<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
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-KSB or any
amendment to this Form 10-KSB. [X]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant was approximately $3,995,971 as of March 31, 1998, based upon the
closing price on the NASDAQ Electronic Bulletin Board System reported for
such date. Shares of Common Stock held by each Officer and Director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such person may under certain circumstances be deemed to be
affiliates. The determination of an affiliate status is not necessarily a
conclusive determination for other purposes.
Number of shares of Common Stock outstanding as of March 31, 1998: 7,108,821
The Registrant's Proxy Statement relating to the Annual Meeting of
Stockholders to be held on July 9, 1998 is hereby incorporated by reference
into Part III of this Form 10-KSB.
<PAGE>
PUROFLOW INCORPORATED
1998 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
PART I
<S> <C> <C>
ITEM 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . 4
ITEM 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 5
ITEM 4. Submission of Matters to Vote of Security Holders . . . . . 5
PART II
ITEM 5. Market for Registrant's Common Equity and
Related Shareholder Matters. . . . . . . . . . . . . . . . 6
ITEM 6. Selected Consolidated Financial Data. . . . . . . . . . . . 7
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . 8
ITEM 8. Financial Statements and Supplementary Data . . . . . . . . 10
ITEM 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . . . 10
PART III
ITEM 10. Directors and Executive Officers of the Registrant. . . . . 10
ITEM 11. Executive Compensation. . . . . . . . . . . . . . . . . . . 10
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . . 11
ITEM 13. Certain Relationships and Related Transactions. . . . . . . 11
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . 11
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
Puroflow Incorporated (the "Registrant" or 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. Used in automobile airbag inflators, aerospace,
petrochemical and a wide range of commercial and industrial applications,
Puroflow's diversity of products and customer base has contributed to its
current financial vibrance. Representing the state-of-the-art in filtration
technology, each product delivered achieves effectiveness of performance
through a careful selection of materials ranging from all welded titanium
construction to epoxy assembled paper elements.
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. Consolidated within a single,
50,000 square foot facility, Puroflow is fully self-contained within the
engineer, test and manufacturing disciplines.
AUTOMOTIVE AIRBAG FILTERS
The Company produces filters, which are an integral part of conventional
pyrotechnic automotive airbag inflators. The primary functions of the airbag
filter is to cool and control the expansion of the hot gas into the inflating
bag and to prevent hot particles of combustion from entering the expanding
bag. The Company's filters are comprised of a unique 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 has agreements to supply airbag filters on a purchase order basis
to two customers - ISI and Breed. The Company supplies airbag filters to ISI
for use in systems produced for Honda, General Motors, Mazda, and Mitsubishi.
Breed's customer base is comprised of Chrysler, Fiat, Ford of Australia,
Jaguar, and General Motors. Both ISI and Breed currently use Puroflow as
their exclusive filter supplier.
The Company designs, manufactures, and operates high precision machines to
fabricate airbag filters. They require minimal time for tooling changes
between production runs of different filter types. These methods permit
greater flexibility and lower unit costs without compromising the high
reliability which is essential for automotive airbag filters.
The Company is in the process of designing and developing new filters in
response to requests for proposals made by various inflator manufacturers,
both domestic and offshore, and has supplied pre-production qualification
filters for possible use in airbag systems to some of these manufacturers.
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.
MARKETING
The Company markets its airbag filters directly to airbag manufacturers
through its executive officers. The Company markets its commercial aerospace
products group through exclusive distributorships on assigned PMA
applications. Typically, the terms of these distribution agreements provide
that the distributor will act as the exclusive distributor for specific parts
manufactured by the Company for a period between 3 to 5 years with minimum
monthly requirements for number and dollar amount of units purchased. The
purchase price of the parts is subject to mutual agreement of the parties and
may be adjusted to take into account inflation, market
1
<PAGE>
changes, changes in costs of production and sales, and other factors. Such
agreements may be terminated by the Company if the distributor does not
comply with these purchase requirements or by either party if the other party
is rendered insolvent. The Company markets its high performance filters
through manufacturers representatives and, to a lesser extent, the Company's
own sales force. The Company has fifty (50) approved units and thirty-seven
(37) units, in various stages of development, pending Federal Aviation
Administration approval.
GOVERNMENT CONTRACTS
The Company has a number of direct contracts with the United States
government. 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 11% and 7%,
respectively, of net sales for fiscal 1998 and 1997. 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 26% of the Company's net sales during these periods.
COMPETITIVE CONDITIONS
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 Vehicle Safety Systems, Inc., a significant global
manufacturer of airbag inflator assemblies ("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 effectively compete in the future against
independent manufacturers of airbag filters or of the Company's other
products.
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 that such claims will not increase in the future.
RESEARCH AND DEVELOPMENT
In fiscal 1998 and fiscal 1997, the Company incurred research and development
expenditures of approximately $124,000 and $6,500, 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 Manufacturer
Approval for the commercial aerospace products group.
HIGH PERFORMANCE FILTERS
Since 1961, the Company has designed and manufactured, state-of-the-art,
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 to 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 is a leading filter supplier for United States space
applications, including the Space Shuttle program, various commercial and
military satellites, launch vehicles and boosters, and ground support
equipment. Certain of the manufacturing, welding, cleaning and testing
required by these applications are performed in a laminar flow, class 10,000
clean room.
2
<PAGE>
REPLACEMENT PARTS
The Company is a leading supplier of aftermarket filtration products used in
jet aircraft and turboshaft powered aircraft and helicopters. Utilizing
highly successful reverse engineering techniques, the Company produces
"generic plain wrap" filters for use in the aftermarket at a substantial
reduction in cost to the distributor and end user. The Company utilizes
exclusive agreements with its distributor base which assists them to
dominate, on a part number base, a particular market segment. The Company
continues to market this product and projects that it will contribute 68
percent of both sales and profit in FY 1998. The Company has fifty (50) units
approved by the FAA and thirty-seven (37) units, in various stages of
development, pending FAA approval.
RAW MATERIALS AND SUPPLIES
The principal raw materials utilized by the Company in connection with its
filter operations include stainless steel and other manmade 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. 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. This facility does not handle or store hazardous substances and
thus does not incur significant costs relating to compliance with
environmental laws.
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.
MAJOR CUSTOMERS
Sales to four customers identified below represented approximately 49% of net
sales during fiscal year 1998 and 58% of net sales during fiscal year 1997.
For fiscal year 1998 and 1997, sales to Breed Automotive Technologies, Inc.
were $1,723,463 and $2,200,127, respectively. Sales to Inflation Systems Inc.
were $842,921 and $1,438,355, respectively. Sales to DFAS were $954,234 and
$473,863, respectively, and sales to Norcross Air, Inc. were $656,901 and
$818,372, respectively. 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. During fiscal
1998, no other customer accounted for more than 10% of net sales.
BACKLOG
As of February 28, 1998 and February 28, 1997, the Company had a backlog of
approximately $6,470,000 and $5,800,000, respectively. Approximately
$4,000,000 of the Company's backlog at February 28, 1998 is scheduled to be
shipped in the current fiscal year. 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.
REGULATION
Demand for the Company's airbag filters was initially affected by federal
regulations requiring installation of
3
<PAGE>
airbags in passenger cars, light trucks, and vans by model years 1998 and
1999, respectively, and which in the meantime require installation of airbags
or other passive frontal crash protective systems. Consumer demand is now the
leading force in the growth of this product segment. Demand for the
Company's commercial aerospace products group is covered 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 to 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 as a small business concern, 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.
EMPLOYEES
At February 1, 1998, the Company had 71 full-time employees, including 3
employed in Sales and Marketing, 15 employed in Engineering and Quality
Control, and 43 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 excellent.
INSURANCE
The Company maintains general liability, automobile, aircraft products,
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 which was successfully defended by the Company. 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.
ITEM 2. PROPERTIES
The following table sets forth information as to the location and general
character of the facility of the Registrant:
<TABLE>
<CAPTION>
LOCATION PRINCIPAL USE APPROXIMATE SQ. FT. LEASE EXP. DATE
- ---------------------- ----------------------------------------- --------------------- -----------------
<S> <C> <C> <C>
16559 Saticoy Street Headquarters and manufacturing facility 50,000 August 30, 2000
Van Nuys, CA 91406 for airbag components, government and
aerospace filtration.
</TABLE>
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.
4
<PAGE>
ITEM 3. PENDING LEGAL PROCEEDINGS
1) 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, which note was executed 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 or 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 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. See "Financial Statements - Note 7".
At January 31, 1998, an accrual in the amount of approximately $256,000 has
been recorded for judgments against the Company for lawsuits that have
concluded.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Registrant did not submit any matters to a vote of security holders
during the fourth quarter of the fiscal year covered by this report.
5
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS, COMMON STOCK PRICE RANGE, AND DIVIDEND POLICY
The Common Stock of the Company is traded on the National Association of
Securities Dealers, Inc., Electronic Bulletin Board ("NASDAQ") 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 NASDAQ. These quotations
represent inter-dealer prices and do not include retail markups, markdowns or
commissions, and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH BID LOW BID
-------- -------
<S> <C> <C>
Fiscal Year Ended 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
4th Quarter . . . . . . . . . . . . . . 1 15/16
Fiscal Year Ended January 31, 1998
1st Quarter . . . . . . . . . . . . . . .9211 .8125
2nd Quarter . . . . . . . . . . . . . .8010 .7237
3rd Quarter . . . . . . . . . . . . . . .8835 .8158
4th Quarter . . . . . . . . . . . . . . .7942 .7380
Fiscal Year Ended January 31, 1999
Two Months Ending March 30, 1998 . . . . .7230 .6563
</TABLE>
(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 March 31, 1998, the closing bid price for the Company's Common Stock on
the Bulletin Board System was $.6563 per share. As of March 31, 1998, the
Company had approximately 289 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.
6
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended January 31,
-------------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (1):
Net Sales $ 5,908 $ 9,044 $ 8,816 $ 8,458 $ 8,597
Cost of goods sold 5,137 7,644 5,957 5,888 6,161
-------- -------- -------- -------- --------
Gross profit 771 1,400 2,859 2,570 2,436
Selling, general & administrative expense 1,313 1,629 1,443 1,446 1,599
-------- -------- -------- -------- --------
Operating income (loss) (542) (229) 1,416 1,124 837
Other income (expense) -0- -0- (282) (61) 17
Non-recurring expenses (2) (213) (292) (253) (394) (554)
-------- -------- -------- -------- --------
Income (loss) from continuing operations
before income taxes (755) (521) 881 669 300
Provision (benefit) for income taxes -0- 6 6 6 192
-------- -------- -------- -------- --------
Income (loss) from continuing operations (755) (527) 875 663 492
Income (loss) from discontinued operations 189 (1,845) 23 -0- -0-
-------- -------- -------- -------- --------
Net income (loss) $ (566) $ (2,372) $ 898 $ 663 $ 492
Net income (loss) per common share:
From continuing operations $ (.20) $ (.12) $ 0.19 $ 0.11 $ 0.07
From discontinued operations .05 (.41) -0- 0.11 -0-
-------- -------- -------- -------- --------
$ (.15) $ (.53) $ 0.19 $ 0.11 $ 0.07
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Weighted average number of shares 3,724 4,509 4,632 6,107 7,248
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital $ 823 $ (1,214) $ (13) $ 2,518 $ 2,710
Total Assets 7,329 4,721 3,962 4,094 5,046
Long-Term Debt 108 71 -0- -0- 2
Stockholders' Equity 2,307 185 1,083 3,489 3,981
</TABLE>
(1) In November 1994, the Company sold its ultraviolet water product
subsidiary, Ultra Dynamics Corporation. This 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, 1995 and 1994 have been adjusted
to reflect the discontinued operations, prior years have not been adjusted.
(2) Non-recurring expenses are comprised of a one-time 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. The year ended
January 31, 1998 represents litigation settlements and related litigation
fees.
7
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION, ANALYSIS OF FINANCIAL CONDITION, AND RESULTS
OF OPERATIONS
GENERAL
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 and Michigan Dynamics, Inc.
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 CPI
division, including CPI assets it had acquired from MDI in June 1992. During
November 1994, the Company settled the litigation with Glasco Ultraviolet
Systems Inc. and disposed of the operating assets of Ultra Dynamics
Corporation, its ultraviolet water products subsidiary.
The Company's principal products consist of automotive airbag filters and
high performance filters. Net sales for each of these product lines for the
fiscal years ended January 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
(in thousands)
-------------------------------
1997 1998
--------- ----------
<S> <C> <C>
Net Sales:
Airbag Filters $ 3,639 $ 2,766
High Performance Filters 4,819 5,831
--------- ----------
TOTAL $ 8,458 $ 8,597
--------- ----------
--------- ----------
</TABLE>
8
<PAGE>
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 in the period ended January 31, 1998.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
----------------------
1997 1998
----- -----
(in thousands)
<S> <C> <C>
Net Sales: 100.0% 100.0%
----- -----
Cost and expenses:
Cost of goods sold 69.6 71.7
Selling, general and administrative 17.1 18.6
Other (income) expense (.1) (.2)
Non-recurring expenses 4.7 6.4
Interest expense .8 -0-
----- -----
Income (loss) from continuing operations
before income taxes 7.9 3.5
Provision for income taxes (.1) (2.2)
Income (loss) from discontinued operations -0- -0-
----- -----
Net income (loss) 7.8% 5.7%
----- -----
----- -----
</TABLE>
COMPARISON OF THE FISCAL YEARS ENDED JANUARY 31, 1998 AND 1997
Net sales in fiscal 1998 increased 1.6%, compared to fiscal 1997, due to
sales of high performance filters which increased from the current fiscal
1998 to $5,831,000 from $4,819,000, due primarily to continued concentration
on expanding the PMA program. The Company has obtained FAA approval on fifty
(50) part numbers and there are thirty-seven (37) applications pending for
parts qualification as of January 31, 1998. Sales of airbags decreased in
fiscal 1998 from $3,639,000 to $2,766,000 due to a phase-out of the old
program of azide filters and the slow ramp up of the non-azide passenger and
side impact application.
Gross profit as a percentage of net sales were 28.3% for fiscal 1998,
compared to 30.4% in fiscal 1997. The reduction in gross profit was due to
the increase in material costs and price adjustments for airbag business.
For the year ended 1998 and 1997, selling, general and administrative
expenses were $1,599,000 and $1,440,000, respectively, due to increased costs
for research and development of approximately $118,000.
Interest expense decreased by $207,000 in fiscal 1997, due to elimination of
bank debt in the middle of fiscal 1997.
Non-recurring expenses of $554,000 and $394,000 in fiscal 1998 and 1997,
respectively, was a direct result of the Receivership terminated in fiscal
1997, and settlement of various litigation actions in fiscal 1998.
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
$2,100,000 for Federal Income Tax purposes and $2,760,000 for California
State Income Tax purposes at January 31, 1998. Such operating loss
carryforwards expire from 2008 to 2011.
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, income from
operations. In fiscal 1998, cash provided by operating activities was
656,479, consisting of $491,900 from net income, non-cash operating income
and expenses of $209,000, an increase in inventories, prepaid expenses, and a
reduction in accounts payable and accrued expenses offset by a reduction in
accounts receivable.
9
<PAGE>
The Company's working capital was $2,710,000 and $2,518,000 as of January 31,
1998 and 1997 respectively. The current ratio is 4.2 at January 31, 1998
compared to 5.2 at January 31, 1997 provided for a change in the Company's
ability to pay its obligations.
Cash used in investing activities was used to purchase plant equipment of
$461,207, offset by collection on notes receivable of $40,884.
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 $1,742,900 of net proceeds,
including $1,300 of interest. The purchase price of the Common Stock was
$.80 per share. From the gross proceeds, 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 (i) aggregate net worth (plus subordinated debt,
less any intangible assets and less any amount due from shareholders,
officers and affiliates of the Company) of not less than $3,250,000, (ii) a
ratio of current and non-current liabilities (less subordinated debt) to net
worth of not more than 0.50 to 1.00, (iii) working capital of not less than
$2,000,000, and (iv) debt service coverage ratio of not less than 1.75 to
1.00. The Company is currently in compliance with the foregoing covenants.
EFFECTS OF INFLATION ON BUSINESS
Management believes that inflation has not had a material effect on the
Company's operations.
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' report
beginning on page F-1 of this report on Form 10-KSB.
ITEM 9. DISAGREEMENT ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this item is hereby incorporated by reference
from the Registrant's definitive Proxy Statement under the captions
"MANAGEMENT" and "ELECTION OF DIRECTORS".
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item is hereby incorporated by reference
from the Registrant's definitive Proxy Statement under the captions
"EXECUTIVE COMPENSATION" and "NON-STATUTORY STOCK OPTIONS (NSO)."
10
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item is hereby incorporated by reference
from the Registrant's definitive Proxy Statement under the captions "STOCK
OPTIONS" and "NON-STATUTORY STOCK OPTIONS (NSO)."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is hereby incorporated by reference
from the Registrant's definitive Proxy Statement under the caption "RELATED
PARTY TRANSACTIONS."
PART IV
ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
(A) (1) FINANCIAL STATEMENTS
The following financial statements (including notes thereto and the
Independent Auditors' Report with respect thereto), are filed as
part of this annual report on Form 10-KSB starting on page F-1 hereof:
Independent Auditors' Reports.
Consolidated Balance Sheets at January 31, 1998 and 1997.
Consolidated Statements of Operations for each of the two years in
the period ended January 31, 1998.
Consolidated Statements of Stockholders' Equity for each of the two
years in the period ended January 31, 1998.
Consolidated Statements of Cash Flows for each of the two years in
the period ended January 31, 1998.
Notes to Consolidated Financial Statements.
(A) (2) EXHIBITS
Exhibits, including management contracts, compensatory plans and
arrangements required to be filed as part of this report, are
listed in the Exhibit Index, which follows the financial statements
and financial statement schedules.
(B) REPORTS ON FORM 8-K
On July 15, 1997, Registrant reported an extension of the Bank loan
agreement with California United Bank for one (1) year expiring
June 3, 1998.
On October 8, 1997, Registrant reported a settlement with Reliable
Metallurgical Processes Inc. of all claims between the parties
except for the fixing of legal fees, which was resolved on March 11,
1998.
On October 10, 1997, Registrant reported the resignation of Leo
Unger as Director.
On October 21, 1997, Registrant reported the receipt of two (2)
contracts covering airbag components, valued in excess of 4.8
million with performance due during fiscal January 31, 1999.
11
<PAGE>
SIGNATURES
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
<TABLE>
<CAPTION>
<S> <C>
By: /s/Michael H. Figoff April 27, 1998
--------------------------------
Michael H. Figoff
President/Chief Executive Officer
Director
</TABLE>
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
<S> <C>
By: /s/Michael H. Figoff April 27, 1998
-------------------------------------
Michael H. Figoff
President/Chief Executive Officer
Director
By: /s/Reuben M. Siwek April 27, 1998
-------------------------------------
Reuben M. Siwek
Chairman of the Board
General Counsel
By: /s/Robert A. Smith April 27, 1998
-------------------------------------
Robert A. Smith
Vice Chairman of the Board
By: /s/Tracy K. Pugmire April 27, 1998
-------------------------------------
Dr. Tracy K. Pugmire
Director
</TABLE>
12
<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 January 31, 1998
and 1997, and the related statements of operations, stockholders' equity and
cash flows for the years then ended. 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 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 January 31, 1998 and 1997, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
Rose, Snyder & Jacobs
A Corporation of Certified Public Accountants
Burbank, California
March 31, 1998
F-1
<PAGE>
PUROFLOW INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash, note 9 $ 361,523 $ 164,415
Accounts receivable
Net of allowance for doubtful
accounts of $23,523
(January 31, 1998) and $49,504
(January 31, 1997), Note 3 1,602,267 1,462,170
Inventories, Note 3 1,566,865 1,398,561
Current portion of note receivable, Note 2 40,889
Prepaid expenses and deposits 76,331 57,595
---------- -----------
TOTAL CURRENT ASSETS 3,606,986 3,123,630
---------- -----------
PROPERTY AND EQUIPMENT - NOTE 3
Leasehold improvements 26,980 11,660
Machinery and equipment 3,491,625 2,988,092
Automobile 1,679 1,679
Tooling and dies 303,399 262,480
Construction in progress 44,977 143,542
---------- -----------
3,868,660 3,407,453
Less accumulated depreciation
and amortization 2,750,092 2,452,888
---------- -----------
NET PROPERTY AND EQUIPMENT 1,118,568 954,565
---------- -----------
OTHER ASSETS, NOTE 6 320,750 16,750
---------- -----------
TOTAL ASSETS $5,046,304 $4,094,945
---------- -----------
---------- -----------
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt,
Note 4 $ 168,034 $ 207,087
Accounts payable 467,131 212,397
Accrued expenses 430,112 186,395
---------- -----------
TOTAL CURRENT LIABILITIES 1,065,277 605,879
---------- -----------
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.
Outstanding 7,108,821 shares
at January 31, 1998 and 7,108,621 shares
at January 31, 1997 430,579 430,579
Additional paid-in capital 4,947,727 4,947,727
Accumulated deficit (1,397,279) (1,889,240)
---------- -----------
TOTAL STOCKHOLDERS' EQUITY 3,981,027 3,489,066
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,046,304 $4,094,945
---------- -----------
---------- -----------
</TABLE>
See independent auditors' report and notes to financial statements.
F-2
<PAGE>
PUROFLOW INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 31, 1998 AND 1997
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31, 1998 1997
---------- ---------
<S> <C> <C>
Net sales $8,597,340 $8,458,454
Cost of goods sold 6,161,016 5,888,825
---------- ----------
Gross profit 2,436,324 2,569,629
Selling, general and administrative expenses 1,599,175 1,445,626
---------- ----------
Operating income 837,149 1,124,003
Other income and (expense)
Other income 17,498 10,173
Interest expense (71,407)
Nonrecurring expenses, Note 7 (554,117) (394,184)
---------- ----------
Income before tax 300,530 668,585
Income tax (benefit) expense, Note 6 (191,431) 5,600
---------- ----------
Net income $ 491,961 $ 662,985
---------- ----------
---------- ----------
Basic earnings per share, Note 13 $ 0.07 $ 0.11
---------- ----------
---------- ----------
Diluted earnings per share, Note 13 $ 0.07 $ 0.11
---------- ----------
---------- ----------
Weighted average number of shares, basic 7,108,821 5,843,521
---------- ----------
---------- ----------
Weighted average number of shares, diluted 7,248,268 6,107,812
---------- ----------
---------- ----------
</TABLE>
See independent auditors' report and notes to financial statements.
F-3
<PAGE>
PUROFLOW INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON ADDITIONAL RETAINED
STOCK PAID-IN EARNINGS
PAR VALUE CAPITAL TOTAL TOTAL
----------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Balance at January 31, 1996 $ 405,279 $ 3,230,127 $ (2,552,225) $ 1,083,181
Sale of common stock 25,300 1,717,600 1,742,900
Net income 662,985 662,985
----------- ------------ ------------- ------------
Balance at January 31, 1997 430,579 4,947,727 (1,889,240) 3,489,066
Net income 491,961 491,961
----------- ------------ ------------- ------------
Balance at January 31, 1998 $ 430,579 $ 4,947,727 $ (1,397,279) $ 3,981,027
----------- ------------ ------------- ------------
----------- ------------ ------------- ------------
</TABLE>
See independent auditors' report and notes to financial statements.
F-4
<PAGE>
PUROFLOW INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 1998 AND 1997
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31, 1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 491,961 $ 662,985
Adjustments to reconcile net income to net
cash provided by/used in operating activities:
Depreciation and amortization 297,204 318,052
Provision for losses on accounts receivable (20,000)
Inventory valuation allowance 35,150
Gain on vendor notes settlements (124,482)
Changes in operating assets and liabilities:
Accounts receivable (140,097) 106,325
Inventories (168,304) (194,244)
Prepaid expenses and other assets (322,736) (23,895)
Accounts payable and accrued expenses 498,451 (421,073)
---------- ----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 656,479 338,818
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (461,207) (253,189)
Payments received on notes receivable 40,889 63,218
---------- ----------
NET CASH USED IN OPERATING ACTIVITIES (420,318) (189,971)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft (59,363)
Proceeds from sale of common stock 1,742,900
Net borrowing (repayments) under line of credit (235,857)
Principal payments on long-term debt (39,053) (1,432,112)
---------- ----------
NET CASH PROVIDED BY
(USED IN) FINANCING ACTIVITIES (39,053) 15,568
---------- ----------
NET INCREASE IN CASH 197,108 164,415
CASH AT BEGINNING OF PERIOD 164,415 -0-
---------- ----------
CASH AT END OF PERIOD $ 361,523 $ 164,415
---------- ----------
---------- ----------
</TABLE>
See independent auditors' report and notes to financial statements.
F-5
<PAGE>
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 in 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 assumed jurisdiction over all the Company's assets, which were in
the possession fo 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
could elect 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:
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31,
1998 1997
---------- ------------
<S> <C> <C>
Raw materials and purchased parts $ 790,981 $ 729,740
Work in progress 458,040 247,868
Finished goods 317,844 420,953
---------- ------------
Total $1,566,865 $ 1,398,561
---------- ------------
---------- ------------
</TABLE>
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:
<TABLE>
<CAPTION>
Classification Life
----------------------- ----------
<S> <C>
Machinery and equipment 5-15 years
Automobile 5 years
Tooling and dies 5 years
Leasehold improvements 5 years
</TABLE>
See independent auditors' report.
F-6
<PAGE>
REVENUE RECOGNITION
Revenues are recognized when finished products are shipped.
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 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 valuation allowance for deferred tax assets.
Management uses its historical record and knowledge of its business in making
these estimates.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenditures are expensed as incurred and are
approximately as follows for the years ended January 31,
<TABLE>
<CAPTION>
1998 1997
--------- -------
<S> <C> <C>
$ 124,300 $ 6,500
--------- -------
</TABLE>
NON-RECURRING EXPENSES
For the year ended January 31, 1998, non-recurring expenses are comprised of
legal settlements of several lawsuits for which management believes that
there will be no additional liability with regard to these settled lawsuits.
For the year ended January 31, 1997, non-recurring expenses are comprised of
a one-time fee of $89,834 charged by the Company's former bank for its costs
related to the Receivership during August 1996, and the monthly
administrative fees charged by the Receiver during the receivership period.
Administrative fees were billed monthly by the Receiver for its role as
monitor for the bank of all of the Company's cash disbursements and receipts
and for its handling of all court reports, filings and related Receivership
matters. The Receivership Estate began on May 1, 1995 and ended August 22,
1996 (see note 11).
EARNINGS PER SHARE
In the first quarter of the year ended January 31, 1998, the Company adopted
Statement of Financial Accounting Standards No. 128, 'Earnings per Share"
(FAS 128), which supersedes Accounting Principles Board Opinion No. 15.
Under FAS 128, earnings per common share is computed by dividing net income
available to common stockholders by the weighted-average number of common
shares outstanding during the period. Diluted earnings per share reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted
in the issuance of common stock. Prior-period amounts have been restated,
where appropriate, to conform to the requirements of FAS 128 (see Note 14).
See independent auditors' report.
F-7
<PAGE>
NOTE 2 - NOTE RECEIVABLE
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31,
1998 1997
---------- --------------
<S> <C> <C>
8 1/2% note receivable, monthly
principal and interest payments of
$4,250, secured by equipment of the
debtor, maturing in November, 1997 $ -0- $ 40,889
Less current portion $ -0- 40,889
----- -----------
$ -0- $ -0-
----- -----------
----- -----------
</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 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. 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 the
Company's assets. Both of these loans are cross-collateralized. The terms
of these loan agreements contain certain restrictive covenants, including
maintenance of minimum working capital, net worth, and ratios of current
assets to current liabilities and debt to net worth.
NOTE 4 - LONG-TERM DEBT
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31,
1998 1997
---------- --------------
<S> <C> <C>
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
one, which is in dispute (see Note 7).
$ 168,034 $ 207,087
---------- ------------
Less current portion 168,034 207,087
---------- ------------
Long-term debt $ -0- $ -0-
---------- ------------
---------- ------------
</TABLE>
Interest paid in cash totaled as follows, for the years ended January 31,
<TABLE>
<CAPTION>
1998 1997
--------- -------
<S> <C> <C>
$ -0- $ 87,017
------ --------
</TABLE>
See independent auditors' report.
F-8
<PAGE>
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, and Directors of the Company 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 options granted was $.33 per option. Fair
value was determined by estimating the future sale 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:
<TABLE>
<CAPTION>
SHARES
-----------
<S> <C>
Held at January 31, 1996 (outstanding and unexercised) 359,000
Granted -0-
Exercised 100
Canceled or expired 9,000
-----------
Held at January 31, 1997 (outstanding and unexercised) 349,900
Granted 82,000
Exercised 200
Canceled or expired 40,000
-----------
Held at January 31, 1998 (outstanding and unexercised) 391,700
-----------
-----------
Shares exercisable, January 31, 1998 277,740
-----------
-----------
Shares available for future grants, end of period 108,000
-----------
-----------
Price range of options held, January 31, 1997 $.025-$.075
-----------
-----------
</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
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.
See independent auditors' report.
F-9
<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 for the years ended January 31,
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Income tax provision at 34% $ 102,180 $ 227,319
Meals and entertainment 2,370 2,048
Officer's life insurance 1,975 2,803
Excess book (tax) depreciation and amortization (3,247) 30,707
Change in allowance for doubtful accounts (8,833) (30,769)
Write-off of obsolete inventory (61,426) (51,396)
Reserve for legal matters (11,488) 9,059
Other 14,852 2,608
State taxes for prior year (1,904) (1,632)
Benefit of net operating loss carryforwards (31,610) (190,747)
------------ -----------
Current federal tax provision 2,869 -0-
Change in valuation allowance (200,000) -0-
California franchise tax 5,700 5,600
------------ -----------
Provision for income tax $ (191,431) $ 5,600
------------ -----------
------------ -----------
</TABLE>
Deferred tax benefits reflect the impact of loss carryforwards and, temporary
differences between the assets and liabilities recorded for financial
reporting purposes and tax purposes. These differences are as follows:
<TABLE>
<CAPTION>
1998 1997
------------- -----------
<S> <C> <C>
Allowance for doubtful accounts $ 10,186 $ 16,831
Allowance for inventory obsolescence 21,650 78,426
Less valuation allowance (31,836) (95,257)
------------- -----------
Current $ -0- $ -0-
------------- -----------
------------- -----------
Tax loss carryforward 1,133,165 927,362
Depreciation and amortization (73,892) (47,071)
Reserve for legal matters -0- 43,059
Less valuation allowance (755,273) (923,350)
------------- -----------
Non current $ 304,000 $ -0-
------------- -----------
------------- -----------
</TABLE>
Realization of the deferred benefit is contingent upon future taxable
earnings. The benefit recognized in the year ending January 31, 1998
represents the reduction of the valuation allowance from 100% to 69%, and is
based on the Company's continuing profitability.
The Company estimates it had available net operating loss carryforwards of
approximately $2,760,000 for federal income tax purposes and $2,100,000 for
state income tax purposes at January 31, 1998. The Company's net operating
loss carryforwards expire from 2008 to 2011.
See independent auditors' report.
F-10
<PAGE>
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:
<TABLE>
<CAPTION>
Twelve Months Ending January 31,
-----------------------------------------
<S> <C>
1999 $ 291,000
2000 291,000
2001 169,750
----------
TOTAL $ 751,750
----------
----------
</TABLE>
Total rental expense under the facility lease (including expenses) is as
follows for the two years ending January 31,
<TABLE>
<CAPTION>
1998 1997
---------- ------------
<S> <C>
$ 301,000 $ 305,000
---------- ------------
---------- ------------
</TABLE>
LEGAL MATTERS
The Company is party to various legal proceedings, several of which were
settled in the year ended January 31, 1998. 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 one of the actions. At January 31, 1997,
an accrual in the amount of approximately $242,000 had been recorded in
anticipation of certain judgments against the Company related to certain
matters. $168,034 of this accrual remains in notes payable to vendors at
January 31, 1998 (see Note 4).
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 $72,801 and $62,033 for the years
ended January 31, 1998 and 1997, respectively.
NOTE 9 - CONCENTRATIONS
MAJOR CUSTOMER INFORMATION
Concentration of sales in the Company's four largest customers is as follows
for the years ending January 31,
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
Breed Automotive Technologies $ 1,723,463 $ 2,200,127
Inflation Systems, Inc. 842,921 1,438,355
DFAS 954,239 473,863
Norcross Air, Inc. 656,901 818,372
----------- ------------
$ 4,177,524 $ 4,930,717<PAGE>
----------- ------------
----------- ------------
</TABLE>
See independent auditors' report.
F-11
<PAGE>
CONCENTRATION OF CREDIT RISK
Concentration of receivables due from the Company's four largest customers is
as follows at January 31,
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Breed Automotive Technologies $ 103,242 $ 276,566
Inflation Systems, Inc. 352,307 369,073
DFAS 173,799 115,498
Norcross Air, Inc. 90,633 88,511
----------- -----------
$ 719,981 $ 849,648
----------- -----------
----------- -----------
</TABLE>
Breed Automotive Technologies and Inflation Systems, Inc. are U.S. based
major suppliers to the automobile industry. Norcross Air, Inc., is a U.S.
based distributor of spare parts to the airline industry, and DFAS is the
U.S. government. The Company grants trade credit to these customers on an
unsecured basis.
MAJOR SUPPLIERS
The Company is dependent on three suppliers for the majority of its material
needs for automotive airbag filter production.
CASH IN BANK
At January 31, 1998, the Company had cash in a bank in excess of federally
insured limits by $89,992.
NOTE 10 - STOCKHOLDERS' EQUITY
During the year ended January 31, 1997, 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 Company
incurred $80,000 of legal, printing and accounting costs related to
registration of the shares. The underwriter also received a 24 month option
to purchase 177,100 shares, at a price of $.80 per share. Proceeds received
by the Company have been used to retire bank debt (See Note 11) and other
pre-Receiver debt.
NOTE 11 - CESSATION OF RECEIVERSHIP
On August 13, 1996, all bank debt owed by the Company was repaid. On August
22, 1996, the Receivership Estate was terminated by order of the Superior
Court of the State of California and control of the Company was returned to
the Board of Directors and Management.
NOTE 12 - VENDOR NOTE SETTLEMENTS
The Company paid $352,915 as settlement for $477,397 of vendor notes in the
year ended January 31, 1997.
NOTE 13 - RECENT PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS
130). FAS 130 establishes standards for reporting and display of
comprehensive income and its components in the financial statements. FAS 130
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes are required. The adoption of this standard will have no
impact on the Company's results of operations, financial position or cash
flows.
See independent auditors' report.
F-12
<PAGE>
In June 1997, the FASB issued Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (FAS
131). FAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers. FAS 131 is effective for
financial statements for fiscal years beginning after December 15, 1997.
Financial statement disclosures for prior periods are required to be
restated. The adoption of FAS 131 will have no impact on the Company's
consolidated results of operations, financial position or cash flows.
NOTE 14 - EARNINGS PER SHARE
Reconciliation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
PER SHARE
INCOME SHARES AMOUNT
---------- --------- -------------
<S> <C> <C> <C>
YEAR ENDED JANUARY 31, 1998
Basic earnings per share $ 491,961 7,108,821 $ 0.07
-------------
-------------
EFFECT OF DILUTED SECURITIES
Stock options 139,437
---------- ---------
Diluted earnings per share $ 491,961 7,248,258 $ 0.07
---------- --------- -------------
---------- --------- -------------
YEAR ENDED JANUARY 31, 1997
Basic earnings per share $ 662,985 5,843,521 $ 0.11
-------------
-------------
EFFECT OF DILUTED SECURITIES
Stock options 264,291
---------- ---------
Diluted earnings per share $ 662,985 6,107,812 $ 0.11
---------- --------- -------------
---------- --------- -------------
</TABLE>
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 15 - RETIREMENT PLAN
The Company has a defined contribution 401(k) covering all employees who have
completed one year of service. The Company makes "matching" contributions of
10% of the participant's deferral amount, limited to 5% of the participant's
eligible compensation for the year.
The Company may also make discretionary contributions to the plan based upon
participant compensation and net profits. During the year ended January 31,
1998, the Company contributed $2,780.00 to the Plan. The Company's maximum
contribution is limited to 1/2 of 1% of the employee's compensation.
See independent auditors' report.
F-13
<PAGE>
PUROFLOW INCORPORATED
INDEX TO EXHIBITS
This Index is filed in response to Item 14(a) (3), and the following
documents are filed as Exhibits in response to Item 14(c), as required by
Item 601 of Regulation S-K:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------------------------------------------------------------------------------
<S> <C>
3.1 Certificate of Incorporation*
3.2 Bylaws*
10.1 Asset Purchase Agreement dated September 29, 1992 between the
Company and Engineered Magnetics, Inc. for sale of the CPI
Division *****
10.2 Asset Purchase Agreement dated as of April 30, 1992 among the
Company, Michigan Dynamics, Inc. and consented and agreed to by
Fuji Filter Manufacturing Co. Ltd. and consented to by NBD Bank,
N.A.**
10.3 Lease Agreement dated April 6, 1984 for premises at 1631 10th
Street, Santa Monica, California*
10.4 Lease Agreement dated August 1, 1985 for premises at 1648 10th
Street, Santa Monica, California*
10.5 Lease Agreement dated November 10, 1992 for premises at 1558 10th
Street, Santa Monica, California *****
10.6 Employment Agreement dated March 1, 1993 between the Company and
Joseph B. Jasso*****
10.7 Employment Agreement dated March 1, 1993 between the Company and
Michael H. Figoff*****
10.8 Employment Agreement dated February 14, 1991 between the Company
and Robert A. Smith*
10.9 1991 Key Employee Incentive Stock Option Plan*
10.10 Form of Stock Option Agreement under the 1991 Key Employee
Incentive Stock Option Plan*
10.11 Form of Directors Stock Option Agreement dated July 9, 1987*
10.12 Form of Directors Stock Option Agreement dated February 14, 1991*
10.13 Letter Agreement and related Note Payable to Imperial Bank dated March
17, 1993*****
10.14 Note payable to Imperial Bank dated March 17, 1993*****
10.15 Security and Loan Agreement with Imperial Bank dated March 17,
1993*****
10.16 Letter dated May 14, 1993 waiving compliance with covenants contained
in the Credit Terms and Conditions Agreement with Imperial Bank dated
July 24, 1989*****
10.17 Lease dated January 13, 1992 between the Company and Jerome and Faith
Pearlman***
10.18 Settlement Agreement with Stroock & Stroock & Lavan, special counsel
to the Registrant, dated November 17, 1992****
<PAGE>
10.19 Agreement between Registrant and Alpine Service Ltd. dated June
30, 1993 for the private placement of 1,000,000 shares pursuant
to Regulation "S" of the Securities Act of 1933, as amended******
10.20 Note payable to Imperial Bank dated November 5, 1993*******
10.21 Note payable to Imperial Bank dated November 5, 1993*******
10.22 Security and Loan Agreement with Imperial Bank dated November 5,
1993*******
10.23 Stipulation for immediate appointment of Receiver on behalf of
Imperial Bank dated May 1, 1995********
10.24 Stipulation re: First Amendment to Order Appointing Receiver
dated September 5, 1995********
10.25 First Amendment to Stipulation re: First Amendment to Order
appointing Receiver dated January 16, 1996********
10.26 Sublease dated July 27, 1995 between Kaiser Marquardt and the
Company with sublease guarantor Kaiser Aerospace and
Electronics********
22 Subsidiaries of the Company
</TABLE>
- ---------------------
* 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.
** Incorporated by reference to Amendment No. 1 to the Company's
Registration Statement on Form S-1, filed with the Securities and
Exchange Commission on May 14, 1992, Registration No. 33-43225.
*** Incorporated by reference to the Company's Form 10-K filed with
the Securities and Exchange Commission on April 29, 1992.
**** Incorporated by reference to the Company's Form 10-K filed with
the Securities and Exchange Commission on December 15, 1992.
**** Incorporated by reference to the Company's Form 10-K filed with
the Securities and Exchange Commission on May 15, 1993.
***** Incorporated by reference to the Company's Form 10-Q filed with the
Securities and Exchange Commission on September 10, 1993.
****** Incorporated by reference to the Company's Form 10-Q filed with
the Securities and Exchange Commission on December 12, 1993.
******** Incorporated by reference to the Company's Form 10-K filed with
the Securities and Exchange Commission on April 25, 1996.
<PAGE>
PUROFLOW INCORPORATED EXHIBIT 22
SUBSIDIARIES OF THE COMPANY
STATE OF INCORPORATION
----------------------
PUROFLOW CORPORATION NEW YORK
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 361,523
<SECURITIES> 0
<RECEIVABLES> 1,625,790
<ALLOWANCES> 23,523
<INVENTORY> 1,566,865
<CURRENT-ASSETS> 3,606,986
<PP&E> 3,868,660
<DEPRECIATION> 2,570,092
<TOTAL-ASSETS> 5,046,304
<CURRENT-LIABILITIES> 1,065,277
<BONDS> 0
0
0
<COMMON> 5,378,306
<OTHER-SE> (1,397,279)
<TOTAL-LIABILITY-AND-EQUITY> 5,046,304
<SALES> 8,597,340
<TOTAL-REVENUES> 8,597,340
<CGS> 6,161,016
<TOTAL-COSTS> 7,760,191
<OTHER-EXPENSES> 563,619
<LOSS-PROVISION> (25,981)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 300,530
<INCOME-TAX> (191,431)
<INCOME-CONTINUING> 491,961
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 491,961
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
