Conformed copy SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED APRIL 30, 1996 COMMISSION FILE NUMBER 0-5622 - -------------------------------------------------------------------------------- PUROFLOW INCORPORATED - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 13-1947195 - -------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer identification No.) of incorporation or organization) 16559 SATICOY STREET, VAN NUYS, CALIFORNIA 91406-1739 - -------------------------------------------------------------------------------- (Address of executive offices) (ZIP Code) Registrant's telephone number, including area code: (818) 756-1388 Securities registered pursuant to Section 12(g) of the Act: Common Stock Shares outstanding COMMON STOCK, $.01 PAR VALUE 4,578,521 - -------------------------------------------------------------------------------- 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 [ ]
ITEM 1. FINANCIAL INFORMATION PUROFLOW INCORPORATED CONSOLIDATED BALANCE SHEETS (UNAUDITED) APRIL 30, JANUARY 31, DESCRIPTION 1996 1996 - -------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash $ 12,512 $ - Trade accounts receivable, net of allowance for doubtful accounts of $150,000 at April 30, 1996, and $140,000 at January 31, 1996. 1,316,943 1,548,495 Inventories 1,383,047 1,239,467 Note receivable, current portion 46,377 43,831 Prepaid expenses and other current assets 169,011 33,700 - -------------------------------------------------------------------------------- Current assets 2,927,890 2,865,493 - -------------------------------------------------------------------------------- PLANT & EQUIPMENT Machinery & equipment 2,906,152 2,900,343 Tooling & dies 253,921 253,921 - -------------------------------------------------------------------------------- Plant & equipment at cost 3,160,073 3,154,264 Less: accumulated depreciation (2,220,091) (2,134,836) - -------------------------------------------------------------------------------- Net plant & equipment 939,982 1,019,428 - -------------------------------------------------------------------------------- OTHER ASSETS Note receivable 28,924 60,276 Other assets 16,750 16,750 - -------------------------------------------------------------------------------- TOTAL ASSETS $ 3,913,546 $ 3,961,947 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Bank overdraft $ 59,363 Current portion - long term debt $ 1,714,059 1,763,681 Line of credit 235,857 Accounts payable 680,626 582,393 Accrued expenses 222,218 237,472 - -------------------------------------------------------------------------------- Current liabilities 2,616,903 2,878,766 - -------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred stock, par value $.10 per share Authorized, 500,000 shares; issued, none. Common stock, par value $.01 per share. Authorized, 12,000,000 shares; Outstanding 4,578,521 shares at April 30, 1996 and January 31, 1996. 405,279 405,279 Additional paid-in capital 3,230,127 3,230,127 Accumulated deficit (2,338,763) (2,552,225) - -------------------------------------------------------------------------------- Total stockholders' equity 1,296,643 1,083,181 - -------------------------------------------------------------------------------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 3,913,546 $ 3,961,947 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- See accompanying notes to the consolidated financial statements. 1
PUROFLOW INCORPORATED CONSOLIDATED BALANCE SHEETS (UNAUDITED) FOR THE THREE MONTHS ENDED APRIL 30, 1996 1995 - -------------------------------------------------------------------------------- Net revenue $ 2,166,708 $ 1,812,463 Cost of goods sold 1,445,221 1,369,250 - -------------------------------------------------------------------------------- Gross profit 721,487 443,213 Selling, general and administrative expense 471,923 481,777 - -------------------------------------------------------------------------------- Operating income (loss) 249,564 (38,564) Interest expense 36,102 86,350 - -------------------------------------------------------------------------------- Income (loss) from continuing operations before taxes 213,462 (124,914) Provision for income taxes - -------------------------------------------------------------------------------- Income (loss) from continuing operations 213,462 (124,914) Income from discontinued operations 83,774 - -------------------------------------------------------------------------------- NET INCOME (LOSS) $ 213,462 $ (41,140) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Net income (loss) per common share: Continuing operations $ 0.05 $ (0.03) Discontinued operations - 0.02 - -------------------------------------------------------------------------------- PRIMARY EARNINGS PER SHARE $ 0.05 $ (0.01) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- See accompanying notes to the consolidated financial statements. 2
PUROFLOW INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS ENDED APRIL 30, 1996 1995 - -------------------------------------------------------------------------------- CASH AT BEGINNING OF PERIOD $ - $ 74,441 CASH FLOWS FROM OPERATING ACTIVITIES Net income 213,462 (41,140) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 85,255 93,444 Provision for losses on accounts receivable 10,000 (8,949) Changes in operating assets and liabilities: Accounts receivable 221,552 198,724 Inventories (143,580) (242,411) Prepaid expenses and other current assets (135,311) 94,464 Other assets 71 Accounts payable 98,233 275,043 Accrued expenses (15,254) (34,691) - -------------------------------------------------------------------------------- Net cash provided by operating activities 334,357 334,555 - -------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (5,809) Proceeds from sale of assets 322 Payments received on notes receivable 28,806 10,030 - -------------------------------------------------------------------------------- Net cash provided by investing activities 22,997 10,352 - -------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Bank overdraft (59,363) Net repayment under line of credit (235,857) (20,461) Principal payments on long-term debt (49,622) (305,164) Advances to officers and employees (1,399) - -------------------------------------------------------------------------------- Net cash used in financing activities (344,842) (327,024) - -------------------------------------------------------------------------------- NET INCREASE IN CASH 12,512 17,883 - -------------------------------------------------------------------------------- CASH AT END OF PERIOD $ 12,512 $ 92,324 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- See accompanying notes to the consolidated financial statements. 3
PUROFLOW INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. APRIL 30, 1996, JANUARY 31, 1996, AND APRIL 30, 1995 NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION 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 herein 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 thoughout the world, most of which are located in the United States. On May 1, 1995, the Superior Court of California appointed a Receiver as a result of a lawsuit filed by the Company's bank. The Company was in default of its obligations under various credit agreements with the bank. The Receiver has assumed jurisdiction over all of the Company's assets, which are now in the possession of the Receiver's estate, and held for the benefit of all creditors and shareholders. The Receiver is not obligated to pay liabilities that existed prior to his appointment; however, the receiver is working with the Company's management in operating the business. The information presented for the three months ended April 30, 1996 and 1995 has not been audited by independent accountants, but includes all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results for such periods. The income from discontinued operations reflect the results from operations of the Company's valve and industrial filters products subsidiaries which were sold or discontinued during the year ended January 31, 1996. The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's January 31, 1996 Annual Report on Form 10-K. The results of operations for the three months ended April 30, 1996 are not necessarily indicative of the results to be expected for the year ended January 31, 1997. NOTE 2 - INVENTORIES Inventories consist of the following: April 30, 1996 January 31, 1996 ---------------------------------- Raw materials and purchased parts $718,785 $757,921 Work in process 267,184 235,404 Finished goods and assemblies 397,078 246,142 ---------------------------------- Totals $1,383,047 $1,239,467 ---------------------------------- ---------------------------------- 4
NOTE 3 - NET INCOME PER SHARE The computation of net income (loss) per common share is based on the weighted average number of shares outstanding, including the effect of common stock equivalents (common stock options) when dilutive. NOTE 4 - SUBSEQUENT EVENT On March 26, 1996, the Company entered into an agreement with an investment banker to raise equity through a private placement offering. The plan is to sell shares of the Company's common stock with a 1,200,000 share minimum, and 2,500,000 share maximum. The purchase price is set at $.80 per share. The Company will be entitled to 90% of the net proceeds, with the remainder being commissions and expenses. The agent is entitled to a 24 month option to purchase 7% of the amount of shares sold, at an exercisable price of $.80 per share. The net proceeds of the offering will be used to reduce bank debt by $500,000, with the remainder for general corporate purposes. The Company plans to register the securities within six months of the closing of the offering. There can be no assurance that this offering can be completed successfully. 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The Company's principal products consist of high performance filters and automotive airbag filters. The following table reflects the percentage relationship to net sales of certain items included in the Company's statement of operations for the quarters ended April 30, 1996 and 1995. Quarters ended April 30, 1996 1995 ----------------------------- Net sales 100.0% 100.0% Cost and expenses: Cost of goods sold 66.7% 75.5% Selling, general, and administrative 21.8% 26.6% Interest expense, net 1.7% 4.8% ----------------------------- Income (loss) from continuing operations 9.9% (6.9%) Income from discontinued operations 4.3% ----------------------------- Net income (loss) 9.9% (2.3%) ----------------------------- ----------------------------- Comparison of quarters ended April 30, 1996 and 1995. NET SALES Net sales for the quarter ended April 30, 1996 increased 19.5% over the quarter ended April 30, 1995, with revenues of $2,166,708 and $1,812,463 respectively. Net sales of Government and Aerospace Filtration Products increased by $356,852 due to the continuing acceptance of the Company's PMA program. The airbag product line showed virtually no revenue difference with a slight decrease of $2,433. COST OF SALES/GROSS PROFIT Gross profit as a percentage of net sales was 33.3% for the quarter ended April 30, 1996 as compared to 24.5% for the quarter ended April 30, 1995. The increased gross profit margin was due to consolidation of manufacturing facilities during the third quarter of the prior year. This allowed management to reduce costs of manufacturing overhead and personnel, while increasing productive capacity. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative expense was $471,923, or 21.8% of revenue, for the quarter ended April 30, 1996. In the quarter ended April 30, 1995, such expenses were $481,777, or 26.6% of revenue. This decrease was primarily attributable to reductions in administrative personnel due to the sale and closing of unprofitable subsidiaries and product lines. 6
INTEREST EXPENSE Interest expense decreased $50,248 for the quarter ended April 30, 1996, as compared to the quarter ended April 30, 1995, due primarily to reduction in principal debt to Imperial Bank. PROVISION FOR INCOME TAXES No provision for income taxes is necessary due to the Company's federal net operating loss carryforwards in excess of $3,342,000 for federal income tax purposes, and $2,709,000 for state income tax purposes, at January 31, 1996. Such operating loss carryforwards expire from 2008 to 2011. INCOME FROM DISCONTINUED OPERATIONS The income from discontinued operations reflect the results from operations of the Company's valve and industrial filters products subsidiaries which were sold or discontinued during the year ended January 31, 1996. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital was $310,987 and $(1,152,898) as of April 30, 1996 and 1995, respectively. This equates to current ratios of approximately 1.12 and .74 at April 30, 1996 and 1995, respectively. The Company's debt at April 30, 1996 was $1,714,059 consisting of notes payable to the Company's bank totaling $1,019,197 and notes payable to vendors of $694,862. Principal under the Company's term loans accrues interest at the bank's prime rate plus 3.5% (11.75% at April 30, 1996) and is secured by accounts receivable, inventories, equipment purchased with the loan proceeds and all other unencumbered assets of the Company. In addition, the Company has a revolving line of credit with its bank under which it may borrow up to the lesser of $1,200,000 or 65% of eligible accounts receivable. Outstanding balances accrue interest at the bank's prime rate plus 3.5% (11.75% at April 30, 1996). This line is collateralized by the Company's accounts receivable, inventories and a first priority interest in all unencumbered assets. On April 30, 1996, the Company had no outstanding balance under this agreement. Future cash advances under the line are limited in amount by the terms and conditions of the line as expressed above. There are no additional borrowings available under the line of credit. The terms of the credit agreements contain certain restrictive covenants, including maintenance of minimum working capital, net worth, and ratios of current assets to current liabilities and debt to net worth. Previously, the Company was in default of various loan covenants. As a result, on May 1, 1995, the Company entered into a stipulation for the immediate appointment of a receiver. The receiver, in concert with the current management, continue to operate the Company. The Company recently negotiated with the bank to obtain extensions of their credit and term loans until December 31, 1996. On March 26, 1996, the Company entered into an agreement with an investment banker to raise equity through a private placement offering. The plan is to sell shares of the Company's common stock with a 7
1,200,000 share minimum, and 2,500,000 share maximum. The purchase price is set at $.80 per share. The Company will be entitled to 90% of the net proceeds, with the remainder being commissions and expenses. The agent is entitled to a 24 month option to purchase 7% of the amount of shares sold, at an exercisable price of $.80 per share. The net proceeds of the offering will be used to reduce bank debt by $500,000, with the remainder for general corporate purposes. The Company plans to register the securities within six months of the closing of the offering. There can be no assurance that this offering can be completed successfully. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 1. Puroflow Incorporated vs. George Solymar. Registrant seeks recovery of $46,000, plus interest from 1989, for conversion of Corporate funds by defendant for personal obligations. George Solymar commenced an action for alleged breach of an oral agreement of employment, alleging oral continuance of a written contract dated back to 1969. There is no merit to the claim, nor do the Registrant's records support the defendant's claim. Both actions have been consolidated for trial. The Receiver has taken over the active pursuit of this litigation, with all discovery completed 2. Joseph B. Jasso and Martha Jasso commenced action against Puroflow Incorporated and all Members of the Board for breach of an employment contract. The Board of Directors authorized the Registrant to cross-claim for breach of fiduciary duties, misfeasance and malfeasance as a former Director and Chief Executive Officer. 3. DSS Company vs. Ultra Dynamics Corporation, a wholly owned subsidiary, for breach of alleged purchase order of $30,000. Ultra Dynamics claims it does not owe plaintiff any sums because the plaintiff changed the terms of the warranty which were not acceptable to the defendant, and the purchase order was not accepted by the defendant. Plaintiff alleges damages of $15,000 in discovery proceedings. Registrant believes that there is no merit to this action, and that it will ultimately be dismissed. 4. Cynthia Meals vs. M. Rowena Willis, et al. represents a civil action commenced in Court of Common Pleas of Chester County, Pennsylvania for unspecified damages resulting from improper maintenance of a treatment system for drinking water. Ultra Dynamics Corporation is included as one of six codefendants as a supplier of the equipment to a codefendant distributor. Ultra Dynamics has filed a cross complaint against all codefendants and plaintiff. Registrant believed that there is absolutely no merit to this action against Ultra, and the action will ultimately be dismissed on motion. 5. Registrant previously reported on Form 10-Q for the quarter ended October 31, 1994, the award of a judgment in favor of Micro-Numerics, Inc. for $34,398.26 plus interest and costs. The Judgment Creditor has made a total levy of $43,939.56 for the unpaid judgment which remains unsatisfied. 6. Imperial Bank commenced an action against Puroflow Incorporated for breach of various loan and security agreements. A Receiver was installed by order of the Los Angeles County Superior Court, and the Receiver remains in control of the Registrant. 7. Tenth and Colorado Associates, Ltd. commenced action against Puroflow Incorporated for unlawful detainer related to Puroflow's occupation of a building located in Santa Monica, California, which previously housed Registrants Airbag and Michigan Dynamics operations. Registrant vacated and 8
Plaintiff has attempted to convert the action to a breach of lease action. Registrant believes that it has valid legal defenses to this claim, and that it will ultimately be dismissed. 8. Reliable Metallurgical Processes Inc. commenced an action against Puroflow Corporation and Michigan Dynamics Inc. in September, 1995 in Los Angeles County Superior Court for breach of contract, open account, and anticipatory breach. This action is being vigorously opposed and the Registrant believes it has valid legal defenses to this action, including damages for failure to properly perform the alleged Contract, ultra vires acts in consummation of original Agreement, and breach of fiduciary obligation by a former Director and Officer of Registrant who were also Officers and Directors of the Plaintiff. 9. Jerome Pearlman d.b.a. J&F Enterprises, a former Director of the Registrant, commenced an action in the Los Angeles County Supreme Court, for breach of an alleged promissory note. The Registrant will vigorously defend by filing a cross-complaint against Plaintiff for breach of fiduciary duty and constructive trust, seeking a return of all funds paid to Plaintiff plus interest. 10. J&F Management, Inc., controlled by Jerome Pearlman, a former Director of the Registrant, commenced an action in Municipal Court of Santa Monica Judicial District against the Registrant, and the Court appointed Receiver for possession and conversion of personal property. Defendants have vigorously defended the action by filing a motion to disqualify Plaintiff's Counsel, a demurrer to the complaint, and a cross-complaint seeking recision of the contract and restitution to Defendant of all funds paid to the Plaintiff pursuant to contract for a breach of Pearlman's fiduciary duties to the Registrant. 11. Memtec America Corporation obtained a confession of judgment from the Circuit Court for Baltimore County, Maryland, on December 19, 1995, against the Company for approximately $220,000, based upon the execution of a promissory note by a former CEO of Puroflow. The judgment was obtained without due notice to the Company. The Receiver has retained Counsel in Baltimore, Maryland, for the purpose of setting aside the confession of Judgment, and to assert a number of counter-claims against Memtec, in the event the Court permits the reopening of the Order, and setting aside of the Judgment. The Company is not a party to any other material pending suits of legal actions, and is not aware of any material claims that are threatened. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULT UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 9
ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K None. SIGNATURE Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed and on its behalf by the undersigned thereto, duly authorized. PUROFLOW INCORPORATED May 14, 1996 By: /s/ Michael H. Figoff ------------------------------ Michael H. Figoff President 10