<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 APRIL 30, 1999 COMMISSION FILE NUMBER 0-5622
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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)
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16559 Saticoy Street, Van Nuys, California 91406-1739
(Address of executive offices) (ZIP Code)
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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 8,100,321
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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>
APRIL 30, JANUARY 31,
1999 1999
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ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 67,221 $ 828,809
Accounts receivable
Net of allowance for doubtful accounts of $20,000 at
April 30, 1999 and $22,000 at January 31, 1999 1,560,007 1,373,254
Accounts Receivable, other - 375,763
Advances to Officers & Employees - 2,907
Deferred Tax benefit, current 45,347 45,347
Inventories 1,762,729 1,562,939
Note receivable, current portion -
Prepaid expenses and other current assets 62,093 91,677
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TOTAL CURRENT ASSETS 3,497,397 4,280,696
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PROPERTY & EQUIPMENT
Leasehold improvements 57,379 55,954
Machinery and equipment 3,851,868 3,808,188
Automobile 1,679 1,679
Tooling and dies 334,131 327,411
Construction in progress - -
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4,245,057 4,193,232
Less accumulated depreciation
and amortization 3,150,611 3,082,386
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NET PROPERTY AND EQUIPMENT 1,094,446 1,110,846
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DEFERRED TAXES 747,980 747,980
OTHER ASSETS 329,410 340,423
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TOTAL ASSETS $ 5,669,233 $ 6,479,945
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------------------ -------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable, current $ 110,000 $ 97,200
Accounts payable 464,107 465,678
Accrued expenses 95,629 477,335
Payable for acquired company 447,875
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TOTAL CURRENT LIABILITIES 669,736 1,488,088
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Long-Term Debt 114,800 139,400
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TOTAL LIABILITIES 784,536 1,627,488
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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 - 8,100,321 shares 440,979 440,979
Additional paid-in capital 5,667,327 5,667,327
Accumulated deficit (635,890) (668,030)
Less:
Notes receivable from stockholders (554,800) (554,900)
Treasury stock at cost (32,919) (32,919)
TOTAL STOCKHOLDERS' EQUITY 4,884,697 4,852,457
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 5,669,233 $ 6,479,945
------------------ -------------------
------------------ -------------------
</TABLE>
1
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PUROFLOW INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 30,
1999 1998
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<S> <C> <C>
Net revenue $ 2,070,363 $ 2,096,284
Cost of goods sold 1,498,836 1,493,582
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Gross profit 571,527 602,702
Selling, general
and administrative expense 534,162 470,457
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Operating income 37,365 132,245
Interest expense (4,224) (1,074)
Amortization Expense (11,013) -
Other income 10,612 3,411
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Income before taxes 32,740 134,582
Provision (benefit) for income taxes 600 (51,000)
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NET INCOME $ 32,140 $ 185,582
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NET INCOME PER COMMON SHARE
Basic earnings per share $ 0.004 $ 0.030
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Diluted earnings per share $ 0.004 $ 0.030
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</TABLE>
2
<PAGE>
PUROFLOW INCORPORATED
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED APRIL 30 1999 1998
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<S> <C> <C>
CASH AT BEGINNING OF PERIOD $ 828,809 $ 361,523
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) 32,139 185,583
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 68,225 73,729
Provision for losses on accounts receivable (2,000) 2,477
Inventory valuation allowance - -
Changes in operating assets and liabilities:
Advances to Officers & Employees 2,907 (3,682)
Accounts receivable (184,753) (55,711)
Other Receivables 375,763 -
Inventories (199,790) (148,425)
Prepaid expenses and other current assets 29,583 24,436
Deferred Taxes - (51,000)
Other Payable (445,650) -
Accounts payable & Accrued expenses (385,500) (242,954)
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Net cash provided by operating activities (709,076) (215,547)
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (51,825) (26,504)
Amortization of Goodwill/Non-Compete 11,013 -
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Net cash provided by investing activities (40,812) (26,504)
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CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt (11,800) 236,000
Notes Recevable from Stockholders 100 -
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Net cash used by financing activities (11,700) 236,000
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NET INCREASE IN CASH (761,588) (6,051)
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CASH AT END OF PERIOD $ 67,221 $ 355,472
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</TABLE>
3
<PAGE>
PUROFLOW INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
FROM
COMMON ADDITIONAL RETAINED STOCKHOLDER
STOCK PAID-IN EARNINGS AND TREASURY
FOR THE THREE MONTHS ENDED PAR VALUE CAPITAL STOCK TOTAL
APRIL 30, 1999 ----------------- ----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Balance at January 31, 1999 $ 440,979 $ 5,667,327 $ (668,030) $ (587,819) $ 4,852,457
Receivable Payment - - - 100 -
Net income - - 32,140 - 32,140
----------------- ----------------- ------------------ ----------------- -----------------
Balance at April 30, 1999 $ 440,979 $ 5,667,327 $ (635,890) $ (587,719) $ 4,884,697
----------------- ----------------- ------------------ ----------------- -----------------
----------------- ----------------- ------------------ ----------------- -----------------
</TABLE>
4
<PAGE>
PUROFLOW INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
APRIL 30, 1999, JANUARY 31, 1999, AND APRIL 30, 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, 1999 (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>
APRIL 30, JANUARY 31,
1999 1999
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<S> <C> <C>
Raw materials and purchased parts $ 1,027,465 $ 918,559
Work in process 430,191 307,444
Finished goods and assemblies 305,073 336,936
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Totals $ 1,762,729 $ 1,562,939
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</TABLE>
NOTE 3 - STOCKHOLDERS EQUITY
On August 24, 1998, the Company issued an 8-K Report stating that the Board of
Directors has authorized the issuance 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 shares of common
stock for a total cost of $32,919 from the open market and is presently holding
them as treasury stock.
5
<PAGE>
NOTE 4 - NET INCOME PER SHARE
Reconciliation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
AMOUNT
------------------ ------------------- ---------------
<S> <C> <C> <C>
3 MONTHS ENDED APRIL 30, 1999
Basic earnings per share $ 32,140 8,100,321 $ .004
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EFFECT OF DILUTED SECURITIES
Stock options 137,007
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Diluted earnings per share $ 32,140 8,237,328 $ .004
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------------------ ------------------- ---------------
3 MONTHS ENDED APRIL 30, 1998
Basic earnings per share $ 185,582 7,108,821 $ .030
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EFFECT OF DILUTED SECURITIES
Stock Options 92,253
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Diluted earnings per share $ 185,582 7,201,074 $ .026
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</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.
EARNINGS PER SHARE
In the first quarter of the year ended January 31, 1999, 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.
NOTE 5 - LINE OF CREDIT
The Company has a $1,000,000 revolving credit line maturing on June 3, 1999.
This credit line bears interest at the rate of prime plus 0.5% per annum, and is
secured primarily by the Company's accounts receivable and inventories. The
terms of this loan agreement contains certain restrictive covenants, including
maintenance of minimum working capital, net worth, and ratios of current assets
to current liabilities and debt to net worth. There is no outstanding balance
under this line on January 31, 1999 and April 30,1999.
NOTE 6 - INCOME TAXES
Income tax benefits recognized represents the benefit of income tax loss
carryforwards.
6
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1999, the Company had cash available of $67,221, compared to
$828,809 on January 31, 1999. It had a current ratio of 5.22 to 1 at April 30,
1999, compared to 2.87 to 1 on January 31, 1999.
OPERATING ACTIVITIES
Cash flow from Operations for the three months ended April 30,1999 was
reduced by $761,588 compared to a decrease of $6,051 for the three months
ended April 30,1998. The reduction in cash available resulted from the
acquisition of QCCC and a reduction in accrued expenses associated with
payment of bills from completed litigation.
INVESTING ACTIVITIES
The Company invested $51,825 in new capital equipment in the current quarter
predominantly for equipment for a new type of airbag filter.
FINANCING ACTIVITIES
The Company has 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
non-recurring judgment against it as well as purchase a necessary blueprint
copier. The outstanding balance as of April 30, 1999 is $170,867.
BUSINESS ACQUISITION
On January 31, 1999, the Company acquired Quality Controlled Cleaning
Corporation ("QCCC") for $550,630 including all costs of the acquisition. QCCC
is a precision cleaning and repair company located in Commerce, California. The
Company's acquisition resulted in goodwill of approximately $274,000 and a
non-compete agreement of $50,000. The goodwill will amortize over 10 years and
the non-compete agreement over its term of 3 years.
In addition to the purchase price, the agreement includes a contingent payment
of 50% of net sales in the year ending January 31, 2000, in excess of $500,000
up to a maximum of $800,000. If the full amount of the contingency is realized,
the liability would total $150,000 and would be recorded as additional goodwill.
RESULTS OF OPERATIONS FOR QUARTER ENDED APRIL 30, 1999
REVENUES
Sales were $2,070,363 for the three months ended April 30,1999 compared to
$2,096,284 in 1998, a modest decrease of $25,921. Sales of airbag filters were
relatively flat for the comparable period due to the slow ramp-up of the new
model non-azide airbag, a decrease in shipments for technical aftermarket
filters of $234,100 offset by our new QCCC operation revenue of $177,900 and
shipments of $23,700 for International Sales.
7
<PAGE>
GROSS PROFIT
Gross profit as a percentage of sales was 27.6% in April 1999, compared to 28.7%
in April 1998, representing a decrease of 1.1% representing lower margins on
airbag filters. Increased marketing costs are a result of development of the
International Sales Division.
OPERATING INCOME
Operating income was $37,365 in April 1999 compared to $132,245 in April 1998, a
decrease of $63,705 due to the lower margins on airbag filters as a result of
the slow ramp-up of the new model non-azide airbag filter for the driver and
passenger-side impact filter and substantial increase in marketing costs due to
the development of the International Sales Division.
INTEREST CHARGES
Interest on the bank loan was $4,724 as of April 30, 1999 and $1,074 at
April 30, 1998.
INCOME TAXES
A tax benefit of $51,000 was recognized as a result of income tax loss
carryforwards in 1998.
PART II - OTHER INFORMATION
ITEM 1. PENDING LEGAL PROCEEDINGS
1. The Company reported the conclusion of litigation with Memtec America
Corporation in February 1999 and the award of damages reported in its Form
10 KSB filing for the fiscal year ended January 31, 1999.
2. The Company reports the commencing of a lawsuit by Steel Partners II L.L.P.
against the Company and its four directors on May 3, 1999 in the U.S.
District Court for the District of Delaware seeking to rescind or enjoin the
Private Placement of 940,000 shares of common stock purchased by the
directors, officers and employees of the Company. The purpose of the lawsuit
is calculated to obtain control of the Board of Directors and to sell the
assets of Puroflow. Steel Partners II L.L.P. owns 16.6% of the issued and
outstanding shares of the Registrant.
The Company has retained counsel in Delaware to vigorously contest the
action, for the lawsuit is without merit and seeks to intimidate the Board
of Directors.
The Company has retained counsel in the State of California to commence an
action in the Supreme Court of the State of California, County of Los
Angeles, to seek compensatory and punitive damages and injunctive relief for
interference with prospective economic advantage of the Company's business.
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
None.
8
<PAGE>
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
On January 31, 1999, the Registrant acquired Quality Controlled
Cleaning Corporation representing 100% of the issued and
outstanding shares (see Business Acquisition above).
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
June 11, 1999 By: /s/ Michael H. Figoff
--------------------------------------------
Michael H. Figoff
President/Chief Executive Officer
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1999
<PERIOD-END> APR-30-1999
<CASH> 67,221
<SECURITIES> 0
<RECEIVABLES> 1,580,007
<ALLOWANCES> 20,000
<INVENTORY> 1,762,729
<CURRENT-ASSETS> 3,497,397
<PP&E> 4,245,057
<DEPRECIATION> 3,150,611
<TOTAL-ASSETS> 5,669,233
<CURRENT-LIABILITIES> 669,736
<BONDS> 0
0
0
<COMMON> 5,520,587
<OTHER-SE> (635,890)
<TOTAL-LIABILITY-AND-EQUITY> 5,669,233
<SALES> 2,070,363
<TOTAL-REVENUES> 2,070,363
<CGS> 1,498,836
<TOTAL-COSTS> 2,032,998
<OTHER-EXPENSES> 401
<LOSS-PROVISION> (2,000)
<INTEREST-EXPENSE> 4,224
<INCOME-PRETAX> 32,740
<INCOME-TAX> 600
<INCOME-CONTINUING> 32,140
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,140
<EPS-BASIC> .004
<EPS-DILUTED> .004
</TABLE>
