-----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, Nc2p/aHSPTzM7ev09EnDmkpWAUECn5KQMBUGj9DOw20xNppiS0Nn75aYe5IKwcFU FwCXloX5xxoHZcxM60XYyA== 0001047469-98-016957.txt : 19980430 0001047469-98-016957.hdr.sgml : 19980430 ACCESSION NUMBER: 0001047469-98-016957 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980429 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: 10KSB SEC ACT: SEC FILE NUMBER: 000-05622 FILM NUMBER: 98604007 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 10KSB 1 10KSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB ( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM TO Commission File No. 0-5622 PUROFLOW INCORPORATED ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 13-1947195 - ------------------------------- ------------------------------------ (State or other jurisdiction 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-KSB or any amendment to this Form 10-KSB. [X] The aggregate market value of the Common Stock held by non-affiliates of the Registrant was approximately $3,995,971 as of March 31, 1998, based upon the closing price on the NASDAQ Electronic Bulletin Board System reported for such date. Shares of Common Stock held by each Officer and Director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such person may under certain circumstances be deemed to be affiliates. The determination of an affiliate status is not necessarily a conclusive determination for other purposes. Number of shares of Common Stock outstanding as of March 31, 1998: 7,108,821 The Registrant's Proxy Statement relating to the Annual Meeting of Stockholders to be held on July 9, 1998 is hereby incorporated by reference into Part III of this Form 10-KSB. PUROFLOW INCORPORATED 1998 FORM 10-KSB ANNUAL REPORT TABLE OF CONTENTS
PAGE PART I ITEM 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . 1 ITEM 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . 4 ITEM 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 5 ITEM 4. Submission of Matters to Vote of Security Holders . . . . . 5 PART II ITEM 5. Market for Registrant's Common Equity and Related Shareholder Matters. . . . . . . . . . . . . . . . 6 ITEM 6. Selected Consolidated Financial Data. . . . . . . . . . . . 7 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . 8 ITEM 8. Financial Statements and Supplementary Data . . . . . . . . 10 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . 10 PART III ITEM 10. Directors and Executive Officers of the Registrant. . . . . 10 ITEM 11. Executive Compensation. . . . . . . . . . . . . . . . . . . 10 ITEM 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . . 11 ITEM 13. Certain Relationships and Related Transactions. . . . . . . 11 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . 11 Signatures. . . . . . . . . . . . . . . . . . . . . . . . . 12
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. 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. Typically, the terms of these distribution agreements provide that the distributor will act as the exclusive distributor for specific parts manufactured by the Company for a period between 3 to 5 years with minimum monthly requirements for number and dollar amount of units purchased. The purchase price of the parts is subject to mutual agreement of the parties and may be adjusted to take into account inflation, market 1 changes, changes in costs of production and sales, and other factors. Such agreements may be terminated by the Company if the distributor does not comply with these purchase requirements or by either party if the other party is rendered insolvent. The Company markets its high performance filters through manufacturers representatives and, to a lesser extent, the Company's own sales force. The Company has fifty (50) approved units and thirty-seven (37) units, in various stages of development, pending Federal Aviation Administration approval. 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 11% and 7%, respectively, of net sales for fiscal 1998 and 1997. 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 26% of the Company's net sales during these periods. COMPETITIVE CONDITIONS A broad range of companies produce products or are capable of producing products that compete with products manufactured by the Company in its various markets. Many of these companies have significantly greater financial resources than the Company. Morton International, Inc. ("MII") and other major domestic airbag manufacturers produce their airbag filter components in-house, and TRW Vehicle Safety Systems, Inc., a significant global manufacturer of airbag inflator assemblies ("TRW"), produces passenger side airbag filters for its own use. Other companies may choose to enter the automotive airbag filter market. There is no assurance that the Company's airbag manufacturer customers will not manufacture all their own filters or that the Company will be able to effectively compete in the future against independent manufacturers of airbag filters or of the Company's other products. PRODUCT WARRANTIES In all product lines, the Company provides standard commercial warranties, consistent with its products and industry. Although claims under product warranties have been minimal during the past five years, no assurance can be given that such claims will not increase in the future. RESEARCH AND DEVELOPMENT In fiscal 1998 and fiscal 1997, the Company incurred research and development expenditures of approximately $124,000 and $6,500, 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. 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. 2 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 68 percent of both sales and profit in FY 1998. The Company has fifty (50) units approved by the FAA and thirty-seven (37) units, in various stages of development, pending FAA approval. 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. This facility does not handle or store hazardous substances and thus does not incur significant costs relating to compliance with environmental laws. 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 four customers identified below represented approximately 49% of net sales during fiscal year 1998 and 58% of net sales during fiscal year 1997. For fiscal year 1998 and 1997, sales to Breed Automotive Technologies, Inc. were $1,723,463 and $2,200,127, respectively. Sales to Inflation Systems Inc. were $842,921 and $1,438,355, respectively. Sales to DFAS were $954,234 and $473,863, respectively, and sales to Norcross Air, Inc. were $656,901 and $818,372, respectively. These customers purchased airbag filters and filters for commercial and aerospace applications. The loss of any of these customers would have a material adverse effect on the automotive airbag filter or the high performance filter segments of the Company's business. During fiscal 1998, no other customer accounted for more than 10% of net sales. BACKLOG As of February 28, 1998 and February 28, 1997, the Company had a backlog of approximately $6,470,000 and $5,800,000, respectively. Approximately $4,000,000 of the Company's backlog at February 28, 1998 is scheduled to be shipped in the current fiscal year. The backlog figures include firm purchase orders and, with respect to airbag filters, six-month planning requirements prepared by the Company's customers. As is generally the case in the automotive industry, the Company's airbag filter customers provide the Company, on a monthly basis, with firm commitment purchase orders for the upcoming three months and their best estimate, for planning purposes, of their requirements for the following six-month period. These rolling nine-month statements of firm commitment purchase orders and planning requirements are revised and updated each month. The Company's customer purchase orders may be revised or canceled by the customer, subject to reimbursement of certain costs in the case of cancellation of scheduled shipments or other commitments. The Company's contracts (direct or indirect), with respect to United States government agencies, are subject to unilateral termination at the convenience of the government, subject only to the reimbursement of certain costs plus a termination fee. REGULATION Demand for the Company's airbag filters was initially affected by federal regulations requiring installation of 3 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, 1998, the Company had 71 full-time employees, including 3 employed in Sales and Marketing, 15 employed in Engineering and Quality Control, and 43 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 which was successfully defended by the Company. The Company has product liability insurance, covering in such amounts and against such risk as Management believes advisable, in light of the Company's business and the terms and cost of such insurance. There is no assurance that claims will not arise in the future in excess of such insurance or that the Company will maintain the same level of insurance coverage. ITEM 2. PROPERTIES The following table sets forth information as to the location and general character of the facility of the Registrant:
LOCATION PRINCIPAL USE APPROXIMATE SQ. FT. LEASE EXP. DATE - ---------------------- ----------------------------------------- --------------------- ----------------- 16559 Saticoy Street Headquarters and manufacturing facility 50,000 August 30, 2000 Van Nuys, CA 91406 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. 4 ITEM 3. PENDING LEGAL PROCEEDINGS 1) 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 chief executive officer of the Company, which note was executed in exchange for goods and services delivered by the plaintiff. The Company disputes that any amounts are due under the note as a result of Company's right of set-off. The judgment was obtained without due notice to the Company. The Receiver 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 America Corporation. The confession of judgment was vacated by order or the Circuit Court for Baltimore County on June 24, 1996. The Company filed an amended counterclaim and third party complaint on August 12, 1996 against Memtec America Corporation and four former employees of the Company now employed by Memtec America Corporation. The counter-claim against the four former employees was dismissed for jurisdictional purposes. The Company now is in the process of securing positive depositions from key witnesses to support the amended counter-claim, and management believes the Company will recover a reasonable award and legal fees. Although the Company cannot determine the potential liability which may result from the foregoing, it 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 operation. See "Financial Statements - Note 7". At January 31, 1998, an accrual in the amount of approximately $256,000 has been recorded for judgments against the Company for lawsuits that have concluded. The Company is not a party, nor are its properties subject to, any material pending legal proceedings other than ordinary routine litigation incidental to the Company's business and the matters described above. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Registrant did not submit any matters to a vote of security holders during the fourth quarter of the fiscal year covered by this report. 5 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 BID LOW BID -------- ------- Fiscal Year Ended January 31, 1997 1st Quarter . . . . . . . . . . . . . . 1 3/8 1 3/8 2nd Quarter . . . . . . . . . . . . . . 1 5/8 1 3/8 3rd Quarter . . . . . . . . . . . . . . 1 1/4 1 1/4 4th Quarter . . . . . . . . . . . . . . 1 15/16 Fiscal Year Ended January 31, 1998 1st Quarter . . . . . . . . . . . . . . .9211 .8125 2nd Quarter . . . . . . . . . . . . . .8010 .7237 3rd Quarter . . . . . . . . . . . . . . .8835 .8158 4th Quarter . . . . . . . . . . . . . . .7942 .7380 Fiscal Year Ended January 31, 1999 Two Months Ending March 30, 1998 . . . . .7230 .6563
(1) The Common Stock of the Company was delisted by NASDAQ on June 9, 1995, as a result of the Company not meeting the minimum capital requirement. Trading in the Common Stock resumed on November 17, 1995, with a listing on the Bulletin Board System. On March 31, 1998, the closing bid price for the Company's Common Stock on the Bulletin Board System was $.6563 per share. As of March 31, 1998, the Company had approximately 289 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. 6 ITEM 6. SELECTED FINANCIAL DATA
Year Ended January 31, ------------------------------------------------------------------- 1994 1995 1996 1997 1998 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA (1): Net Sales $ 5,908 $ 9,044 $ 8,816 $ 8,458 $ 8,597 Cost of goods sold 5,137 7,644 5,957 5,888 6,161 -------- -------- -------- -------- -------- Gross profit 771 1,400 2,859 2,570 2,436 Selling, general & administrative expense 1,313 1,629 1,443 1,446 1,599 -------- -------- -------- -------- -------- Operating income (loss) (542) (229) 1,416 1,124 837 Other income (expense) -0- -0- (282) (61) 17 Non-recurring expenses (2) (213) (292) (253) (394) (554) -------- -------- -------- -------- -------- Income (loss) from continuing operations before income taxes (755) (521) 881 669 300 Provision (benefit) for income taxes -0- 6 6 6 192 -------- -------- -------- -------- -------- Income (loss) from continuing operations (755) (527) 875 663 492 Income (loss) from discontinued operations 189 (1,845) 23 -0- -0- -------- -------- -------- -------- -------- Net income (loss) $ (566) $ (2,372) $ 898 $ 663 $ 492 Net income (loss) per common share: From continuing operations $ (.20) $ (.12) $ 0.19 $ 0.11 $ 0.07 From discontinued operations .05 (.41) -0- 0.11 -0- -------- -------- -------- -------- -------- $ (.15) $ (.53) $ 0.19 $ 0.11 $ 0.07 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Weighted average number of shares 3,724 4,509 4,632 6,107 7,248
YEAR ENDED JANUARY 31, ------------------------------------------------------------------- 1994 1995 1996 1997 1998 -------- -------- -------- -------- -------- (IN THOUSANDS) BALANCE SHEET DATA: Working Capital $ 823 $ (1,214) $ (13) $ 2,518 $ 2,710 Total Assets 7,329 4,721 3,962 4,094 5,046 Long-Term Debt 108 71 -0- -0- 2 Stockholders' Equity 2,307 185 1,083 3,489 3,981
(1) In November 1994, the Company sold its ultraviolet water product subsidiary, Ultra Dynamics Corporation. This subsidiary has been accounted for as a discontinued operation. In the year ended January 31, 1996, the Company sold its valve product subsidiary Decca Valves Corporation and shut down operation of its Michigan Dynamics subsidiary. These two subsidiaries have been accounted for as discontinued operations. The selected data related to the years ended January 31, 1996, 1995 and 1994 have been adjusted to reflect the discontinued operations, prior years have not been adjusted. (2) Non-recurring expenses are comprised of a one-time fee of $89,834 charged by the Bank during August 1996, and the monthly administrative fees charged by the Receiver during the receivership period. The Receivership Estate began on May 1, 1995 and ended on August 22, 1996. The year ended January 31, 1998 represents litigation settlements and related litigation fees. 7 ITEM 7. MANAGEMENT'S DISCUSSION, ANALYSIS OF FINANCIAL CONDITION, AND RESULTS OF OPERATIONS GENERAL The Company was incorporated in Delaware in 1961, under the name Ultra Dynamics Corporation, and was originally engaged in the water purification business. In November 1968, the Company organized Puroflow Corporation to acquire all of the assets and liabilities of a business established in 1961, under the name Aerospace Components Corporation, and was primarily engaged in the manufacture of high performance filters for the aerospace industry. In 1980, the Company acquired Decca Valves Corporation, a corporation engaged in the manufacture of fluid control valves. The Company changed its name to Puroflow Incorporated in 1983. The Company acts as the holding company, directly or indirectly, for Puroflow Corporation and Michigan Dynamics, Inc. In fiscal 1989, the Company began designing, testing and producing filters for automotive airbag systems, primarily as an outgrowth of its expertise in aerospace filtration. During September 1992, the Company disposed of its CPI division, including CPI assets it had acquired from MDI in June 1992. During November 1994, the Company settled the litigation with Glasco Ultraviolet Systems Inc. and disposed of the operating assets of Ultra Dynamics Corporation, its ultraviolet water products subsidiary. The Company'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, 1997 and 1998 are as follows:
YEAR ENDED JANUARY 31, (in thousands) ------------------------------- 1997 1998 --------- ---------- Net Sales: Airbag Filters $ 3,639 $ 2,766 High Performance Filters 4,819 5,831 --------- ---------- TOTAL $ 8,458 $ 8,597 --------- ---------- --------- ----------
8 RESULTS OF OPERATIONS The following table reflects the percentage relationship to net sales of certain items included in the Company's statement of operations for each of the two years in the period ended January 31, 1998.
YEAR ENDED JANUARY 31, ---------------------- 1997 1998 ----- ----- (in thousands) Net Sales: 100.0% 100.0% ----- ----- Cost and expenses: Cost of goods sold 69.6 71.7 Selling, general and administrative 17.1 18.6 Other (income) expense (.1) (.2) Non-recurring expenses 4.7 6.4 Interest expense .8 -0- ----- ----- Income (loss) from continuing operations before income taxes 7.9 3.5 Provision for income taxes (.1) (2.2) Income (loss) from discontinued operations -0- -0- ----- ----- Net income (loss) 7.8% 5.7% ----- ----- ----- -----
COMPARISON OF THE FISCAL YEARS ENDED JANUARY 31, 1998 AND 1997 Net sales in fiscal 1998 increased 1.6%, compared to fiscal 1997, due to sales of high performance filters which increased from the current fiscal 1998 to $5,831,000 from $4,819,000, due primarily to continued concentration on expanding the PMA program. The Company has obtained FAA approval on fifty (50) part numbers and there are thirty-seven (37) applications pending for parts qualification as of January 31, 1998. Sales of airbags decreased in fiscal 1998 from $3,639,000 to $2,766,000 due to a phase-out of the old program of azide filters and the slow ramp up of the non-azide passenger and side impact application. Gross profit as a percentage of net sales were 28.3% for fiscal 1998, compared to 30.4% in fiscal 1997. The reduction in gross profit was due to the increase in material costs and price adjustments for airbag business. For the year ended 1998 and 1997, selling, general and administrative expenses were $1,599,000 and $1,440,000, respectively, due to increased costs for research and development of approximately $118,000. Interest expense decreased by $207,000 in fiscal 1997, due to elimination of bank debt in the middle of fiscal 1997. Non-recurring expenses of $554,000 and $394,000 in fiscal 1998 and 1997, respectively, was a direct result of the Receivership terminated in fiscal 1997, and settlement of various litigation actions in fiscal 1998. A provision for income taxes of $5,600 for minimum franchise taxes to the State of California was recorded. No additional provision is necessary due to the Company's federal net operating loss carryforwards of approximately $2,100,000 for Federal Income Tax purposes and $2,760,000 for California State Income Tax purposes at January 31, 1998. Such operating loss carryforwards expire from 2008 to 2011. 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 1998, cash provided by operating activities was 656,479, consisting of $491,900 from net income, non-cash operating income and expenses of $209,000, an increase in inventories, prepaid expenses, and a reduction in accounts payable and accrued expenses offset by a reduction in accounts receivable. 9 The Company's working capital was $2,710,000 and $2,518,000 as of January 31, 1998 and 1997 respectively. The current ratio is 4.2 at January 31, 1998 compared to 5.2 at January 31, 1997 provided for a change in the Company's ability to pay its obligations. Cash used in investing activities was used to purchase plant equipment of $461,207, offset by collection on notes receivable of $40,884. On March 26, 1996, the Company entered into an agreement with Toluca Pacific Securities Corporation ("TPSC") to raise equity through a private placement offering. On July 24, 1996, such offering was completed. The Company sold 2,530,000 shares of Common Stock and received $1,742,900 of net proceeds, including $1,300 of interest. The purchase price of the Common Stock was $.80 per share. From the gross proceeds, TPSC received a fee of $202,400. TPSC (or its designees) also received 24-month options to purchase 177,100 common shares, at a price of $.80 per share. Proceeds received by the Company were used to retire bank debt and other pre-Receiver debt. Pursuant to the terms of a Registration Rights Agreement, the Company is obligated to register the Securities under the Securities Act. On August 13, 1996, all bank debt owed by the Company was repaid. On August 22, 1996, the Receivership Estate was terminated by order of the Superior Court of the State of California and control of the Company was returned to the Board of Directors and management. Additionally, the Company entered into a new banking relationship. The Company obtained a $750,000 revolving credit line. This credit line bears interest at the rate of prime plus 1.5% per annum, and is secured primarily by the Company's accounts receivable and inventories. The Company also obtained a $300,000, non-revolving equipment acquisition credit line, which bears interest at the rate of prime plus 1.75% per annum, and is secured by all of the Company's assets. Both of these loans are cross-collateralized. The terms of these loan agreements contain certain restrictive covenants, including maintenance of (i) aggregate net worth (plus subordinated debt, less any intangible assets and less any amount due from shareholders, officers and affiliates of the Company) of not less than $3,250,000, (ii) a ratio of current and non-current liabilities (less subordinated debt) to net worth of not more than 0.50 to 1.00, (iii) working capital of not less than $2,000,000, and (iv) debt service coverage ratio of not less than 1.75 to 1.00. The Company is currently in compliance with the foregoing covenants. EFFECTS OF INFLATION ON BUSINESS Management believes that inflation has not had a material effect on the Company's operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information called for by this item is hereby incorporated by reference from the Registrant's financial statements and independent auditors' report beginning on page F-1 of this report on Form 10-KSB. ITEM 9. DISAGREEMENT ON ACCOUNTING AND FINANCIAL DISCLOSURES None. 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)." 10 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." 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-KSB starting on page F-1 hereof: Independent Auditors' Reports. Consolidated Balance Sheets at January 31, 1998 and 1997. Consolidated Statements of Operations for each of the two years in the period ended January 31, 1998. Consolidated Statements of Stockholders' Equity for each of the two years in the period ended January 31, 1998. Consolidated Statements of Cash Flows for each of the two years in the period ended January 31, 1998. 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 July 15, 1997, Registrant reported an extension of the Bank loan agreement with California United Bank for one (1) year expiring June 3, 1998. On October 8, 1997, Registrant reported a settlement with Reliable Metallurgical Processes Inc. of all claims between the parties except for the fixing of legal fees, which was resolved on March 11, 1998. On October 10, 1997, Registrant reported the resignation of Leo Unger as Director. On October 21, 1997, Registrant reported the receipt of two (2) contracts covering airbag components, valued in excess of 4.8 million with performance due during fiscal January 31, 1999. 11 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 H. Figoff April 27, 1998 -------------------------------- Michael H. Figoff President/Chief Executive Officer Director
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 27, 1998 ------------------------------------- Michael H. Figoff President/Chief Executive Officer Director By: /s/Reuben M. Siwek April 27, 1998 ------------------------------------- Reuben M. Siwek Chairman of the Board General Counsel By: /s/Robert A. Smith April 27, 1998 ------------------------------------- Robert A. Smith Vice Chairman of the Board By: /s/Tracy K. Pugmire April 27, 1998 ------------------------------------- Dr. Tracy K. Pugmire Director
12 INDEPENDENT AUDITORS' REPORT To the Stockholders of Puroflow Incorporated We have audited the accompanying consolidated balance sheets of Puroflow Incorporated (a Delaware corporation), and subsidiaries at January 31, 1998 and 1997, and the related statements of operations, stockholders' equity and cash flows for the years then ended. 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 audits 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 above present fairly, in all material respects, the financial position of Puroflow Incorporated and Subsidiaries at January 31, 1998 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Rose, Snyder & Jacobs A Corporation of Certified Public Accountants Burbank, California March 31, 1998 F-1 PUROFLOW INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JANUARY 31, 1998 AND 1997
1998 1997 ---------- ----------- ASSETS CURRENT ASSETS: Cash, note 9 $ 361,523 $ 164,415 Accounts receivable Net of allowance for doubtful accounts of $23,523 (January 31, 1998) and $49,504 (January 31, 1997), Note 3 1,602,267 1,462,170 Inventories, Note 3 1,566,865 1,398,561 Current portion of note receivable, Note 2 40,889 Prepaid expenses and deposits 76,331 57,595 ---------- ----------- TOTAL CURRENT ASSETS 3,606,986 3,123,630 ---------- ----------- PROPERTY AND EQUIPMENT - NOTE 3 Leasehold improvements 26,980 11,660 Machinery and equipment 3,491,625 2,988,092 Automobile 1,679 1,679 Tooling and dies 303,399 262,480 Construction in progress 44,977 143,542 ---------- ----------- 3,868,660 3,407,453 Less accumulated depreciation and amortization 2,750,092 2,452,888 ---------- ----------- NET PROPERTY AND EQUIPMENT 1,118,568 954,565 ---------- ----------- OTHER ASSETS, NOTE 6 320,750 16,750 ---------- ----------- TOTAL ASSETS $5,046,304 $4,094,945 ---------- ----------- ---------- ----------- 1998 1997 ---------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt, Note 4 $ 168,034 $ 207,087 Accounts payable 467,131 212,397 Accrued expenses 430,112 186,395 ---------- ----------- TOTAL CURRENT LIABILITIES 1,065,277 605,879 ---------- ----------- COMMITMENTS AND CONTINGENCIES NOTE 7 STOCKHOLDERS' EQUITY, NOTES 5 AND 10 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 7,108,821 shares at January 31, 1998 and 7,108,621 shares at January 31, 1997 430,579 430,579 Additional paid-in capital 4,947,727 4,947,727 Accumulated deficit (1,397,279) (1,889,240) ---------- ----------- TOTAL STOCKHOLDERS' EQUITY 3,981,027 3,489,066 ---------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,046,304 $4,094,945 ---------- ----------- ---------- -----------
See independent auditors' report and notes to financial statements. F-2 PUROFLOW INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JANUARY 31, 1998 AND 1997
YEARS ENDED JANUARY 31, 1998 1997 ---------- --------- Net sales $8,597,340 $8,458,454 Cost of goods sold 6,161,016 5,888,825 ---------- ---------- Gross profit 2,436,324 2,569,629 Selling, general and administrative expenses 1,599,175 1,445,626 ---------- ---------- Operating income 837,149 1,124,003 Other income and (expense) Other income 17,498 10,173 Interest expense (71,407) Nonrecurring expenses, Note 7 (554,117) (394,184) ---------- ---------- Income before tax 300,530 668,585 Income tax (benefit) expense, Note 6 (191,431) 5,600 ---------- ---------- Net income $ 491,961 $ 662,985 ---------- ---------- ---------- ---------- Basic earnings per share, Note 13 $ 0.07 $ 0.11 ---------- ---------- ---------- ---------- Diluted earnings per share, Note 13 $ 0.07 $ 0.11 ---------- ---------- ---------- ---------- Weighted average number of shares, basic 7,108,821 5,843,521 ---------- ---------- ---------- ---------- Weighted average number of shares, diluted 7,248,268 6,107,812 ---------- ---------- ---------- ----------
See independent auditors' report and notes to financial statements. F-3 PUROFLOW INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JANUARY 31, 1998 AND 1997
COMMON ADDITIONAL RETAINED STOCK PAID-IN EARNINGS PAR VALUE CAPITAL TOTAL TOTAL ----------- ------------ ------------- ------------ Balance at January 31, 1996 $ 405,279 $ 3,230,127 $ (2,552,225) $ 1,083,181 Sale of common stock 25,300 1,717,600 1,742,900 Net income 662,985 662,985 ----------- ------------ ------------- ------------ Balance at January 31, 1997 430,579 4,947,727 (1,889,240) 3,489,066 Net income 491,961 491,961 ----------- ------------ ------------- ------------ Balance at January 31, 1998 $ 430,579 $ 4,947,727 $ (1,397,279) $ 3,981,027 ----------- ------------ ------------- ------------ ----------- ------------ ------------- ------------
See independent auditors' report and notes to financial statements. F-4 PUROFLOW INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JANUARY 31, 1998 AND 1997
YEARS ENDED JANUARY 31, 1998 1997 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 491,961 $ 662,985 Adjustments to reconcile net income to net cash provided by/used in operating activities: Depreciation and amortization 297,204 318,052 Provision for losses on accounts receivable (20,000) Inventory valuation allowance 35,150 Gain on vendor notes settlements (124,482) Changes in operating assets and liabilities: Accounts receivable (140,097) 106,325 Inventories (168,304) (194,244) Prepaid expenses and other assets (322,736) (23,895) Accounts payable and accrued expenses 498,451 (421,073) ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES 656,479 338,818 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (461,207) (253,189) Payments received on notes receivable 40,889 63,218 ---------- ---------- NET CASH USED IN OPERATING ACTIVITIES (420,318) (189,971) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Bank overdraft (59,363) Proceeds from sale of common stock 1,742,900 Net borrowing (repayments) under line of credit (235,857) Principal payments on long-term debt (39,053) (1,432,112) ---------- ---------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (39,053) 15,568 ---------- ---------- NET INCREASE IN CASH 197,108 164,415 CASH AT BEGINNING OF PERIOD 164,415 -0- ---------- ---------- CASH AT END OF PERIOD $ 361,523 $ 164,415 ---------- ---------- ---------- ----------
See independent auditors' report and notes to financial statements. F-5 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Puroflow Incorporated was organized on May 15, 1961 under the laws of the State of Delaware. Puroflow Incorporated and its wholly owned subsidiaries (together referred therein as the "Company") specializes primarily in designing and manufacturing automotive airbag filters and high performance filters. The Company is located in Van Nuys, California, and does business with customers throughout the world, most of which are located in the United States. RECEIVERSHIP 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 assumed jurisdiction over all the Company's assets, which were in the possession fo the Receiver's estate, and held for the benefit of all creditors and shareholders. The Receiver was not obligated to pay liabilities that existed prior to their appointment; however, the Receiver could elect to pay certain of those liabilities with the leave of the Court. On August 13, 1996, all bank debt owed by the Company was repaid. On August 22, 1996, the Receivership Estate was terminated by order of the Superior Court of the State of California and control of the Company was returned to the Board of Directors and Management. 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. Only Puroflow Corporation is presently active. INVENTORIES Inventories are stated at the lower of cost of market on a first-in, first-out basis, and consist of the following items:
JANUARY 31, JANUARY 31, 1998 1997 ---------- ------------ Raw materials and purchased parts $ 790,981 $ 729,740 Work in progress 458,040 247,868 Finished goods 317,844 420,953 ---------- ------------ Total $1,566,865 $ 1,398,561 ---------- ------------ ---------- ------------
PROPERTY AND EQUIPMENT Depreciation and amortization of property and equipment is computed using the straight line method based upon the estimated useful lives of the assets, except for leasehold improvements which are amortized over the shorter of the life of the lease or the improvements. The estimated useful lives are as follows:
Classification Life ----------------------- ---------- Machinery and equipment 5-15 years Automobile 5 years Tooling and dies 5 years Leasehold improvements 5 years
See independent auditors' report. F-6 REVENUE RECOGNITION Revenues are recognized when finished products are shipped. INCOME TAXES The Company complies with Financial Accounting Standards No. 109, Accounting for Income Taxes. CASH FLOWS For the purpose of the statement of cash flows, the Company considers cash equivalents to include cash only and to exclude any near-cash short-term investments. ESTIMATES Generally accepted accounting principles require that financial statements include estimates by management in the valuation of certain assets and liabilities. The Company's management estimates the reserve for doubtful accounts, the reserve for obsolete inventory, the useful lives of property and equipment and the valuation allowance for deferred tax assets. Management uses its historical record and knowledge of its business in making these estimates. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenditures are expensed as incurred and are approximately as follows for the years ended January 31,
1998 1997 --------- ------- $ 124,300 $ 6,500 --------- -------
NON-RECURRING EXPENSES For the year ended January 31, 1998, non-recurring expenses are comprised of legal settlements of several lawsuits for which management believes that there will be no additional liability with regard to these settled lawsuits. For the year ended January 31, 1997, non-recurring expenses are comprised of a one-time fee of $89,834 charged by the Company's former bank for its costs related to the Receivership during August 1996, and the monthly administrative fees charged by the Receiver during the receivership period. Administrative fees were billed monthly by the Receiver for its role as monitor for the bank of all of the Company's cash disbursements and receipts and for its handling of all court reports, filings and related Receivership matters. The Receivership Estate began on May 1, 1995 and ended August 22, 1996 (see note 11). EARNINGS PER SHARE In the first quarter of the year ended January 31, 1998, the Company adopted Statement of Financial Accounting Standards No. 128, 'Earnings per Share" (FAS 128), which supersedes Accounting Principles Board Opinion No. 15. Under FAS 128, earnings per common share is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock. Prior-period amounts have been restated, where appropriate, to conform to the requirements of FAS 128 (see Note 14). See independent auditors' report. F-7 NOTE 2 - NOTE RECEIVABLE
JANUARY 31, JANUARY 31, 1998 1997 ---------- -------------- 8 1/2% note receivable, monthly principal and interest payments of $4,250, secured by equipment of the debtor, maturing in November, 1997 $ -0- $ 40,889 Less current portion $ -0- 40,889 ----- ----------- $ -0- $ -0- ----- ----------- ----- -----------
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 was secured by accounts receivable, inventories and a first priority interest in all unencumbered assets, and matured in June, 1996. In August 1996, the outstanding balance was repaid in full. In August 1996, the Company entered a new banking relationship. The Company obtained a $750,000 revolving credit line. This credit line bears interest at the rate of prime plus 1.5% per annum, and is secured primarily by the Company's accounts receivable and inventories. The Company also obtained a $300,000 non-revolving equipment acquisition credit line, which bears interest at the rate of prime plus 1.75% per annum, and is secured by all the Company's assets. Both of these loans are cross-collateralized. The terms of these loan 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. NOTE 4 - LONG-TERM DEBT
JANUARY 31, JANUARY 31, 1998 1997 ---------- -------------- Notes payable to vendors bearing no interest maturing at various dates. 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. All the notes have been paid in full or written-off, except for one, which is in dispute (see Note 7). $ 168,034 $ 207,087 ---------- ------------ Less current portion 168,034 207,087 ---------- ------------ Long-term debt $ -0- $ -0- ---------- ------------ ---------- ------------
Interest paid in cash totaled as follows, for the years ended January 31,
1998 1997 --------- ------- $ -0- $ 87,017 ------ --------
See independent auditors' report. F-8 NOTE 5 - STOCK OPTION PLANS In the year ended January 31, 1996, the Company implemented stock option plans, which provide for the granting of options to certain officers and key employees, and Directors of the Company to purchase shares of its common stock within prescribed periods at prices that vary from $0.25 to $0.75. The weighted average fair value of options granted was $.33 per option. Fair value was determined by estimating the future sale of the underlying stock and discounting the gain on the options based on a risk free rate of return adjusted for equity risk. Share activity under the Company's stock option plans is summarized below:
SHARES ----------- Held at January 31, 1996 (outstanding and unexercised) 359,000 Granted -0- Exercised 100 Canceled or expired 9,000 ----------- Held at January 31, 1997 (outstanding and unexercised) 349,900 Granted 82,000 Exercised 200 Canceled or expired 40,000 ----------- Held at January 31, 1998 (outstanding and unexercised) 391,700 ----------- ----------- Shares exercisable, January 31, 1998 277,740 ----------- ----------- Shares available for future grants, end of period 108,000 ----------- ----------- Price range of options held, January 31, 1997 $.025-$.075 ----------- -----------
Statement of Financial Accounting No. 123, "Accounting for Stock-Based Compensation," requires companies to measure employee stock compensation plans based on the fair value method of accounting. However, the statement allows the alternative of continued use of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," with pro-forma disclosure of net income earnings per share determined as if the fair value based method had been applied in measuring compensation cost. The Company has elected the alternative of continued use of APB No. 25. No pro-forma disclosure is presented because the change in compensation cost is immaterial. See independent auditors' report. F-9 NOTE 6 - INCOME TAXES The following is a reconciliation of the tax provision, computed by applying the statutory federal income tax rates, and the income tax provision per the financial statements for the years ended January 31,
1998 1997 ------------ ----------- Income tax provision at 34% $ 102,180 $ 227,319 Meals and entertainment 2,370 2,048 Officer's life insurance 1,975 2,803 Excess book (tax) depreciation and amortization (3,247) 30,707 Change in allowance for doubtful accounts (8,833) (30,769) Write-off of obsolete inventory (61,426) (51,396) Reserve for legal matters (11,488) 9,059 Other 14,852 2,608 State taxes for prior year (1,904) (1,632) Benefit of net operating loss carryforwards (31,610) (190,747) ------------ ----------- Current federal tax provision 2,869 -0- Change in valuation allowance (200,000) -0- California franchise tax 5,700 5,600 ------------ ----------- Provision for income tax $ (191,431) $ 5,600 ------------ ----------- ------------ -----------
Deferred tax benefits reflect the impact of loss carryforwards and, temporary differences between the assets and liabilities recorded for financial reporting purposes and tax purposes. These differences are as follows:
1998 1997 ------------- ----------- Allowance for doubtful accounts $ 10,186 $ 16,831 Allowance for inventory obsolescence 21,650 78,426 Less valuation allowance (31,836) (95,257) ------------- ----------- Current $ -0- $ -0- ------------- ----------- ------------- ----------- Tax loss carryforward 1,133,165 927,362 Depreciation and amortization (73,892) (47,071) Reserve for legal matters -0- 43,059 Less valuation allowance (755,273) (923,350) ------------- ----------- Non current $ 304,000 $ -0- ------------- ----------- ------------- -----------
Realization of the deferred benefit is contingent upon future taxable earnings. The benefit recognized in the year ending January 31, 1998 represents the reduction of the valuation allowance from 100% to 69%, and is based on the Company's continuing profitability. The Company estimates it had available net operating loss carryforwards of approximately $2,760,000 for federal income tax purposes and $2,100,000 for state income tax purposes at January 31, 1998. The Company's net operating loss carryforwards expire from 2008 to 2011. See independent auditors' report. F-10 NOTE 7 - COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company is committed to minimum lease payments on a non-cancelable operating lease for its facility, which expires in August 2000, as follows:
Twelve Months Ending January 31, ----------------------------------------- 1999 $ 291,000 2000 291,000 2001 169,750 ---------- TOTAL $ 751,750 ---------- ----------
Total rental expense under the facility lease (including expenses) is as follows for the two years ending January 31,
1998 1997 ---------- ------------ $ 301,000 $ 305,000 ---------- ------------ ---------- ------------
LEGAL MATTERS The Company is party to various legal proceedings, several of which were settled in the year ended January 31, 1998. Except as noted below, the outcome of these proceedings and the potential liability 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. Additionally, the Company has filed counterclaims in one of the actions. At January 31, 1997, an accrual in the amount of approximately $242,000 had been recorded in anticipation of certain judgments against the Company related to certain matters. $168,034 of this accrual remains in notes payable to vendors at January 31, 1998 (see Note 4). 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 $72,801 and $62,033 for the years ended January 31, 1998 and 1997, respectively. NOTE 9 - CONCENTRATIONS MAJOR CUSTOMER INFORMATION Concentration of sales in the Company's four largest customers is as follows for the years ending January 31,
1998 1997 ----------- ------------ Breed Automotive Technologies $ 1,723,463 $ 2,200,127 Inflation Systems, Inc. 842,921 1,438,355 DFAS 954,239 473,863 Norcross Air, Inc. 656,901 818,372 ----------- ------------ $ 4,177,524 $ 4,930,717 ----------- ------------ ----------- ------------
See independent auditors' report. F-11 CONCENTRATION OF CREDIT RISK Concentration of receivables due from the Company's four largest customers is as follows at January 31,
1998 1997 ----------- ----------- Breed Automotive Technologies $ 103,242 $ 276,566 Inflation Systems, Inc. 352,307 369,073 DFAS 173,799 115,498 Norcross Air, Inc. 90,633 88,511 ----------- ----------- $ 719,981 $ 849,648 ----------- ----------- ----------- -----------
Breed Automotive Technologies and Inflation Systems, Inc. are U.S. based major suppliers to the automobile industry. Norcross Air, Inc., is a U.S. based distributor of spare parts to the airline industry, and DFAS is the U.S. government. The Company grants trade credit to these customers on an unsecured basis. MAJOR SUPPLIERS The Company is dependent on three suppliers for the majority of its material needs for automotive airbag filter production. CASH IN BANK At January 31, 1998, the Company had cash in a bank in excess of federally insured limits by $89,992. NOTE 10 - STOCKHOLDERS' EQUITY During the year ended January 31, 1997, the Company sold 2,530,000 shares of common stock and received $1,742,900 of net proceeds, including $1,300 of interest. The purchase price of the common stock was $.80 per share. From the gross proceeds, the underwriter received $202,400 as a fee. The Company incurred $80,000 of legal, printing and accounting costs related to registration of the shares. The underwriter also received a 24 month option to purchase 177,100 shares, at a price of $.80 per share. Proceeds received by the Company have been used to retire bank debt (See Note 11) and other pre-Receiver debt. NOTE 11 - CESSATION OF RECEIVERSHIP On August 13, 1996, all bank debt owed by the Company was repaid. On August 22, 1996, the Receivership Estate was terminated by order of the Superior Court of the State of California and control of the Company was returned to the Board of Directors and Management. NOTE 12 - VENDOR NOTE SETTLEMENTS The Company paid $352,915 as settlement for $477,397 of vendor notes in the year ended January 31, 1997. NOTE 13 - RECENT PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes standards for reporting and display of comprehensive income and its components in the financial statements. FAS 130 is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes are required. The adoption of this standard will have no impact on the Company's results of operations, financial position or cash flows. See independent auditors' report. F-12 In June 1997, the FASB issued Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (FAS 131). FAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. FAS 131 is effective for financial statements for fiscal years beginning after December 15, 1997. Financial statement disclosures for prior periods are required to be restated. The adoption of FAS 131 will have no impact on the Company's consolidated results of operations, financial position or cash flows. NOTE 14 - EARNINGS PER SHARE Reconciliation of basic and diluted earnings per share:
PER SHARE INCOME SHARES AMOUNT ---------- --------- ------------- YEAR ENDED JANUARY 31, 1998 Basic earnings per share $ 491,961 7,108,821 $ 0.07 ------------- ------------- EFFECT OF DILUTED SECURITIES Stock options 139,437 ---------- --------- Diluted earnings per share $ 491,961 7,248,258 $ 0.07 ---------- --------- ------------- ---------- --------- ------------- YEAR ENDED JANUARY 31, 1997 Basic earnings per share $ 662,985 5,843,521 $ 0.11 ------------- ------------- EFFECT OF DILUTED SECURITIES Stock options 264,291 ---------- --------- Diluted earnings per share $ 662,985 6,107,812 $ 0.11 ---------- --------- ------------- ---------- --------- -------------
Basic earnings per share is based on the weighted average number of shares outstanding. Diluted earnings per share include the effect of common stock equivalents when dilutive. NOTE 15 - RETIREMENT PLAN The Company has a defined contribution 401(k) covering all employees who have completed one year of service. The Company makes "matching" contributions of 10% of the participant's deferral amount, limited to 5% of the participant's eligible compensation for the year. The Company may also make discretionary contributions to the plan based upon participant compensation and net profits. During the year ended January 31, 1998, the Company contributed $2,780.00 to the Plan. The Company's maximum contribution is limited to 1/2 of 1% of the employee's compensation. See independent auditors' report. F-13 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**** 10.19 Agreement between Registrant and Alpine Service Ltd. dated June 30, 1993 for the private placement of 1,000,000 shares pursuant to Regulation "S" of the Securities Act of 1933, as amended****** 10.20 Note payable to Imperial Bank dated November 5, 1993******* 10.21 Note payable to Imperial Bank dated November 5, 1993******* 10.22 Security and Loan Agreement with Imperial Bank dated November 5, 1993******* 10.23 Stipulation for immediate appointment of Receiver on behalf of Imperial Bank dated May 1, 1995******** 10.24 Stipulation re: First Amendment to Order Appointing Receiver dated September 5, 1995******** 10.25 First Amendment to Stipulation re: First Amendment to Order appointing Receiver dated January 16, 1996******** 10.26 Sublease dated July 27, 1995 between Kaiser Marquardt and the Company with sublease guarantor Kaiser Aerospace and Electronics******** 22 Subsidiaries of the Company
- --------------------- * Incorporated by reference to the Company's Registration Statement on Form S-1, filed with the Securities and Exchange Commission on October 15, 1991, Registration No. 33-43228. ** Incorporated by reference to Amendment No. 1 to the Company's Registration Statement on Form S-1, filed with the Securities and Exchange Commission on May 14, 1992, Registration No. 33-43225. *** Incorporated by reference to the Company's Form 10-K filed with the Securities and Exchange Commission on April 29, 1992. **** Incorporated by reference to the Company's Form 10-K filed with the Securities and Exchange Commission on December 15, 1992. **** Incorporated by reference to the Company's Form 10-K filed with the Securities and Exchange Commission on May 15, 1993. ***** Incorporated by reference to the Company's Form 10-Q filed with the Securities and Exchange Commission on September 10, 1993. ****** Incorporated by reference to the Company's Form 10-Q filed with the Securities and Exchange Commission on December 12, 1993. ******** Incorporated by reference to the Company's Form 10-K filed with the Securities and Exchange Commission on April 25, 1996. EX-22 2 EXHIBIT 22 PUROFLOW INCORPORATED EXHIBIT 22 SUBSIDIARIES OF THE COMPANY STATE OF INCORPORATION ---------------------- PUROFLOW CORPORATION NEW YORK EX-27 3 EXHIBIT 27
5 YEAR JAN-31-1998 FEB-01-1997 JAN-31-1998 361,523 0 1,625,790 23,523 1,566,865 3,606,986 3,868,660 2,570,092 5,046,304 1,065,277 0 0 0 5,378,306 (1,397,279) 5,046,304 8,597,340 8,597,340 6,161,016 7,760,191 563,619 (25,981) 0 300,530 (191,431) 491,961 0 0 0 491,961 .07 .07
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