-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ebn2fzgaJuJhli1E6aMtVMbubKFa1Gi0R05aY8DKrWqprt3Z1ulkWMUWweeBnY8g 2LerAvQCEpCQ4VShgUq2Vw== 0000912057-96-007535.txt : 19960501 0000912057-96-007535.hdr.sgml : 19960501 ACCESSION NUMBER: 0000912057-96-007535 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19960131 FILED AS OF DATE: 19960430 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUROFLOW INC CENTRAL INDEX KEY: 0000100591 STANDARD INDUSTRIAL CLASSIFICATION: GENERAL INDUSTRIAL MACHINERY & EQUIPMENT, NEC [3569] IRS NUMBER: 131947195 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-05622 FILM NUMBER: 96553874 BUSINESS ADDRESS: STREET 1: 16559 SATICOY STREET CITY: VAN NUYS STATE: CA ZIP: 91406 BUSINESS PHONE: 8187561388 MAIL ADDRESS: STREET 1: 16559 SATICOY STREET CITY: VAN NUYS STATE: CA ZIP: 91406 FORMER COMPANY: FORMER CONFORMED NAME: ULTRA DYNAMICS CORP DATE OF NAME CHANGE: 19830522 10-K405 1 10-K405 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 14 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to For the fiscal year ended January 31, 1996 Commission File No. 0-5622 PUROFLOW INCORPORATED ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 13-1947195 - ---------------------------------- ----------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 16559 Saticoy Street, Van Nuys, California 91406 - ------------------------------------------ ----------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (818) 756-1388 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $0.01 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] On March 29, 1991, the aggregate market value based on the average bid and asked price of the voting stock held by nonaffiliates of the Registrant was $4,700,895. Number of shares of Common Stock outstanding as of March 29, 1996 : 4,578,521. The Registrant's Proxy Statement relating to the Annual Meeting of Stockholders to be held on July 11, 1996 is hereby incorporated by reference into Part III of this Form 10-K. PART I ITEM 1. BUSINESS Puroflow Incorporated (the "Registrant" or the "Company") designs and manufactures specialized filtration devices. The Company's specialty high performance filtration products are designed and manufactured to meet specific customer needs. Used in automobile airbag inflators, aerospace, petrochemical and a wide range of commercial and industrial applications, Puroflow's diversity of products and customer base has contributed to its current financial vibrance. Representing the state-of-the-art in filtration technology, each product delivered achieves effectiveness of performance through a careful selection of materials ranging from all welded titanium construction to epoxy assembled paper elements. The Company was incorporated in Delaware in 1961 and has its principal offices located at 16559 Saticoy Street, Van Nuys, California, 91406. The Company's telephone number is (818) 756-1388. Consolidated within a single, 50,000 square foot facility, Puroflow is fully self contained within the engineer, test and manufacturing disciplines. AUTOMOTIVE AIRBAG FILTERS The Company produces filters which are an integral part of conventional pyrotechnic automotive airbag inflators. The primary functions of the airbag filter is to cool and control the expansion of the hot gas into the inflating bag and to prevent hot particles of combustion from entering the expanding bag. The Company's filters are comprised of a unique blend of woven wire meshes and random fiber materials. An entire pyrotechnic airbag system includes the bag, the inflator (initiator, filter and gas generant), the module for the steering wheel or dashboard, the sensors, and the diagnostics. When the crash sensors (located in the front of the vehicle) detect a rapid deceleration, equivalent to hitting a stationary object at a predetermined speed, an electrical impulse is transmitted to the initiator. The initiator triggers a chemical reaction of the airbag's gas generant, which inflates the bag, forcing open the module's cover (located either in the center of the steering wheel or in the dashboard on the passenger-side). The inflation sequence is designed to take place in less than one-tenth of a second without interfering with control of the car. After inflation, the airbag automatically deflates in less than one second. The Company has agreements to supply airbag filters on a purchase order basis to two customers - ISI and Breed. The Company supplies airbag filters to ISI for use in systems produced for Honda, General Motors, Mazda, and Mitsubishi. Breed's customer base is comprised of Chrysler, Fiat, Ford of Australia, Jaguar, and General Motors. Both ISI and Breed currently use Puroflow as their exclusive filter supplier. The Company designs, manufactures, and operates high precision machines to fabricate airbag filters. They require minimal time for tooling changes between production runs of different filter types. These methods permit greater flexibility and lower unit costs without compromising the high reliability which is essential for automotive airbag filters. The Company is in the process of designing and developing new filters in response to requests for proposals made by various inflator manufacturers, both domestic and offshore, and has supplied pre-production qualification filters for possible use in airbag systems to some of these manufacturers. The Company intends to continue to enhance its technology and product development in order to meet the changing needs of airbag manufacturers and their customers. The Company is developing filters for the next generation azide and non-azide passenger and side impact airbag applications. 1 HIGH PERFORMANCE FILTERS Since 1961, the Company has designed and manufactured state-of-the-art, precision filtration products for critical applications. Specializing in highly reliable, all metallic filters of standard and custom design, the Company's products range from filters in hydraulic, fuel and pneumatic systems to large cryogenic and petrochemical filters. The Company also designs and manufactures surface tension devices for propellant management in missiles and satellites using porous metal, high-performance filter media and specialized gas tungsten arc welding processes. The Company is a leading filter supplier for United States space applications, including the Space Shuttle program, various commercial and military satellites, launch vehicles and boosters, and ground support equipment. Certain of the manufacturing, welding, cleaning and testing required by these applications are performed in a laminar flow, class 10,000 clean room. REPLACEMENT PARTS The Company is a leading supplier of aftermarket filtration products used in jet aircraft and turboshaft powered aircraft and helicopters. Utilizing highly successful reverse engineering techniques, the Company produces "generic plain wrap" filters for use in the aftermarket at a substantial reduction in cost to the distributor and end user. The Company utilizes exclusive agreements with its distributor base which assists them to dominate, on a part number base, a particular market segment. The Company continues to market this product and projects that it will contribute 25 percent of both sales and profit in FY 1997. RAW MATERIALS AND SUPPLIES The principal raw materials utilized by the Company in connection with its filter operations include stainless steel and other manmade or natural products, which are standard items available from a number of sources. Additionally, the Company subcontracts out a significant portion of the fabricated or machine parts required to produce components used in the Company's products, which it designs and assembles. These services are rapidly available from a wide variety of sources. The Company engineers, manufactures and assembles its products at its facility in Van Nuys, California. 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 ten customers represented 85% of net sales during fiscal year 1996. Two of these customers purchased airbag filters, and the eight other customers (including government direct, prime contractors, and PMA exclusive distributors) purchased filters for commercial and aerospace applications. The loss of any of these ten customers could have a material adverse effect on the automotive airbag filter or the high performance filter segments of the Company's business. BACKLOG As of February 29, 1996, and February 28, 1995, the Company had a backlog of approximately $5,489,000 and $5,165,000, respectively. Approximately $3,983,000 of the Company's backlog at February 29, 1996 2 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. MARKETING The Company markets its airbag filters directly to airbag manufacturers through its executive officers. The Company markets its commercial aerospace products group through exclusive distributorships on assigned PMA applications. The Company markets its high performance filters through manufacturers representatives and, to a lesser extent, the Company's own sales force. GOVERNMENT CONTRACTS The Company has a number of direct contracts with the United States government. Substantial sales of high performance filters are made to companies that are prime contractors of the United States government. Sales to the United States government accounted for approximately 7.4% of net sales for fiscal 1996 and approximately 7.0% of net sales for fiscal 1995. While separate figures are not maintained, the Company believes that when added to sales to the United States government's prime contractors, government sales accounted for approximately 29% of the Company's net sales for fiscal 1996 and 15.8% for fiscal 1995. COMPETITIVE CONDITIONS The business of manufacturing automotive airbag filters and high performance filters is highly competitive and, with respect to high performance filters, the industry is highly fragmented. The Company believes there are currently three principal manufacturers of airbag filters in the United States: Morton International, Inc., which manufactures the filter component of its own airbag system; National-Standard Company, which supplies driver-side airbag filters to TRW; and the Company. Additional companies are attempting to enter the automotive airbag filter market; however, there are substantial monetary, time, costs and quality issues associated with product qualification, as well as development and start-up. There is no assurance that any airbag manufacturer which purchases the Company's products will not choose to produce airbag filters internally in the future or to use a different supplier. The Company believes that the primary competitive factors in its business are performance and price in the case of high performance filters, and airbag filters, which are now subject to commodity pricing. While the Company believes its prices are competitive, it does not position itself as the lowest price supplier in all of its markets. The Company relies on the quality of its products and customer service in order to compete with companies which in many cases have substantially greater resources. PRODUCT WARRANTIES In all product lines, the Company provides standard commercial warranties, consistent with its products and industry. Claims under product warranties have been minimal during the past five years. 3 RESEARCH AND DEVELOPMENT In fiscal 1996 and fiscal 1995, the Company incurred research and development expenditures of approximately $28,000 and $381,000, 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, including passenger side, advanced driver-side and side impact airbag filters and Parts Manufacturer Approval for the commercial aerospace products group. 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 1998 and 1999, respectively, and which in the meantime require installation of airbags or other passive frontal crash protective systems. Consumer demand is now the leading force in the growth of this product segment. Demand for the Company's commercial aerospace products group is covered by the Federal Aviation Administration Regulations for National and International Operations. While the Company believes that the trends in automotive safety is toward increased regulation and are beneficial to the Company, a decline in enforcement or compliance expenditures, a change in the regulations, or an emerging technology that would deem airbags as obsolete, could have a significant adverse effect on the demand for the products offered by the Company. United States government contracts and related customer orders subject the Company to various laws and regulations governing United States government contractors and subcontractors, generally which are more restrictive than for non-government contractors. This includes subjecting the Company to examinations by government auditors and investigators, from time to time, to insure compliance and to review costs. Violations may result in costs disallowed, and substantial civil or criminal liabilities (including, in severe cases, denial of future contracts). The United States government may limit the competitive bidding of any contract under a small business or minority set-aside, in which bidding is limited to companies meeting the criteria for a small business or minority business, respectively. The Company is currently qualified as a small business concern, but not minority ownership, set-asides. To the extent bidding may be so limited, the Company has an opportunity to benefit from the reduced number of qualified bidders. EMPLOYEES At February 1, 1996, the Company had 78 full-time employees, including 3 employed in sales and marketing, 13 employed in engineering and quality control, and 41 employed in production. The remaining employees are administrative and support staff. No employees are represented by a collective bargaining unit. Management considers its relationship with its employees to be excellent. INSURANCE The Company maintains general liability, automobile, aircraft products, product liability, workers' compensation, and employer's liability insurance coverage. The Company is engaged in various businesses which could expose it to claims for injury, resulting from the failure of products sold by it. During the last decade, the Company has had only one claim for injury filed as a result of an Ultra Dynamics product installation, wherein the Distributor failed to service the installation, and the Company was joined in the action. 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. 4 ITEM 2. PROPERTIES The following table sets forth information as to the location and general character of the facility of the Registrant: LOCATION PRINCIPAL USE APPROXIMATE SQ. FT. LEASE EXP. DATE - -------------------- ------------------- ------------------ ------------------- 16559 Saticoy Street Headquarters and 50,000 August 30, 2000 Van Nuys, CA 91406 manufacturing facility for airbag components, government and aerospace filtration. The Company's current sub-lease from Kaiser Aerospace & Electronics Corporation includes the use of gas, electric, water, telephone service, real estate taxes and parking at an annual rental of $291,000. The Company has an option to extend the lease for 29 months until December 31, 2002, at an annual rental of $312,000, inclusive of the above services. ITEM 3. PENDING LEGAL PROCEEDINGS 1) Puroflow Incorporated vs. George Solymar. Registrant seeks recovery of $46,000 (plus interest) from 1989, for conversion of Corporate funds by defendant for personal obligations. George Solymar commenced an action for alleged breach of an oral agreement of employment, alleging oral continuance of a written contract dated back to 1969. There is no merit to the claim, nor does the Registrant's records support the defendants claim. Both actions have been consolidated for trial. The Receiver has taken over the active pursuit of this litigation, with all discovery completed. 2) Joseph B. Jasso and Martha Jasso commenced action against Puroflow Incorporated and all Members of the Board for breach of an employment contract. The Board of Directors authorized the Registrant to cross-claim for breach of fiduciary duties, misfeasance and malfeasance as a former Director and Chief Executive Officer. 3) DSS Company vs. Ultra Dynamics Corporation, a wholly owned subsidiary, for breach of alleged purchase order of $30,000. Ultra Dynamics claims it does not owe plaintiff any sums because the plaintiff changed the terms of the warranty which were not acceptable to the defendant, and the purchase order was not accepted by the defendant. Plaintiff alleges damages of $15,000 in discovery proceedings. 4) Cynthia Meals vs. M. Rowena Willis, et al. represents a civil action commenced in Court of Common Pleas of Chester County, Pennsylvania for unspecified damages, resulting from improper maintenance of a treatment system for drinking water. Ultra Dynamics Corporation is included as one of six codefendants as a supplier of the equipment to a codefendant distributor. Ultra Dynamics has filed a cross-complaint against all codefendants and plaintiff. Registrant believed that there is absolutely no merit to this action against Ultra, and the action will ultimately be dismissed on motion. 5) Registrant previously reported on Form 10-Q for quarter ended October 31, 1994, the award of a Judgment in favor of Micro-Numerics, Inc. for $34,398.26, plus interest and costs. 5 6) Imperial Bank commenced an action against Puroflow Incorporated for breach of various loan and security agreements. A Receiver was installed by order of the Los Angeles County Superior Court, and the Receiver remains in control of the Registrant. 7) Tenth and Colorado Associates, Ltd. commenced action against Puroflow Incorporated for unlawful detainer related to Puroflow's occupation of a building located in Santa Monica, which previously housed Registrants Airbag and Michigan Dynamics operations. Registrant vacated and Plaintiff has attempted to convert the action to a breach of lease action. Registrant believes that it has valid legal defenses to this claim, and that it will ultimately be dismissed. 8) Reliable Metallurgical Processes Inc. commenced an action against Puroflow Corporation and Michigan Dynamics Inc. in September 1995, in Los Angeles County Superior Court for breach of contract, open account, and anticipatory breach. This action is being vigorously opposed and the Registrant believes it has valid legal defenses to this action, including damages for failure to properly perform the alleged Contract, ultra vires acts in consummation of original Agreement, and breach of fiduciary obligation by a former Director and Officer of Registrant who were also Officers and Directors of the Plaintiff. 9) Jerome Pearlman d.b.a. J & F Enterprises, a former Director of the Registrant, commenced an action in the Los Angeles County Supreme Court, for breach of an alleged promissory note. The Registrant will vigorously defend by filing a cross-complaint against Plaintiff for breach of fiduciary duty and constructive trust, seeking a return of all funds paid to Plaintiff plus interest. 10) J & F Management Inc., controlled by Jerome Pearlman, a former Director of the Registrant, commenced an action in Municipal Court of Santa Monica Judicial District against the Registrant, and the Court appointed Receiver for possession and conversion of personal property. Defendants have vigorously defended the action by filing a motion to disqualify Plaintiff's Counsel, a demurrer to the complaint, and a cross-complaint seeking recision of the contract and restitution to Defendant of all funds paid to the Plaintiff pursuant to contract for a breach of Pearlman's fiduciary duties to the Registrant. 11) Memtec America Corporation obtained a confession of judgment from the Circuit Court for Baltimore County, Maryland, on December 19, 1995, against the Company for approximately $220,000, based upon the execution of a promissory note by a former CEO of Puroflow. The judgment was obtained without due notice to the Company. The Receiver has retained Counsel in Baltimore, Maryland, for the purpose of setting aside the confession of Judgment, and to assert a number of counter-claims against Memtec, in the event the Court permits the reopening of the Order, and setting aside of the Judgment. The Company is not a party to any other material pending suits or legal actions, and is not aware of any material claims that are threatened. 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. 6 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.
High Low -------- -------- Fiscal Year Ended January 31, 1995 1st Quarter . . . . . . . . . . . . . . . . . . . 1 1/2 1 2nd Quarter . . . . . . . . . . . . . . . . . . . 1 5/16 1 1/16 3rd Quarter . . . . . . . . . . . . . . . . . . . 15/16 13/16 4th Quarter . . . . . . . . . . . . . . . . . . . 13/16 23/32 Fiscal Year Ended January 31, 1996 1st Quarter . . . . . . . . . . . . . . . . . . . 23/32 21/32 2nd Quarter (Note I). . . . . . . . . . . . . . . 11/32 8/32 3rd Quarter (Note I) . . . . . . . . . . . . . . N/A N/A 4th Quarter . . . . . . . . . . . . . . . . . . . 1 3/8 5/8 Fiscal Year Ended January 31, 1997 Two Months Ending March 29, 1996 . . . . . . . . 1 7/16 1 1/4
NOTE ( I ) 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 was resumed on November 17, 1995, with a listing on the Electronic Bulletin Board. The Company intends to reapply for a listing on the Automated Quotation System in the near term future after the filing of its Annual Financial Statement for the fiscal year ended January 31, 1996. On March 29, 1996, the closing bid price for the Company's Common Stock on NASDAQ was $1.25 per share. As of March 29, 1996, the Company had approximately 321 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. 7 ITEM 6. SELECTED FINANCIAL DATA
Year Ended January 31, -------------------------------------------------------------------------------------- 1992 1993 1994 1995 1996 ------ ------ ------ ------ ------- (in thousands, except per share data) Statement of Operations Data (1): Net Sales $ 9,882 $ 5,899 $ 5,908 $ 9,044 $ 8,816 Cost of goods sold 6,599 6,155 5,137 7,644 5,957 ------ ------ ------ ------ ------- Gross profit 3,283 (256) 771 1,400 2,859 Selling, general & administrative expense 1,697 2,057 1,313 1,635 1,702 ------ ------ ------ ------ ------- Operating income (loss) 1,586 (2,313) (542) (235) 1,157 (Other income) and interest expense - net 182 (68) 213 292 282 ------ ------ ------ ------ ------- Income (loss) from continuing operations before income taxes 1,404 (2,245) (755) (527) 875 Provision (benefit) for income taxes 568 (65) - - - ------ ------ ------ ------ ------- Income (loss) from continuing operations 836 (2,180) (755) (527) 875 Income (loss) from discontinued operations 30 (494) 189 (1,845) 23 ------ ------ ------ ------ ------- Net income (loss) $ (866) $ (2,674) $ (566) $ (2,372) $ 898 ------ ------ ------ ------ ------- ------ ------ ------ ------ ------- Net income (loss) per common share: From continuing operations $.25 $.(66) $.(.20) $(.12) $ .19 From discontinued operations .01 (.15) .05 (.41) - ------ ------ ------ ------ ------- $ .26 $(.81) $ (.15) $ (.53) $ .19 ------ ------ ------ ------ ------- ------ ------ ------ ------ ------- Weighted average number of shares 3,370 3,290 3,724 4,509 4,632 January 31, -------------------------------------------------------------------------------------- 1992 1993 1994 1995 1996 ------ ------ ------ ------ ------- (in thousands) Balance Sheet Data: Working Capital $ 3,338 $ 137 $ 823 $ (1,214) $ (13) Total Assets 8,408 7,897 7,329 4,721 3,962 Long-Term Debt 1,109 53 108 71 - Stockholders' Equity 3,672 1,781 2,307 185 1,083
(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 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. 8 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. During June 1995, the Company disposed of the inventory and intangible assets of Decca Valve Corporation. The disposal of these assets have been accounted for as a discontinued operation. (See Note 11 of the Notes to Consolidated Financial Statements.) 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, 1994, 1995 and 1996 are as follows:
Year Ended January 31, ---------------------- (in thousands) 1994 1995 1996 -------- -------- -------- Net Sales: Airbag Filters $ 3,318 $ 6,361 $ 4,175 High Performance Filters 2,590 2,684 4,641 -------- -------- -------- Total $ 5,908 $ 9,045 $ 8,816 -------- -------- -------- -------- -------- --------
9 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 three years in the period ended January 31, 1996.
YEAR ENDED JANUARY 31, (IN THOUSANDS) 1994 1995 1996 ---- ---- ---- Net Sales: 100.0% 100.0% 100.0% ------ ------ ----- Cost and expenses: Cost of goods sold 87.0 84.5 67.6 Selling, general and administrative 22.2 18.0 19.3 Other (income) (2.3) - - Interest expense 5.9 3.3 3.2 Income (loss) from continuing ------ ------ ----- operations before income taxes (12.8) (5.8) 9.9 Provision (benefit) for income taxes Income (loss) from discontinued operations 3.2 (20.4) 0.3 ------ ------ ----- Net income (loss) (9.6)% (26.2)% 10.2% ------ ------ ----- ------ ------ -----
COMPARISON OF THE FISCAL YEARS ENDED JANUARY 31, 1996 AND 1995 Net sales in fiscal 1996 decreased 2.5% compared to fiscal 1995. This is due primarily to a decrease in sales of airbag filters from $6,361 to $4,175 due to a change in customer supplied raw material in the current year compared to prior year practice of the Company supplying the raw material. Sales of high performance filters, including the PMA program, increased in the current year to $4,641 compared to $2,684 in the prior year. The Company sold the valve business in June 1995. The Company supplied the airbag filters on an exclusive basis to two customers, who in turn sell airbags to various automobile manufacturers (including Honda, General Motors, Mazda, Mitsubishi, Chrysler, Fiat, Ford of Australia, and Jaguar). Several other major inflator manufacturers indicated an interest in the Company's R&D program for developing passenger and side impact non-azide programs. The increased sales of high performance filters is due primarily to the developing FAA parts manufacturing authority and the signing of exclusive distributorship agreements. The wide swing in the gross margins of 32.4% in fiscal 1996, compared to 15.5% in fiscal 1995, is a result of a combination of factors. The Company consolidated its manufacturing facilities in September 1995 with reduced rental and manufacturing costs; increased prices in the PMA program line with cost controls and manufacturing efficiencies; and increased margins in high- performance filters. The gross margins in fiscal 1995 were affected by a discontinuance of the MDI Dynapore product line, resulting in approximately $1,000,000 inventory write-down, and high manufacturing and other costs incurred during the program start-up phase of the PMA products due to the learning curve and the time lag in securing qualification of the PMA products. Selling, general and administrative expenses were $1,702,000 and $1,636,000 for fiscal 1996 and 1995 respectively, a decrease of 4.1%, due primarily to overhead cost controls and payroll reduction. Interest expense decreased to $279,000 in fiscal 1996 from $306,000 in fiscal 1995 due to the reduction of the principal balance outstanding. This occurred despite an increase in the interest rate to 12% by the lending institution. 10 COMPARISON OF THE FISCAL YEARS ENDED JANUARY 31, 1995 AND 1994 Net sales in fiscal 1995 increased 53.1%, compared to fiscal 1994, due primarily to the increase in the sales of airbag filters to $6,361,000 from $3,318,000 in fiscal 1994, a 91.7% increase. The Company supplies airbag filters on an exclusive basis to two customers, who in turn sell airbags to various automobile manufacturers including Honda, General Motors, Mazda, Mitsubishi, Chrysler, Fiat, Ford of Australia, and Jaguar. The increase in the Company's sale of airbag filters in fiscal 1995 is reflective of increased airbag sales made by these manufacturers. In addition, during fiscal 1995, there were modest decreases in the sales of high performance filters and fluid control valves. Although gross margins on airbag filters increased to approximately 30% in fiscal 1995 from 12% in fiscal 1994, overall gross margins decreased to 3.2% from 17.6% in fiscal 1994. During the first quarter of fiscal 1995, the Company discontinued its MDI Dynapore product line, which resulted in an inventory write-down in the fourth quarter of 1995, of approximately $1,000,000. Further, gross margins on high performance filters were adversely impacted by high manufacturing and other costs incurred during the program start-up phase of the PMA products. The Company is continuing its efforts towards reducing its manufacturing costs of these products, while at the same time negotiating a higher sales price from its distributor. Selling, general and administrative expenses were $1,636,000 and $1,313,000 for fiscal 1995 and 1994, respectively, an increase of $323,000, or 24.6%. This increase is a result of additional costs required to manage the increase in sales and a restatement of discontinued operations. Interest expense decreased to $306,000 in fiscal 1995 from $346,000 in fiscal 1994. This decrease is primarily due to the reduced principal balance on the notes outstanding. During the fourth quarter of fiscal 1995, the Company sold its ultraviolet water products subsidiary - Ultra Dynamics Corporation. The sales price was $235,000. This subsidiary has been accounted for as a discontinued operation. During fiscal 1995, loss from discontinued operations was $1,845,000, as compared to a profit of $189,000 in fiscal 1994. 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 1996, cash provided by operating activities was $1,312,466, consisting of $898,119 from operating income, non-cash operating expenses of $660,365, and a reduction in inventories and prepaid expense, offset by an increase in accounts receivable, and reduction of accounts payable and accrued expense. Cash provided by investing activities was primarily from proceeds from sale of property and equipment. Cash used in financing activities was $1,606,177, due primarily to a reduction of bank debt. The Company's debt at January 31, 1996 was $1,999,538, consisting of line of credit and notes payable to the bank of $1,315,054 and notes payable to vendors of $684,483 representing a reduction in debt of $1,669,409 from fiscal January 31, 1995. Principal under the Company's term loans accrues interest at the bank's prime rate plus 3.5% (12% at January 31, 1996), and is secured by accounts receivable, inventories, equipment, and all other unencumbered assets of the Company. In addition, the Company has a revolving line of credit with its bank, under which it may borrow up to the lesser of $1,200,000 or 65% of eligible accounts receivable. Outstanding balances accrue interest at the bank's prime rate plus 3.5% (12% at January 31, 1996). This line is secured by the Company's accounts receivable, inventories and a first priority interest in all unencumbered assets. The Company had an 11 outstanding balance of $235,857 under this agreement at January 31, 1996. There are no additional borrowings available under the line of credit. The terms of the credit agreements contain certain restrictive covenants including maintenance of minimum working capital, net worth and ratios of current assets to current liabilities and debt to net worth. Currently, the Company is in default on various loan covenants. As a result, on May 1, 1995, the Company entered into a stipulation for the immediate appointment of a Receiver. The appointment was based upon the default of the Company on its obligations under these agreements with the bank. The Receiver has assumed jurisdiction over substantially all of the assets of the Company. The Receiver continues to operate the Company with the assistance of existing management. The Company recently negotiated with the bank to obtain extensions of their line of credit and term loans until December 31, 1996. The Company also needs to obtain additional working capital and may seek additional equity which could have a dilutive effect on the Company's current shareholders. 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-K. ITEM 9. DISAGREEMENT ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information called for by this item is hereby incorporated by reference from the Registrant's definitive Proxy Statement under the captions "MANAGEMENT" and "ELECTION OF DIRECTORS". ITEM 11. EXECUTIVE COMPENSATION The information called for by this item is hereby incorporated by reference from the Registrant's definitive Proxy Statement under the captions "EXECUTIVE COMPENSATION" and "NON-STATUTORY STOCK OPTIONS (NSO)." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for by this item is hereby incorporated by reference from the Registrant's definitive Proxy Statement under the captions "STOCK OPTIONS" and "NON-STATUTORY STOCK OPTIONS (NSO)." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by this item is hereby incorporated by reference from the Registrant's definitive Proxy Statement under the caption "RELATED PARTY TRANSACTIONS." 12 PART IV ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K (a) (1) FINANCIAL STATEMENTS The following financial statements (including notes thereto and the Independent Auditors' Report with respect thereto), are filed as part of this annual report on Form 10-K starting on page F-1 hereof: Independent Auditors' Reports. Consolidated Balance Sheets at January 31, 1996 and 1995. Consolidated Statements of Operations for each of the three years in the period ended January 31, 1996. Consolidated Statements of Stockholders' Equity for each of the three years in the period ended January 31, 1996. Consolidated Statements of Cash Flows for each of the three years in the period ended January 31, 1996. 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 March 13, 1995, the Company filed a Form 8-K reporting the commencement of litigation by Joseph B. Jasso for termination of his employment contract. The Company has a vigorous defense to the action for violation of his fiduciary obligation as a Director and Chief Executive Officer. On May 12, 1995, the Company filed Form 8-K, reporting the appointment of a Receiver, pursuant to an order of the Los Angeles Superior Court. On November 9, 1995, the Company and the Receiver filed Form 8-K, reporting the commencement of two actions by Jerome Pearlman, a former Director of the Registrant for funds advanced, and for conversion of personal property. The Receiver, on behalf of the Company, filed cross-complaints in both actions for breach of fiduciary duties and constructive trust, seeking a return of all funds paid to Plaintiff. On November 18, 1995, the Company filed a Form 8-K reporting a change in auditors to Rose, Snyder & Jacobs, CPA's, Burbank, California for the fiscal year ended January 31, 1996, replacing Deloitte & Touche. The change in auditors was based solely upon cost reduction of audit fees, and not a result of any disagreement with the former auditors on the scope and auditing or presentation of financials. 13 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 By /s/ Michael D. Myers April 25, 1996 ------------------------------------------- Michael D. Myers Receiver 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. By /S/ Michael H. Figoff April 25, 1996 ------------------------------------------- Michael H. Figoff President/Chief Executive Officer Director By /s/ Reuben M. Siwek April 25, 1996 ------------------------------------------- Reuben M. Siwek Chairman of the Board General Counsel By /s/ Robert A. Smith April 25, 1996 ------------------------------------------- Robert A. Smith Vice Chairman of the Board By /s/ Tracy K. Pugmire April 25, 1996 ------------------------------------------- Dr. Tracy K. Pugmire Director By /s/ Leo S. Unger April 25, 1996 ------------------------------------------- Leo S. Unger Director 14 PUROFLOW INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JANUARY 31, 1996 AND 1995
1996 1995 -------------- ------------- ASSETS CURRENT ASSETS: Cash $ $ 74,441 Accounts receivable Net of allowance for doubtful accounts of $140,000 in 1996 and $204,469 in 1995 1,548,495 1,266,150 Advances to officers and employees 3,868 Inventories, note 1 1,239,467 1,746,237 Prepaid expenses and deposits 33,700 125,794 Current portion of note receivable 43,831 34,008 -------------- ------------- TOTAL CURRENT ASSETS 2,865,493 3,250,498 -------------- ------------- PROPERTY AND EQUIPMENT - at cost, note 1 Leasehold improvements 203,733 Machinery and equipment 2,900,343 2,873,215 Automobile 7,500 Tooling and dies 253,921 274,282 -------------- ------------- 3,154,264 3,358,730 Less accumulated depreciation and amortization 2,134,836 2,021,474 -------------- ------------- NET PROPERTY AND EQUIPMENT 1,019,428 1,337,256 -------------- ------------- NOTE RECEIVABLE, note 2 60,276 94,005 -------------- ------------- OTHER ASSETS 16,750 39,077 -------------- ------------- TOTAL ASSETS $ 3,961,947 $ 4,720,836 -------------- ------------- -------------- ------------- 1996 1995 -------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Bank overdraft $ 59,363 $ Line of credit, note 3 235,857 810,003 Accounts payable 582,393 655,485 Accrued expenses 237,472 211,343 Current portion of promissory notes, note 4 1,763,681 2,787,543 -------------- ------------- TOTAL CURRENT LIABILITIES 2,878,766 4,464,374 -------------- ------------- PROMISSORY NOTES, note 4 71,400 -------------- ------------- COMMITMENTS AND CONTINGENCIES note 7 STOCKHOLDERS' EQUITY, notes 5, 10, and 13 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 4,578,521 shares at January 31, 1996 and 1995 405,279 405,279 Additional paid-in capital 3,230,127 3,230,127 Accumulated deficit (2,552,225) (3,450,344) -------------- ------------- TOTAL STOCKHOLDERS' EQUITY 1,083,181 185,062 -------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,961,947 $ 4,720,836 -------------- ------------- -------------- -------------
See independent auditors' report and notes to financial statements F-1 PUROFLOW INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended January 31, 1996 1995 1994 ------------ ------------ ------------- Net sales $ 8,815,889 $ 9,044,707 $ 5,907,949 Cost of goods sold 5,957,007 7,644,422 5,137,042 ------------ ------------ ------------- Gross profit 2,858,882 1,400,285 770,907 Selling, general and administrative expense 1,701,611 1,635,632 1,312,605 ------------ ------------ ------------- Operating income (loss) 1,157,271 (235,347) (541,698) Other income and (expense) Other income (expense) (2,895) 14,132 133,197 Interest expense (279,237) (305,627) (346,424) ------------ ------------ ------------- Income (loss) from continuing operations before taxes 875,139 (526,842) (754,925) ------------ ------------ ------------- Provision for income taxes, notes 1 and 6 ------------ ------------ ------------- Income (loss) from continuing operations 875,139 (526,842) (754,925) Discontinued operations, note 12 Income (loss) from operations 168,140 (1,845,314) 188,999 Loss on sale of property and equipment (145,160) ------------ ------------ ------------- 22,980 (1,845,314) 188,999 ------------ ------------ ------------- Net income (loss) $ 898,119 $ (2,372,156) $ (565,926) ------------ ------------ ------------- ------------ ------------ ------------- Net income (loss) per common share: Continuing operations $ 0.19 $ (0.12) $ (0.20) Discontinued operations (0.41) 0.05 ------------ ------------ ------------- Primary earnings per share, note 1 $ 0.19 $ (0.53) $ (0.15) ------------ ------------ ------------- ------------ ------------ -------------
See independent auditors' report and notes to the financial statements F-2 PUROFLOW INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY YEARS ENDED JANUARY 31, 1996, 1995, AND 1994
Common Additional Retained stock paid-in earnings par value capital total Total --------------- --------------- --------------- --------------- Balance at January 31, 1993 $ 321,625 $ 1,971,581 $ (512,262) $ 1,780,944 Net loss (565,926) (565,926) Sale of common stock 69,655 1,022,545 1,092,200 --------------- --------------- --------------- --------------- Balance at January 31, 1994 391,280 2,994,126 (1,078,188) 2,307,218 Net loss (2,372,156) (2,372,156) Sale of common stock 13,999 236,001 250,000 --------------- --------------- --------------- --------------- Balance at January 31, 1995 405,279 3,230,127 (3,450,344) 185,062 Net income 898,119 898,119 --------------- --------------- --------------- --------------- Balance at January 31, 1996 $ 405,279 $ 3,230,127 $ (2,552,225) $ 1,083,181 --------------- --------------- --------------- --------------- --------------- --------------- --------------- ---------------
See independent auditors' report and notes to financial statements F-3 PUROFLOW INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended January 31, 1996 1995 1994 ---------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 898,119 $(2,372,156) $ (565,926) Adjustments to reconcile net income (loss) to net cash provided by/used in operating activities: Depreciation and amortization 340,103 365,934 356,913 Provision for losses on accounts receivable 104,205 134,069 9,058 Inventory valuation allowance 59,000 999,305 17,695 Loss on sale of assets 157,057 15,784 Changes in operating assets and liabilities: Accounts receivable (386,550) 242,305 118,682 Inventories 73,073 1,154,010 (589,353) Prepaid expenses and other assets 114,421 (83,328) (533) Income taxes receivable 718,852 Accounts payable and accrued expenses (46,962) 288,426 (160,653) Deferred income taxes (27,692) ---------- ----------- ----------- Net cash provided by (used in) operating activities 1,312,466 728,565 (107,173) ---------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (131,336) (122,182) (279,974) Proceeds from sale of assets 326,700 Payments received on notes receivable 23,906 6,616 Other assets (9,725) 39,517 ---------- ----------- ----------- Net cash provided by (used in) investing activities 219,270 (125,291) (240,457) ---------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Bank overdraft 59,363 250,000 1,092,200 Proceeds from sale of common stock Proceeds from issuance of long-term debt 865,143 Net borrowing (repayments) under line of credit (574,146) 65,412 (739,715) Principal payments on long-term debt (1,095,262) (838,761) (1,011,086) Principal payments under capital lease obligations (26,346) (20,233) Advances to officers and employees 3,868 1,941 (278) ---------- ----------- ----------- Net cash provided by (used in) financing activities (1,606,177) (547,754) 186,031 ---------- ----------- ----------- NET DECREASE IN CASH (74,441) 55,520 (161,599) CASH AT BEGINNING OF YEAR 74,441 18,921 180,520 ---------- ----------- ----------- CASH AT END OF YEAR $ - $ 74,441 $ 18,921 ---------- ----------- ----------- ---------- ----------- -----------
See independent auditors' report and notes to the financial statements F-4 PUROFLOW INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 within the United States. On May 1, 1995, the Superior Court of California appointed a Receiver as a result of a lawsuit filed by the Company's bank. The Company was in default of its obligations under various credit agreements with the bank. The Receiver has assumed jurisdiction over all of the Company's assets, which are now in the possession of the Receiver's estate, and held for the benefit of all creditors and shareholders. The Receiver is not obligated to pay liabilities that existed prior to his appointment; however, the Receiver may elect to pay certain of those liabilities with the leave of the Court. The Receiver is presently working with the Company's management in operating the business. 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. INVENTORIES Inventories are stated at the lower of cost of market on a first-in, first-out basis, and consists of the following items:
1996 1995 -------------- -------------- Raw materials and purchased parts $ 757,921 $ 818,187 Work in process 235,404 503,033 Finished goods 246,142 425,017 -------------- -------------- Total $1,239,467 $ 1,746,237 -------------- -------------- -------------- --------------
PROPERTY AND EQUIPMENT Depreciation and amortization of property and equipment is computed using the straight line method based See independent auditors' report F-5 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: CLASSIFICATION LIFE ----------------------- ---------- Machinery and equipment 5-15 years Automobile 5 years Tooling and dies 5 years Leasehold Improvement 5 years 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 the 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 reserve for contingencies. Management uses its historical record and knowledge of its business in making these estimates. RECLASSIFICATION Certain amounts previously reported in the Company's 1995 and 1994 financial statements have been reclassified to conform to the presentation adopted during 1996. Such reclassifications had no effect on the net losses as previously reported. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenditures are expenses as incurred and totaled approximately $28,000, $381,000 and $207,000 for the years ended January 31, 1996, 1995, and 1994, respectively. EARNINGS PER SHARE The computation of the net income (loss) per common share (primary) is based on the weighted average number of common shares and common share equivalents outstanding. The weighted average shares outstanding were 4,631,740, 4,508,521, and 3,724,271 during the years ended January 31, 1996, 1995, and 1994, respectively. See independent auditors' report F-6 NOTE 2 - NOTE RECEIVABLE
1996 1995 -------------- -------------- 8 1/2 % note receivable, $ 104,107 $ 128,013 monthly principal and interest payments of $4,250, secured by equipment of the debtor, maturing in November, 1997 Less current portion 43,831 34,008 -------------- -------------- $ 60,276 $ 94,005 -------------- -------------- -------------- --------------
NOTE 3 - LINE OF CREDIT On November 5, 1993, the Company entered into a security and loan agreement with its bank under which it could obtain credit up to 65% of certain accounts receivable, but not in excess of $1,200,000, at prime plus 3 1/2%. This loan is secured by accounts receivable, inventories and a first priority interest in all unencumbered assets, and matures in June, 1996. During the fiscal year, the Company defaulted on its loans, resulting in the appointment of a Receiver (See Note 4). All collections of accounts and inventory proceeds shall be applied to the Company's loan account. Any credit given by the bank upon receipt of said proceeds is conditional credit subject to final collection. Outstanding balances under this line of credit were $235,857 and $810,003 at January 31, 1996 and 1995, respectively. NOTE 4 - PROMISSORY NOTES Note payable to bank at prime rate plus 3 1/2%, secured by all the assets of the Company, maturing in June, 1996. The Company is making monthly interest payments and principal payments are being made from time to time depending on the surplus cash flow available. $ 107,900 $ 537,500 Note payable to bank at prime rate plus 3 1/2%,secured by all the assets of the Company, maturing in June, 1996. 971,297 1,168,882 Note payable to vendors bearing no interest maturing at various dates, through December, 1997. These notes were negotiated with vendors to convert accounts payable balancesinto notes with terms varying from three months to three years. All these notes existed when the Receiver was appointed on May 1, 1995. 684,483 1,022,926 Other obligations 129,635 ----------- ------------ 1,763,680 2,858,943 Less current portion 1,763,680 2,787,543 ----------- ----------- $ -0- $71,400 ----------- ----------- ----------- -----------
See independent auditors' report F-7 The Company is in breach of its covenants under the terms of its bank agreements. As discussed in Note 1, a Receiver is now in possession of the assets of the Company for the benefit of creditors. Accordingly, all amounts are classified as current. Under the first amendment to the stipulation appointing a Receiver dated August 31, 1995, the bank extended its forbearance period to June 15, 1996. Under the agreement beginning on January 1, 1996, the Company is required to make principal payments of at least $20,000 per month on the notes payable to the bank. On February 16, 1996, the bank, in order to facilitate the Company's efforts to consummate a private placement, extended the forbearance period to December 31, 1996, and agreed to reduce the interest rate for the line of credit by 1/4%. In consideration, the Company agreed to make a $500,000 principal payment on notes payable to the bank from the proceeds of the planned private placement offering (Note 13). For the year ended January 31, 1996, 1995, and 1994, interest paid in cash totaled $263,627, $305,627, and $346,424, respectively. NOTE 5 - STOCK OPTION PLANS In 1995, the Company implemented stock option plans which provide for the granting of options to certain officers and key employees to purchase shares of its common stock within prescribed period at prices that vary from $0.25 to $0.75. Share activity during 1995 under the Company's stock option plans is summarized below: Held at beginning of year 0 Granted to 20 officers and key employees 359,000 Exercised 0 Canceled or expired 0 Held at end of year by 20 officers and key employees 359,000 ------------ Shares exercisable, end of year 225,600 ------------ Shares available for future grants, end of year 141,000 ------------ ------------ Price range of options held, end of year $0.25 to $0.75
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 will adopt the standard in the year ended January 31, 1997, and expects to elect the continued use of APB No. 25. Pro-forma disclosure is expected to be immaterial. See independent auditors' report F-8 NOTE 6 - INCOME TAXES The provision for income taxes is comprised of the following:
Years Ended January 31, 1996 1995 1994 -------- -------- -------- Current payable: Federal $ -0- $ -0- $ 27,692 State -0- -------- -------- -------- -0- -0- 27,692 Deferred -0- -0- (27,692) -------- -------- -------- Provision for income taxes $ -0- $ -0- $ -0- -------- -------- -------- -------- -------- --------
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:
Years Ended January 31, 1996 1995 1994 --------- --------- --------- Income tax provision at 34% $ 305,360 $(806,533) $(192,415) Excess tax depreciation and amortization (39,658) Excess book loss on disposition 20,252 Change in allowance for doubtful accounts (21,920) Write-off of obsolete inventory (338,358) Reserve for legal matters 11,975 Other 11,440 --------- --------- --------- Current federal tax benefit (50,909) (806,533) (192,415) Current state tax benefit (12,106) --------- --------- --------- Net current tax benefit (63,015) (806,533) (192,415) Unrecognized benefit of losses 63,015 806,533 192,415 --------- --------- --------- Provision for Income Taxes $ -0- $ -0- $ -0- --------- --------- --------- --------- ----------- -----------
See independent auditors' report F-9 Deferred tax benefits at January 31, 1996 and 1995 reflects the impact of loss carryforwards, temporary differences between the assets and liabilities recorded for financial reporting purposes and tax purposes. These differences are as follows:
1996 1995 ------------ ------------ Allowance for doubtful accounts $ 60,620 $ 81,788 Allowance for inventory obsolescence 165,332 538,800 Less valuation allowance (225,952) (620,588) ------------ ------------ Current $ -0- $ -0- ------------ ------------ ------------ ------------ Tax loss carryforward $ 1,422,366 $ 1,376,992 Depreciation and amortization (41,741) (168,951) Reserve for legal matters 43,300 Less valuation allowance (1,423,925) (1,208,041) ------------ ------------ Non current $ -0- $ -0- ------------ ------------ ------------ ------------
Realization of the deferred benefit is contingent upon future taxable earnings. In accordance with SFAS No. 109, the valuation allowance is 100% of the benefit based on the uncertainty of the Company to realize this benefit. The Company had available net operating loss carryforwards of approximately $3,342,000 for federal income tax purposes, and $2,709,000 for state income tax purposes, at January 31, 1996. The Company's net operating loss carryforwards expire from 2008 to 2011. NOTE 7 - COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company is committed to minimum lease payments on a non-cancelable operating lease for facilities, which expires in August 2000, as follows:
Year Ending January 31, ----------------------- 1997 $ 291,000 1998 291,000 1999 291,000 2000 291,000 2001 169,750 ----------- TOTAL $1,333,750 ----------- -----------
The leases with respect to the former location were terminated under the powers of the Receiver. See independent auditors' report F-10 Total rental expense under facilities leases was approximately $275,000, $410,000 and $421,000 for the years ended January 31, 1996, 1995, and 1994, respectively. CAPITAL LEASES All Company's capital leases for machinery and equipment were terminated under the powers of the Receiver during the year ended January 31, 1996. At January 31, 1995, the obligation under capital leases was $51,366. LEGAL MATTERS On May 1, 1995, the Company was placed into Receivership as a result of a lawsuit initiated by the Company's bank, following a breach of the borrowings covenants. At January 31, 1996, and 1995, the total outstanding balance owed to the bank was $1,315,054 and $2,516,385, respectively. It is the opinion of the Company that the dispute will be resolved by continuing cooperation. The Company is also party to various legal proceedings. The outcome of these proceedings cannot be determined; however, the Company believes it will prevail in its defenses, and does not expect that such litigation will have a material adverse effect on its financial position or results of operations. An accrual in the amount of $100,000 has been recorded for the year ended January 31, 1996, in anticipation of certain judgments against the Company related to these matters. NOTE 8 - RELATED PARTY TRANSACTIONS The Company is using the legal expertise of a lawyer who is a director of the Company. Related legal expenses totaled $42,284, $80,625, and $77,750 for the years ended January 31, 1996, 1995, and 1994. The amount due to this director was $27,500 at January 31, 1996. NOTE 9 - MAJOR CUSTOMERS INFORMATION Sales to three major customers during the years ended January 31, 1996 and 1995 totaled approximately $5,298,273 and $7,470,352, respectively. The amount due from these customers, included in accounts receivable, was approximately $593,310 and $746,631 at January 31, 1996 and 1995, respectively. NOTE 10 - STOCKHOLDERS' EQUITY During the year ended January 31, 1995, the Company issued 210,000 shares of common stock, the net proceeds of which were $250,000. During the year ended January 31, 1994, the Company issued 1,044,300 shares of common stock, the net proceeds of which were $1,092,200. NOTE 11 - FOURTH QUARTER ADJUSTMENTS During the quarter ended January 31, 1995, the Company recorded an inventory write-down of $1,000,000 resulting from the re-evaluation of inventory requirements caused by the discontinuation of the Michigan Dynamics' Dynapore product line. See independent auditors' report F-11 During the quarter ended January 31, 1994, the Company recorded inventory write-downs of $160,000 resulting from the re-evaluation of inventory requirements due to lower current and forecasted sales volume of certain products. In addition, a book to physical inventory adjustment of $508,000 was recorded resulting from the January 31, 1994 physical inventory count. NOTE 12 - DISCONTINUED OPERATIONS On June 15, 1995, the Company sold certain inventory, equipment, trade name, contracts and work in process, of its wholly owned subsidiary Decca Valves Corporation, leading to a discontinuation of its related operations. The assets were sold for a consideration of $305,000 cash. During the year ended January 31, 1996, the operations of its wholly owned subsidiary Michigan Dynamics, Inc. were also discontinued. The remaining assets of this subsidiary have been transferred to Puroflow Corporation. In November 1994, the Company sold the operating assets of its ultraviolet water purification products subsidiary, Ultra Dynamics, including inventories, property and intangible assets for $234,629 consisting of $100,000 cash and a note receivable of $134,629. The disposition of these assets have been accounted for as discontinued operations and accordingly, the operating results of the subsidiaries are segregated and reported as discontinued operations in the accompanying consolidated statements of operations. The prior year's financial statements have been restated to reflect the discontinued operations. Revenues applicable to the discontinued operations were $326,509, $2,615,540, and $3,868,347 for the years ended January 31, 1996, 1995, and 1994, respectively. NOTE 13 - SUBSEQUENT EVENT On March 26, 1996, the Company entered into an agreement with an investment banker to raise equity through a private placement offering. The plan is to sell shares of the Company's common stock with a 1,200,000 share minimum, and 2,500,000 share maximum. The purchase price is set at $0.80 per share. The Company will be entitled to 90% of the net proceeds, with the remainder being commissions and expenses. The agent is entitled to a 24 month option to purchase 7% of the amount of shares sold, at an exercisable price of $0.80 per share. The net proceeds of the offering will be used to reduce bank debt by $500,000, with the remainder for general corporate purposes. The Company plans to register the securities within six months of the closing of the offering. There can be no assurance that this offer can be completed successfully. See independent auditors' report F-12 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: Exhibit No. Description - ------- ----------- 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**** Exhibit No. Description - ------- ----------- 10.19 Agreement between Registrant and Alpine Services 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 - ---------------------- * 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 8-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. EX-10.23 2 EXHIBIT 10.23 EXHIBIT 10.23 PUROFLOW INCORPORATED PETER CSATO (State Bar No. 89272) GARY OWEN CARIS (State Bar No. 88919) HENRY G. WEINSTEIN (State Bar No. 139117) Members of FRANDZEL & SHARE A Law Corporation 5500 Wilshire Boulevard 17th Floor Los Angeles, California 90048-4920 (213) 852-1000 Attorneys for Plaintiff IMPERIAL BANK SUPERIOR COURT OF THE STATE OF CALIFORNIA FOR THE COUNTY OF LOS ANGELES IMPERIAL BANK, etc., ) CASE NO. BC 126 904 ) Plaintiff, ) STIPULATION FOR IMMEDIATE ) APPOINTMENT OF RECEIVER AND vs. ) PRELIMINARY INJUNCTION; ORDER ) THEREON PUROFLOW CORPORATION, etc., et ) al., ) Discovery Cutoff ) Date: None Assigned Defendants. ) Motion Cutoff ) Date: None Assigned _______________________________________) Trial Date: None Assigned Based, INTER ALIA, upon the default of defendant Puroflow Corporation on its obligations to plaintiff Imperial Bank ("Bank") under the Loan and Security Agreement (Accounts Receivable and/or Inventory) and the amendment and addendum thereto dated November 5, 1993 (collectively "Loan Agreement") and Forbearance Agreement dated March 16, 1995 ("Forbearance Agreement") (hereinafter collectively referred to as "Lending Documents"), and the defaults of defendants Puroflow Inc. ("PI"), Decca Valves Corporation ("DVC"), and Michigan Dynamics, Inc. ("MDI") (Puroflow Corporation, PI, DVC, and MDI are hereafter collectively referred to as "Puroflow") under their respective guaranties of the obligations of Puroflow to the Bank which the Bank contends have an aggregate outstanding, unpaid principal balance of approximately $2,340,277.80, the parties hereto stipulate and agree as follows: STIPULATION AND APPOINTMENT OF RECEIVER --------------------------------------- 1. Michael D. Myers be, and he is hereby appointed Receiver in this action, subject to the condition that before entry upon his duties as a Receiver, he shall take the oath and file a bond with a surety thereon approved by this Court in the sum of $10,000.00 to secure the faithful performance of his duties as the Receiver. 2. The Bank shall file with the Court an undertaking in the amount of $1,500.00 3. Puroflow hereby waives the statutory requirement that there be a hearing to confirm the appointment of the Receiver. POWERS AND RESPONSIBILITIES OF THE RECEIVER ------------------------------------------- 4. The Receiver shall be authorized and empowered to enter and gain access to the Puroflow business premises located at 1631 Tenth Street, Santa Monica, California 90404, and any other location from which Puroflow conducts business ("Business Premises") in order to operate the business under the following terms and conditions: -2- a. The Receiver shall be authorized to take possession of the Puroflow Business Premises and take possession, manage, and control the Bank's collateral, including, but not limited to, accounts receivable, accounts, deposit accounts, existing or after-acquired inventory, equipment, fixtures, all chattel paper and general intangibles, monies due or to become due thereunder, and all products and proceeds, including insurance proceeds, with respect to the foregoing, and all of Puroflow's books and records relating thereto (collectively, "Collateral"), wherever located, whether the Collateral is in the possession of Puroflow, its agents, officers, directors, and/or employees or any other person. The Receiver shall further be authorized to take possession and collect all accounts, chattel paper and general intangibles of every kind arising out of the sale or lease of Puroflow's inventory and to take possession of all the books and records relating to the foregoing, wherever located, as the Receiver deems necessary for the proper administration, operation of the Receivership estate, but the books and records shall be made available to Puroflow as reasonably necessary. b. The Receiver shall further be authorized to take possession of all the books and records relating to the Bank's Collateral, wherever located, as the Receiver deems necessary for the proper administration and operation of the -3- Receivership estate, but the books and records shall be made available to Puroflow as is reasonably necessary. c. The Receiver shall be authorized to operate the business of Puroflow, including but not limited to, the manufacturing, processing, preparing, reconditioning, and sale of Puroflow's inventory in the ordinary course of business, including work-in-progress, and incur the expenses necessary to preserve, protect and carry out the foregoing. d. The Receiver is authorized and empowered with the right to execute and prepare all documents and to perform all acts, either in the name of the defendants, as it is applicable, or in the Receiver's own name, which are necessary or incidental to manufacturing, preserving, protecting, managing, controlling, selling and operating the property of the Receivership estate. e. The Receiver is authorized and empowered with the right to demand, collect and receive all monies, funds and payments arising from the Bank's Collateral in the name of Puroflow or in the Receiver's name. f. The Receiver may take any and all steps necessary to receive, collect and review all mail addressed to Puroflow, including, but not limited to, mail addressed to each and every one of the Puroflow Business Premises, and any post office boxes held in the name of Puroflow, and the -4- Receiver is authorized to instruct the U.S. Postmaster to reroute, hold, and/or release said mail to the Receiver. Mail reviewed by the Receiver in the performance of his duties will promptly be made available for inspection to Puroflow after review by the Receiver. g. The Receiver shall take possession of all bank accounts of Puroflow wherever located. The Receiver shall receive possession of any money on deposit in said bank accounts, and the receipt by the Receiver for said funds shall discharge said bank from further responsibility for accounting to said account holder for funds which the Receiver shall give his receipt. h. The Receiver is authorized to employ servants, agents, employees, appraisers, guards, clerks, accountants, attorneys and management consultants, including Ted Slosson for as long as Puroflow consents, to administer the Receivership estate and to protect the Bank's Collateral as he shall deem it necessary; to purchase materials, supplies and services and to pay therefore at the usual rate and prices out of funds that shall come into his possession; to pay the reasonable value of said services out of the proceeds of the estate; to compromise debts of the business and to do all things and to incur only those obligations ordinarily incurred in connection with the operation of similar businesses and enterprises and that no risk or obligation incurred by said Receiver shall be at personal -5- risk or obligation of the Receiver, but shall be the risk or obligation of the Receivership estate. i. If there is insufficient insurance coverage on the Bank's Collateral, it is hereby ordered that the Receiver shall have thirty (30) working days to procure said insurance on the Bank's Collateral, provided the Receiver has funds available to do so, and during said period, said Receiver shall not be personally responsible for claims arising or for the procurement of insurance. j. The monies coming into possession of the Receiver pursuant to his operation of Puroflow, and not expended for any of the purposes herein authorized, may be turned over to the Bank for the payment of Puroflow's obligations to the Bank under that certain Loan Agreement sued upon in the Complaint, without further order of this Court, at the Receiver's sole discretion and the Receiver is authorized to borrow under said Loan Agreement as long as Puroflow is not in further default and there is availability under the Line of Credit. k. The Receiver is empowered to establish Bank accounts at any bank the Receiver deems appropriate for the deposit of monies and funds collected and received in connection with his administration of the Receivership estate, provided that all funds on deposit are insured by an agency of the United States Government. -6- l. The Receiver is authorized to institute ancillary proceedings in this State or other States as is necessary to obtain possession and control of any property or asset of the defendants, and the Receiver may engage the services of counsel if necessary. The Receiver may pay for such services from the funds of the Receivership estate. m. To the extent feasible, the Receiver shall, within thirty (30) days of his qualification hereunder, file in this action an inventory of all property of which he shall have taken possession pursuant to this Order and shall file periodic accountings thereafter. n. The Receiver shall prepare periodic interim statements reflecting the Receiver's fees and administrative costs and expenses incurred for said period in the operation and administration of the Receivership estate. Upon completion for an interim statement, and the mailing of said statement to the parties respective attorneys of record or any other designated personal agent, the Receiver shall pay from the estate funds, if any, the amount of said statement. Despite the periodic statement of Receiver's fees and administrative expenses, such fees and expenses shall be submitted to the Court for its approval and confirmation, in the form of either a noticed interim request for fees, stipulation among the parties or Receiver's final account and report. -7- o. The Receiver, or any party to this action, may from time to time, and on due notice to all parties, make application to this Court for further orders instructing said Receiver. p. The Receiver may not take any steps to liquidate the business of Puroflow except by further order of this Court. PRELIMINARY INJUNCTION --------------------- 5. Puroflow, and its officers, directors, agents, servants, and employees, and all persons or entities acting under, or in concert with it, or for it, are ordered to do the following and are restrained and enjoined from engaging in, or performing, directly or indirectly, any or all of the followings acts: (1) Interfering, hindering or molesting in any way whatsoever the Receiver in the performance of the Receiver's duties herein described and in the performance of any duties incident thereto; (2) Transferring, directly or indirectly, any interest by sale except in the ordinary course of business, shipment of goods, pledge, grant of security interest, assignment, invoice or encumbering in any -8- manner the Bank's Collateral, and all proceeds and products thereof; (3) Moving the physical location of the Bank's Collateral, and all proceeds and products thereof, from any of the Puroflow Business Premises or any location whatsoever; (4) Transferring, concealing, destroying, defacing or altering any of Puroflow's books and records relating to the Bank's Collateral; (5) Diverting in any way any of the proceeds from the Bank's Collateral; (6) Puroflow shall immediately upon receipt turnover to the Receiver all mail relating to the Collateral; (7) Failing or refusing to immediately turn over to the Receiver all monies, checks, funds or proceeds relating to the Bank's Collateral and belonging to or for the benefit of Puroflow, and all books and records of Puroflow relating to the Bank's Collateral; (8) Puroflow shall notify the Receiver upon the Receiver taking possession of the Bank's Collateral whether or not there is sufficient insurance coverage on -9- the Bank's Collateral. If sufficient insurance does exist or is entirely unnecessary, the Defendants shall be responsible and are hereby ordered to name the Receiver as an additional insured on the policies of insurance for the period that the Receivership shall be in possession of the Bank's Collateral; (9) Furthermore, the Bank and its officers, employees and agents shall have immediate access to all the Puroflow Business Premises and the books and records of the foregoing in the Receiver's possession, to enable the Bank to review and inspect its Collateral for the purposes of accounting and appraisal. Dated: May 1, 1995 FRANDZEL & SHARE A Law Corporation PETER CSATO GARY OWEN CARIS HENRY G. WEINSTEIN By: /s/ HENRY G. WEINSTEIN ------------------------------------- HENRY G. WEINSTEIN Attorneys for Plaintiff IMPERIAL BANK Dated: May 1, 1995 PUROFLOW INCORPORATED By: /s/ MICHAEL FIGOFF ------------------------------------- MICHAEL FIGOFF, President -10- Dated: May 1, 1995 PUROFLOW CORPORATION By PUROFLOW INCORPORATED By: /s/ MICHAEL FIGOFF -------------------------------- MICHAEL FIGOFF, President Dated: May 1, 1995 DECCA VALVES CORPORATION By PUROFLOW INCORPORATED By: /s/ MICHAEL FIGOFF -------------------------------- MICHAEL FIGOFF, President Dated: May 1, 1995 MICHIGAN DYNAMICS, INC. By PUROFLOW INCORPORATED By: /s/ MICHAEL FIGOFF -------------------------------- MICHAEL FIGOFF, President ORDER ----- Pursuant to the parties' Stipulation, IT IS SO ORDERED. Dated: May 1, 1995 ________________________________________ JUDGE OF THE SUPERIOR COURT -11- EX-10.24 3 EXHIBIT 10.24 EXHIBIT 10.24 PUROFLOW INCORPORATED GARY OWEN CARIS (State Bar No. 088918) PETER CSATO (State Bar No. 089272) HENRY G. WEINSTEIN (State Bar No. 139117) FRANDZEL & SHARE, A Law Corporation 6500 Wilshire Boulevard Seventeenth Floor Los Angeles, California 90048-4920 (213) 852-1000 Attorneys for Plaintiff IMPERIAL BANK SUPERIOR COURT OF CALIFORNIA COUNTY OF LOS ANGELES, CENTRAL DISTRICT IMPERIAL BANK, a California ) CASE NO. BC 126 904 corporation, ) Plaintiff, ) STIPULATION RE FIRST ) AMENDMENT TO ORDER vs. ) APPOINTING RECEIVER AND ) ORDER THEREON PUROFLOW CORPORATION, a ) California corporation, dba ) PUROFLOW FILTER CORPORATION; ) DECCA VALVES CORPORATION; a ) California corporation; ) MICHIGAN DYNAMICS, INC., a ) California corporation; ) PUROFLOW INCORPORATED, a ) Delaware corporation; and DOES ) 1 through 50, inclusive, ) ) Defendants. ) _______________________________________) This Stipulation Re First Amendment to Order Appointing Receiver and Order Thereon (this "Stipulation") is entered into among Puroflow Corporation ("Debtor"), Decca Valves Corporation ("Decca"). Michigan Dynamics, Inc. -1- ("Michigan"), and Puroflow Incorporated ("Puro Inc."), by and through their attorneys of record, Thomas Kearney, Esq. of Kearney, Bistline & Cohoon, Michael D. Myers ("Receiver"), and Imperial Bank ("Bank") by and through its attorneys of record, Peter Csato, Esq. of Frandzel & Share. Debtor, Decca, Michigan and Puro Inc. are sometimes hereinafter individually and collectively referred to as "Obligors." This Stipulation is entered into with respect to the following facts: I RECITALS A. On or about November 5, 1993, for good and valuable consideration, Bank and Debtor entered into a Loan and Security Agreement (Accounts Receivable and/or Inventory) pursuant to which Bank agreed to extend a line of credit not to exceed $1,200,000.00 (the "Line of Credit") to Debtor. From time to time, the Line of Credit was extended pursuant to various amendments and addenda modifying the terms of the agreement, such that the Line of Credit fully and finally matured on February 3, 1995. The agreement together with all addenda and amendments thereto are hereinafter collectively referred to as the "Agreement." All initially capitalized terms as used herein shall have the meanings ascribed to such terms in the Agreement unless specifically defined herein. B. On or about May 5, 1994, for good and valuable consideration, Debtor made, executed and delivered to Bank that -2- certain promissory note of even date in the original principal amount of $625,000.00 ("Note No. 1"); and that certain promissory note of even date, in the original principal amount of $1,634,922.64 ("Note No. 2"). The Agreement, Note No. 1 and Note No. 2 are hereinafter collectively referred to as the "Loan Documents." C. Pursuant to the terms of the Loan Documents, the obligations of Debtor to Bank are secured by a lien on all of Debtor's personal property assets including, without limitation, all of Debtor's machinery, equipment, accounts receivable and inventory and the proceeds thereof (collectively, the "Collateral"). D. In order to induce Bank to extend credit accommodations to Debtor, each of Decca, Michigan and Puro Inc. (hereinafter individually and collectively referred to as the "Guarantors"), made, executed and delivered separate continuing guaranties dated on or about July 9, 1992 (collectively, the "Continuing Guaranties") of the obligations of Debtor. Each of the Guarantors further executed a security agreement (collectively, the "Guarantor Security Agreements") pursuant to which their respective guarantee is secured by all of such Guarantor's personal property assets (collectively, the "Guarantor Collateral"). The Continuing Guaranties and the Guarantor Security Documents are hereinafter collectively referred to as the "Guarantor Documents." -3- E. Debtor defaulted on its obligations to Bank under the Loan Documents by failing to repay the credit facilities at maturity on February 3, 1995. Guarantors defaulted on their obligations to Bank under their respective Continuing Guaranties by failing to pay under said guaranties after the default of Debtor. F. In connection with such defaults, Obligors and Bank entered into those certain letter agreements dated as of March 7, 1995 and March 16, 1995 (collectively, the "Letter Forbearance"), with respect to such defaults. Pursuant to the terms of the Letter Forbearance, Bank agreed to continue to extend financing on a day-to-day basis from February 3, 1995, to give Debtor additional time to arrange substitute financing. Obligors defaulted under the terms of the Letter Forbearance by, among other things, failing to keep interest current. G. On or about May 1, 1995, Bank filed its complaint against Obligors for, among other things, breach of the Loan Documents and Continuing Guaranties, and for appointment of a receiver and injunctive relief. Obligors consented by stipulation to the appointment of a receiver conferring to the receiver the powers and duties, among others, to operate Debtor's and each Guarantor's business, to collect all accounts, chattel paper and general intangibles, and to protect, manage and sell the assets of Obligors, and to borrow money from Bank under the Agreement so long as Debtor and -4- Guarantors are not in further default and there is further availability under the Line of Credit established pursuant to the Agreement. Receiver is not authorized to liquidate the business of Obligors without further court order. Michael D. Myers is the court-appointed Receiver over the business of Debtor and each of the Guarantors. H. Debtor, Guarantors and Bank consider it to be in their respective best interests to enter into this Stipulation which provides, among other things, that Bank shall continue to extend financing on a limited basis in connection with Receiver's conducting of the business operations of Obligors until December 15, 1995, to allow Receiver to continue operating Obligors and to attempt to find substitute financing in order to pay the entire outstanding balance due before Bank exercises its remedies under the Loan Documents, the Letter Forbearance and the Guarantor Documents. AGREEMENT NOW, THEREFORE, in consideration of the terms, conditions and provisions of this Stipulation, and the facts and circumstances of the proceedings out of which this Stipulation arises, the parties to this Stipulation hereby stipulate, acknowledge, and agree as follows: -5- 1. RECITALS. The Recitals are incorporated herein by this reference. The parties agree that the matters set forth in the Recitals are true and correct. 2. INCORPORATION AND VALIDATION OF LOAN DOCUMENTS. Except as otherwise expressly modified, superseded, or supplemented herein, all of the terms, conditions, and provisions of each of the Loan Documents and Letter Forbearance shall remain in full force and effect. Debtor acknowledges that it and its attorneys are aware of no grounds to challenge the validity of any of the Loan Documents or the Letter Forbearance or the validity or priority of Bank's claims or liens on the Collateral or the proceeds thereof. Debtor hereby affirms that it has granted and does hereby grant Bank a security interest in all of Debtor's presently existing and hereafter arising accounts receivable, inventory, general intangibles, chattel paper, deposit accounts, furniture, fixtures and equipment and all of the proceeds thereof and all of Debtor's books and records with respect thereto. 3. INCORPORATION AND VALIDATION OF GUARANTOR DOCUMENTS. Except as otherwise expressly modified, superseded, or supplemented herein, all of the terms, conditions, and provisions of each of the Guarantor Documents shall remain in full force and effect. Each of the Guarantors acknowledge that it and its attorneys are aware of no grounds to challenge the validity or enforceability of any of the Guarantor Documents or the validity or priority of Bank's claims or liens on the -6- Guarantor Collateral or the proceeds thereof. In connection therewith, each of the Guarantors hereby affirms that it has granted and does hereby grant Bank a security interest in all of each of the Guarantors presently existing and hereafter arising accounts receivable, inventory, general intangibles, chattel paper, deposit accounts, furniture, fixtures and equipment and all of the proceeds thereof and all of each of the Guarantors' books and records with respect thereto. 4. OBLIGATIONS OWING PURSUANT TO THE LOAN DOCUMENTS AND GUARANTOR DOCUMENTS. As of July 15, 1995, the following sums are due, owing, and unpaid by Debtor to Bank pursuant to the Loan Documents and the Letter Forbearance and each of the Guarantors pursuant to the Guarantor Documents: AGREEMENT PRINCIPAL: $627,754.70 ACCRUED INTEREST: $ 5,917.12 TOTAL: $633,671.82 NOTE NO. 1 PRINCIPAL: $226,900.00 ACCRUED INTEREST: $ 2,562.31 TOTAL: $229,462.31 NOTE NO. 2 PRINCIPAL: $1,071,297.57 ACCRUED INTEREST: $ 10,563.98 TOTAL: $1,081,861.55 -7- Additionally, certain fees and costs have been incurred in connection with this proceeding, as well as attorneys' fees and costs in an amount yet to be determined, and all such fees and costs are currently due, owing, and unpaid to Bank pursuant to the Loan Documents. 5. INTEREST ACCRUAL ON THE NOTES LOAN DOCUMENTS. Obligors, and each of them, acknowledge and agree that interest continues to accrue on the sums owing under the Loan Documents at the rates provided for therein. Obligors, and each of them, agree that from and after June 30, 1995, interest on the unpaid principal balance under the Agreement shall accrue at the variable rate of Bank's Prime Rate plus 3.5% per annum; that interest on the unpaid principal balance of Note No. 1 and Note No. 2 shall accrue at the variable rate of Bank's Prime Rate plus 3.5% per annum. 6. ADDITIONAL INDEBTEDNESS UNDER THE LOAN DOCUMENTS. Bank will continue to incur attorneys' fees and costs and foreclosure-related costs, in addition to the sums specified in paragraph 4 hereinabove, until the obligations under the Loan Documents are paid in full, including, but not limited to, attorneys' fees incurred in this action. All such additional attorneys' fees and costs and foreclosure-related costs will be added to the balance due under the Loan Documents, as determined by Bank in its sole discretion, until the same is paid in full. -8- 7. SALE OF DECCA ASSETS. Bank acknowledges that Receiver has completed the sale of Decca's assets (except for the accounts receivable and general intangibles), and Obligors acknowledge that Receiver has turned over the proceeds of such sale to Bank for application against the obligations under Note No. 1 and Note No. 2 in such order and amount as Bank decides in its sole discretion, and Obligors hereby consent thereto. 8. CONDITIONS OF BANK'S FORBEARANCE. Bank agrees to forbear from conducting any foreclosure sale of the Collateral or the Guarantor Collateral prior to December 31, 1995 (the "Forbearance Period") and to provide limited financing under the Agreement to Receiver, provided Obligors timely perform and comply with all of the terms and conditions of this Stipulation, the Loan Documents, the Letter Forbearance, and the Guarantor Documents except as specifically modified hereby. If, on December 31, 1995, the obligations of Obligors to Bank are not paid in full, then Bank may take any and all actions that it deems necessary or appropriate to enforce any and all of its rights and remedies under and in connection with any of the Loan Documents, the Letter Forbearance and/or the Guarantor Documents. Such actions include, without limitation, pursuing and completing one or more foreclosure sales of the Collateral and/or the Guarantor Collateral. -9- 9. EVENTS OF DEFAULT. A default shall occur under this Stipulation, at the option of Bank, upon the occurrence of any of the following (individually, an "Event of Default"); A. Obligors' and Receiver's failure to promptly turn over in kind to Bank all proceeds of Collateral and Guarantor Collateral to be applied by Bank in accordance with the terms of this Stipulation; B. Obligors' and Receiver's failure to provide uninterrupted insurance on the Collateral or Guarantor Collateral in an amount of not less than the aggregate loan balance, naming Bank as a loss payee and additional insured; C. The use of loan advances made by Bank to Receiver under the Line of Credit for purposes other than as provided under this Stipulation or as specifically consented to in writing by Bank; D. Obligors' breach of any term, provision, or condition of the Stipulation herein; or E. A breach of any term, condition, or provision of the Loan Documents or the Guarantor Documents other than defaults described in Recitals E and F above. 10. TERMINATION OF FORBEARANCE PERIOD IN THE EVENT OF DEFAULT. If an Event of Default occurs as provided in -10- paragraph 9 above, then Bank may give Receiver and Obligors written notice setting forth the default or defaults ("Default Notice") by serving a copy of the Default Notice via personal delivery or telecopy upon the Debtor's and Guarantors' counsel and Receiver. If the default or defaults specified in the Default Notice are not cured within three (3) days after the Default Notice is served upon Debtor's and Guarantors' counsel and Receiver, then the Forbearance Period set forth in paragraph 8 hereinabove shall immediately terminate and be of no further force or effect whatsoever, without further notice to Obligors and/or their respective attorneys or Receiver and without further notice, hearing, or order of the Court. In that event, Bank shall have the right, in its own absolute discretion, (1) to immediately conduct and conclude its foreclosure proceedings in accordance with applicable state law; and (2) immediately proceed to exercise any and all rights and remedies it may have under the Loan Documents, the Guarantor Documents and/or the Letter Forbearance. 11. RELIANCE IN CONSIDERATION OF FORBEARANCE. Bank's promise to forbear from conducting a foreclosure sale of the Collateral during the Forbearance Period constitutes (a) a concession by Bank of its substantial and valuable rights; (b) a valuable forbearance from exercising other rights and remedies available to Bank to pursue and enforce its rights under the Loan Documents, the Guarantor Documents, and the Letter Forbearance; and (c) a prejudice to Bank's rights, -11- remedies, and interests in the Collateral and Guarantor Collateral. 12. RECEIVER'S LOAN REQUESTS, PAYMENT OF EXPENSES AND OTHER POWERS. Upon entry of an order approving this Stipulation, Receiver may request from Bank until December 31, 1995, loans and advances under the Line of Credit, so long as no Event of Default occurs hereunder and subject to all of the following terms, conditions, and limitations: A. In no event shall the aggregate amount outstanding under the Line of Credit plus the amount of any requested advance exceed 65% of Eligible Accounts. B. Receiver shall collect and promptly turn over in the same form as received all proceeds of Collateral and Guarantor Collateral to Bank. Collections of Puroflow accounts shall be applied to reduce the outstanding principal balance under the Line of Credit. Collections and proceeds from all other Collateral and Guarantor Collateral shall be applied against Debtor's obligations under Note No. 1 and Note No. 2. C. Receiver shall use his best efforts to pay from collections by Receiver on any Accounts, actual, reasonable, and necessary expenses which arise in the ordinary and usual operation of Obligors' business ("Expenses") consistent with the estimated expenses set forth in the Cash -12- Flow Analysis and Projected Income Statements of Puroflow Corporation (collectively, the "Budget") attached hereto as Exhibits "1", and "2", respectively, and incorporated herein. For purposes of this Stipulation, the periods subject to the Budget are July 1, 1995, through and including December 31, 1995. The parties hereto acknowledge and agree that the expenses and income set forth in the Budget are estimates only and that Receiver's obligations to pay Obligors' Costs and expenses as provided in this paragraph 12.C shall be deemed satisfied in full if and so long as Bank receives from Receiver payments through December 31, 1995, of $20,000.00 each month, commencing on September 30, 1995, as more particularly set forth in paragraph 12.E, below. D. Except as otherwise expressly provided hereinbelow and if there are insufficient funds to pay from collections on Obligors' Accounts, Receiver may use loan advances under the Line of Credit to pay the Expenses except for capital improvements. E. Commencing on September 30, 1995, and continuing on the last day of each calendar month thereafter through and including December 31, 1995, Obligors and/or Receiver shall pay to Bank the sum of at least $20,000.00 each month. On December 31, 1995, any funds remaining in Receiver's account shall be paid to Bank. Bank shall apply such monthly payment and any other payments from Receiver and/or Obligors to -13- Debtor's outstanding obligations under Note No. 1 and/or Note No. 2 in any order or manner that Bank deems appropriate in its sole and absolute discretion, except as otherwise provided for herein. F. Receiver shall provide Bank with monthly detailed reports of: (1) Receiver's actual performance compared to its projections in the Budget for the prior month, identifying for expenses each payee, the amount paid for each item of expense, and the purpose or basis for the payment; (2) an accounts receivable aging including the name and address of each account debtor, the amount of each invoice owed from such debtor and such other information as Bank may require; and (3) an accounts payable aging. Each monthly report shall be provided to Bank on or before the THIRTIETH (30TH) day of the month following the month that is the subject of the report. G. Michael D. Myers shall continue to act as Receiver over the business estates of Debtor and Guarantor, with all of the powers hereunder and those previously granted to him by court order, except as the same may be modified hereby. H. The parties hereto acknowledge and agree that Receiver may sell the Collateral and/or Guarantor Collateral, except in the ordinary course of Obligor's business, only upon the entry of an order the Court. -14- I. Commencing on September 30, 1995, and continuing on the last day of each calendar month thereafter through and including December 31, 1995. Receiver shall provide Bank monthly an updated status report on this efforts to sell or refinance the business of the Obligors for the previous month. 13. RECEIVER'S LIENS. Receiver hereby grants a lien on and security interest in all personal property assets of Obligors arising after the imposition of the Receivership (the "Receivership Estate Collateral"), including any and all accounts, chattel paper, general intangibles, inventory, equipment, fixtures, documents and goods, whenever and however arising and attributable to such entities or in which they have an interest, and the proceeds thereof, which security interest shall have the same priority, extent, and validity as Bank's security interest or other interest in the Collateral and Guarantor Collateral used by Receiver. The replacement lien and security interest granted herein are valid, enforceable, and fully perfected, and no filing or recordation or any other act in accordance with any applicable local, state, or federal law is necessary to create or perfect such lien and security interest. 14. DEBTOR'S AND GUARANTOR'S OBLIGATIONS UNDER STIPULATION TO REMAIN IN EFFECT. Obligors acknowledge and agree that notwithstanding the occurrence of an Event of Default hereunder and the consequent exercise by Bank of any or -15- all of its rights and remedies, any and all obligations imposed on Obligors or Receiver pursuant to this Stipulation including, but not limited to, Receiver's obligation to turn over to Bank the proceeds of the Collateral and Guarantor Collateral, shall remain in full force and effect. Obligors and Receiver further agree that in the event Bank completes one or more foreclosure sales on the Collateral and/or the Guarantor Collateral, and is the successful bidder at one or more of such sales, Receiver (as applicable) shall turn over to Bank, within twenty-four (24) hours after the completion of any such foreclosure sale, all Collateral. Receivership Estate and Guarantor Collateral in its possession, custody or control purchased by Bank at any such foreclosure sales. 15. PAYMENTS TO BANK. Any payments made hereunder of performance due to Bank hereunder shall be made to Bank at the following address: Imperial Bank 9920 South La Cienega Blvd., Suite 623 Inglewood, Ca. 90310 Attention: Sonia Rubin, AVP 16. NO FURTHER COMMITMENTS TO LEND. Obligors,and each of them, agree and acknowledge that Bank shall not and has no obligation to advance, provide or loan any further or additional monies or credit to Obligors, or any of them. Obligors, and each of them, further agree and acknowledge that Bank shall not and has no obligation to further extend the time -16- for payment of any obligations owing to or arising in favor of Bank by Obligors, or any of them. 17. ORDER APPROVING STIPULATION. This Stipulation shall become effective and binding on all parties upon the entry of an order from the Court approving the Stipulation. 18. DUTY TO COOPERATE. Receiver and Obligors shall cooperate fully with Bank in order to effectuate the purpose and terms of this Stipulation and shall execute any and all documents as Bank may reasonably request in connection with this Stipulation. Receiver and Obligors specifically agree that they and each of them shall execute all documents deemed necessary by Bank, in its sole and absolute discretion, in order to effectuate the terms of the Stipulation herein. 19. REPRESENTATIONS AND WARRANTIES. The parties hereto further represents and warrants to one another as follows: A. Each party hereto has received independent legal advice of that party's choice with respect to the advisability of executing this Stipulation, and prior to the -17- execution of this Stipulation by each party, that party's attorney reviewed this Stipulation and discussed the Stipulation with the party, and the party has made all desired changes: B. Except as expressly stated in this Stipulation, no party hereto has made any statement or representation to any other party hereto regarding any facts relied upon by said party in entering into this Stipulation, and each party hereto specifically does not rely upon any statement, representation, or promise of any other party hereto in executing the Stipulation; C. Each party and its attorneys have made such investigation of the facts pertaining to this Stipulation, and all of the matters appertaining thereto, as they deem necessary; D. The terms of this Stipulation are contractual and not a mere recital; and E. This Stipulation has been carefully read by, the contents hereof are known and understood by, and it is signed freely by each party, and each party executing this Stipulation in a representative capacity is empowered to do so. -18- 20. NO WAIVER AND/OR MODIFICATION. No failure or delay on the part of Bank in the exercise of any power, right, or privilege hereunder shall operate as a waiver thereof, and no single or partial exercise of such power, right, or privilege shall preclude further exercise thereof or of any other power, right, or privilege. Any waiver, permit, consent, or approval of any kind by Bank of any breach or default hereunder by Debtor or Guarantors, or any such waiver of any such provision or condition hereof, must be in writing and shall be effective only to the extent set forth in writing. This Stipulation and the terms and conditions hereof may not be modified, amended or extended except in writing executed by the parties hereto and upon the entry of an order of the Court. Further, except as modified by the Stipulation, all terms and conditions of the Loan Documents, the Letter Forbearance, and the Guarantor Document shall remain in full force and effect and shall in no way be modified, impaired, affected, or exonerated by the terms of this Stipulation. 21. ATTORNEYS' FEES. In the event that it becomes necessary for any party to bring an action or other proceeding to construe and/or enforce the terms, conditions, or provisions of this Stipulation, the prevailing party of said action and/or other proceeding shall be entitled to recover his reasonable -19- attorneys' fees and costs incurred in said action or other proceeding. 22. INTEGRATION. Except as otherwise provided in this Stipulation, this Stipulation is the final written expression and the complete and exclusive statement of all agreements, conditions, promises, and covenants between the parties with respect to the subject matter hereof and supersedes all prior or contemporaneous agreements, negotiations, representations, understandings, and discussions among the parties' hereto and/or their respective attorneys with respect to the subject matter hereof. Any amendment or modification of this Stipulation, to be legally binding, must be set forth in writing, specifically referring to this Stipulation and duly signed by authorized representatives of all parties hereto. 23. NEUTRAL CONSTRUCTION OF STIPULATION. This Stipulation is the product of negotiation among the parties hereto and represents the jointly conceived, bargained-for, agreed-upon language mutually determined by the parties to express their intentions in entering into this Stipulation. Any ambiguity or uncertainty in this Stipulation shall be deemed to be caused by, or attributable to, all parties hereto collectively. In any action to enforce or interpret this Stipulation, the Stipulation shall be construed -20- in a neutral manner and no terms or provision of this Stipulation, or the Stipulation as a whole, shall be construed more or less favorably to any one party, or group of parties, to this Stipulation. 24. NOTICES. For the purpose of this Stipulation, all services, notices, correspondence, and documents required by this Stipulation shall be delivered to Bank's attorneys at the following address: Peter Csato, Esq. Frandzel & Share A Law Corporation 6500 Wilshire Boulevard Seventeenth Floor Los Angeles, California 90048 Telephone: (213) 852-1000 Fax : (213) 651-2577 All services, notices, correspondence, and documents required by this Stipulation shall be delivered to Obligors' attorneys at the following address: Thomas Kearney, Esq. Kearney, Bistline & Cohoon 300 S. Grand Ave., Suite 3265 Los Angeles, CA 90071 Telephone: (213) 617-9209 Fax : (213) 617-9325 All services, notices, correspondence, and documents required by this Stipulation shall be delivered to Receiver at the following address: -21- Michael D. Myers, Esq. 416 North Garey Avenue Pomona, CA 91767 Telephone: (909) 865-5992 Fax : (909) 865-5065 Notices, documents, and correspondence shall be deemed served and/or delivered only upon actual receipt thereof. 25. COUNTERPART. This Stipulation may be executed in counterparts and such counterparts together shall constitute but one and the same Stipulation. 26. BANK'S ACCESS TO DEBTOR'S BOOKS AND RECORDS. Bank shall be provided access to Debtor's and each Guarantor's books and records, and Bank shall have the right to have its representatives review Debtor's and each Guarantor's books and records. Receiver, Debtor and each Guarantor further promises and agrees to cooperate fully with Bank's representatives, including their review of Debtor's business records relating to the Collateral and Guarantor Collateral. Dated: August 31, 1995 /s/ MICHAEL D. MYERS _______________________________ MICHAEL D. MYERS, Receiver FRANDZEL & SHARE A Law Corporation GARY OWEN CARIS PETER CSATO HENRY G. WEINSTEIN [SIGNATURES CONTINUED ON NEXT PAGE] -22- Dated: September 11, 1995 By: /s/ PETER CSATO _______________________________ PETER CSATO Attorneys for IMPERIAL BANK KEARNEY, BISTLINE & COHOON A.P.C. Dated: September 5, 1995 By: /s/ THOMAS KEARNEY _______________________________ THOMAS KEARNEY Attorneys for Defendants -23- ORDER ----- Pursuant to the parties' stipulation, and good cause appearing, IT IS SO ORDERED. Dated: September 14, 1995 DIANE WAYNE _______________________________ JUDGE OF THE SUPERIOR COURT ZPC4624:42500-124 EX-10.25 4 EXHIBIT 10.25 EXHIBIT 10.25 PUROFLOW INCORPORATED GARY OWEN CARIS (State Bar No. 088918) PETER CSATO (State Bar No. 089272) HENRY G. WEINSTEIN (State Bar No. 139117) FRANDZEL & SHARE A Law Corporation 6500 Wilshire Boulevard 17th Floor Los Angeles, California 90048-4920 (213) 852-1000 Attorneys for Plaintiff IMPERIAL BANK SUPERIOR COURT OF CALIFORNIA COUNTY OF LOS ANGELES IMPERIAL BANK, a California ) CASE NO. BC 126 904 corporation, ) ) FIRST AMENDMENT TO STIPULATION Plaintiff, ) RE FIRST AMENDMENT TO ORDER ) APPOINTING RECEIVER AND ORDER vs. ) THEREON ) PUROFLOW CORPORATION, a ) California corporation, dba ) PUROFLOW FILTER CORPORATION; ) DECCA VALVES CORPORATION; a ) California corporation; MICHIGAN ) DYNAMICS, INC., a California ) corporation; PUROFLOW INCORPORATED, a ) Delaware corporation; and ) DOES 1 through 50, inclusive, ) ) Defendants. ) _______________________________________) This First Amendment to Stipulation re First Amendment to Order Appointing Receiver (this "Amendment") is entered into among Puroflow Corporation ("Debtor"), Decca Valves Corporation ("Decca"), Michigan Dynamics, Inc. ("Michigan"), and Puroflow Incorporated ("Puro"), by and through their attorneys of record, Thomas Kearney, Esq., of Kearney, Bistline & Cohoon A.P.C., Michael D. Myers ("Receiver") and Imperial Bank ("Bank") by and through its attorneys of record Peter Csato, Esq. of Frandzel & Share. Debtor, Decca, Michigan and Puro are sometimes hereinafter individually and collectively referred to as "Obligors." This Amendment is entered into with respect to the following facts: RECITALS -------- A. On or about August 31, 1995, Obligors and Bank entered into a Stipulation re First Amendment to Order Appointing Receiver and Order Thereon ("Stipulation"). (Hereinafter, any capitalized term not defined herein shall have the meaning ascribed to it in the Stipulation.) B. Under the Stipulation, Bank agreed, INTER ALIA, to forbear from conducting any foreclosure sale of the Collateral or the Guarantor Collateral prior to December 31, 1995, and to provide limited financing under the Agreement to Receiver. In consideration for said forbearance, Obligors agreed to repay all of their obligations to Bank under the Loan Documents, the Letter Forbearance, and the Guarantor Documents by December 31, 1995. C. Obligors have notified Bank that they will be unable to perform as required under the Stipulation and has requested Bank to provide additional time to repay the outstanding obligations of Obligors to Bank under the Loan Documents, the Letter Forbearance, and the Guarantor Documents. 2 D. Bank is willing to extend the Forbearance Period to June 15, 1996, subject to the terms and conditions hereinafter set forth. NOW, THEREFORE in consideration of the terms, conditions and provisions of this Amendment, and the facts and circumstances of the proceedings out of which the Stipulation and this Amendment arise, the parties to this Amendment hereby stipulate, acknowledge and agree as follows: 1. RECITALS. The Recitals are incorporated herein by this reference. The parties agree that the matters set forth in the Recitals are true and correct. 2. ACKNOWLEDGMENT OF BALANCE OWING. a. Obligors, and each of them, acknowledge that as of December 1995, the following sums are due, owing, and unpaid by Debtor to Bank pursuant to the Loan Documents and the Letter Forbearance and each of the guarantors pursuant to the Guarantor Documents; AGREEMENT --------- Principal: $621,533.63 Accrued Interest: $ 4,003.04 Total $625,536.57 3 NOTE NO. 1 ---------- Principal: $127,900.00 Accrued Interest: $ 1,434.68 Total $129,334.68 NOTE NO. 2 ---------- Principal: $971,297.57 Accrued Interest: $ 10,818.17 Total $982,115.74 3. REAFFIRMATION. This Amendment is, in part, a reaffirmation of the obligations of Obligors to Bank under the Stipulation and is not to be construed as a release or modification of any of the terms, conditions, warranties, waivers or other rights set forth in the Stipulation except to the extent expressly modified herein. Obligors, in consideration of Bank's agreement to modify the Stipulation, hereby reaffirms all of the obligations of Obligors to Bank as set forth in the Stipulation as modified herein. 4. EXTENSION OF FORBEARANCE PERIOD. a. Bank agrees to extend the Forbearance Period to June 15, 1995. If, on June 15, 1995, the obligations of Obligors to Bank are not paid in full, then Bank may take any and 4 all actions that it deems necessary or appropriate to enforce any and all of its rights and remedies under and in connection with any of the Loan Documents, the Letter Forbearance and/or the Guarantor Documents. Such actions include, without limitation, pursuing and completing one or more foreclosure sales of the Collateral and/or the Guarantor Collateral. b. Bank's agreement to extend the Forbearance Period and from further forebearing from conducting a foreclosure sale of the Collateral and/or Guarantor Collateral during the Forbearance Period constitutes (a) a concession by Bank of its substantial and valuable rights; (b) a valuable forbearance from exercising other rights and remedies available to Bank to pursue and enforce its rights under the Loan Documents, the Guarantor Documents, and the Letter Forbearance; and (c) a prejudice to Bank's rights, remedies, and interests in the Collateral and Guarantor Collateral. 5. FURTHER LOAN REQUESTS. Upon entry of an order approving this Amendment, Receiver may continue to request from Bank until June 15, 1996, loans and advances under the Line of Credit so long as no Event of Default occurs under the Stipulation, as amended hereby, and subject to all of the terms, conditions, and limitations set forth in the Stipulation and as follows: 5 a. Receiver shall use his best efforts to pay from collections by Receiver on any Accounts, actual, reasonable, and necessary expenses which arise in the ordinary and usual operation of Obligors' business ("Expenses") consistent with the estimated expenses set forth in the Cash Flow Analysis and Projected Income Statements of Puroflow Corporation attached to the Stipulation as Exhibits "1" and "2" thereof. For purposes of this Amendment, the periods subject to the Budget are July 1, 1995, through and including June 15, 1996. The parties hereto acknowledge and agree that the expenses and income set forth in the Budget are estimates only and that Receiver's obligations to pay Obligors' Costs and Expenses as provided in herein shall be deemed satisfied in full if and so long as Bank continues to receive from Receiver through May 31, 1996, monthly payments of $20,000.00 each month. b. Commencing on January 1, 1996, and continuing on the first (1st) day of each calendar month thereafter through and including June 1, 1996, Obligors and/or Receiver shall pay to Bank the sum of at least $20,000.00 each month. On June 15, 1996, any funds remaining in Receiver's account shall be paid to Bank. Bank shall apply such monthly payments and any other payments from Receiver and/or Obligors to Debtor's outstanding obligations under Note No. 1 and/or Note No. 2 in any order or manner that Bank deems appropriate in its sole and absolute discretion. 6 c. Receiver shall continue to provide the monthly status reports described and as required in Paragraph 12.I of the Stipulation. 6. NO OTHER ADVANCES. The parties agree and acknowledge that Bank shall not and has no obligation to advance, provide, or loan any further or additional monies or credit to Obligors, other than pursuant to this Amendment. The parties further agree and acknowledge that, except as provided herein, Bank shall not and has no obligation to further extend the time for payment of any obligation of Obligors, or any of them, to Bank. 7. CONDITIONS PRECEDENT. The obligations of Bank under this Amendment are expressly conditioned upon Bank having received such additional agreements, certificates, reports, approvals, instruments, documents, agreements, and consents as Bank may request, in its sole and absolute opinion and judgment, in connection with this Amendment. 8. REPRESENTATIONS AND WARRANTIES. Obligors, and each of them, represent and warrant to Bank, and Bank is relying thereon, as follows: a. This Amendment constitutes legal, valid, and binding obligations of Obligors, and each of them, to Bank. b. There are no actions, suits, or proceedings pending or, to the knowledge of Obligors, threatened against or 7 affecting Obligors in relation to Obligors' obligations to Bank, or involving the validity or enforceability of this Amendment. 9. RELEASES. a. Obligors, and each of them, do hereby forever, finally, fully, unconditionally, and completely release, relieve, acquit, remise, and discharge Bank and its subsidiaries, affiliates, successors, predecessors, and assigns, and past and present employees, officers, directors, agents, representatives, attorneys, accountants, and shareholders, each in its, his, or her individual and representative capacities, from any and all claims, debts, liabilities, demands, obligations, promises, acts, agreements, liens, losses, costs and expenses (including, without limitation, attorneys' fees), damages, injuries, suits, actions, and causes of action of whatever kind or nature, whether known or unknown, suspected or unsuspected, contingent or fixed, at law or in equity, including, but not limited to, those based on, arising out of, incidental to, appertaining to, in connection with, or emanating from, in any way, any of the matters or facts alleged or set forth in the Recitals set forth above, or any other obligations of Obligors to Bank, or the lending arrangements between Bank and Obligors. b. Obligors, and each of the, acknowledge and agree that Obligors have been informed by Obligors' attorneys and advisors of and that each of the Obligors is familiar with and hereby expressly waives, the provisions of section 1542 of the 8 California Civil Code, and any similar statute, code, law, or regulation of any State of the United States, or of the United States, to the fullest extent that Obligors may waive such rights and benefits. Section 1542 provides: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. c. Obligors, and each of them, acknowledge and agree that Obligors are aware that Obligors may hereafter discover claims presently unknown or unsuspected or facts in addition to or different from those which Obligors now know or believe to be true, as to the matters released herein. Nevertheless, it is the intention of Obligors, and each of them, through this release, to fully, finally, and forever release all such matters, and all claims related thereto, which do now exist, may exist, or heretofore have existed. In furtherance of such intention, the releases herein given shall be and remain in effect as full and complete releases of such matters, notwithstanding the discovery or existence of any such additional or different claims or facts related thereto by any party hereto. In entering into this release, the parties hereto are not relying upon any statement, 9 representation, or promise of any other party hereto or any other person, except as expressly stated in this Amendment. d. Obligors, and each of them, assume the risk of any misrepresentation, concealment, or mistake, and if Obligors should subsequently discover that any fact relied upon by Obligors in entering into this Amendment is untrue or that any fact was concealed from said party or that an understanding of the facts or the law was incorrect, Obligors shall not be entitled to set aside this Amendment or the releases provided for herein by reason thereof. e. Obligors, and each of them, represent and warrant that Obligors are the sole and lawful owner of all right, title, and interest in and to every claim and other matter which Obligors release herein, and that Obligors, and each of them, have not heretofore assigned or transferred, or purported to assign or transfer, to any person, any claims or other matters herein released. Obligors, and each of them, shall indemnify, defend, and hold harmless Bank from and against all claims based upon or arising in connection with any prior assignment or purported assignment or transfer of any claims or matters released herein. 10. REVIVAL. If any payment of money made by Obligors and/or Receiver to Bank should for any reason subsequently be declared to be "fraudulent" within the meaning of any state or federal law 10 relating to fraudulent conveyances, preferential or otherwise avoidable or recoverable, in whole or in part, for any reason, under the United States Bankruptcy Code or any other federal or state law (individually and collectively referred to herein as "Voidable Transfer") and Bank is required to pay or restore the amount of any such Voidable Transfer, or any portion thereof, then as to the amount repaid or restored pursuant to any such Voidable Transfer (including all costs, expenses, and attorneys' fees of Bank related thereto, including, without limitation, relief from stay or similar proceedings), the liability of Obligors shall automatically be revived, reinstated, and restored in such amount or amounts, and shall exist as though such Voidable Transfer had never been made to Bank. Nothing set forth herein is an admission that such Voidable Transfer has occurred. Obligors expressly acknowledge that Bank may rely upon advice of counsel, and if so advised by counsel, may settle, without defending, any action to void any alleged Voidable Transfer and that upon such settlement, Obligors shall again be liable for any deficiency resulting from such settlement as provided in the Stipulation as amended herein. 11. MISCELLANEOUS. a. NOT A NOVATION. This Amendment is not a novation, nor is it to be construed as a release or modification of any of the terms, conditions, warranties, waivers, or rights set forth in the Stipulation, except as set forth herein. 11 b. SURVIVAL OF WARRANTIES. All agreements, representations and warranties made herein shall survive the execution and delivery of this Amendment. c. APPLICABLE LAW. The Stipulation and this Amendment and the rights and obligations of the parties hereto shall be governed by and construed in accordance with the laws of the State of California. d. ASSIGNABILITY. The Stipulation and this Amendment shall be binding upon and inure to the benefit of Bank and Obligors and their respective successors and assigns, except that Obligors' rights hereunder are not assignable without the prior written consent of Bank, which consent Bank may give or withhold in its sole and absolute opinion and judgment. e. ACKNOWLEDGMENT OF WAIVER. The parties represent and warrant that all of the waivers, warranties, and promises set forth in this Amendment are made after or opportunity to consult with legal counsel of their choosing and with an understanding of their significance and consequence and that they are reasonable. f. TIME OF ESSENCE. The parties hereto expressly acknowledge and agree that time is of the essence and that all deadlines and time periods provided for under the Amendment are ABSOLUTE AND FINAL. 12 g. EXECUTION IN COUNTERPART. This Amendment may be executed and delivered in two or more counterparts, each of which, when so executed and delivered, shall be an original, and such counterparts together shall constitute but one and the same instrument and agreement, and this Amendment shall not be binding on any party until all parties have executed it. h. ORDER APPROVING AMENDMENT. This Amendment shall become effective and binding on all parties upon the entry of an order from the Court approving this Amendment. Date: 1/16/96 /s/ MICHAEL D. MYERS -------------------- ---------------------------------------- MICHAEL D. MYERS, Receiver Date: FRANDZEL & SHARE -------------------- A Law Corporation ---------------------------------------- Peter Csato, Esq. Attorneys for IMPERIAL BANK Date: KEARNEY, BISTLINE & COCOON -------------------- A.P.C. ---------------------------------------- Thomas Kearney Attorneys for Obligors 13 ORDER ----- Pursuant to the parties' amendment to the stipulation, and good cause appearing, IT IS SO ORDERED. Date:_________________________ ________________________________________ JUDGE OF THE SUPERIOR COURT 42500-124 14 EX-10.26 5 EXHIBIT 10.26 EXHIBIT 10.26 PUROFLOW INCORPORATED STANDARD SUBLEASE American Industrial Real Estate Association 1. PARTIES. This Sublease, dated, for reference purposes only, July 7, 1995, is made by and between Kaiser Marquardt (herein called "Sublessor") and Puroflow Incorporated (herein called Sublessee"). 2. PREMISES. Sublessor hereby subleases to Sublessee and Sublessee hereby subleases from Sublessor for the term, at the rental, and upon all of the conditions set forth herein, that certain real property situated in the County of Los Angeles, State of California, commonly known as a portion of 16555 Saticoy Street, Van Nuys, California 91409 and decribed as approximately fifty-thousand square feet of a larger building commonly known as Kaiser Marquardt Building Three (3). Said real property, including the land and all improvements thereon, is hereinafter called the "Premises". 3. TERM. 3.1 TERM. The term of this Sublease shall be for sixty (60) months commencing on September 1, 1995 and ending on August 30, 2000, unless sooner terminated pursuant to any provision hereof. 3.2 DELAY IN COMMENCEMENT. Notwithstanding said commencement date, if for any reason Sublessor cannot deliver possession of the Premises to Sublessee on said date, Sublessor shall not be subject to any liability therefore, nor shall such failure affect the validity of this Lease or the obligations of Sublessee hereunder or extend the term hereof, but in such case Sublessee shall not be obligated to pay rent until possession of the Premises is tendered to Sublessee; provided, however, that if Sublessor shall not have delivered possession of the Premises within sixty (60) days from said commencement date, Sublessee may, at Sublessee's option, by notice in writing to Sublessor within ten (10) days thereafter, cancel this Sublease, in which event the parties shall be discharged from all obligations thereunder. If Sublessee occupies the Premises prior to said commencement date, such occupancy shall be subject to all provisions hereof, such occupancy shall not advance the termination date and Sublessee shall pay rent for such period at the initial monthly rates set forth below. 4. RENT. Sublessee shall pay rent to Sublessor as rent for the Premises equal monthly payments of $16,750.00, in advance, on the first (1st) day of each month of the term hereof, Sublessee shall pay Sublessor upon the execution hereof $16,750.00 as rent for September, 1995. Rent for any period during the term hereof which is for less than one month shall be a prorata portion of the monthly installment, Rent shall be payable in lawful money of the United States to Sublessor at the address stated herein or to such other persons or at such other places as Sublessor may designate in writing. 5. SECURITY DEPOSIT. Sublessee shall deposit with Sublessor upon execution hereof $16,750.00 as security for Sublessee's faithful performance of Sublessee's obligations hereunder. If Sublessee fails to pay rent or other charges due hereunder, or otherwise defaults with respect to any provision of this Sublease, Sublessor my use, apply or retain all or any portion of said deposit for the payment of any rent or other charge in default or for the payment of any other sum to which Sublessor may become obligated by reason of Sublessee's default, or to compensate Sublessor for any loss or damage which Sublessor may suffer thereby. If Sublessor so uses or applies all or any portion of said deposit, Sublessee shall within ten (10) days after written demand therefore deposit cash with Sublessor in an amount sufficient to restore said deposit to the full amount hereinabove atated and Sublessee's failure to do so shall be a material breach of this Sublease. Sublessor shall not be required to keep said deposit separate from its general accounts. If Sublessee performs all of Sublessee's obligations hereunder, said deposit, or so much thereof as has not theretofore been applied by Sublessor, shall be returned, without payment of interest or other increment for its use to Sublessee (or at Sublessor's option, to the last assignee, if any, of Sublessee's interest hereunder) at the expiration of the term hereof, and after Sublessee has vacated the Premises. No trust relationship is created herein between Sublessor and Sublessee with respect to said Security Deposit. 6. USE. 6.1 USE. The Premises shall be used and occupied only for design, manufacture, assembly and test of filters, air bag filters and hydraulic valves and other similar products and for no other purpose. 6.2 COMPLIANCE WITH LAW. (a) Sublessor warrants to Sublessee that the Premises, in its existing state, but without regard to the use for which Sublessee will use the Premises, does not violate any applicable building code regulation or ordinance at the time that this Sublease is executed. In the event that it is determined that this warranty has been violated, then it shall be the obligation of the Sublessor, after written notice from Sublessee, to promptly, at Sublessor's sole cost and expense, rectify any such violation. In the event that Sublessee does not give to Sublessor written notice of the violation of this warranty within one (1) year from the commencement of the term of this Sublease, it shall be conclusively deemed that such violation did not exist and the correction of the same shall be the obligation of the Sublessee. (b) Except as provided in Paragraph 6.2(a). Sublessee shall, at Sublessee's expense, comply promptly with all applicable statutes, ordinance, rules, regulations, orders, restrictions of record, and requirements in effect during the term or any part of the term hereof regulating the use by Sublessee of the Premises. Sublessee shall not use or permit the use of the Premises in any manner that will tend to create waste or a nuisance or, if there shall be more than one tenant of the building containing the Premises, which shall tend to disturb such other tenants. 6.3 CONDITION OF PREMISES. Except as provided in Paragraph 6.2(a), Paragraph 13.1 and Exhibit 2, Sublessee hereby accepts the Premises in their condition existing as of the date of the execution hereof, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the Premises, and accepts this Sublease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. Sublessee acknowledges that neither Sublessor not Sublessor's agents have made any representation or warranty as to the suitability of the Premises for the conduct of Sublessee's business. 7. MASTER LEASE 7.1 Sublessor is the lessee of the Premises by virtue of a lease, hereafter referred to as the "Master Lease", a copy of which is attached hereto marked Exhibit 1, dated November 29, 1991 wherein The Marquardt Company is the lessor, hereinafter referred to as the "Master Lessor". 7.2 This Sublease is and shall be at all times subject and subordinate to the Master Lease. 7.3 The terms, conditions and respective obligations of Sublessor and Sublessee to each other under this Sublease shall be the terms and conditions of the Master Lease. Therefore, for the purposes of this Sublease, wherever in the Master Lease the word "Lessor" is used it shall be deemed to mean the Sublessor herein and whenever in the Master Lease the word "Lessee" is used it shall be deemed to mean the Sublessee herein. 7.4 During the term of this Sublease and for all periods subsequent for obligations which have arisen prior to the termination of this Sublease, Sublessee does hereby expressly assume and agree to perform and comply with, for the benefit of Sublessor and Master Lessor, each and every obligation of Sublessor under the Master Lease except for the following paragraphs which are excluded therefrom: 1,2,3.1,3.2,4.5,6.1,8.2,10.1,10.3,15,26,39,48,49,50,51,53, ---------------------------------------------------------- 54,56,57,58,,60,77 and 78. - -------------------------- 7.5 The obligations that Sublessee has assumed under Paragraph 7.4 hereof are hereinafter referred to as the "Sublessee's Assumed Obligations". The obligations that Sublessee has NOT assumed under Paragraph 7.4 hereof are hereinafter referred to as the "Sublessor's Remaining Obligations". 7.6 Sublessee shall hold Sublessor free and harmless of and from all liability, judgments, costs, damages, claims or demands, including reasonable attorneys fees, arising out of Sublessee's failure to comply with or perform Sublessee's Assumed Obligations. 7.7 Sublessor agrees to maintain the Master Lease during the entire term of this Sublease, subject, however, to any earlier termination of the Master Lease without the fault of the Sublessor, and to comply with or perform Sublessor's Remaining Obligations and to hold Sublessee free and harmless of and from all liability, judgments, costs, damages, claims or demands arising out of Sublessor's failure to comply with or perform Sublessor's Remaining Obligations. 7.8 Sublessor represents to Sublessee that the Master Lease is in full force and effect and that no default exists on the part of any party to the Master Lease. 7.9 Neither the Sublease nor this Agreement shall release or discharge (a) Sublessor from any liability, whether past, present or future, under the Master Lease or alter the primary liability of the Sublessor to pay rent and perform and comply with all of the obligations of the tenant to be performed under the Master Lease (including the payment of all bills rendered by Lessor for charges incurred by the Subtenant for services and materials supplied to the Subleased Premises), or (b) Guarantor from any liability, whether past, present or future, under the Guaranty. Any breach or violation of any provision of the Master Lease by Subtenant shall be deemed to be and shall constitute a default by Sublessor with respect to such provision. 8. ASSIGNMENT OF SUBLEASE AND DEFAULT. 8.1 Sublessor hereby assigns and transfer to Master Lessor the Sublessor's interest in this Sublease and all rentals and income arising therefrom, subject however to terms of paragraph 8.2 hereof. 8.2 Master Lessor, by executing this document, agrees that until a default shall occur in the performance of Sublessor's Obligations under the Master Lease, that Sublessor may receive, collect and enjoy the rents accruing under this Sublease. However, if Sublessor shall default in the performance of its obligations to Master Lessor then Master Lessor may, at its option, receive and collect, directly from Sublessee, all rent owing and to be owed under this Sublease. Master Lessor shall not, by reason of this assignment of the Sublease nor be reason of the collection of the rents from the Sublessee, be deemed liable to Sublessee for any failure of the Sublessor to perform and comply with Sublessor's Remaining Obligations. 8.3 Sublessor hereby irrevocably authorizes and directs Sublessee, upon receipt of any written notice from the Master Lessor starting that a default exists in the performance of Sublessor's obligations under the Master Lease, to pay to Master Lessor the rents due and to become due under the Sublease. Sublessor agrees that Sublessee shall have the right to rely upon any such statement and request from Master Lessor, and that Sublessee shall pay such rents to Master Lessor without any obligation or right to inquire as to whether such default exists and notwithstanding any notice from or claim from Sublessor to the contrary and Sublessor shall have no right or claim against Sublessee for any such rents so paid by Sublessee. 8.4 No Changes or modifications shall be made to this Sublease without the consent of master Lessor. 9. CONSENT OF MASTER LESSOR. 9.1 In the event that the Master Lease requires that Sublessor obtain the consent of Master Lessor to any subletting by Sublessor then, this Sublease shall not be effective unless, within ten (10) days of the date hereof, Master Lessor signs this Sublease thereby giving its consent to this Subletting. 9.2 In the event that the obligations of the Sublessor under the master Lease have been guaranteed by third parties then this Sublease, nor the Master Lessor's consent, shall not be effective unless, within ten days of the date hereof, said guarantors sign this Sublease thereby giving guarantors consent to this Sublease and the terms thereof. 9.3 In the event that Master Lessor does give such consent then: (a) Such consent will not release Sublessor of its obligations or alter the primary liability of Sublessor to pay the rent and perform and comply with all the obligations of Sublessor to be performed under the Master Lease. (b) The acceptance of rent by Master Lessor from Sublessee or any one else liable under the Master Lease shall not be deemed a waiver by Master Lessor of any provisions of the Master Lease. (c) The consent to this Sublease shall not constitute a consent to any subsequent subletting or assignment. (d) In the event of any default of Sublessor under the Master Lease, Master Lessor may proceed directly against Sublessor, any guarantors or any one else liable under the Master Lease or this Sublease without first exhausting master Lessor's remedies against any other person or entity liable thereon to Master Lessor. (e) Master Lessor may consent to subsequent sublettings and assignments of the Master Lease or this Sublease or any amendments or modifications thereto without notifying Sublessor nor any one else liable under the Master Lease and without obtaining their consent and such action shall not relieve such persons from liability. (f) In the event that Sublessor shall default in its obligations under the Master Lease, then Master Lessor, at its option and without being obligated to do so, may require Sublessee to attorn to Master Lessor in which event Master Lessor shall undertake the obligations of Sublessor under this Sublease from the time of the exercise of said option to terminiation of this Sublease but Master Lessor shall not be liable for any prepaid rents nor any security deposit paid by Sublessee, nor shall Master Lessor be liable for any other defaults of the Sublessor under the Sublease. 9.4 The signature of the Master Lessor and any Guarantors of Sublessor at the end of this document shall constitue their consent to the terms of the Sublease. 9.5 Master Lessor acknowledges that, to the Master Lessor's knowledge, no default presently exists under the Master Lease of Obligations to be performed by Sublessor except as set forth in Article 12, herein and that the Master Lease is in full force and effect. 9.6 In the event that Sublessor defaults under its obligations to be performed under the Master Lease by Sublessor, Master Lessor agrees to endeavor to deliver to Sublessee a copy of any such notice of default. Sublessee shall have the right to cure any default of Sublessor described in any notice of default within ten days (10) after service of such notice of default on Sublessee. If such default is cured by Sublessee then Sublessee shall have the right of reimbursement and offset from and against Sublessor. Lessor is not a party to and shall not be bound by any of the terms, covenants, conditions, provisions or agreements of the Sublease or any amendment thereto. Nothing in the Sublease shall be construed to modify, waive, impair or affect (a) any of the provisions, covenants or conditions in the Lease or the Guaranty, (b) any of Sublessor's obligations under the Lease or any of Guarantor's obligations under the Guaranty, or (c) any rights, remedies of Lessor under the Lease or the Guaranty or otherwise to enlarge or increase Lessor's obligations or Sublessor's or Guarantor's rights under the Lease, the Guaranty or otherwise. In case of any conflict between the provisions of the Lease and the provisions of the Sublease, the provisions of the Lease prevail unaffected by the Sublease. 10. BROKERS FEE. Deleted. 11. ATTORNEY'S FEES. If any party named herein brings an action to enforce the terms hereof or to declare rights hereunder, the prevailing party in any such action, on trial and appeal, shall be entitled to his reasonable attorney's fees to be paid by the losing party as fixed by the Court. 12. ADDITIONAL PROVISIONS. Exception to Paragraph 9.5: Master Lessor reserves the right to assert that the Sublessor has not complied with the requirements of the Master Lease. ADDENDUM TO STANDARD SUBLEASE DATED JUNE 19, 1995 BETWEEN KAISER AEROSPACE AND ELECTRONICS CORPORATION (SUBLESSOR) AND PUROFLOW INCORPORATED (SUBLESSEE) 13. TENANT IMPROVEMENTS AND RELOCATION COSTS 13.1 Sublessor, at Sublessor's expense shall provide the Tenant Improvements described in Exhibit 2. In addition, Sublessor shall reimburse Sublessee for the expense incurred to relocate Sublessee's assets from the existing facility to the Premises. Sublessor shall allocate a maximum one-hundred thousand dollars ($100,000.00) to such tenant improvements and relocation costs. Sublessee agrees to be responsible for and pay for all costs or expenses which exceed one-hundred thousand dollars ($100,000.00). Notwithstanding the foregoing, Sublessor, at its option, may agree to increase the allocation with the condition that any such allocation over $100,000.00 shall be reimbursed to Sublessor by Sublessee as additional rent during the first six (6) months of the Sublease term. Any such amount shall be fully amortized over the six month period and re-paid in six equal payments. However, in no event shall the allocation of the Tenant Improvement and Relocation allowance exceed the line item amounts and the total amount described in Exhibit 3. Such additional rent shall be guaranteed in accordance with paragraph 23, hereunder. Sublessee shall select, contract for and relocate its assets in total to the premises and set the assets in place. Sublessor shall provide the connection of utilities to the assets. Sublessee agrees to indemnify, defend and hold Sublessor and Master Lessor harmless from and against all claims, suits, causes of action, costs fees, including reasonable attorneys' fees and costs arising out of relocation of Sublessee's assets to the premises. 14. TENANT IMPROVEMENTS BY SUBLESSEE Sublessee at its sole expense may make additional alterations, additions and improvements to the premises, subject to the Sublessee complying with Paragraph 7 of the Master Lease. 15. OPERATING EXPENSES As additional rent, Sublessee shall pay an additional $7,500.00 to Sublessor each month for utilities fairly allocated to the Premises or actual expenses, whichever is greater, for natural gas, electricity and water. If sublessor provides telephone service to Sublessee, Sublessee shall, in addition to the above, pay a pro rate share of the cost of providing such service, In addition, Sublessee shall pay for all of Sublessee's outgoing telephone calls and any additional services provided sublessee by any telephone service supplier. 16. HAZARDOUS MATERIAL 16.1 DEFINITION OF HAZARDOUS MATERIAL As hereinafter used, the terms "Hazardous Material" shall mean any substance or material which has been determined by any state, federal or local governmental authority to be capable of posing a risk of injury to health, safety, property or the environment, including all those materials and substances designated as hazardous or toxic by the city and county in which the premises are located, the United States Environmental Protection Agency, the California Environmental Protection Agency, the Consumer Product Safety Commission, the Food and Drug Administration, and any federal agencies that have overlapping jurisdiction with such agencies, or any other governmental agency now or hereafter authorized to regulate materials and substances in the environment. 16.2 COMPLIANCE WITH APPLICABLE HAZARDOUS MATERIALS LAW Sublessee agrees not to introduce any Hazardous Material in, on or adjacent to the premises without complying with all applicable federal, state and local laws, rules, regulations, policies and authorities relating to the storage, use, disposal, transportation, and clean-up of Hazardous Materials, including but not limited to, the obtaining of proper permits. 16.3 REPORTABLE USE OF HAZARDOUS MATERIAL REQUIRES CONSENT Sublessee shall not engage in any activity in, on or about the premises which constitute a Reportable Use, as hereinafter defined, of Hazardous Material without the express consent of Sublessor. Reportable use shall mean the manufacture, storage, use, transportation or disposal of any Hazardous Material or the generation of any Hazardous Waste that requires a permit from, or with respect to which a report, notice, registration, business plan or contingency plan is required to be prepared and submitted to any governmental agency. Reportable Use shall also include Sublessee being responsible for the presence in, on or about the Premises of any Hazardous Material for which any applicable law requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Sublessee without Sublessor's prior consent but in compliance with applicable law, use ordinary and customary material reasonably required to be used by the Sublessee in the normal course of Sublessee's business permitted on the Premises, providing such use is not a Reportable Use and does not expose the premises or neighboring properties to any meaningful risk of exposure, contamination or damage or expose Sublessor or Lessor to any liability therefor. Sublessor may condition its consent to the use or presence of any Hazardous Material in, on or about the Premises if, in its reasonable discretion, deems it necessary to protect the Sublessor, Lessor, the public, the premises and the environment against damage, contamination or injury and/or liability therefrom and therefor, including, but not limited to, the installation (and removal on or before Sublease expiration or earlier termination) or reasonably necessary protective modifications to the Premises (such as protective containment and/or additional security deposit and/or additional insurance coverage, the cost of which shall be paid by Sublessee. 16.4 INDEMNIFICATION OF MASTER LESSOR AND SUBLESSOR If Sublessee's storage, use or disposal of any Hazardous Material in, on or adjacent to the Premises results in any contamination of the Premises, the soil or surface or groundwater requiring remediation under federal, state or local law, ordinance, regulation or policy, Sublessee agrees to clean-up the contamination. Sublessee further agrees to indemnify, defend and hold Sublessor and Master Lessor harmless from and against any claims, suits, causes of action, costs, fees, including reasonable attorneys' fees and costs arising out of or in connection with any clean-up work, inquiry or enforcement proceeding arising from acts or omissions of the Sublessee or its agents, employees or contractors, and any Hazardous Materials currently or hereafter used, stored or disposed of by Sublessee or its agents, employees or contractors on or about the Premises. 17. INDEMNIFICATION OF SUBLEASE Sublessor shall defend, indemnify and hold Sublessee harmless from any liability arising out of Sublessor's failure to comply prior to the execution date hereof with any federal, state or local laws and regulations relating to the environment, including but not limited to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), the Resource Conservation and Recovery Act, the Federal Water Pollution Control Act, the Toxic Substances Control Act, the California Environmental Quality Act, the Safe Drinking Water Act and the Clean Air Act, all as the same may be amended or supplemented from time to time and any analogous or comparable federal, state or local statutes and the regulations adopted pursuant thereto. Sublessor shall defend, indemnify and hold Sublessee harmless from any liability arising out of the presence on or under or release from the Premises prior to the execution date hereof, or subsequently introduced by Sublessor, Master Lessor or agents, contractors or employees of Sublessor or Lessor, of a hazardous substance, as defined in Section 101 of CERCLA or any analogous or comparable state or federal statute, as the same may be amended from time to time; petroleum products or petroleum wastes; and pollutants or contaminants, as defined in Section 101 of CERCLA or any analogous or comparable state or federal statute, as the same may be amended from time to time. 18. MAINTENANCE AND REPAIRS 18.1 SUBLESSEE Sublessee agrees to maintain and keep the Premises in accordance with paragraph 7 of the Master Lease and to surrender the Premises in the same condition, excepting normal wear and tear, as the condition of the Premises existing as of the date Sublessor delivers possession of the Premises to Sublessee. Sublessee shall maintain its furnishings and equipment, provide janitorial and cleaning services for the Clean Room and replace Clean Room Hepa Filters and other perishable items as required. Sublessee may provide its own janitorial service or, as an additional operating expense, purchase those services from Sublessor. 18.2 SUBLESSOR Notwithstanding Paragraph 18.1, Sublessor shall provide building maintenance including maintenance of the physical structure and utilities to the Premises. 19. REPRESENTATIONS AND WARRANTIES Sublessor hereby warrants that: (a) it is the Lessee under a Master Lease for the use of the Premises and that such Master Lease extends beyond the initial Term of this Sublease: (b) it has the full power, right and authority to enter into and execute this Sublease; and (c) those persons whose signatures are hereinafter evidenced on this Sublease on behalf of Sublessor are duly authorized signatories of Sublessor, fully empowered to commit and bind Sublessor to those certain terms, covenants and conditions set forth herein for the Term of Sublease. 20. SUBLESSE'S INSURANCE Sublessee, at Sublesse's expense shall provide Worker's Compensation, Employer's Liability and Comprehensive General Liability insurance including property damage, against liability for personal injury (including Sublessee's employees), bodily injury, death and damage to property occurring in or about the Premises with combined single limit coverage of not less than two million dollars ($2,000,000.00) and property damage insurance in "all risk" form insuring Sublessee's trade fixtures, furnishings and tenant alterations for the full replacement cost. 21. LATE CHARGES The parties agree that Sublessee shall not be liable for any late payments to Lessor under the Master Lease as a result of Sublessor's failure to make payments required under the Master Lease, and Sublessor agrees to indemnify Sublease for any late charges that may occur as a result, except to the extent Sublessee is directly responsible for such late payment. 22. OPTION TO EXTEND Providing Sublessee is not in default hereunder Sublessee shall have one option to extend the term of the Sublease for approximately twenty-nine (29) months. Notwithstanding the above, any extension hereof shall terminate concurrent with the Master Lease. Rent for such extension shall be at $0.37/sq. ft. or 90% of the market rate, whichever is greater. Sublessee shall provide Sublessor with no more than 180 days written notice of Sublessee's desire to exercise the option to extend. 23. EARLY TERMINATION OF THE RECEIVERSHIP ESTATE'S RESPONSIBILITY The term of Sublease shall be for sixty (60) months. The Receivership Estate of Puroflow, Inc. and its Court Appointed Receiver agree to guarantee payment of the first six months rent. If at any time after the end of the six month Puroflow, Incorporated or the Receivership Estate fails to make payment of the rent, the Receivership Estate shall immediately reimburse Kaiser Aerospace & Electronics one-half of the Relocation/Tenant improvement allowance. Such reimbursement shall be one-half the amount actually expended for relocation and tenant improvements, but in no event shall the reimbursement exceed $30,000.00. Upon repayment of the aforementioned Relocation/tenant Improvement allowance this Sublease shall remain in full force and effect except that the guarantee provided by the Receivership Estate shall terminate. 24. FINANCIAL REPORTING Sublessee, subject to appropriate non-disclosure terms, will provide Sublessor with periodic financial performance data. Such data shall include but not be limited to, current balance sheets, projected bookings and backlog data and any such data necessary to evidence the ongoing financial performance and stability of Sublessee's ability to satisfy its obligations hereunder. Executed at: KAISER MARQUARDT /s/ Ron McMahon ------------------------------ -------------------------------- on: July 31, 1995 By: Ron McMahon ---------------------------------------- ----------------------------- address: 16555 Saticoy Street, Its: President ----------------------------------- ---------------------------- Van Nuys, CA 91406 "Sublessor" (Corporate Seal) - ------------------------------------------- Executed at: PUROFLOW /s/ Michael Figoff ------------------------------ -------------------------------- on: July 27, 1995 By: Michael Figoff ---------------------------------------- ----------------------------- address: 1631 Tenth St. Its: President ----------------------------------- ---------------------------- Santa Monica, CA 90404 "Sublessee" (Corporate Seal) - ------------------------------------------- Executed at: THE MARQUARDT COMPANY /s/ James P. Shinehouse ------------------------------ -------------------------------- on: February 8, 1996 By: James P. Shinehouse ---------------------------------------- ----------------------------- address: 3725 Electronics Way, Its: VP Treasurer ----------------------------------- ---------------------------- P.O. Box 3025 "Master Lessor" (Corporate Seal) - ------------------------------------------- Lancaster, PA 17604-3025 - ------------------------------------------- Executed at: KAISER AEROSPACE & ELEC. /s/ John Chapin ------------------------------ -------------------------------- on: August 3, 1995 By: John Chapin ---------------------------------------- ----------------------------- address: 950 Tower Lane Its: Vice President ----------------------------------- ---------------------------- Foster City, CA "Guarantors" - ------------------------------------------- EX-22 6 EXHIBIT 22 EXHIBIT 22 PUROFLOW INCORPORATED SUBSIDIARIES OF THE COMPANY STATE OF INCORPORATION ACTIVE: Puroflow Corporation New York Michigan Dynamics, Inc. California INACTIVE: Ultra Dynamics Corporation Delaware Decca Valves Corporation California EX-27 7 EXHIBIT 27 (FDS)
5 YEAR JAN-31-1996 FEB-01-1995 JAN-31-1996 0 0 1,688,495 (140,000) 1,239,467 2,865,493 3,154,264 (2,134,836) 3,961,947 2,878,766 0 0 0 3,635,406 (2,552,225) 3,961,947 8,815,889 8,815,889 5,957,007 5,957,007 1,701,611 104,205 282,132 875,139 0 875,139 22,980 0 0 898,119 .19 .19
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