 - NET INCOME PER SHARE
Reconciliation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
PER-SHARE
INCOME SHARES AMOUNT
-------- --------- ----------
<S> <C> <C> <C>
6 MONTHS ENDED JULY 31, 1998
Basic earnings per share $327,684 7,108,621 $ .05
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-------
EFFECT OF DILUTED SECURITIES
Stock options 103,331
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Diluted earnings per share $327,684 7,211,952 $ .05
-------- --------- -------
-------- --------- -------
6 MONTHS ENDED JULY 31, 1997
Basic earnings per share $446,163 7,108,621 $ .06
-------
-------
EFFECT OF DILUTED SECURITIES
Stock Options 144,409
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Diluted earnings per share $446,163 7,253,030 $ .06
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</TABLE>
A basic earnings per share is based on the weighted average number of shares
outstanding. Diluted earnings per share include the effect of common stock
equivalents when dilutive.
NOTE 5 - INCOME TAXES
Income tax benefits recognized represents the benefit of income tax loss
carryforward
NOTE 6 - YEAR 2000 READINESS
The Company has taken all practical steps to insure that its computer hardware
and software will be unaffected by any Year 2000 issues, pursuant to
representation made by Dataworks Corp. of San Diego, California on the software
and Santa Monica Systems of Santa Monica, California on the hardware.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1998, the Company had cash available of $343,904, compared to
$361,523 on January 31, 1998, and it had a current ratio of 5.37 to 1 at July
31, 1998, compared to 4.2 to 1 on January 31, 1998. The company has a bank loan
outstanding as of July 31,1998 of $220,700.
INVESTING ACTIVITIES
The Company invested $80,185 in new capital equipment in the six month period
ending July 31, 1998, predominantly for equipment for a new type of airbag
filter.
6
<PAGE>
FINANCING ACTIVITIES
The Company has an unused revolving credit line of $1,000,000 which bears
interest at the rate of prime plus 0.5% per annum, secured by the Company's
accounts receivable and inventory. The Company is in compliance with all
covenants under its loan agreement with the Bank. The Company obtained a loan of
$236,000 to pay the non-recurring judgment against it as well as purchase a
necessary blueprint copier.
RESULTS OF OPERATIONS FOR QUARTER ENDED JULY 31, 1998
REVENUES
Sales were $2,209,044 in 1998, compared to $2,251,959 in 1997, representing a
decrease of $42,915 or 2%, due primarily to a reduction of 14.5% in the sale of
airbags. This was the result of two factors; the continuing slow ramp-up in the
new model non-azide airbag for the driver and passenger side impact filters, as
well as the effect toward the latter part of the quarter of the General Motors
strike.
GROSS PROFIT
Gross profit as a percentage of sales was 32% in July 1998, compared to 26% in
July 1997, an increase of 6% representing higher margins on precision filters on
the PMA Program as well as increased manufacturing efficiencies.
OPERATING INCOME
Operating income was $98,745 in July 1998 compared to $139,086 in July 1997, a
decrease of $40,341. This was due to several factors; lower margins on airbag
filters, the cost of new product development, increased marketing cost due to
the creation of an international division, and increased legal fees as the pace
of the Company's final litigation increases.
INTEREST CHARGES
Interest on the bank loan was $7,179 as of July 31, 1998
INCOME TAXES
A tax benefit of $102,000 was recognized as a result of income tax loss
carryforwards
7
<PAGE>
PART LL - OTHER INFORMATION
ITEM 1. PENDING LEGAL PROCEEDINGS
1. Memtec America Corporation obtained a confession of judgment from the
Circuit Court of Baltimore County, Maryland, on December 19, 1995 against
the Company for approximately $220,000 based upon the execution in exchange
for goods and services delivered by the Plaintiff. The Company disputes
that any amounts are due under the Note as a result of Company's right of
set-off. The judgment was obtained without due notice to the Company. The
Receiver retained counsel in Baltimore, Maryland for the purpose of setting
aside the confession of judgment and to assert a number of counter-claims
against Memtec America Corporation. The confession of judgment was vacated
by order of the Circuit Court of Baltimore on June 24, 1996. The Company
filed an amended counter-claim and third party complaint on August 12, 1996
against Memtec America Corporation and four employees of the Company now
employed by Memtec America Corporation. The counter-claim against the four
former employees was dismissed for jurisdictional purposes. The Company now
is in the process of securing positive depositions from key witnesses to
support the amended counter-claim, and management believes the Company will
recover a reasonable award and legal fees. Although the Company cannot
determine the potential liability which may result from the foregoing, it
believes it will prevail in its defenses and does not expect that such
litigation will have a material adverse effect on its financial position or
results of operation.
At January 31, 1998, an accrual in the amount of approximately $256,000 had been
recorded for judgments against the Company for lawsuits that have concluded.
The Company is not party, nor are its properties subject to, any material
pending proceedings other than ordinary routine litigation incidental to the
Company's business and the matters described above.
ITEM 2. CHANGES IN SECURITIES
See Item 6 for explanation of Form 8-K filed August 24, 1998 for private
placement of securities among directors, officers and employees of the
registrant
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Form 8-K filed August 24, 1998 reporting the authorization for the private
placement of one million (1,000,000) shares of common stock among the directors,
officers, and employees of the registrant.
8
<PAGE>
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed and on its behalf by the
undersigned thereto, duly authorized.
PUROFLOW INCORPORATED
August 27, 1998 By: /s/ Michael H. Figoff
---------------------------------
Michael H. Figoff
President/Chief Executive Officer
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> MAY-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 343,904
<SECURITIES> 0
<RECEIVABLES> 1,696,498
<ALLOWANCES> 26,271
<INVENTORY> 1,825,375
<CURRENT-ASSETS> 3,907,098
<PP&E> 3,948,845
<DEPRECIATION> 2,913,550
<TOTAL-ASSETS> 5,365,143
<CURRENT-LIABILITIES> 727,699
<BONDS> 328,734
0
0
<COMMON> 5,378,306
<OTHER-SE> (1,069,596)
<TOTAL-LIABILITY-AND-EQUITY> 5,365,143
<SALES> 4,305,328
<TOTAL-REVENUES> 4,305,328
<CGS> 2,999,270
<TOTAL-COSTS> 4,074,338
<OTHER-EXPENSES> (6,223)
<LOSS-PROVISION> 2,748
<INTEREST-EXPENSE> 7,179
<INCOME-PRETAX> 230,034
<INCOME-TAX> (97,650)
<INCOME-CONTINUING> 327,684
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 327,684
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
