-----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, EfyA1Z3kE/uhoppNGacrp1S1UXOX3mornuBQMfNaEI4lQPKbNr4mS/GiEM7MchTZ JyT+dFjTiO4/P8BunqyFzA== 0001047469-99-016336.txt : 19990427 0001047469-99-016336.hdr.sgml : 19990427 ACCESSION NUMBER: 0001047469-99-016336 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990131 FILED AS OF DATE: 19990426 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: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-05622 FILM NUMBER: 99600891 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 10KSB40 1 10KSB40 PUROFLOW 16559 Saticoy Street Van Nuys, CA 91406 (818) 756-1388 INCORPORATED FAX (818) 779-3902 Dear Shareholders: We closed fiscal 1999 with several notable achievements. Our core business in high performance filtration has a current backlog in excess of $2.7 million dollars for delivery in fiscal 2000, with an additional $2.3 million recorded for sales in fiscal 2001. We continue to add to both the current and out year backlogs as a result of our long-term contractual agreements with our distributors for aftermarket filtration products. The FAA has approved an additional 19 filters for aftermarket distribution. An additional 20 units are pending approval. We have expanded our aftermarket product applications to include flexible fire resistant, rubber/fiberglass inlet turbine ducts, aircraft cabin overhead passenger comfort panels, and passenger cabin air filters, to name a few. The acquisition of Quality Controlled Cleaning Corporation places us in both the original equipment manufactures (OEM) and the aftermarket precision cleaning business. We continue to seek additional acquisitions that have both OEM and aftermarket applications. Our corporate strategy to serve the aftermarket, i.e., airlines and overhaul maintenance users with a broad range of line replaceable product will provide improved bottom-line contributions. Our core business will continue to be filtration products. Our newly created International Division has posted nine month ending orders in excess of $500,000. These products are in support of foreign military aftermarket needs. This activity is very much in line with the direction we have taken with the rest of the Company. Our agency agreements in Turkey, South Korea, Taiwan and NATO are mature and receiving bid opportunities weekly. We anticipate growing this product line an additional 25% in fiscal 2000. Our non azide, side impact airbag inflator filter program is transitioning from low rate pre-production quantities to substantial volume. Deliveries over the past 60 days are in excess of 1,500 units per day. Our mature driver-side, azide programs have remained level over the past 12 months. Fiscal 1999 brought to a close all outstanding legal issues incurred over the past 5 years. We are pleased that the courts have vindicated our dispute with Memtec America however, we are disappointed with the monetary award. Without this monthly drain of dollars and management's time, we can turn our full attention to the continued growth of the Company. Net profit for fiscal 1999 was $739,249, equal to $.10 per share compared to $491,961 equal to $0.07 per share in fiscal 1998, based upon an increase of 12.8% in fully diluted shares outstanding in fiscal 1999. We anticipate major changes in growth of our core business and pending prospective acquisitions to enhance our bottom-line results and accomplish a fair market price for our Shareholders. We thank you for your loyalty and patience to date. Fiscal year 2000 will justify the energies and enthusiasm of our loyal and dedicated management team and employees. Warmest personal regards, Reuben M. Siwek - --------------------------------- Reuben M. Siwek Chairman of the Board Michael Figoff - --------------------------------- Michael Figoff President/Chief Executive Officer 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, 1999 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 (Zip Code) executive offices) 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 $4,636,630 as of March 31, 1999, 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, 1999: 8,100,321 The Registrant's Proxy Statement relating to the Annual Meeting of Stockholders to be held on June 29, 1999 is hereby incorporated by reference into Part III of this Form 10-KSB. PUROFLOW INCORPORATED 1999 FORM 10-KSB ANNUAL REPORT TABLE OF CONTENTS
PAGE PART I ITEM 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ITEM 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ITEM 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 4 ITEM 4. Submission of Matters to Vote of Security Holders. . . . . . . . . 4 PART II ITEM 5. Market for Registrant's Common Equity and Related Shareholder Matters. . . . . . . . . . . . . . . . . . . . . . . . 5 ITEM 6. Selected Consolidated Financial Data . . . . . . . . . . . . . . . 6 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . 7 ITEM 8. Financial Statements and Supplementary Data. . . . . . . . . . . . 9 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . . . . . . . . . . . . . . 9 ITEM 10. Recently Issued Accounting Standards . . . . . . . . . . . . . . . 9 PART III ITEM 11. Directors and Executive Officers of the Registrant . . . . . . . . 9 ITEM 12. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . 9 ITEM 13. Security Ownership of Certain Beneficial Owners and Management . . 9 ITEM 14. Certain Relationships and Related Transactions . . . . . . . . . . 9 PART IV ITEM 15. Financial Statements, Schedules, Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . .10 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
(i) PART I ITEM 1. BUSINESS Puroflow Incorporated (the "Registrant" or the "Company") provide a broad range of products for original equipment manufacturers, foreign and domestic military users, government direct, automotive and aviation aftermarket users; as well as a number of commercial and industrial applications. These applications include military, commercial and general aviation fixed wing and rotary wing vehicles, rockets, launch vehicles, satellites, surface and subsurface vessels, automotive airbag, launch complex installations, and liquid gas manufacturers, to name a few. The Company's products are made from a combination of woven wire meshes, random fiber materials, expanded metals, plastics, rubber, sheet metal and precision machined components assembled via welded, brazed, and/or epoxy construction. The Company acquired 100% control of Quality Controlled Cleaning Corporation (QCCC) on January 31, 1999. QCCC is engaged in cleaning services of precision parts for companies, including commercial aviation, aerospace, and the medical, pharmaceutical and petrol chemical industries. The service includes cleaning, sterilization, testing and assembly of component parts. QCCC is operated as a separate entity. The Company produces automotive airbag filters which are an integral part of airbag inflator assemblies. The primary functions of the airbag filters are to cool and control the expansion of the hot gas into the inflating bag and to prevent hot particles of combustion from entering the expanding bag. The Company's filters are typically comprised of a unique blend of woven wire, expanded metals, random metallic fiber, fiberglass, and/or refractory materials in various combinations. To economically assemble these airbag filters, the Company designs, manufactures, and operates its own high-precision machines. These machines require minimal time for tooling changes between production runs of different filter types. These methods permit greater flexibility and lower unit costs without compromising the high reliability which is essential for automotive airbag filters. The Company was incorporated in Delaware in 1961 and has its principal offices located at 16559 Saticoy Street, Van Nuys, California, 91406. The Company's telephone number is (818) 756-1388. Consolidated within a single, 50,000 square foot facility, Puroflow is fully self-contained within the engineer, test and manufacturing disciplines. QCCC facilities are located at 6118 Ferguson Drive in the City of Commerce, California. MARKETING The Company markets its airbag filters directly to airbag manufacturers through its executive officers. The Company markets its original equipment manufacturing (OEM) aerospace applications and it's QCCC Precision Cleaning Services through a series of manufacturing representatives and to a lesser extent, the Company's own sales force. Each representative is assigned to an exclusive geographic region. The sale of aftermarket products is through exclusive distributorships, who in turn, have exclusively assigned part numbers. Typically, the terms of these distribution agreements provide that the distributor will act as the exclusive distributor for specific parts manufactured by the Company for a period between 3 to 5 years with minimum monthly requirements for number and dollar amount of units purchased. The purchase price of the parts are subject to mutual agreement of the parties and may be adjusted to take into account inflation, market changes, changes in costs of production and sales, and other factors. Such agreements may be terminated by the Company if the distributor does not comply with these purchase requirements or by either party if the other party is rendered insolvent. Foreign military sales are conducted through the Company's International Programs Group, utilizing exclusive agents currently located in Turkey, South Korea, Taiwan and within NATO Nations. GOVERNMENT CONTRACTS The United States government is consistently within the Company's top ten dollar volume customers. Substantial sales of other high performance filters are made to companies that are themselves prime contractors of the United States government. Sales to the United States government accounted for approximately 15.7% and 11%, respectively, of net sales for fiscal 1999 and 1998. While separate figures are not maintained, the Company believes that when added to sales with the United States governments prime contractors, government sales accounted for approximately 28.4% 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 1 manufactured by the Company in its various markets. Many of these companies have significantly greater financial resources than the Company. There are no assurances that the Company's airbag customers will not manufacture some or all of their airbag filters for its own use, or that other companies will not enter into the airbag filter market. PRODUCT WARRANTIES In all product lines, the Company provides standard commercial warranties, consistent with its products and industry. Although claims under product warranties have been minimal during the past five years, no assurance can be given that such claims will not increase in the future. RESEARCH AND DEVELOPMENT In fiscal 1999 and fiscal 1998, the Company incurred research and development expenditures of approximately $239,598 and $124,287, 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 petrol-chemical filters. The Company also designs and manufactures surface tension devices for propellant management in missiles and satellites using porous metal, high-performance filter media and specialized gas tungsten arc welding processes. The Company is a leading filter supplier for United States space applications, including the Space Shuttle program, various commercial and military satellites, launch vehicles and boosters, and ground support equipment. Certain of the manufacturing, welding, cleaning and testing required by these applications are performed in our laminar flow, Class 100 clean room. QCCC's facility has a Class 10,000 clean room. REPLACEMENT PARTS The Company is a leading supplier of aftermarket products used in jet aircraft, turboshaft powered aircraft, and helicopters. Utilizing highly successful reverse engineering techniques, the Company produces "generic plain wrap" products for use in the aftermarket at a substantial reduction in cost to the distributor and end-user. The Company utilizes exclusive agreements with its distributor base which assists them to dominate, on a part number basis, a particular market segment. The preponderance of future Company sales will continue to be within its core filtration product line. Aftermarket applications, to include sales within the International Product Group, are significantly more diverse. These products include unique items such as interior trim, heat resistant ducting, mechanical and electrical components, and aircraft structural parts. This market segment is specialized and has consistently generated improved profit margins when compared to the highly competitive aftermarket filter products. RAW MATERIALS AND SUPPLIES The principal raw materials utilized by the Company in connection with its filter operations include stainless steel and other man-made or natural products, which are standard items available from a number of sources. Additionally, the Company subcontracts out a significant portion of the fabricated or machine parts required to produce components used in the Company's products which it designs and assembles. These services are readily and rapidly available from a wide variety of sources. The Company engineers, manufactures and assembles its products at its facility in Van Nuys, California. This facility, as well as the QCCC facility in Commerce, California, does not handle or store hazardous substances and thus does not incur significant costs relating to compliance with environmental laws. 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. 2 MAJOR CUSTOMERS Sales to three customers identified below represented approximately 49.4% of net sales during fiscal year 1999, 37% of net sales during fiscal year 1998, and 53% during fiscal year 1997. For fiscal year 1999, 1998, and 1997, sales to Breed Automotive Technologies, Inc. were $844,627, $1,723,463 and $2,200,127, respectively. Sales to Inflation Systems Inc. were $1,856,582, $842,921 and $1,438,355, respectively, and sales to Norcross Air, Inc. were $888,038, $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 1999, no other customer accounted for more than 10% of net sales, except the Department of Defense, which accounted for 15.7% of the total sales. BACKLOG As of February 28, 1999 and February 28, 1998, the Company had a backlog of approximately $5,820,000 and $5,900,000, respectively. Approximately $3,500,000 of the Company's backlog at February 28, 1999 is scheduled to be shipped in the current fiscal year. The backlog figures include firm purchase orders and, with respect to airbag filters, six-month planning requirements prepared by the Company's customers. As is generally the case in the automotive industry, the Company's airbag filter customers provide the Company, on a monthly basis, with firm commitment purchase orders for the upcoming three months and their best estimate, for planning purposes, of their requirements for the following six-month period. These rolling nine-month statements of firm commitment purchase orders and planning requirements are revised and updated each month. The Company's customer purchase orders may be revised or canceled by the customer, subject to reimbursement of certain costs in the case of cancellation of scheduled shipments or other commitments. The Company's contracts (direct or indirect), with respect to United States government agencies, are subject to unilateral termination at the convenience of the government, subject only to the reimbursement of certain costs plus a termination fee. REGULATION Demand for the Company's airbag filters was initially affected by federal regulations requiring installation of airbags in passenger cars, light trucks, and vans by model years 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-aside. 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, 1999, the Company had 73 full-time employees, including 4 employed in Sales and Marketing, 13 employed in Engineering and Quality Control, and 44 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. The Company retained 7 employees from Quality Controlled Cleaning Corporation effective February 1, 1999, of which 4 were employed in Operations and 3 employed in Administration. 3 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 50,000 August 30, 2000 Van Nuys, CA 91406 facility for airbag components, government and aerospace filtration. 6118 Ferguson Drive Administration and production 10,000 January 31, 2004 Commerce, CA 90040 facility for Quality Controlled Cleaning Corporation.
The Company's current Saticoy sub-lease from Kaiser Aerospace & Electronics Corporation includes the use of gas, electric, water, telephone service, real estate taxes and parking at an annual rental of $291,000. The Company 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. The Company's lease from Ferguson Properties, a California Partnership, is for 60 months, with an optional right to terminate same following the first 36 months of the subject lease. An additional 60-month option to renew at the sole discretion of the company. ITEM 3. PENDING LEGAL PROCEEDINGS 1) The Company concluded its final piece of outstanding litigation on February 3, 1999 against Memtec America Corporation. The Circuit Court of Baltimore County in a ruling entitled "MEMTEC AMERICA CORPORATION VS PUROFLOW INCORPORATED" ruled that Memtec had misappropriated trade secrets relating to Puroflow products and operations. The Court awarded $557,390 in damages to Puroflow, insufficient to cover all legal costs and disbursements. The Company has recognized amounts due from Memtec and recorded all amounts owed to its counsel in the January 31, 1999 accounts. The Company is not a party, nor are its properties subject to, any material pending legal proceedings other than ordinary routine litigation incidental to the Company's business and the matters described above. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Registrant did not submit any matters to a vote of security holders during the fourth quarter of the fiscal year covered by this report. 4 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, 1998 1st Quarter................................................... .9211 .8125 2nd Quarter .................................................. .8010 .7237 3rd Quarter................................................... .8835 .8158 4th Quarter................................................... .7942 .7380 Fiscal Year Ended January 31, 1999 1st Quarter................................................... .875 .625 2nd Quarter .................................................. .812 .700 3rd Quarter................................................... .821 .562 4th Quarter................................................... .812 .720 Fiscal Year Ended January 31, 2000 Two Months Ending March 31, 1999.............................. .906 .844
(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, 1999, the closing bid price for the Company's Common Stock on the Bulletin Board System was $.906 per share. As of March 31, 1999, the Company had approximately 275 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. 5
YEAR ENDED JANUARY 31, (in thousands) ------------------------------------------------------------------------- ------------------------------------------------------------------------- 1995 1996 1997 1998 1999 ------------ ------------ ----------- ------------ ------------ ------------ ------------ ----------- ------------ ------------ STATEMENT OF OPERATIONS DATA (1): Net Sales $ 9,044 $ 8,816 $ 8,458 $ 8,597 $ 8,018 Cost of goods sold 7,644 5,957 5,888 6,161 5,834 ------------ ------------ ----------- ------------ ------------ Gross profit 1,400 2,859 2,570 2,436 2,184 Selling, general & administrative expense 1,629 1,443 1,446 1,497 1,833 ------------ ------------ ----------- ------------ ------------ Operating income (loss) (229) 1,416 1,124 939 351 Other income (expense) -0- (282) (61) 17 6 Non-recurring expenses (2) (292) (253) (394) (656) (93) ------------ ------------ ----------- ------------ ------------ Income (loss) from continuing operations before income taxes (521) 881 669 300 264 Provision (benefit) for income taxes 6 6 6 192 465 ------------ ------------ ----------- ------------ ------------ Income (loss) from continuing operations (527) 875 663 492 729 Income (loss) from discontinued operations (1,845) 23 -0- -0- -0- ------------ ------------ ----------- ------------ ------------ Net income (loss) $(2,372) $ 898 $ 663 $ 492 729 Net income (loss) per common share: From continuing operations $ (.12) $ 0.19 $ 0.11 $ 0.07 $ 0.10 From discontinued operations (.41) -0- -0- -0- -0- ------------ ------------ ----------- ------------ ------------ $ (.53) $ 0.19 $ 0.11 $ 0.07 $ 0.10 ------------ ------------ ----------- ------------ ------------ ------------ ------------ ----------- ------------ ------------ Weighted average number of shares (diluted) 4,509 4,632 6,107 7,248 7,598 ------------------------------------------------------------------------ ------------------------------------------------------------------------ 1995 1996 1997 1998 1999 ------------ ------------ ----------- ------------ ------- ------------ ------------ ----------- ------------ ------- BALANCE SHEET DATA: Working Capital $(1,214) $ (13) $ 2,518 $ 2,710 $ 2,792 Total Assets 4,721 3,962 4,094 5,046 6,479 Long-Term Debt 71 -0- -0- -0- 139 Stockholders' Equity 185 1,083 3,489 3,981 4,852
(1) In November 1994, the Company sold its ultraviolet water product subsidiary, Ultra Dynamics Corporation. This subsidiary has been accounted for as a discontinued operation. In the year ended January 31, 1996, the Company sold its valve product subsidiary, Decca Valves Corporation and shut down operation of its Michigan Dynamics subsidiary. These two subsidiaries have been accounted for as discontinued operations. The selected data related to the years ended January 31, 1996, 1995 and 1994 have been adjusted to reflect the discontinued operations, prior years have not been adjusted. (2) Non-recurring expenses are comprised of a one-time fee of $89,834 charged by the Bank during August 1996, and the monthly administrative fees charged by the Receiver during the receivership period. The Receivership Estate began on May 1, 1995 and ended on August 22, 1996. The years ended January 31, 1998 and 1999 represents litigation settlements and related litigation fees. 6 ITEM 7. MANAGEMENT'S DISCUSSION, ANALYSIS OF FINANCIAL CONDITION, AND RESULTS OF OPERATIONS GENERAL The Company was incorporated in Delaware in 1961, under the name Ultra Dynamics Corporation, and was originally engaged in the water purification business. In November 1968, the Company organized Puroflow Corporation to acquire all of the assets and liabilities of a business established in 1961 under the name Aerospace Components Corporation, and was primarily engaged in the manufacture of high performance filters for the aerospace industry. In 1980, the Company acquired Decca Valves Corporation, a corporation engaged in the manufacture of fluid control valves. The Company changed its name to Puroflow Incorporated in 1983. The Company acts as the holding company, directly or indirectly, for Puroflow Corporation and Michigan Dynamics, Inc. In fiscal 1989, the Company began designing, testing and producing filters for automotive airbag systems primarily as an outgrowth of its expertise in aerospace filtration. During September 1992, the Company disposed of its CPI division, including CPI assets it had acquired from MDI in June 1992. During November 1994, the Company settled the litigation with Glasco Ultraviolet Systems Inc. and disposed of the operating assets of Ultra Dynamics Corporation, its ultraviolet water products subsidiary. The Company acquired 100% control of the shares in Quality Controlled Cleaning Corporation on January 31, 1999 and management intends to expand this niche market during fiscal 2000. The International Division was created in June 1998 to provide spare parts for hard to find or obsolete components to service the United States military equipment acquired by foreign government. The Company's principal products consist of automotive airbag filters and high performance filters. Net sales for each of these product lines for the fiscal years ended January 31, 1998 and 1999 are as follows:
YEAR ENDED JANUARY 31, (in thousands) ---------------------------- ---------------------------- 1998 1997 -------- --------- -------- --------- Net Sales: Airbag Filters $ 2,766 $ 2,737 High Performance Filters 5,831 5,167 Precision Cleaning & Repair -0- 87 International Division -0- 27 -------- --------- TOTAL $ 8,597 $ 8,018 -------- --------- -------- ---------
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,:
YEAR ENDED JANUARY 31, (in thousands) --------------------------------------- --------------------------------------- 1998 1999 -------------- ---------------- -------------- ---------------- Net Sales: 100.0% 100.0% -------------- ---------------- Cost and expenses: Cost of goods sold 71.7 72.8 Selling, general and administrative 17.5 23.0 Other (income) expense (.2) (.3) Non-recurring expenses 6.4 -0- Memtec litigation 1.2 1.2 Interest expense -0- -0- -------------- ---------------- Income (loss) from continuing operations 3.5 3.3 before income taxes Provision (benefit) for income taxes (2.2) (5.8) Income (loss) from discontinued operations -0- -0- -------------- ---------------- Net income (loss) 5.7% 9.1% -------------- ---------------- -------------- ----------------
7 COMPARISON OF THE FISCAL YEARS ENDED JANUARY 31, 1999 AND 1998 Net sales decreased 6.7% in fiscal 1999 compared to fiscal 1998, due to product mix represented by a general downsizing in the aviation/aerospace industry, offset by an increase in government sales and the expansion of the PMA program. The Company had a win rate on its quotations of 55% in fiscal 1999 compared to 42% in fiscal 1998. Management anticipates an expansion of sales in the International market and cleaning services in fiscal 2000. Gross profit as a percentage of net sales was 27.2% of fiscal 1999 compared to 28.3% in fiscal 1998. The modest reduction is attributable to the product mix and reduction in sales volume. Selling, general and administrative expense increased to $1,832,768 in fiscal 1999 compared to $1,496,915 in fiscal 1998. The increase is attributable to a major increase in sales and promotional cost for the penetration of the International sales effort, increase in research and development expense of $115,300 and general administration overhead. Increases in research and development center on increased activity on FAA/PMA products and machine design for non-azide airbag filter manufacturing. Interest expense of $17,339 in the current year was offset by interest income of $23,991. Litigation costs for Memtec was finally concluded at $93,013 in fiscal 1999 compared to $102,210 in fiscal 1998 after giving effect to the Court awarded damages of $557,390. 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 1999, cash provided by operating activities was $868,385, primarily from non-cash operating income and reduction in accounts receivable. The Company's working capital was $2,792,000 and $2,710,000 as of January 31, 1999 and 1998 respectively. The current ratio is 2.9 at January 31, 1999 compared to 3.3 at January 31, 1998 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 $264,572 and the acquisition of "QCCC", the wholly owned subsidiary. The Company maintains a revolving credit line of $1,000,000 with an interest rate of 1/2 of 1% above prime. The Company obtained a loan of $236,000 to pay a non-recurring judgment. The terms of these loan agreements contain certain restrictive covenants, including maintenance of: (I) aggregate net worth (plus subordinated debt, less any intangible assets and less any amount due from shareholders, officers and affiliates of the Company) of not less than $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. YEAR 2000 The Year 2000 issue arose because many existing computer programs use only the last two digits to refer to a year. Therefore, these computer programs do not properly recognize a year that begins with 20 instead of 19. If not corrected, many computer applications could fail or create erroneous results. The Company has reviewed the Year 2000 issue as it may affect the Company's business activities. The Company has purchased its internal manufacturing and financial information systems within the last three years and installs, on an ongoing basis, all updates and patches as they are released by the vendors to ensure that the Company's systems and software are up-to-date and Year 2000 compliant, according to vendor representations. The Company has taken all practical steps to insure that its computer hardware and software will be unaffected by any Year 2000 issues. Pursuant to representation made by Dataworks Corp. on our systems software and Santa Monica Systems of Santa Monica, California on the hardware, we are in Year 2000 compliance. All other applications fall under Microsoft NT software and are stated to be in Year 2000 compliance. The Company has also been engaged in communications with its vendors, service providers and customers to determine the extent to which the Company would be vulnerable to a third party's failure to address its own Y2K issues. The Company is developing a contingency plan in the event that one or more internal systems of key external parties that support the Company's business fails as a result of the Year 2000. This plan will incorporate manual 8 processes to carry to operating functions in the event that computer systems fail. The Company also intends to develop an inventory stocking plan to address possible failures related to third-party suppliers. This contingency plan is expected to be completed by the end of the second quarter 1999. Costs to address the Company's Year 2000 issues are not expected to exceed $10,000 in 1999, and will consist primarily of the cost of certain hardware and software to perform testing functions and the cost of internal resources that will be applied to this effort. No costs have been incurred through December 31, 1998. The Company is in the process of contacting all third parties with which it has significant relationships to determine the extent to which the Company could be vulnerable to failure by any of them to obtain Year 2000 compliance. To date, the Company is not aware of any significant third parties with a Year 2000 issue that could materially impact the Company's operations, liquidity or capital resources. However, the Company has no means of ensuring that third parties will be Year 2000 ready and the potential effect of third-party non-compliance is currently not determinable. The Company has devoted and will continue to devote the resources necessary to ensure that all Year 2000 issues are properly addressed. However, there can be no assurance that all Year 2000 problems are detected. Further, there can be no assurance that the Company's assessment of its third party vendors and suppliers will be accurate. EFFECTS OF INFLATION ON BUSINESS Management believes that inflation has not had a material effect on the Company's operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information called for by this item is hereby incorporated by reference from the Registrant's financial statements and independent auditors' report beginning on page F-1 of this report on Form 10-KSB. ITEM 9. DISAGREEMENT ON ACCOUNTING AND FINANCIAL DISCLOSURES None. ITEM 10. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board issued SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" which is effective for fiscal years beginning after December 15, 1997. Ninety Nine percent of the Company's net sales are presently derived from one segment, filter products. Beginning in fiscal year 2000, because of the acquisition of Quality Controlled Cleaning Corporation, the Company will be required to disclose information on its segments. PART III ITEM 11. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information called for by this item is hereby incorporated by reference from the Registrant's definitive Proxy Statement under the captions "MANAGEMENT" and "ELECTION OF DIRECTORS". ITEM 12. EXECUTIVE COMPENSATION The information called for by this item is hereby incorporated by reference from the Registrant's definitive Proxy Statement under the captions "EXECUTIVE COMPENSATION" and "NON-STATUTORY STOCK OPTIONS (NSO)." ITEM 13. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for by this item is hereby incorporated by reference from the Registrant's definitive Proxy Statement under the captions "STOCK OPTIONS" and "NON-STATUTORY STOCK OPTIONS (NSO)." ITEM 14. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by this item is hereby incorporated by reference from the Registrant's definitive Proxy Statement under the caption "RELATED PARTY TRANSACTIONS." 9 PART IV ITEM 15. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K (a) (1) FINANCIAL STATEMENTS The following financial statements (including notes thereto and the Independent Auditors' Report with respect thereto), are filed as part of this annual report on Form 10-KSB starting on page F-1 hereof: Independent Auditors' Reports. Consolidated Balance Sheets at January 31, 1999 and 1998. Consolidated Statements of Operations for each of the two years in the period ended January 31, 1999. Consolidated Statements of Stockholders' Equity for each of the two years in the period ended January 31, 1999. Consolidated Statements of Cash Flows for each of the two years in the period ended January 31, 1999. 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 August 14, 1998, Registrar reported the Private Placement of one million shares of common stock to be placed among directors, officers and employees of the Registrar. On November 2, 1998, Registrar reported the formation of a strategic alliance with AAR Cooper Aviation, a Division of AAR Corp., (NYSE AIR) Norcross Air Inc, a wholesale distributor and Puroflow Incorporated (OTC Bulletin Board PURO) for the distribution of filtration products to the general aviation aftermarket. On January 31, 1999, Registrar reported the purchase of 100% control of Quality Controlled Cleaning Corporation engaging in the technical services of cleaning, sterilizing, testing and assembly of components and parts for firms engaged in commercial aviation, aerospace, medical, pharmaceutical and petrol-chemical industries. 10 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 22, 1999 -------------------------------------- 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 22, 1999 -------------------------------------- Michael H. Figoff President/Chief Executive Officer Director By: /s/Reuben M. Siwek April 22, 1999 -------------------------------------- Reuben M. Siwek Chairman of the Board General Counsel By: /s/Robert A. Smith April 22, 1999 -------------------------------------- Robert A. Smith Vice Chairman of the Board By: /s/Tracy K. Pugmire April 22, 1999 -------------------------------------- Dr. Tracy K. Pugmire Director 11 INDEPENDENT AUDITORS' REPORT To the Stockholders of Puroflow Incorporated We have audited the accompanying consolidated balance sheets of Puroflow Incorporated (a Delaware corporation), and subsidiaries as of January 31, 1999 and 1998, 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 audits provide 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 as of January 31, 1999 and 1998, 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 Encino, California March 18, 1999 F-1 PUROFLOW INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JANUARY 31, 1999 AND 1998
1999 1998 ---------- ---------- CURRENT ASSETS: Cash, Note 8 $ 828,809 $ 361,523 Accounts receivable Net of allowance for doubtful accounts of $22,000 (January 31, 1999) and $23,523 (January 31, 1998), Note 2 1,373,254 1,602,267 Accounts receivable, other 375,763 -0- Advances to officers and employees 2,907 -0- Deferred tax benefit, current 45,347 -0- Inventories, Note 2 1,562,939 1,566,865 Prepaid expenses and deposits 91,677 76,331 ---------- ---------- TOTAL CURRENT ASSETS 4,280,696 3,606,986 ---------- ---------- PROPERTY AND EQUIPMENT - NOTE 2 Leasehold improvements 55,954 26,980 Machinery and equipment 3,808,188 3,491,625 Automobile 1,679 1,679 Tooling and dies 327,411 303,399 Construction in progress -0- 44,977 ---------- ---------- 4,193,232 3,868,660 Less accumulated depreciation and amortization 3,082,386 2,750,092 ---------- ---------- NET PROPERTY AND EQUIPMENT 1,110,846 1,118,568 ---------- ---------- DEFERRED TAX BENEFIT, NOTE 5 747,980 304,000 OTHER ASSETS, NOTES 6 AND 12 340,423 16,750 ---------- ---------- TOTAL ASSETS $6,479,945 $5,046,304 ---------- ---------- ---------- ---------- CURRENT LIABILITIES: Notes payable, current, Note 3 $ 97,200 $ 168,034 Accounts payable 465,678 467,131 Accrued expenses 477,335 430,112 Payable for acquired company, Note 12 447,875 -0- ---------- ---------- TOTAL CURRENT LIABILITIES 1,488,088 1,065,277 ---------- ---------- LONG TERM DEBT, NOTE 3 139,400 -0- COMMITMENTS AND CONTINGENCIES, NOTES 6 AND 12 STOCKHOLDERS' EQUITY, NOTES 4 AND 9 Preferred stock, par value $.10 per share Authorized - 500,000 shares. Issued - None Common stock, par value $.01 per share Authorized - 12,000,000 shares. Outstanding 8,100,321 shares at January 31, 1999 and 7,108,821 shares at January 31, 1998 440,979 430,579 Additional paid-in capital 5,667,327 4,947,727 Accumulated deficit (668,030) (1,397,279) Less: Notes receivable from stockholders (554,900) -0- Treasury stock at cost (32,919) -0- ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 4,852,457 3,981,027 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,479,945 $5,046,304 ---------- ---------- ---------- ----------
See independent auditors' report and notes to financial statements. F-2 PUROFLOW INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JANUARY 31, 1999 AND 1998
YEARS ENDED JANUARY 31, 1999 1998 ----------- ----------- ----------- ----------- Net sales $ 8,018,395 $ 8,597,340 Cost of goods sold 5,834,824 6,161,016 ----------- ----------- Gross profit 2,183,571 2,436,324 Selling, general and administrative expenses 1,832,768 1,496,915 ----------- ----------- Operating income 350,803 939,409 Other income and (expense) Other income 23,991 17,498 Interest expense (17,339) Nonrecurring expenses -0- (554,117) Memtec litigation, net, Note 6 (93,013) (102,260) ----------- ----------- Income before tax 264,442 300,530 Income tax (benefit) expense, Note 5 (464,807) (191,431) ----------- ----------- Net income $ 729,249 $ 491,961 ----------- ----------- ----------- ----------- Basic earnings per share, Note 10 $ 0.10 $ 0.07 ----------- ----------- ----------- ----------- Diluted earnings per share, Note 10 $ 0.10 $ 0.07 ----------- ----------- ----------- ----------- Weighted average number of shares, basic 7,494,021 7,108,821 ----------- ----------- ----------- ----------- Weighted average number of shares, diluted 7,597,863 7,248,258 ----------- ----------- ----------- -----------
See independent auditors' report and notes to financial statements. F-3 PUROFLOW INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JANUARY 31, 1999 AND 1998
NOTES RECEIVABLE FROM COMMON ADDITIONAL ACCUMULATED STOCKHOLDERS STOCK PAID-IN DEFICIT AND TREASURY TOTAL PAR VALUE CAPITAL TOTAL STOCK --------- ----------- ------------ -------------- ------------- --------- ----------- ------------ -------------- ------------- Balance at January 31, 1997 $ 430,579 $ 4,947,727 $ (1,889,240) $ -0- $ 3,489,066 Net income 491,961 $ 491,961 --------- ----------- ------------ -------------- ------------- Balance at January 31, 1998 $ 430,579 $ 4,947,727 $ (1,397,279) $ -0- $ 3,981,027 --------- ----------- ------------ -------------- ------------- Issue 940,000 shares of common stock at $.75 per share 9,400 695,600 (554,900) 150,100 Acquire 48,500 shares of Treasury Stock (32,919) (32,919) Exercise stock options for 100,000 shares at $.25 per share 1,000 24,000 25,000 Net income 729,249 729,249 --------- ----------- ------------ -------------- ------------- Balance at January 31, 1999 $ 440,979 $ 5,667,327 $ (668,030) $ (587,819) $ 4,852,457 --------- ----------- ------------ -------------- ------------- --------- ----------- ------------ -------------- -------------
See independent auditors' report and notes to financial statements. F-4 PUROFLOW INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JANUARY 31, 1999 AND 1998
FOR THE YEARS ENDED JANUARY 31, 1999 1998 --------- --------- --------- --------- CASH AT BEGINNING OF PERIOD $ 361,523 $ 164,415 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) 729,249 491,961 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 332,294 297,204 Provision for losses on accounts receivable 15,713 -0- Gain on note payable (Memtec) (168,034) -0- Changes in operating assets and liabilities: Advances to officers & employees (632) -0- Accounts receivable 326,967 (140,097) Other receivable (375,763) -0- Inventories 30,968 (168,304) Prepaid expenses and other current assets 530 (18,736) Deferred taxes (489,327) (304,000) Accounts payable and accrued expenses 20,770 498,451 Payable for acquired company 445,650 -0- --------- --------- Net cash provided by operating activities 868,385 656,479 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (264,572) (461,207) Business acquisition, net of cash acquired (515,308) -0- Payments received on notes receivable -0- 40,889 --------- --------- Net cash used by investing activities (779,880) (420,318) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under notes payable 286,000 -0- Principal payments on notes payable (49,400) (39,053) Proceeds from exercise of stock options 25,000 -0- Proceeds from sale of common stock, net of loan to stockholders 150,100 -0- Purchase of Treasury Stock (32,919) -0- --------- --------- Net cash provided (used) by financing activities 378,781 (39,053) --------- --------- NET INCREASE IN CASH 467,286 197,108 --------- --------- CASH AT END OF PERIOD $ 828,809 $ 361,523 --------- --------- --------- ---------
See independent auditors' report and notes to financial statements. F-5 NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ITEM 1. ORGANIZATION Puroflow Incorporated was organized on May 15, 1961 under the laws of the State of Delaware. Puroflow Incorporated and its wholly owned subsidiaries (together referred therein as the "Company") specializes primarily in designing and manufacturing automotive airbag filters and high performance filters. The Company is located in Van Nuys, California, and does business with customers throughout the world, most of which are located in the United States. CONSOLIDATED SUBSIDIARIES The consolidated financial statements include the accounts of the Company's wholly owned subsidiaries, Puroflow Corporation, Decca Valves Corporation, Michigan Dynamics, Inc., and Ultra Dynamics Corporation. Material intercompany transactions and balances have been eliminated. Puroflow Corporation acquired Quality Controlled Cleaning Corporation (QCCC) on January 31, 1999 (See Note 12). INVENTORIES Inventories are stated at the lower of cost of market on a first-in, first-out basis, and consist of the following items:
JANUARY 31, JANUARY 31, 1999 1998 ------------ ------------ ------------ ------------ Raw materials and purchased parts $ 918,559 $ 790,981 Work in progress 307,444 458,040 Finished goods 336,936 317,844 ------------ ------------ Total $ 1,562,939 $ 1,566,865 ------------ ------------ ------------ ------------
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
REVENUE RECOGNITION Revenues are recognized when finished products are shipped. INCOME TAXES The Company complies with Financial Accounting Standards No. 109, Accounting for Income Taxes. CASH FLOWS For the purpose of the statement of cash flows, the Company considers cash equivalents to include cash only and to exclude any near-cash short-term investments. ESTIMATES Generally accepted accounting principles require that financial statements include estimates by management in the valuation of certain assets and liabilities. The Company's management estimates the reserve for doubtful accounts, the reserve for obsolete inventory, the useful lives of property and equipment and the valuation allowance for deferred tax assets. Management uses its historical record and knowledge of its business in making these estimates. Accordingly, actual results may differ from estimates. See independent auditors' report F-6 RESEARCH AND DEVELOPMENT EXPENSES Research and development expenditures are expensed as incurred and are approximately as follows for the years ended January 31,
1999 1998 --------------------------- ------------------------- --------------------------- ------------------------- $ 240,000 $ 124,300 --------------------------- ------------------------- --------------------------- -------------------------
NON-RECURRING EXPENSES For the year ended January 31, 1999, 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. EARNINGS PER SHARE In the first quarter of the year ended January 31, 1999, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" (FAS 128), which supersedes Accounting Principles Board Opinion No. 15. Under FAS 128, earnings per common share is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock. Prior period amounts have been restated, where appropriate, to conform to the requirements of FAS 128 (see Note 10). INTANGIBLE ASSETS Intangible assets include goodwill and non-compete agreement resulting from a business acquired (See Note 12). These assets are amortized over the estimated useful lives. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of certain of the Company's financial instruments, including accounts receivable and accounts payable, approximates fair value due to the relatively short maturity of such instruments. The Company's long term debt approximates fair value. NOTE 2 - LINE OF CREDIT The Company has a $1,000,000 revolving credit line maturing on June 3, 1999. This credit line bears interest at the rate of prime plus 0.5% per annum, and is secured primarily by the Company's accounts receivable and inventories. The terms of this loan agreement contains certain restrictive covenants, including maintenance of minimum working capital, net worth, and ratios of current assets to current liabilities and debt to net worth. There is no outstanding balance under this line on January 31, 1999. See independent auditors' report F-7 NOTE 3 - LONG-TERM DEBT
JANUARY 31, JANUARY 31, 1999 1998 ----------- ----------- ----------- ----------- 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 May 1, 1995. All the notes have been paid in full or written off, except for one, which was eliminated by litigation in fiscal 1999 (see Note 7). $ -0- $ 168,034 Note payable to a bank bearing interest at prime plus 1.5% payable in principal monthly payments of $3,933, 186,600 -0- maturing on April 2003. Note payable bearing interest at 7%, principal and interest payable on January 2000. 50,000 ----------- ----------- 236,600 168,034 Less current portion 97,200 168,034 ----------- ----------- Long-term debt $ 139,400 $ -0- ----------- ----------- ----------- -----------
Maturities of long-term debt is as follows: 2000 $ 97,200 2001 47,200 2002 47,200 2003 45,000 -------- $236,600 -------- --------
Interest paid in cash totaled as follows for the years ended January 31,: 1999 1998 --------- --------- --------- --------- $ 17,339 $ -0- --------- ---------
See independent auditors' report F-8 NOTE 4 - STOCK OPTION PLANS In the year ended January 31, 1996, the Company implemented stock option plans, which provide for the granting of options to certain officers 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 $0.31 per option. Fair value was determined by estimating the future sale of the underlying stock and discounting the gain on the options based on a risk free rate of return adjusted for equity risk. Share activity under the Company's stock option plans is summarized below:
SHARES -------------- -------------- Held at January 31, 1997 (outstanding and unexercised) 349,900 Granted 82,000 Exercised (200) Canceled or expired (25,000) -------------- Held at January 31, 1998, (outstanding and unexercised) 406,700 Granted 35,000 Exercised (100,000) Canceled or expired (22,700) Held at January 31, 1999 (outstanding and unexercised) 319,000 -------------- -------------- Shares exercisable, January 31, 1999 179,200 -------------- -------------- Shares available for future grants, end of period 80,700 Price range of options held, January 31, 1999 $ .025 - $.081 -------------- --------------
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 5 - INCOME TAXES The following is a reconciliation of the tax provision, computed by applying the statutory federal income tax rates and the income tax provision per the financial statements for the years ended January 31,
1998 1999 1998 --------- --------- Income tax provision at 34% $ 89,910 $ 102,180 Meals and entertainment 3,026 2,370 Officer's life insurance 3,607 1,975 Excess book (tax) depreciation and amortization (20,031) (3,247) Change in allowance for doubtful accounts (518) (8,833) Write-off of obsolete inventory (17,000) (61,426) Reserve for legal matters -0- (11,488) Other (16,777) 14,852 State taxes for prior year (2,059) (1,904) Benefit of net operating loss carryforwards (40,158) (31,610) --------- --------- Current federal tax provision -0- 2,869 Change in valuation allowance (472,327) (200,000) State franchise taxes 7,520 5,700 --------- --------- Provision for income tax $(464,807) $(191,431) --------- --------- --------- ---------
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:
1999 1998 ----------- ----------- Allowance for doubtful accounts $ 9,425 $ 10,186 Allowance for inventory obsolescence -0- 21,650 Vacation accrual 17,993 -0- Other 17,939 -0- Less valuation allowance -0- (31,836) ----------- ----------- Current 45,357 -0- ----------- ----------- ----------- ----------- Tax loss carryforward 906,242 1,133,165 Depreciation and amortization (123,262) (73,892) Reserve for legal matters -0- -0- Less valuation allowance (35,000) (755,273) ----------- ----------- Non current $ 747,980 $ 304,000 ----------- ----------- ----------- -----------
Realization of the deferred benefit is contingent upon future taxable earnings. The benefit recognized in the year ending January 31, 1999 represents the reduction of the valuation allowance from 69% to 4%, and is based on the Company's continuing profitability. The Company estimates it has available net operating loss carryforwards of approximately $2,500,000 for federal income tax purposes and $570,000 for state income tax purposes at January 31, 1999. The Company's federal net operating loss carryforwards expire from 2008 to 2011, State net operating loss carryforwards expire in 2000. See independent auditors' report F-10 NOTE 6 - COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company is committed to minimum lease payments on two non-cancelable operating leases for its facilities which expire in August 2000 and January 2002, as follows:
Twelve Months Ending January 31, ------------------------------------------- ------------------------------------------- 2000 $ 321,000 2001 199,750 2002 30,000 ------------ ------------ TOTAL $ 550,750 ------------ ------------
Total rental expense under the facility lease (including expenses) is as follows for the years ending January 31,
1999 1998 ---------- ---------- ---------- ---------- $ 305,000 $ 301,000 ---------- ---------- ---------- ----------
LEGAL MATTERS The Company concluded its final piece of outstanding litigation against Memtec America Corporation (Memtec). The Circuit Court of Baltimore County in a ruling entitled "MEMTEC AMERICA CORPORATION VS PUROFLOW INCORPORATED" ruled that Memtec had misappropriated trade secrets relating to Puroflow products and operations. The Court awarded $557,390 gross in damages to Puroflow and allowed the deduction of the $168,034 note payable. The Company has recognized amounts due from Memtec and all amounts owed to its counsel in the January 31, 1999 accounts. The Company is not party to any further legal matters. YEAR 2000 The Company has taken all practical steps to insure that its computer hardware and software will be unaffected by any Year 2000 issues. Pursuant to representation made by Dataworks Corp. on our systems software and Santa Monica Systems of Santa Monica, California on the hardware, we are in Year 2000 compliance. All other applications fall under Microsoft NT software and are stated to be in Year 2000 compliance. The Company has also been engaged in communications with its vendors, service providers and customers to determine the extent to which the Company would be vulnerable to a third party's failure to address its own Y2K issues. NOTE 7 - RELATED PARTY TRANSACTIONS The Company is using the legal expertise of a lawyer who is a director of the Company. Related legal expenses totaled $83,078 and $66,250 for the years ended January 31, 1999, and 1998, respectively. NOTE 8 - CONCENTRATIONS MAJOR CUSTOMER INFORMATION Concentration of sales in the Company's four largest customers is as follows for the years ending January 31,:
1999 1998 ---------- ---------- Inflation Systems, Inc. $1,856,582 $ 842,921 DFAS 1,084,554 954,239 Norcross Air, Inc. 888,038 656,901 Breed Automotive Technologies 844,627 1,723,463 ---------- ---------- $4,673,801 $4,177,524 ---------- ---------- ---------- ----------
See independent auditors' report F-11 CONCENTRATION OF CREDIT RISK Concentration of receivables due from the Company's largest customers is as follows at January 31,
1999 1998 -------------- --------------- -------------- --------------- Breed Automotive Technologies $ 136,946 $ 103,242 Inflation Systems, Inc. 405,394 352,307 DFAS 102,818 173,799 Norcross Air, Inc. 93,495 90,633 -------------- --------------- $ 738,653 $ 719,981 -------------- --------------- -------------- ---------------
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 two suppliers for the majority of its material needs for automotive airbag filter production. CASH IN BANK At January 31, 1999, the Company had cash in a bank in excess of federally insured limits by $130,994. NOTE 9 - STOCKHOLDERS' EQUITY On August 24, 1998, the Company issued an 8-K report stating that the Board of Directors has authorized the issuance of 1,000,000 shares of common stock for sale to directors, officers and employees. The Company sold 940,000 shares of this common stock and received proceeds of $705,000 divided between $147,000 in cash and $558,000 in notes receivables. During the 3-month period from August 1, 1998 through October 31, 1998, the Company purchased 48,500 shares of common stock for a total cost of $32,919 from the open market and is presently holding them as treasury stock. NOTE 10 - EARNINGS PER SHARE Reconciliation of basic and diluted earnings per share:
PER SHARE INCOME SHARES AMOUNT -------- --------- --------- YEAR ENDED JANUARY 31, 1999 - ----------------------------- Basic earnings per share $729,249 7,494,021 $0.10 ----- ----- EFFECT OF DILUTIVE SECURITIES - ----------------------------- Stock options 103,842 -------- --------- Diluted earnings per share $729,249 7,597,863 $0.10 -------- --------- ----- -------- --------- ----- YEAR ENDED JANUARY 31, 1998 - ----------------------------- Basic earnings per share $491,961 7,108,821 $0.07 ----- ----- EFFECT OF DILUTIVE SECURITIES - ----------------------------- Stock options 139,437 -------- --------- Diluted earnings per share $491,961 7,248,258 $0.07 -------- --------- ----- -------- --------- -----
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. See independent auditors' report F-12 NOTE 11 - RETIREMENT PLAN The Company has a defined contribution 401(k) covering all employees who have completed one year of service. The Company makes "matching" contributions of 10% of the participant's deferral amount, limited to 5% of the participant's eligible compensation for the year. The Company may also make discretionary contributions to the plan based upon participant compensation and net profits. During the years ended January 31, 1999 and January 31, 1998, the Company contributed $8,284 and $2,780 to the Plan. The Company's maximum contribution is limited to 1/2 of 1% of the employee's compensation. NOTE 12 - BUSINESS ACQUISITION On January 31, 1999, the Company acquired Quality Controlled Cleaning Corporation ("QCCC") for $550,630 including all costs of the acquisition. QCCC is a precision cleaning and repair company located in Commerce, California. The Company's acquisition resulted in goodwill of approximately $274,000 and a non-compete agreement of $50,000. The goodwill will amortize over 10 years and the non-compete agreement over its term of 3 years. In addition to the purchase price, the agreement includes a contingent payment of 50% of net sales in the year ending January 31, 2000, in excess of $500,000 up to a maximum of $800,000. If the full amount of the contingency is realized, the liability would total $150,000 and would be recorded as additional goodwill. 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 Description No. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 EXHIBIT 22 PUROFLOW INCORPORATED SUBSIDIARIES OF THE COMPANY
STATE OF INCORPORATION ---------------------- Puroflow Corporation New York Quality Controlled Cleaning Corporation California
EX-27 3 EXHIBIT 27
5 YEAR JAN-31-1999 FEB-01-1998 JAN-31-1999 828,809 0 1,395,254 22,000 1,562,939 4,280,696 4,193,232 3,082,386 6,479,945 1,488,088 0 0 0 5,961,466 (668,030) 6,479,945 8,018,395 8,018,395 5,834,824 7,667,592 69,022 0 17,339 264,442 464,807 729,249 0 0 0 729,249 .10 .10
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