<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED OCTOBER 31, 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)
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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 8,123,721
- -------------------------------------------------------------------------------
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>
October 31, January 31,
1999 1999
------------------ -------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 8,810 $ 828,809
Accounts receivable
Net of allowance for doubtful accounts of $25,000 at
October 31, 1999 and $22,000 at January 31, 1999 1,149,339 1,373,254
Accounts Receivable, other - 375,763
Advances to Officers & Employees - 2,907
Inventories 1,927,070 1,562,939
Deferred tax benefit 48,947 45,347
Prepaid expenses and other current assets 28,573 91,677
------------------ -------------------
TOTAL CURRENT ASSETS 3,162,739 4,280,696
------------------ -------------------
PROPERTY & EQUIPMENT
Leasehold improvements 59,229 55,954
Machinery and equipment 3,574,144 3,808,188
Automobile - 1,679
Tooling and dies 342,922 327,411
Construction in progress - -
------------------ -------------------
3,976,295 4,193,232
Less accumulated depreciation
and amortization 3,042,425 3,082,386
------------------ -------------------
NET PROPERTY AND EQUIPMENT 933,870 1,110,846
------------------ -------------------
DEFERRED TAXES 747,978 747,980
OTHER ASSETS 380,884 340,423
------------------ -------------------
TOTAL ASSETS $ 5,225,471 $ 6,479,945
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable, current 110,000 97,200
Accounts payable 336,124 465,678
Accrued expenses 234,181 477,335
Payable for acquired company - 447,875
Line of credit 280,000 -
------------------ -------------------
TOTAL CURRENT LIABILITIES 960,305 1,488,088
------------------ -------------------
Long-Term Debt 91,200 139,400
------------------ -------------------
TOTAL LIABILITIES 1,051,505 1,627,488
------------------ -------------------
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 at 441,213 440,979
October 31,1999
Additional paid-in capital 5,681,193 5,667,327
Accumulated deficit (1,359,798) (668,030)
Less:
Notes receivable from stockholders (555,723) (554,900)
Treasury stock at cost (32,919) (32,919)
------------------ -------------------
TOTAL STOCKHOLDERS' EQUITY 4,173,966 4,852,457
------------------ -------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 5,225,471 $ 6,479,945
================== ===================
</TABLE>
1
<PAGE>
PUROFLOW INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
1999 1998 1999 1998
------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net revenue $ 1,768,123 $ 1,908,249 $ 5,567,679 $ 6,213,577
Cost of goods sold 1,298,603 1,372,373 4,139,885 4,371,743
------------------- ---------------- ---------------- ----------------
Gross profit 469,520 535,876 1,427,794 1,841,834
Selling, general
and administrative expense 541,304 507,872 1,632,026 1,419,149
------------------- ---------------- ---------------- ----------------
Operating income (71,784) 28,004 (204,232) 422,685
Interest expense (5,635) (5,451) (13,854) (12,630)
Other income 8,811 6,446 27,134 12,669
Goodwill/Non-Compete (14,513) - (36,539) -
Non-Recurring Legal Expenses (223,880) (60,921) (356,314) (224,612)
Gain/(Loss) from Sale of P&E - - (106,067) -
------------------- ---------------- ---------------- ----------------
Income from continuing (307,001) (31,922) (689,872) 198,112
operations before taxes
Provision for income taxes - (48,825) 1,896 (146,475)
------------------- ---------------- ---------------- ----------------
NET INCOME $ (307,001) $ 16,903 $ (691,768) $ 344,587
=================== ================ ================ ================
Net income (loss) per common share:
Basic earnings per share $ (0.09) $ 0.002 (0.09) $ 0.05
Diluted earnings per share $ (0.09) $ 0.002 (0.09) $ 0.05
Weighted average number of shares 8,123,721 7,252,725 8,113,322 7,527,615
</TABLE>
2
<PAGE>
PUROFLOW INCORPORATED
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED OCTOBER 31 1999 1998
------------------ -----------------
<S> <C> <C>
CASH AT BEGINNING OF PERIOD $ 828,809 $ 361,523
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) (691,768) 344,587
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 188,440 254,187
Provision for losses on accounts receivable 3,000 (3,585)
Write-off of obsolete equipment 106,067 -
Changes in operating assets and liabilities:
Advances to Officers & Employees 2,907 (1,282)
Accounts receivable 220,915 149,138
Other receivables 375,763 -
Inventories (364,131) (95,083)
Prepaid expenses and other current assets 63,104 (65,725)
Deferred tax benefit (3,600) -
Deferred taxes - (153,000)
Other payable (445,650) -
Accounts payable & accrued expenses (421,933) (271,589)
------------------ -----------------
Net cash used in operating activities (966,886) 157,648
------------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (110,990) (138,290)
Purchases received on notes receivable
------------------ -----------------
Net cash provided by investing activities (110,990) (138,290)
------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of options 14,100 -
Current portion long term debt (35,400) -
Advance on credit line 280,000 -
Principal new long term debt (823) -
Addition to Long Term Debt 201,400
Proceeds from Sale of Common Stock 705,000
Notes Receivable from Stockholders (558,000)
Buy Back Treasury Stock at Cost (32,919)
------------------ -----------------
Net cash provided by financing activities 257,877 315,481
------------------ -----------------
NET INCREASE (DECREASE) IN CASH (819,999) 334,839
================== =================
CASH AT END OF PERIOD $ 8,810 $ 696,362
================== =================
</TABLE>
3
<PAGE>
PUROFLOW INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
FROM
COMMON ADDITIONAL ACCUMULATED STOCKHOLDER
STOCK PAID-IN DEFICIT AND TREASURY
PAR VALUE CAPITAL STOCK TOTAL
---------------- ---------------- ----------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
FOR THE NINE MONTHS ENDED OCTOBER 31, 1999
Balance at January 31, 1999 $ 440,979 $ 5,667,327 $ (668,030) $ (587,819) $ 4,852,457
Principal Receivable - - - (823) (823)
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 - - (691,768) - (691,768)
---------------- ---------------- ----------------- --------------- --------------
Balance at October 31, 1999 $ 441,213 $ 5,681,193 $(1,359,798) $ (588,642) $(4,173,966)
================ ================ ================= =============== ==============
</TABLE>
4
<PAGE>
PUROFLOW INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
OCTOBER 31, 1999, JANUARY 31, 1999, AND OCTOBER 31, 1998
NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION
The consolidated balance sheet at the end of the preceding fiscal year has been
derived from the audited consolidated balance sheet contained in the Company's
annual report on Form 10-KSB for the fiscal year ended January 31, 1999 (The
"Form 10-KSB") and is presented for comparative purposes. All other financial
statements are unaudited. In the opinion of management, all adjustments that
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 generally accepted accounting principles have been omitted in
accordance with the published rules and regulations of the Securities and
Exchange Commission.
NOTE 2 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1999 1999
------------ -----------
<S> <C> <C>
Raw materials and purchased parts $1,174,455 $918,559
Work in process 264,397 307,444
Finished goods and assemblies 488,218 336,936
------------ -----------
Totals $1,927,070 $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>
PER-SHARE
INCOME SHARES AMOUNT
<S> <C> <C> <C>
9 MONTHS ENDED OCTOBER 31, 1999
Basic earnings per share (loss) $(691,768) 8,113,322 $ (.09)
=========
EFFECT OF DILUTED SECURITIES
Stock options -0-
---------- ---------
Diluted earnings per share $(691,768) 8,113,322 $ (.09)
========== ========= =========
9 MONTHS ENDED OCTOBER 31, 1998
Basic earnings per share $344,587 7,413,657 $ .05
=========
EFFECT OF DILUTED SECURITIES
Stock options 98,033
---------- ---------
Diluted earnings per share $344,587 7,511,690 $ .05
========== ========= =========
</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 $280,000 as of
October 31, 1999.
6
<PAGE>
NOTE 6 - INCOME TAXES
Income tax benefits recognized represents the benefit of income tax loss
carryforwards.
NOTE 7 - YEAR 2000 READINESS
The Company has taken all practical steps to insure that its' computer hardware
and software will be unaffected by any Y2K issues. Pursuant to representation
made by Dataworks Corp. On our system software and Santa Monica Systems of Santa
Monica, California on the hardware we are in Y2K compliance. All other
applications fall under Microsoft NT software and are stated to be in Y2K
compliant. The Company has also been engaged in communications with its vendors,
service providers and customers to determine the extent to which the Company
would be vulnerable to third party's failure to address its own Y2K issues.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1999, the Company had cash of $ 8,810, compared to $828,809 on
January 31, 1999. It had a current ratio of 3.29 to 1 at October 31, 1999,
compared to 2.87 to 1 on January 31, 1999.
OPERATING ACTIVITIES
Cash flow from Operations for the nine months ended October 31, 1999 was reduced
by $966,886 compared to an increase of $157,648 for the nine months ended
October 31, 1998. The reduction in cash available resulted from the acquisition
of QCCC and the operating loss for the period.
INVESTING ACTIVITIES
The Company invested $110,000 in new capital equipment in the current quarter
predominantly for test equipment used in developing FAA/PMA filters, and
computer upgrades to support engineering CAD/CAM systems.
FINANCING ACTIVITIES
The Company has a 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 of which $280,000 is outstanding at October 31,1999.
The Company is in compliance with all covenants under its loan agreement with
the Bank. The Company obtained a loan of $236,000 in 1998 to pay non-recurring
judgment against it as well as purchase a necessary blueprint copier, now
reduced to $151,200.
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.
7
<PAGE>
RESULTS OF OPERATIONS FOR QUARTER ENDED OCTOBER 31, 1999
REVENUES
Sales were $1,768,123 for the three months ended October 31,1999 compared to
$1,908,249 in 1998, a 7.3% decrease of $140,126. Sales of airbag filters
decreased $480,251 for the comparable period due to the slow ramp-up of the new
model non-azide airbag and a decrease in shipments for technical aftermarket
filters. This was partially offset by our own new QCCC operation revenue of
$177,269 and shipments of $157,442 for our international sales.
GROSS PROFIT
Gross profit as a percentage of sales was 26.6% in October 1999, compared to
28.1% in October 1998, representing a decrease of 1.5% as result of product mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The increase in selling, general and administrative expenses for the three
months ended October 31, 1999 and for the nine months ended October 31, 1999 was
$33,432, and $212,877 respectively, 1) Due to the addition of personnel to staff
our new international division as well as increased sales commission.
2) The Company has also written off $45,000 receivables of Breed Technologies
who have entered under court protection.
OPERATING INCOME
Operating loss was $71,784 in October 1999 compared to operating income of
$28,004 in October 1998, a decrease of $99,788 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 side impact filter and substantial decrease in sales
volume, product mix and the above mentioned $45,000 write off of receivables.
INTEREST CHARGES
Interest on the bank loan was $5,635 as of October 31,1999, and $5,451 at
October 31, 1998.
PART ll - OTHER INFORMATION
ITEM 1. PENDING LEGAL PROCEEDINGS
The Company previously reported in its Form 10QSB filing for period ending July
31,1999, the commencement of a lawsuit by Steel Partners II L.P. against the
Company and it's four directors on May 3, 1999 in 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 company retained counsel in Delaware to contest
the action. The Company also retained counsel in the State of California to
commence an action in the Supreme Court of the State of California, County of
Los Angeles, seeking compensation and punitive damages, and injunctive relief.
In September 1999 the Company and Steel Partners II, L. P. jointly announced
that the Company and it's Board of Directors entered into a settlement agreement
with Steel Partners and its affiliates
8
<PAGE>
under which Steel Partners agreed to terminate its pending proxy contest in
exchange for board representation.
Pursuant to the settlement agreement, which will expire by its terms after
the 2000 annual meeting of stockholders, and the Company's by-laws, the
Company did expand its current Board to seven members and appointed three
representatives from Steel Partners to the Board to fill the three vacancies.
At the annual meeting of stockholders held Thursday, October 21, the size of
the Board was reduced to five, with the Company nominating three
representatives and Steel Partners nominating two representatives.
The Company and Steel Partners also agreed to vote its shares of Puroflow common
stock in favor of the new five-person slate of nominees presented at the 1999
annual meeting. The Company also agreed to promptly amend its shareholders
rights plan to increase the beneficial ownership threshold at which the rights
plan is triggered from 17.5% to 20%. Also as part of the settlement agreement,
both the Company and Steel Partners agreed to dismiss their respective lawsuits
in California and Delaware.
The Company is not party, nor are its properties subject to any material pending
proceeding other than ordinary routing litigation incidental to the Company's
business and the matters described above.
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).
On June 14,1999 Registrant reported the extension of the loan
agreement with Pacific Century Bank.
On August 17,1999 Registrant reported the filing of Form 8K
revising the text of a Form 8A for typographical errors.
On September 16, 1999 Registrant reported the filing of Form 8K
representing the settlement agreement with Steel Partners.
9
<PAGE>
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed and on its behalf by the
undersigned thereto, duly authorized.
PUROFLOW INCORPORATED
December 10, 1999 /s/ Michael H. Figoff
---------------------------------------
Michael H. Figoff
President/Chief Executive Officer
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> AUG-01-1999
<PERIOD-END> OCT-31-1999
<CASH> 8,810
<SECURITIES> 0
<RECEIVABLES> 1,174,339
<ALLOWANCES> 25,000
<INVENTORY> 1,927,070
<CURRENT-ASSETS> 3,162,739
<PP&E> 3,976,295
<DEPRECIATION> 3,042,425
<TOTAL-ASSETS> 5,225,471
<CURRENT-LIABILITIES> 960,305
<BONDS> 91,200
0
0
<COMMON> 5,533,764
<OTHER-SE> (1,359,798)
<TOTAL-LIABILITY-AND-EQUITY> 5,225,471
<SALES> 5,567,679
<TOTAL-REVENUES> 5,567,679
<CGS> 4,139,885
<TOTAL-COSTS> 5,771,911
<OTHER-EXPENSES> (435,247)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,393
<INCOME-PRETAX> (689,872)
<INCOME-TAX> 1,896
<INCOME-CONTINUING> (691,768)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (691,768)
<EPS-BASIC> (.09)
<EPS-DILUTED> (.09)
</TABLE>
