-----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, JrcTxTVtmFmQINJ3dXPtr5HAHZMzEAzOO1eodtUT0GwvMQTHilm3V794+VRbqAe9 wMA3mzdkc2KpczKm11JL6A== 0000912057-97-007216.txt : 19970228 0000912057-97-007216.hdr.sgml : 19970228 ACCESSION NUMBER: 0000912057-97-007216 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960131 FILED AS OF DATE: 19970227 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/A SEC ACT: SEC FILE NUMBER: 000-05622 FILM NUMBER: 97546012 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/A 1 FORM 10-K/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A AMENDMENT NO. 1 ( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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. EXPLANATORY NOTE: The purpose of this Form 10-K/A is to amend Item 8 of the registrant's Form 10-K for the fiscal year ended January 31, 1996 to include the Independent Auditors' Reports which were unintentionally omitted in the original filing of such Form 10-K. 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' reports beginning on page 15 of this report on Form 10-K. INDEPENDENT AUDITORS' REPORT To the Stockholders of Puroflow Incorporated We have audited the accompanying balance sheet of Puroflow Incorporated and subsidiaries at January 31, 1996, and the related statement of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The 1995 financial statements were audited by other auditors whose report dated May 25, 1995, on those statements included an explanatory paragraph describing conditions that raised substantial doubt about the Company's ability to continue as a going concern. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to in the first paragraph above present fairly, in all material respects, the financial position of Puroflow Incorporated and subsidiaries at January 31, 1996, and the related statements of operations, stockholders' equity and cash flows for the year then ended, in conformity with generally accepted accounting principles. Rose, Snyder & Jacobs A Corporation of Certified Public Accountants Burbank, California March 28, 1996 15 INDEPENDENT AUDITORS' REPORT To the Stockholders of Puroflow Incorporated: We have audited the accompanying consolidated balance sheets of Puroflow Incorporated and its subsidiaries as of January 31, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended January 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Puroflow Incorporated and its subsidiaries as of January 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 1995 in conformity with generally accepted accounting principles. The accompanying consolidated financial statement have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company incurred a net loss of $2,372,156, $565,926 and $2,674,174 for the years ended January 31, 1995, 1994 and 1993, respectively, and has a working capital deficiency of $1,213,876 at January 31, 1995. Additionally, on May 1, 1995, the Company entered into a stipulation for the appointment of a receiver resulting from a lawsuit filed by the Company's bank due to the Company's default on its obligations under various credit agreements with the bank. Hence, the Company continues to be without an adequate long-term financial arrangement. The Company's continuation as a going concern is dependent upon its ability to satisfactorily resolve the litigation with its bank, obtain a long-term financing arrangement, generate sufficient cash flow to meet its obligations on a timely basis and ultimately return to profitable operations. The absence of the foregoing raises a substantial doubt about the Company's ability to continue as a going concern. Management's plans concerning these matters are also discussed in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ DELOITTE & TOUCHE LLP - ----------------------------------- Los Angeles, California May 25, 1995 16 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 balances into 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 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 H. Figoff --------------------------------- Michael H. Figoff Date: February 27, 1997 Chief Executive Officer and President -----END PRIVACY-ENHANCED MESSAGE-----