<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 OCTOBER 31, 1998 COMMISSION FILE NUMBER 0-5622
- -------------------------------------------------------------------------------
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 (IRS Employer identification No.)
or organization)
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 8,000,321
- -------------------------------------------------------------------------------
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>
OCTOBER 31, JANUARY 31,
1998 1998
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<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 696,362 $ 361,523
Accounts receivable
Net of allowance for doubtful accounts of
$19,938 at October 31, 1998 and $25,000 at
January 31, 1998 1,456,214 1,602,267
Advances to Officers & Employees 1,782 --
Inventories 1,661,949 1,566,865
Note receivable, current portion -- --
Prepaid expenses and other current assets 142,055 76,331
----------- -----------
TOTAL CURRENT ASSETS 3,958,363 3,606,986
----------- -----------
PROPERTY & EQUIPMENT
Leasehold improvements 39,512 26,980
Machinery and equipment 3,601,118 3,491,625
Automobile 1,679 1,679
Tooling and dies 318,486 303,399
Construction in progress 46,155 44,977
----------- -----------
4,006,950 3,868,660
Less accumulated depreciation
and amortization 3,004,279 2,750,092
----------- -----------
NET PROPERTY AND EQUIPMENT 1,002,671 1,118,568
----------- -----------
DEFERRED TAXES
OTHER ASSETS 473,750 320,750
----------- -----------
TOTAL ASSETS $ 5,434,784 $ 5,046,304
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long term debt 60,000 --
Accounts payable 491,294 467,131
Accrued expenses 134,361 430,112
----------- -----------
TOTAL CURRENT LIABILITIES 685,655 897,243
Long Term Debt 309,434 168,034
----------- -----------
TOTAL LIABILITIES 995,089 1,065,277
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 - 8,048,821 at October 31, 1998 439,979 430,579
Additional paid-in capital 5,643,327 4,947,727
Accumulated deficit (1,052,692) (1,397,279)
----------- -----------
Less
Notes Receivable from Stockholders (558,000) --
Treasury Stock (48,500 Shares) at Cost (32,919) --
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 4,439,695 3,981,027
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 5,434,784 $ 5,046,304
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to the consolidated financial statements.
1
<PAGE>
PUROFLOW INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
1998 1997 1998 1997
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net revenue $ 1,908,249 $ 2,018,380 $ 6,213,577 $ 6,619,971
Cost of goods sold 1,372,373 1,367,510 4,371,743 4,767,972
----------- ----------- ----------- -----------
Gross profit 535,876 650,870 1,841,834 1,851,999
Selling, general
and administrative expense 568,793 367,949 1,643,761 1,230,145
----------- ----------- ----------- -----------
Operating income (32,917) 282,921 198,073 621,854
Interest expense (5,451) -- (12,630) --
Other income 6,446 6,275 12,669 12,905
Nonrecurring expense -- (369,394) -- (369,394)
----------- ----------- ----------- -----------
Income from continuing
operations before taxes (31,922) (80,198) 198,112 265,365
Provision for income taxes (48,825) (42,452) (146,475) (143,052)
----------- ----------- ----------- -----------
NET INCOME $ 16,903 $ (37,746) $ 344,587 $ 408,417
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income (loss) per common share:
Basic earnings per share $ 0.002 $ -- $ 0.05 $ 0.06
Diluted earnings per share $ 0.002 $ -- $ 0.05 $ 0.06
Weighted average number of shares 8,190,995 7,252,725 7,527,615 7,252,725
</TABLE>
See accompanying notes to the consolidated financial statements.
2
<PAGE>
PUROFLOW INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED OCTOBER 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) 344,587 408,418
Adjustments to reconcile net income to net cash --
provided by operating activities --
Depreciation and amortization 254,187 212,891
Provision for losses on accounts receivable (3,585) 496
Inventory valuation allowance -- 56,591
Changes in operating assets and liabilities:
Advances to Officers & Employees (1,282)
Accounts receivable 149,138 78,630
Inventories (95,083) (125,098)
Prepaid expenses and other current assets (65,725) 4,984
Deferred taxes (153,000) (253,000)
Accounts payable and Accrued Expenses (271,589) 348,010
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Net cash provided by operating activities 157,648 731,922
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (138,290) (339,657)
Payments received on notes receivable -- 36,699
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Net cash provided by investing activities (138,290) (302,958)
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CASH FLOWS FROM FINANCING ACTIVITIES
Addition to Long Term Debt 201,400 --
Proceeds from Sale of Common Stock 705,000 --
Notes Receivable from Stockholders (558,000) --
Buy Back Treasury Stock @ Cost (32,919) --
---------- ---------
Net cash used in financing activities 315,481 --
---------- ---------
NET INCREASE IN CASH 334,839 428,964
CASH AT END OF PERIOD $ 696,362 $ 593,379
---------- ---------
---------- ---------
</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 NINE MONTHS ENDED OCTOBER 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
New Issue - 940,000 @ $ .01 9,400 -- 9,400
New Issue - 940,000 @ $ .74 695,600 695,600
Net income 344,587 344,587
Balance at October 31, 1998 $ 439,979 $ 5,643,327 $ (1,052,692) $5,030,614
---------- ------------ ------------ ----------
---------- ------------ ------------ ----------
Less: Notes Receivable from Stockholders (558,000)
Treasury Stock at costs (32,919)
----------
Total Stockholders' Equity @ October 31, 1998 $4,439,695
</TABLE>
4
<PAGE>
PUROFLOW INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
OCTOBER 31, 1997, JANUARY 31, 1998, AND OCTOBER 31, 1998
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-KSB 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>
OCTOBER 31, JANUARY 31,
1998 1998
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<S> <C> <C>
Raw materials and purchased parts $ 930,440 $766,222
Work in process 395,524 472,656
Finished goods and assemblies 335,985 327,987
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Totals $1,661,949 $1,566,865
---------- ----------
---------- ----------
</TABLE>
NOTE 3 - STOCKHOLDERS EQUITY
On August 24, 1998 The Company issued an 8-K report stating that The Board of
Directors has authorized issue of 1,000,000 shares of common stock for sale
to Directors, Officers and Employees. The Company sold 940,000 shares of this
common stock and received proceeds of $705,000 divided between $147,000 in
cash and $558,000 in Notes Receivables. During the 3-month period from August
1, 1998 through October 31, 1998 The Company purchased 48,500 of common stock
for a total cost of $32,919 from the open market and is presently holding
them as Treasury Stock.
5
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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>
9 MONTHS ENDED OCTOBER 31, 1998
Basic earnings per share $ 344,587 7,413,657 $ .05
-----
-----
EFFECT OF DILUTED SECURITIES
Stock options 98,033
----------- ---------
Diluted earnings per share $ 344,587 7,511,690 $ .05
----------- --------- -----
----------- --------- -----
9 MONTHS ENDED OCTOBER 31, 1997
Basic earnings per share $ 408,417 7,108,821 $ .06
-----
-----
EFFECT OF DILUTED SECURITIES
Stock Options 143,904
----------- ---------
Diluted earnings per share $ 408,417 7,252,725 $ .06
----------- --------- -----
----------- --------- -----
</TABLE>
Basic earnings per share are 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. on our system software and Santa
Monica Systems of Santa Monica, California on the hardware we are in Year
2000 compliance. All other applications fall under Microsoft NT software and
are stated to be in Year 2000 compliant. The Company has also been engaged in
communications with its vendors, service providers and customers to determine
the extent to which the Company would be vulnerable to a third party's
failure to address its own Y2K issues.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1998, the Company had cash available of $696,362, compared to
$361,253 on January 31, 1998, and it had a current ratio of 5.8 to 1 on
October 31, 1998 compared to 4 to 1 on January 31, 1998. The Company has a
bank loan outstanding as of October 31, 1998 of $201,400.
INVESTING ACTIVITIES
The Company invested $138,290 in capital expenditures in the current quarter
predominantly for equipment for a new type of airbag filter, A Multi-Pass
Test machine, other test and computer equipment.
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 OCTOBER 31, 1998
REVENUES
Sales in the quarter ending October 31, 1998 were $1,908,249 compared to
$2,018,380 on October 31, 1997, representing a decrease of $110,131 or 5.5%.
The decreased shipments were due to reduction in high performance filters,
offset by an increase in Airbags.
GROSS PROFIT
Gross profit for the quarter as a percentage of sales was 28% in October
1998, compared to 32%, in October 1997, a decrease of 4% was due to fixed
manufacturing costs, and lower sales on the product mix.
OPERATING INCOME
Operating loss ended October 31, 1998 was ($32,917) compared to an operating
income of $282,921 for the same quarter of the previous year. Several factors
contributed to the reduction of $315,838, such as lower margin on the product
mix, research and development costs of $96,000 on development of new
side-impact airbag filters, increased marketing cost as a result of the
developing an International Marketing division, and continued legal cost on
the Memtec litigation.
7
<PAGE>
INTEREST CHARGES
Interest on the bank loan was $5,211 as of October 31, 1998.
INCOME TAXES
A tax benefit of $51,000 for the quarter was recognized as a result of income
tax loss carryforwards.
PART II. - OTHER INFORMATION
ITEM 1. 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 Company 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 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. Legal counsel for Plaintiff and Defendant held
a non-binding arbitration proceeding in November 1998 for the purpose of
exploring a settlement of the litigation with anticipated favorable
results for Puroflow.
2. 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 routine litigation incidental to the Company's
business and the matters described above.
8
<PAGE>
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.
Form 8-K filed November 18, 1998 reports the strategic alliance between AAR
Cooper Aviation, a division of AAR Corp., Norcross Air Inc., and Puroflow for
the marketing of filtration products for the regional business and general
aviation after-market.
9
<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
December 10, 1998 By: /s/ Michael H. Figoff
---------------------------------------
Michael H. Figoff
President/Chief Executive Officer
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> OCT-31-1998
<CASH> 696,362
<SECURITIES> 0
<RECEIVABLES> 1,476,152
<ALLOWANCES> 19,938
<INVENTORY> 1,661,949
<CURRENT-ASSETS> 3,958,363
<PP&E> 4,006,950
<DEPRECIATION> 3,004,279
<TOTAL-ASSETS> 5,434,784
<CURRENT-LIABILITIES> 685,655
<BONDS> 309,434
0
0
<COMMON> 6,083,306
<OTHER-SE> (1,643,611)
<TOTAL-LIABILITY-AND-EQUITY> 5,434,784
<SALES> 6,213,577
<TOTAL-REVENUES> 6,226,246
<CGS> 4,371,743
<TOTAL-COSTS> 6,015,504
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (3,585)
<INTEREST-EXPENSE> 12,630
<INCOME-PRETAX> 198,112
<INCOME-TAX> (146,475)
<INCOME-CONTINUING> 344,587
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 344,587
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
