<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JULY 31, 1999 COMMISSION FILE NUMBER 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 91406-1739
(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 8,123,721
- --------------------------------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
<PAGE>
PUROFLOW INCORPORATED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1999 1999
------------------ -------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ - $ 828,809
Accounts receivable
Net of allowance for doubtful accounts of $25,000 at
July 31, 1999 and $22,000 at January 31, 1999 1,123,263 1,373,254
Accounts Receivable, other - 375,763
Advances to Officers & Employees - 2,907
Inventories 1,953,821 1,562,939
Deferred tax benefit 48,947 45,347
Prepaid expenses and other current assets 82,022 91,677
------------------ -------------------
TOTAL CURRENT ASSETS 3,208,053 4,280,696
------------------ -------------------
PROPERTY & EQUIPMENT
Leasehold improvements 57,379 55,954
Machinery and equipment 3,536,104 3,808,188
Automobile - 1,679
Tooling and dies 341,387 327,411
Construction in progress - -
------------------ -------------------
3,934,870 4,193,232
Less accumulated depreciation
and amortization 2,992,440 3,082,386
------------------ -------------------
NET PROPERTY AND EQUIPMENT 942,430 1,110,846
------------------ -------------------
DEFERRED TAXES 747,978 747,980
OTHER ASSETS 365,397 340,423
------------------ -------------------
TOTAL ASSETS $ 5,263,858 $ 6,479,945
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank Overdraft $ 76,082 $ -
Line of credit 35,000 -
Notes payable, current 110,000 97,200
Accounts payable 315,285 465,678
Accrued expenses 142,576 477,335
Payable for acquired company - 447,875
------------------ -------------------
TOTAL CURRENT LIABILITIES 678,943 1,488,088
------------------ -------------------
Long-Term Debt 103,000 139,400
------------------ -------------------
TOTAL LIABILITIES 781,943 1,627,488
------------------ -------------------
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 - 8,123,721 shares 441,213 440,979
Additional paid-in capital 5,681,193 5,667,327
Accumulated deficit (1,052,799) (668,030)
Less:
Notes receivable from stockholders (554,773) (554,900)
Treasury stock at cost (32,919) (32,919)
------------------ -------------------
TOTAL STOCKHOLDERS' EQUITY 4,481,915 4,852,457
------------------ -------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 5,263,858 $ 6,479,945
================== ===================
</TABLE>
1
<PAGE>
PUROFLOW INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31, JULY 31,
1999 1998 1999 1998
------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net revenue $ 1,729,193 $ 2,209,044 $ 3,799,556 $ 4,305,328
Cost of goods sold 1,342,446 1,505,788 2,841,282 2,999,370
------------------- ---------------- ---------------- ----------------
Gross profit 386,747 703,256 958,274 1,305,958
Selling, general
and administrative expense 688,994 604,511 1,223,156 1,074,968
------------------- ---------------- ---------------- ----------------
Operating income (302,247) 98,745 (264,882) 230,990
Interest expense (3,995) (6,105) (8,219) (7,179)
Other income 7,711 2,812 18,323 6,223
Amortization goodwill/non-compete (11,013) - (22,026) -
Loss from write-off of
obsolete equipment (106,067) - (106,067) -
------------------- ---------------- ---------------- ----------------
Income/loss before taxes (415,611) 95,452 (382,871) 230,034
Provision for income taxes 1,296 (46,650) 1,896 (97,650)
------------------- ---------------- ---------------- ----------------
NET INCOME $ (416,907) $ 142,102 $ (384,767) $ 327,684
=================== ================ ================ ================
Net income (loss) per common share:
Basic earnings per share $ (0.05) $ 0.02 $ (0.05) $ 0.05
Diluted earnings per share $ (0.05) $ 0.02 $ (0.05) $ 0.05
Weighted average number of shares 8,108,123 7,215,764 8,108,123 7,215,764
</TABLE>
2
<PAGE>
PUROFLOW INCORPORATED
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JULY 31 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) (384,767) 327,683
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 153,942 163,458
Provision for losses on accounts receivable 3,000 2,748
Write-off of obsolete equipment 106,067 -
Changes in operating assets and liabilities:
Advances to Officers & Employees 2,907 (2,482)
Accounts receivable 246,991 (71,208)
Other receivables 375,763 -
Inventories (390,882) (258,509)
Prepaid expenses and other current assets 9,656 16,070
Deferred tax benefit (3,600) (4,350)
Deferred taxes - (102,000)
Other payable (445,650) -
Accounts payable & accrued expenses (534,377) (229,543)
------------------ -----------------
Net cash used in operating activities (860,952) (158,133)
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (69,567) (80,185)
------------------ -----------------
Net cash used in investing activities (69,567) (80,185)
------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of options 14,100 -
Current portion long term debt (23,600) 60,000
Advance on credit line 35,000 -
Principal new long term debt 128 160,700
------------------ -----------------
Net cash used in financing activities 25,628 220,700
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NET DECREASE IN CASH (904,891) (17,618)
------------------ -----------------
CASH AT END OF PERIOD $ (76,082) $ 343,905
================== =================
</TABLE>
3
<PAGE>
PUROFLOW INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
FROM
COMMON ADDITIONAL STOCKHOLDER
STOCK PAID-IN RETAINED AND TREASURY
PAR VALUE CAPITAL EARNINGS STOCK TOTAL
---------------- ---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED JULY 31, 1999
Balance at January 31, 1999 $ 440,979 $ 5,667,327 $ (668,030) $ (587,819) $ 4,852,457
Receivable Payment - - - 127 127
Exercise options for 2,400 shares
@ $.25 per share 24 576 - - 600
Exercise options for 9,000 shares
@ $.50 per share 90 4,410 - - 4,500
Exercise options for 12,000 shares
@ $.75 per share 120 8,880 - - 9,000
Net income - - (384,767) - (384,767)
---------------- ---------------- ----------------- ---------------- ----------------
Balance at July 31, 1999 $ 441,213 $ 5,681,193 $ 1,052,797 $ (587,692) $ 4,481,917
================ ================ ================= ================ ================
</TABLE>
4
<PAGE>
PUROFLOW INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 31, 1999, JANUARY 31, 1999, AND JULY 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,
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>
JULY 31, JANUARY 31,
1999 1999
------------------ ------------------
<S> <C> <C>
Raw materials and purchased parts $ 1,213,130 $ 918,559
Work in process 367,166 307,444
Finished goods and assemblies 373,525 336,936
------------------ ------------------
Totals $ 1,953,821 $ 1,562,939
================== ==================
</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>
6 MONTHS ENDED JULY 31, 1999
Basic earnings per share (loss) $ (384,767) 8,103,123 $ (.05)
===================
EFFECT OF DILUTED SECURITIES
Stock options -0-
---------------------- ----------------------
Diluted earnings per share $ (384,767) 8,103,123 $ (.05)
====================== ====================== ===================
6 MONTHS ENDED JULY 31, 1998
Basic earnings per share $ 327,684 7,108,621 $ .05
===================
EFFECT OF DILUTED SECURITIES
Stock Options 103,331
---------------------- ----------------------
Diluted earnings per share $ 327,684 7,211,952 $ .05
====================== ====================== ===================
</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. Prior period amounts have been restated, where
appropriate to conform to the requirements of FAS 128.
NOTE 5 - LINE OF CREDIT
The Company has a $1,000,000 revolving credit line maturing on June 5, 2000.
This credit line bears interest at the rate of prime plus 0.25% 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 an open
balance of $35,000 as of July 31, 1999.
6
<PAGE>
NOTE 6 - INCOME TAXES
Income tax benefits recognized represents the benefit of income tax loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1999, the Company had cash overdraft of $(76,082), compared to
$828,809 on January 31, 1999. It had a current ratio of 5.15 to 1 at July 31,
1999, compared to 2.87 to 1 on January 31, 1999.
OPERATING ACTIVITIES
Cash flow from Operations for the six months ended July 31, 1999 was reduced
by $1,163,907 compared to a decrease of $158,133 for the six months ended
July 31, 1998. The reduction in cash available resulted from the acquisition
of QCCC, a reduction in accrued expenses and accounts payable, and write-off
of $327,929 for disposal of machinery and equipment, of which $106,067
represents obsolete filter equipment.
INVESTING ACTIVITIES
The Company invested $69,567 in new capital equipment in the current quarter
predominantly for equipment for a new type of airbag filter.
FINANCING ACTIVITIES
The Company has an unused revolving credit line of $1,000,000 which bears
interest at the rate of prime plus 0.25% 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, now reduced to $163,000.
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 JULY 31, 1999
REVENUES
Sales were $1,729,193 for the six months ended July 31,1999 compared to
$2,209,044 in 1998, a 22% decrease of $479,851. Sales of airbag filters
decreased $152,535 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 $595,587 offset by our new QCCC operation, revenue of $185,263 and
shipments of $83,008 for International Sales.
7
<PAGE>
GROSS PROFIT
Gross profit as a percentage of sales was 22.4% in July 1999, compared to
31.8% in July 1998, representing a decrease of 9.4% representing lower
margins on airbag filters and aerospace filters with a reduction in
government sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The increase in selling, general and administrative expenses for the three
months ended July 31, 1999 and for the six months ended July 31, 1999 of
$84,483, and $148,188, respectively, is attributed to the legal costs
incurred to legal proceedings set forth in detail in Part II, Item 1 (2).
OPERATING INCOME
Operating loss was $302,247 in July 1999 compared to operating income of
$98,745 in July 1998, a decrease of $400,992 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
decrease in sales volume and product mix.
INTEREST CHARGES
Interest on the bank loan was $3,995 as of July 31,1999, and $6,105 at July
31, 1998.
INCOME TAXES
A tax benefit of $51,000 was recognized as a result of income tax loss
carryforwards.
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.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.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.
8
<PAGE>
ITEM 2. CHANGES IN SECURITIES
None.
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
September 10, 1999 /s/ Michael H. Figoff
---------------------------------
Michael H. Figoff
President/Chief Executive Officer
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> MAY-01-1999
<PERIOD-END> JUL-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,148,263
<ALLOWANCES> 25,000
<INVENTORY> 1,953,821
<CURRENT-ASSETS> 3,208,053
<PP&E> 3,934,870
<DEPRECIATION> 2,992,440
<TOTAL-ASSETS> 5,263,858
<CURRENT-LIABILITIES> 678,943
<BONDS> 103,000
0
0
<COMMON> 5,534,714
<OTHER-SE> (1,052,799)
<TOTAL-LIABILITY-AND-EQUITY> 5,263,858
<SALES> 3,799,556
<TOTAL-REVENUES> 3,799,556
<CGS> 2,841,282
<TOTAL-COSTS> 4,064,438
<OTHER-EXPENSES> 87,744
<LOSS-PROVISION> 3,000
<INTEREST-EXPENSE> 30,245
<INCOME-PRETAX> (382,871)
<INCOME-TAX> 1,896
<INCOME-CONTINUING> (384,767)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (384,767)
<EPS-BASIC> (.05)
<EPS-DILUTED> (.05)
</TABLE>
