<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, 2000
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
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 $3,514,563 as of March 31, 2000, 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, 2000: 8,130,121
The Registrant's Proxy Statement relating to the Annual Meeting of
Stockholders to be held on June 29, 2000 is hereby incorporated by reference
into Part III of this Form 10-KSB.
<PAGE>
PUROFLOW INCORPORATED
1999 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................................................................................4
ITEM 4. Submission of Matters to Vote of Security Holders................................................4
PART II
ITEM 5. Market for Registrant's Common Equity and Related Shareholder Matters............................5
ITEM 6. Selected Consolidated Financial Data.............................................................6
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............7
ITEM 8. Financial Statements and Supplementary Data......................................................9
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............9
ITEM 10. Recently Issued Accounting Standards.............................................................9
PART III
ITEM 11. Directors and Executive Officers of the Registrant...............................................9
ITEM 12. Executive Compensation...........................................................................9
ITEM 13. Security Ownership of Certain Beneficial Owners and Management...................................9
ITEM 14. Certain Relationships and Related Transactions...................................................9
PART IV
ITEM 15. Financial Statements, Schedules, Exhibits and Reports on Form 8-K...............................10
Signatures......................................................................................11
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
Puroflow Incorporated (the "Registrant" or the "Company") provide a broad
range of products for original equipment manufacturers, foreign and domestic
military users, government direct, automotive and aviation aftermarket users;
as well as a number of commercial and industrial applications. These
applications include military, commercial and general aviation fixed wing and
rotary wing vehicles, rockets, launch vehicles, satellites, surface and
subsurface vessels, automotive airbag, launch complex installations, and
liquid gas manufacturers, to name a few.
The Company's products are made from a combination of woven wire meshes,
random fiber materials, expanded metals, plastics, rubber, sheet metal and
precision machined components assembled via welded, brazed, and/or epoxy
construction.
The Company acquired 100% control of Quality Controlled Cleaning Corporation
(QCCC) on January 31, 1999. QCCC is engaged in cleaning services of precision
parts for companies, including commercial aviation, aerospace, and the
medical, pharmaceutical and petrol chemical industries. The service includes
cleaning, sterilization, testing and assembly of component parts. QCCC is
operated as a separate entity.
The Company produces automotive airbag filters, which are an integral part of
airbag inflator assemblies. The primary functions of the airbag filters are
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 typically comprised of a unique blend of woven wire,
expanded metals, random metallic fiber, fiberglass, and/or refractory
materials in various combinations. To economically assemble these airbag
filters, the Company designs, manufactures, and operates its own
high-precision machines. These machines 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 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. QCCC facilities are located at
6118 Ferguson Drive in the City of Commerce, California.
MARKETING
The Company markets its airbag filters directly to airbag manufacturers
through its executive officers. The Company markets its original equipment
manufacturing (OEM) aerospace applications and it's QCCC Precision Cleaning
Services through a series of manufacturing representatives and to a lesser
extent, the Company's own sales force. Each representative is assigned to an
exclusive geographic region. The sale of aftermarket products is through
exclusive distributorships, who in turn, have exclusively assigned part
numbers. 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 are subject to mutual agreement of the parties
and may be adjusted to take into account inflation, market 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. Foreign military sales are conducted through the Company's
International Programs Group, utilizing exclusive agents currently located in
Turkey, South Korea, Taiwan and within NATO Nations.
GOVERNMENT CONTRACTS
The United States government is consistently within the Company's top ten
dollar volume customers. Substantial sales of other high performance filters
are made to companies that are themselves prime contractors of the United
States government. Sales to the United States government accounted for
approximately 10.6% and 15.7%, respectively, of net sales for fiscal 2000 and
1999. While separate figures are not maintained, the Company believes that
when added to sales with the United States governments prime contractors,
government sales accounted for approximately 19.9% of the Company's net sales
during these periods.
1
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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. There are no assurances that the Company's airbag
customers will not manufacture some or all of their airbag filters for its
own use, or that other companies will not enter into the airbag filter market.
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 2000 and fiscal 1999, the Company incurred research and development
expenditures of approximately $177,000 and $240,000, 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, specialty
filtration products and Federal Aviation Administration 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 petrol-chemical 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 our laminar flow, Class 100
clean room. QCCC's facility has a Class 10,000 clean room.
REPLACEMENT PARTS
The Company is a leading supplier of aftermarket products used in jet
aircraft, turboshaft powered aircraft, and helicopters. Utilizing highly
successful reverse engineering techniques, the Company produces "generic
plain wrap" products 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 basis, a particular market segment. The preponderance of future
Company sales will continue to be within its core filtration product line.
Aftermarket applications, to include sales within the International Product
Group, are significantly more diverse. These products include unique items
such as interior trim, heat resistant ducting, mechanical and electrical
components, and aircraft structural parts. This market segment is specialized
and has consistently generated improved profit margins when compared to the
highly competitive aftermarket filter products.
RAW MATERIALS AND SUPPLIES
The principal raw materials utilized by the Company in connection with its
filter operations include stainless steel and other man-made 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 readily
and 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, as well as the QCCC facility in Commerce,
California, does not handle or store hazardous substances and thus does not
incur significant costs relating to compliance with environmental laws.
2
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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 three customers represented approximately 44.1% of net sales during
fiscal year 2000. Sales to four customers represented 58.3% of net sales
during fiscal year 1999. Three customers represented 37% of net sales during
fiscal year 1998.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 2000, no other customer
accounted for more than 10% of net sales, except the Department of Defense,
which accounted for 15.7% of the total sales.
BACKLOG
As of February 28, 2000 and February 28, 1999, the Company had a backlog of
approximately $8,017,000 and $5,820,000, respectively. Approximately
$4,500,000 of the Company's backlog at February 28, 2000 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 airbags in passenger cars, light
trucks, and vans by model years 1999 and 2000, 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-aside. To the extent bidding may be so limited, the Company
has an opportunity to benefit from the reduced number of qualified bidders.
3
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EMPLOYEES
At February 1, 2000, the Company had 67 full-time employees. 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 50,000 December 31,2002
Van Nuys, CA 91406 facility for airbag components,
government and aerospace filtration.
6118 Ferguson Drive Administration and production 10,000 January 31, 2004
Commerce, CA 90040 facility for Quality Controlled
Cleaning Corporation.
</TABLE>
The Company's current Saticoy 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
exercised its option to extend the lease for 29 months until December 31,
2002, at an annual rental of $384,000, inclusive of the above services.
The Company's lease from Ferguson Properties, a California Partnership, is
for 60 months, with an optional right to terminate same following the first
36 months of the subject lease. An additional 60-month option to renew at the
sole discretion of the company.
ITEM 3. PENDING LEGAL PROCEEDINGS
1) The Company concluded its final piece of outstanding litigation on
February 3, 1999 against Memtec America Corporation. The Circuit
Court of Baltimore County in a ruling entitled "MEMTEC AMERICA
CORPORATION VS PUROFLOW INCORPORATED" ruled that Memtec had
misappropriated trade secrets relating to Puroflow products and
operations. The Court awarded $557,390 in damages to Puroflow,
insufficient to cover all legal costs and disbursements. The
Company has recognized amounts due from Memtec and recorded all
amounts owed to its counsel in the January 31, 1999 accounts.
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.
4
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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
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<S> <C> <C>
Fiscal Year Ended January 31, 1999
1st Quarter.............................. .875 .625
2nd Quarter ............................. .812 .700
3rd Quarter.............................. .821 .562
4th Quarter.............................. .812 .720
Fiscal Year Ended January 31, 2000
1st Quarter.............................. 1.03 .80
2nd Quarter ............................. .936 .713
3rd Quarter.............................. .945 .736
4th Quarter.............................. .625 .56
Fiscal Year Ended January 31, 2000
Two Months Ending March 31, 2000......... .69 .69
</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, 2000, the closing bid price for the Company's Common Stock on
the Bulletin Board System was $.69 per share. As of March 31, 2000, the
Company had approximately 253 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.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
(in thousands)
------------------------------------------------------------
1996 1997 1998 1999 2000
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<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (1):
Net Sales $8,816 $8,458 $8,597 $8,018 $7,437
Cost of goods sold 5,957 5,888 6,161 5,834 5,546
------- ------- ------- ------- -------
Gross profit 2,859 2,570 2,436 2,184 1,891
Selling, general & administrative expense 1,443 1,446 1,497 1,833 2,211
------- ------- ------- ------- -------
Operating income (loss) 1,416 1,124 939 351 (320)
Other income (expense) (282) (61) 17 6 10
Non-recurring expenses (2) (253) (394) (656) (93) (462)
------- ------- ------- ------- -------
Income (loss) from continuing operations
before income taxes 881 669 300 264 (772)
Provision (benefit) for income taxes 6 6 192 465 (76)
------- ------- ------- ------- -------
Income (loss) from continuing operations 875 663 492 729 (848)
Income (loss) from discontinued operations 23 -0- -0- -0- -0-
------- ------- ------- ------- -------
Net income (loss) $898 $663 $492 $729 $ (848)
Net income (loss) per common share:
From continuing operations $0.19 $0.11 $0.07 $0.10 $ (0.10)
From discontinued operations -0- -0- -0- -0- -0-
------- ------- ------- ------- -------
$0.19 $0.11 $0.07 $0.10 $ (0.10)
======= ======= ======= ======= =======
Weighted average number of shares (diluted) 4,632 6,107 7,248 7,598 8,119
</TABLE>
<TABLE>
<CAPTION>
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1996 1997 1998 1999 2000
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital $ (13) $2,518 $2,710 $2,792 $2,193
Total Assets 3,962 4,094 5,046 6,479 5,463
Long-Term Debt -0- -0- -0- 139 92
Stockholders' Equity 1,083 3,489 3,981 4,852 4,020
</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 years ended January 31,
1998, 1999 and 2000 represents litigation settlements and related litigation
fees.
6
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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 acquired 100% control of the shares in Quality Controlled
Cleaning Corporation on January 31, 1999 and management intends to expand
this niche market during fiscal 2000.
The International Division was created in June 1998 to provide spare parts
for hard to find or obsolete components to service the United States military
equipment acquired by foreign government.
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, 1999 and 2000 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
(in thousands)
------------------------------
1999 2000
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<S> <C> <C>
Net Sales:
Airbag Filters $ 2,734 $ 1,719
High Performance Filters 5,255 4,450
Precision Cleaning & Repair 0 854
International Division 29 415
------- -------
TOTAL $ 8,018 $ 7,438
======= =======
</TABLE>
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,
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
(in thousands)
-------------------------------
1999 2000
------- --------
<S> <C> <C>
Net Sales: 100.0% 100.0%
------- --------
Cost and expenses:
Cost of goods sold 72.8 74.6
Selling, general and administrative 23.0 29.7
Other (income) expense (.3) (.4)
Non-recurring expenses -0- 1.4
Memtec litigation 1.2 -0-
Proxy Litigation -0- 4.7
Interest expense -0- .3
------- -------
Income (loss) from continuing operations 3.3 (10.3)
before income taxes
Provision (benefit) for income taxes (5.8) 1.0
Income (loss) from discontinued operations -0- -0-
------- -------
Net Income (loss) 9.1% (11.3)%
======= =======
</TABLE>
7
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COMPARISON OF THE FISCAL YEARS ENDED JANUARY 31, 2000 AND 1999
Net sales decreased 7.2% in fiscal 2000 compared to fiscal 1999, due to a
decrease in airbag sales of 37% and a decrease in government sales of 33% offset
by an increase in precision cleaning and repair of 76.3% and increase in
international sales of 14.4%. Sales efforts are being made during fiscal year
2001 to concentrate on the PMA program and international sales.
Gross profit as a percentage of net sales was 25.4% in fiscal 2000 compared to
27.2% in fiscal 1999. The modest reduction is attributable to the product mix
and reduction in sales volume.
Selling, general and administrative expense increased to $2,211,273 in fiscal
2000 compared to $1,832,768 in fiscal 1999. The increase is attributable to a
major increase in sales and promotional cost for the penetration of the
International sales effort.
Interest expense of $23,213 in the current year was offset by interest income of
$32,760.
Litigation costs for Memtec was finally concluded at $93,013 in fiscal 1999
compared to $102,210 in fiscal 1998 after giving effect to the Court awarded
damages of $557,390.
Non-recurring expenses of $356,314 incurred in fiscal 2000 mainly due to
litigation and proxy costs relating to Steel Partners II.
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 2000, cash provided by bank financing was $500,000.
The Company's working capital was $2,193,367 and $2,792,608 as of January 31,
2000 and 1999, respectively. The current ratio is 2.6 at January 31, 2000
compared to 2.9 at January 31, 1999.
Cash used in investing activities was used to purchase plant equipment of
$127,982 and the additional acquisition of "QCCC", the wholly owned subsidiary.
The Company maintains a revolving credit line of $1,000,000 with an interest
rate of .25% of 1% above prime. The Company obtained a loan of $236,000 to pay a
non-recurring judgment. 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
$4,250,000; (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 was not in compliance with certain
covenants. The Company has obtained waivers from the bank for such
non-compliance.
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.
ITEM 10. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information" which is
effective for fiscal years beginning after December 15, 1997. Ninety Nine
percent of the Company's net sales are presently derived from one segment,
filter products. Beginning in fiscal year 2000, because of the acquisition of
Quality Controlled Cleaning Corporation, the
8
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Company will be required to disclose information on its segments.
PART III
ITEM 11. 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 12. 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)."
ITEM 13. 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 14. 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 15. 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, 2000 and 1999.
Consolidated Statements of Operations for each of the two years
in the period ended January 31, 2000.
Consolidated Statements of Stockholders' Equity for each of the
two years in the period ended January 31, 2000.
Consolidated Statements of Cash Flows for each of the two years
in the period ended January 31, 2000.
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 June 3, 1999 registrant reports extension of the loan
agreement with Pacific Century Bank.
On August 17, 1999 registrant reports the filing on form 8K to
cover a typographical error in form 8-A registrant statement
filed June 2, 1999 covering the shareholder right plan.
On September 17, 1999 the registrant reports filed a settlement
with Steel Partners.
On January 31, 1999, Registrar reported the purchase of 100%
control of Quality Controlled Cleaning Corporation engaging in
the technical services of cleaning, sterilizing, testing and
assembly of components and parts for firms engaged in commercial
aviation, aerospace, medical,
9
<PAGE>
pharmaceutical and petrol-chemical industries.
10
<PAGE>
F-1
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>
<S> <C>
By: /s/ Michael H. Figoff April 25, 2000
---------------------------------------------------------------
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>
<S> <C>
By: /s/ Michael H, Figoff April 25, 2000
---------------------------------------------------------------
Michael H. Figoff
President/Chief Executive Officer
Director
By: /s/ Robert A. Smith April 25, 2000
---------------------------------------------------------------
Robert A. Smith
Vice Chairman of the Board
By: /s/ Dr. Tracy K. Pugmire April 25, 2000
---------------------------------------------------------------
Dr. Tracy K. Pugmire
Director
By: /s/ Warren Lichtenstein April 25, 2000
---------------------------------------------------------------
Warren Litchtenstein
Director
By: /s/ Robert Frankfurt April 25, 2000
---------------------------------------------------------------
Robert Frankfurt
Director
</TABLE>
11
<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 as of January 31,
2000 and 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Puroflow
Incorporated and Subsidiaries as of January 31, 2000 and 1999, and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ Rose, Snyder & Jacobs
Rose, Snyder & Jacobs
A Corporation of Certified Public Accountants
Encino, California
March 15, 2000
<PAGE>
PUROFLOW INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash, Note 8 $ 56,829 $ 828,809
Accounts Receivable, Net of allowance for doubtful accounts of $25,000
(January 31, 2000) and $22,000 (January 31, 1999), Note 2 1,589,322 1,373,254
Accounts receivable, other -0- 375,763
Advances to officers and employees 4,100 2,907
Deferred tax benefit, current 45,347 45,347
Inventories, Note 2 1,741,088 1,562,939
Prepaid expenses and deposits 107,464 91,677
------------ ------------
TOTAL CURRENT ASSETS 3,544,150 4,280,696
------------ ------------
PROPERTY AND EQUIPMENT - NOTE 2
Leasehold improvements 59,229 55,954
Machinery and equipment 3,583,124 3,808,188
Automobile -0- 1,679
Tooling and dies 350,932 327,411
------------ ------------
3,993,285 4,193,232
Less accumulated depreciation
and amortization 3,145,251 3,082,386
------------ ------------
NET PROPERTY AND EQUIPMENT 848,034 1,110,846
------------ ------------
DEFERRED TAX BENEFIT, NOTE 5 678,980 747,980
OTHER ASSETS, NOTE 12 392,227 340,423
TOTAL ASSETS $ 5,463,391 $ 6,479,945
============ ============
CURRENT LIABILITIES:
Line of credit, Note 2 $ 500,000 -0-
Notes payable, current, Note 3 97,200 97,200
Accounts payable 428,554 465,678
Accrued expenses 325,029 477,335
Payable for acquired company, Note 12 -0- 447,875
------------ ------------
TOTAL CURRENT LIABILITIES 1,350,783 1,488,088
------------ ------------
LONG TERM DEBT, NOTE 3 92,200 139,400
COMMITMENTS AND CONTINGENCIES, NOTE 6
STOCKHOLDERS' EQUITY, NOTES 4 AND 9
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 8,130,121 shares at January 31, 2000
and 8,100,321 shares at January 31, 1999 441,277 440,979
Additional paid-in capital 5,682,729 5,667,327
Accumulated deficit (1,516,407) (668,030)
Less:
Notes receivable from stockholders (554,272) (554,900)
Treasury stock at cost (32,919) (32,919)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 4,020,408 4,852,457
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,463,391 $ 6,479,945
============ ============
</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, 2000 AND 1999
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31, 2000 1999
---------- ----------
<S> <C> <C>
Net sales $7,437,328 $8,018,395
Cost of goods sold 5,545,902 5,834,824
---------- ----------
Gross profit 1,891,426 2,183,571
Selling, general and administrative expenses 2,211,273 1,832,768
---------- ----------
Operating income (loss) (319,847) 350,803
Other income (expense)
Other income 32,760 23,991
Interest expense (23,213) (17,339)
Loss on disposal of fixed assets (106,067) -0-
Memtec litigation, net, Note 6 -0- (93,013)
Non-recurring expense (356,314) -0-
---------- ----------
Income (loss) before tax (772,681) 264,442
Income tax (benefit) expense, Note 5 75,696 (464,807)
---------- ----------
Net income (loss) $ (848,377) $ 729,249
========== ==========
Basic earnings (loss) per share, Note 10 $ (0.10) $ 0.10
========== ==========
Diluted earnings (loss) per share, Note 10 $ (0.10) $ 0.10
========== ==========
Weighted average number of shares, basic 8,118,738 7,494,021
========== ==========
Weighted average number of shares, diluted 8,118,738 7,597,863
========== ==========
</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, 2000 AND 1999
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
FROM
COMMON ADDITIONAL ACCUMULATED STOCKHOLDERS
STOCK PAID-IN DEFICIT AND TREASURY TOTAL
PAR VALUE CAPITAL TOTAL STOCK
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 31, 1998 $ 430,579 $ 4,947,727 $(1,397,279) $ -0- $ 3,981,027
Issue 940,000 shares of common stock
at $.75 per share 9,400 695,600 (554,900) 150,100
Purchase of 48,500 shares of Treasury Stock (32,919) (32,919)
Exercise of stock options for 100,000 shares
at $.25 per share 1,000 24,000 25,000
Net income 729,249 729,249
------------- ------------- ------------- ------------- -------------
Balance at January 31, 1999 $ 440,979 $ 5,667,327 $ (668,030) $ (587,819) $ 4,852,457
Payment of note receivable 628 628
Exercise of Stock Options for 9,000 shares at
$0.50 per share 90 4,410 4,500
Exercise of Stock Options for 12,000 shares at
$0.75 per share 120 8,880 9,000
Exercise of Stock Options for 8,800 shares at
$0.25 per share 88 2,112 2,200
Net Loss (848,377) (848,377)
------------- ------------- ------------- ------------- -------------
Balance at January 31, 2000 $ 441,277 $ 5,682,729 $(1,516,407) $ (587,191) $ 4,020,408
============= ============= ============= ============= =============
</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, 2000 AND 1999
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31, 2000 1999
------------ ------------
<S> <C> <C>
CASH AT BEGINNING OF PERIOD $ 828,809 $ 361,523
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) (848,377) 729,249
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 341,173 332,294
Provision for losses on accounts receivable 89,225 15,713
Loss on diposal of fixed assets 106,067 -0-
Gain on note payable (Memtec) -0- (168,034)
Changes in operating assets and liabilities:
Advances to officers & employees (1,193) (632)
Accounts receivable (305,293) 326,967
Other receivable 375,763 (375,763)
Inventories (178,149) 30,968
Prepaid expenses and other current assets 963 530
Deferred taxes 69,000 (489,327)
Accounts payable and accrued expenses (189,430) 20,770
Payable for acquired company (447,875) 445,650
------------ ------------
Net cash provided (used) by operating activities (988,126) 868,385
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (127,982) (264,572)
Business acquisition, net of cash acquired (125,000) (515,308)
------------ ------------
Net cash used by investing activities (252,982) (779,880)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Borrowings under notes payable $ 500,000 286,000
Principal payments on notes payable (47,200) (49,400)
Proceeds from exercise of stock options 15,700 25,000
Proceeds from sale of common stock, net of loan to stockholders 628 150,100
Purchase of Treasury Stock -0- (32,919)
------------ ------------
Net cash provided by financing activities 469,128 378,781
------------ ------------
NET INCREASE (DECREASE) IN CASH (771,980) 467,286
------------ ------------
CASH AT END OF PERIOD $ 56,829 $ 828,809
============ ============
</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.
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. Puroflow
Corporation acquired Quality Controlled Cleaning Corporation (QCCC) on
January 31, 1999 (See Note 12).
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,
2000 1999
---------------- ----------------
<S> <C> <C>
Raw materials and purchased parts $ 1,038,359 $ 918,559
Work in progress 267,968 307,444
Finished goods 434,761 336,936
---------------- ----------------
Total $ 1,741,088 $ 1,562,939
================ ================
</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
Tooling and dies 5 years
Leasehold improvements 5 years
</TABLE>
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. Accordingly, actual results may differ from estimates.
See independent auditors' note
F-6
<PAGE>
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>
2000 1999
------------- --------------
<S> <C>
$177,000 $240,000
============= ==============
</TABLE>
NON-RECURRING EXPENSES
For the year ended January 31, 2000 Non-recurring expenses were comprised of
legal and other expenses related to the proxy dispute which was settled in
September 1999.
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 expanded 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, 1999 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 their 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.
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.
INTANGIBLE ASSETS
Intangible assets include goodwill and non-compete agreement resulting from a
business acquired (See Note 12). These assets are amortized over the
estimated useful lives. Goodwill amortization is computed using straight line
over 10 years and accumulated amortization totaled $39,779 at January 31,
2000. Non-compete agreement amortization is computed using straight line over
3 years and accumulated amortization totaled $16,667 at January 31, 2000.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of certain of the Company's financial instruments,
including accounts receivable and accounts payable, approximates fair value
due to the relatively short maturity of such instruments. The Company's long
term debt approximates fair value.
NOTE 2 - 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. 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. At January 31,
2000, the Company was not in compliance with certain covenants on the line of
credit. The Company has obtained waivers from the bank for such
noncompliance. The balance outstanding was $500,000 at January 31,2000.
See independent auditors' note
F-7
<PAGE>
NOTE 3 - LONG-TERM DEBT
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31,
2000 1999
------------ -------------
<S> <C> <C>
Note payable to a bank bearing interest at prime plus
1.5% payable in principal monthly payments of $3,933, $139,400 $186,600
maturing on April 2003.
Note payable bearing interest at 7%, principal and
interest payable in March 2000. 50,000 50,000
------------ -------------
189,400 236,600
Less current portion 97,200 97,200
------------ -------------
Long-term debt $92,200 $139,400
============ =============
</TABLE>
Maturities of long-term debt is as follows:
<TABLE>
<S> <C>
2001 97,200
2002 47,200
2003 45,000
---------------
$ 189,400
===============
</TABLE>
Interest paid in cash totaled as follows for the years ended January 31,
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C>
$23,213 $17,339
========= =========
</TABLE>
See independent auditors' note
F-8
<PAGE>
NOTE 4 - 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, 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 $0.31 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, 1998 (outstanding and unexercised) 406,700
Granted 35,000
Exercised (100,000)
Canceled or expired (22,700)
-------------
Held at January 31, 1999, (outstanding and unexercised) 319,000
Granted 0
Exercised (29,800)
Canceled or expired (74,600)
-------------
Held at January 31, 2000 (outstanding and unexercised) 214,600
=============
Shares exercisable, January 31, 2000 178,200
=============
Shares available for future grants, end of period 155,300
=============
Price range of options held, January 31, 2000 $.025 - $.081
=============
</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' note
F-9
<PAGE>
NOTE 5 - 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>
2000 1999
-------------- -------------
<S> <C> <C>
Income tax provision at 34% $ (267,264) $ 89,910
Meals and entertainment 2,612 3,026
Officer's life insurance 2,301 3,607
Excess book (tax) depreciation and amortization (9,146) (20,031)
Change in allowance for doubtful accounts 1,020 (518)
Write-off of obsolete inventory 17,000 (17,000)
Other 16,003 (16,777)
State taxes for prior year (272) (2,059)
Net operating loss carryforwards 237,746 (40,158)
-------------- -------------
Current federal tax provision -0- -0-
Deferred Income Taxes 69,000 (472,327)
State franchise taxes 6,696 7,520
-------------- -------------
Provision for income tax $ 75,696 $ (464,807)
============== =============
</TABLE>
During the years ended January 31, 2000 and 1999, the company paid cash
income taxes of $1,896 and $10,520 respectively. 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>
2000 1999
-------------- -------------
<S> <C> <C>
Allowance for doubtful accounts $ 10,710 $ 9,425
Allowance for inventory obsolescence 21,420 -0-
Vacation accrual 36,592 17,993
Inventory uniform capitalization 48,482 17,939
Other (1,847) -0-
Less valuation allowance (70,000) -0-
-------------- -------------
Current $ 45,357 $ 45,357
============== =============
Tax loss carryforward $ 1,105,410 $ 906,242
Depreciation and amortization (129,544) (123,262)
Other (7,886) -0-
Less valuation allowance (289,000) (35,000)
-------------- -------------
Non current $ 678,980 $ 747,980
============== =============
</TABLE>
Realization of the deferred benefit is contingent upon future taxable
earnings. For the year ended January 31, 2000 the company increased its
valuation allowance by $324,000 due to the company generating losses in the
current fiscal year.
The Company estimates it has available net operating loss carryforwards of
approximately $3,100,000 for federal income tax purposes and $336,000 for
state income tax purposes at January 31, 2000. The Company's federal net
operating loss carryforwards expire from 2008 to 2011, State net operating
loss carryforwards
See independent auditors' note
F-10
<PAGE>
expire in 2005.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is committed to minimum lease payments on two non-cancelable
operating leases for its facilities which expire in December 2002 and January
2004, as follows:
<TABLE>
<CAPTION>
Twelve Months Ending January 31,
-----------------------------------
<S> <C>
2001 $ 359,750
2002 414,000
2003 382,000
2004 30,000
==========
TOTAL $1,185,750
==========
</TABLE>
Total rental expense under the facility lease (including expenses) is as
follows for the years ending January 31,
<TABLE>
<CAPTION>
2000 1999
------------ -------------
<S> <C>
$347,270 $305,000
============ =============
</TABLE>
LEGAL MATTERS
The Company concluded its final piece of outstanding litigation against
Memtec America Corporation (Memtec). The Circuit Court of Baltimore County in
a ruling entitled "MEMTEC AMERICA CORPORATION VS PUROFLOW INCORPORATED" ruled
that Memtec had misappropriated trade secrets relating to Puroflow products
and operations. The Court awarded $557,390 gross in damages to Puroflow and
allowed the forgiveness of the $168,034 note payable. The Company has
recognized amounts due from Memtec and all amounts owed to its counsel in the
January 31, 1999 accounts. The Company is not party to any further legal
matters.
NOTE 7 - RELATED PARTY TRANSACTIONS
The Company is using the legal expertise of a lawyer who was a director of
the Company. Related legal expenses totaled $72,257 and $83,078 for the years
ended January 31, 2000 and 1999, respectively.
NOTE 8 - 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>
2000 1999
----------------- ----------------
<S> <C> <C>
Inflation Systems, Inc. $ 1,583,520 $ 1,856,582
DFAS 588,307 1,084,554
Norcross Air, Inc. 1,110,333 888,038
Breed Automotive Technologies 188,588 844,627
----------------- ----------------
$ 3,470,748 $ 4,673,801
================= ================
</TABLE>
See independent auditors' note
F-11
<PAGE>
CONCENTRATION OF CREDIT RISK
Concentration of receivables due from the Company's largest customers is as
follows at January 31,
<TABLE>
<CAPTION>
2000 1999
----------------- ----------------
<S> <C> <C>
Breed Automotive Technologies $ 0 $ 136,946
Inflation Systems, Inc. 165,234 405,394
DFAS 185,823 102,818
Norcross Air, Inc. 123,074 93,495
----------------- ----------------
$ 474,131 $ 738,653
================= ================
</TABLE>
Breed Automotive Technologies filed for bankruptcy in 1999, and is no longer
a customer of the company. Inflation Systems, Inc. is a U.S. based major
supplier 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 SUPPLIER
The Company is dependent on one supplier for the majority of its material
needs for automotive airbag filter production.
CASH IN BANK
At January 31, 2000, the Company had cash in a bank in excess of federally
red limits by $98,446
NOTE 9 - 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 receivable. The notes receivable bears
5% interest and is due on August 2001. 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.
NOTE 10 - 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, 2000
Basic earnings(loss) per share $ (848,377) $ 8,118,738 $(0.10)
EFFECT OF DILUTIVE SECURITIES
Stock options 0 0
--------------- ---------------- ------
Diluted earnings (loss) per share $ (848,377) $ 8,118,738 $(0.10)
--------------- ---------------- ------
YEAR ENDED JANUARY 31, 1999
Basic earnings per share $ 729,249 $ 7,494,021 $ 0.10
EFFECT OF DILUTIVE SECURITIES
Stock options 103,842
--------------- ---------------- ------
Diluted earnings per share $ 729,249 $ 7,597,863 $ 0.10
=============== ================ ======
</TABLE>
See independent auditors' note
F-12
<PAGE>
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 11 - 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 years ended January 31,
2000 and January 31, 1999, the Company contributed $9,399 and $8,284 to the
Plan respectively. The Company's maximum discretionary contribution is
limited to 1/2 of 1% of the employee's compensation.
NOTE 12 - 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 amortizes over
10 years and the non-compete agreement over its term of 3 years.
In addition to the purchase price, the agreement included a contingent
payment of 50% of net sales in excess of $500,000 up to a maximum of $800,000
in the year ending January 31, 2000,.The full amount of the contingency was
realized and $150,000 was recorded as additional goodwill during the year
ended January 31,2000.
NOTE 13 - SEGMENT REPORTING
<TABLE>
<CAPTION>
NET SALES 2000 1999
-------------- ------------
<S> <C> <C>
Aerospace $ 4,552,556 $ 5,255,275
Puroflow International 414,769 28,991
QCCC 751,219 -0-
Airbags 1,718,784 2,734,129
-------------- ------------
$ 7,437,328 $ 8,018,395
-------------- ------------
OPERATING INCOME
Aerospace $ (266,921) $ 482,059
Puroflow International (25,587) (4,633)
QCCC 184,688 -0-
Airbags (212,027) (126,623)
-------------- ------------
$ (319,847) $ 350,803
-------------- ------------
</TABLE>
See independent auditors' note
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 Description
No.
--------- -------------
<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>
EXHIBIT 22
PUROFLOW INCORPORATED
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
STATE OF INCORPORATION
-----------------------
<S> <C>
Puroflow Corporation New York
Quality Controlled Cleaning Corporation California
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> JAN-31-2000
<CASH> 56,829
<SECURITIES> 0
<RECEIVABLES> 1,614,322
<ALLOWANCES> 25,000
<INVENTORY> 1,741,088
<CURRENT-ASSETS> 3,544,150
<PP&E> 3,993,285
<DEPRECIATION> 3,145,251
<TOTAL-ASSETS> 5,463,391
<CURRENT-LIABILITIES> 1,350,763
<BONDS> 0
0
0
<COMMON> 5,536,815
<OTHER-SE> (1,516,407)
<TOTAL-LIABILITY-AND-EQUITY> 5,463,391
<SALES> 7,437,328
<TOTAL-REVENUES> 7,437,328
<CGS> 5,545,902
<TOTAL-COSTS> 7,757,177
<OTHER-EXPENSES> (429,621)
<LOSS-PROVISION> (3,000)
<INTEREST-EXPENSE> 23,213
<INCOME-PRETAX> (772,681)
<INCOME-TAX> (75,696)
<INCOME-CONTINUING> (848,377)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (848,377)
<EPS-BASIC> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>